CFA Institute ESG Investing Certificate in ESG Investing Online Training

Question #51

According to Mercer Consulting, which of the following asset classes has the highest availability of sustainability-themed strategies compared to its asset-class universe?

A . Real estate
B . Private debt
C . Infrastructure

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Correct Answer: C
C

Explanation:

Mercer’s Findings:

Mercer Consulting’s research indicates that infrastructure has a high availability of sustainability-themed strategies. This is due to the inherent characteristics of infrastructure projects, which often involve long-term, tangible assets that can integrate sustainable practices.

Mercer highlights that infrastructure investments are well-suited for sustainability themes due to their potential to contribute to societal goals such as renewable energy, sustainable transportation, and green buildings.

ESG Integration in Infrastructure:

Infrastructure projects provide ample opportunities for ESG integration, from the development phase through to operations and maintenance. These projects can significantly impact environmental and social outcomes, making them a focal point for sustainability-themed strategies.

The CFA Institute notes that infrastructure investments can drive positive ESG outcomes, such as reducing carbon emissions, improving energy efficiency, and enhancing community resilience.

Investor Demand:

There is growing investor demand for sustainability-themed infrastructure investments as they seek to align their portfolios with long-term ESG goals. This demand drives the development and availability of ESG-focused investment strategies in the infrastructure sector.

Mercer reports that the high demand for sustainable infrastructure projects is reflected in the increasing number of investment products and funds dedicated to this asset class.

Case Studies and Examples:

Examples of sustainability-themed infrastructure investments include renewable energy projects (e.g., wind and solar farms), sustainable transport systems (e.g., electric vehicle infrastructure), and green buildings that meet high environmental standards.

The CFA Institute provides case studies demonstrating how infrastructure projects can achieve significant ESG impacts, contributing to both financial returns and societal benefits.

Reference: Mercer Consulting’s report on ESG integration and availability of sustainability-themed strategies by asset class.

CFA Institute, "Environmental, Social, and Governance Issues in Investing: A Guide for Investment Professionals."

Question #52

According to the Sustainability Accounting Standards Board (SASB) materiality risk mapping, greenhouse gas emissions (GHG) are most material for the

A . financial sector
B . healthcare sector.
C . infrastructure sector

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Correct Answer: C
C

Explanation:

SASB Materiality Map:

The SASB materiality map identifies which sustainability issues are likely to have a material impact on the financial performance of companies in different sectors. For the infrastructure sector, GHG emissions are identified as a key material issue.

SASB’s framework emphasizes the financial relevance of GHG emissions for infrastructure companies due to their significant environmental impact and the regulatory and operational risks associated with emissions.

Environmental Impact:

Infrastructure projects, such as transportation systems, energy facilities, and construction projects, have substantial GHG emissions. Managing and mitigating these emissions is crucial for the sustainability and financial performance of companies in this sector.

The CFA Institute notes that the infrastructure sector’s environmental footprint makes GHG emissions a critical focus area for ESG integration and risk management.

Regulatory and Market Pressure:

There is increasing regulatory pressure on the infrastructure sector to reduce GHG emissions. Compliance with environmental regulations and participation in carbon markets can have significant financial implications for infrastructure companies.

The SASB framework helps investors understand the material risks associated with GHG emissions and supports companies in improving their environmental performance to meet regulatory and market expectations.

Investor Focus:

Investors are increasingly focused on the ESG performance of infrastructure companies, particularly regarding GHG emissions. This focus is driven by the long-term risks and opportunities associated with climate change and the transition to a low-carbon economy.

The CFA Institute highlights that addressing GHG emissions in the infrastructure sector is essential for aligning investments with sustainability goals and managing long-term risks.

Reference: Sustainability Accounting Standards Board (SASB) materiality risk mapping.

CFA Institute, "Environmental, Social, and Governance Issues in Investing: A Guide for Investment Professionals."

Question #53

Which of the following statements about the Green Claims Directive (GCD) is most accurate? The GCD:

A . applies to mandatory green claims made by businesses towards consumers
B . aims to make green claims reliable, comparable, and verifiable across the world.
C . requires verification by independent auditors before green claims can be made and marketed

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Question #54

When incorporating ESG factors into valuation inputs, which of the following would most likely require the lowest discount rate?

A . A company with strong ESG practices
B . A high-growth technology company operating in emerging markets
C . A company that is judged to have a negative environmental impact

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Question #55

Excluding investment in companies with a history of labor infractions is best categorized as a(n):

A . universal exclusion.
B . idiosyncratic exclusion.
C . conduct-related exclusion

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Question #56

According to the Active Ownership study, which of the following statements regarding ESG engagement is most accurate?

A . Unsuccessful engagements often have adverse impacts on returns
B . Success is typically achieved within 12 months of the initial engagement
C . Successful engagement activity was followed by positive abnormal financial returns

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Question #57

Which of the following statements about voting is most accurate?

A . Voting is a necessary but not a sufficient element of good stewardship
B . Concerns about the diversity of a company’s board cannot be reflected in voting decisions
C . If there are concerns about the financial viability of a business, investors need to pay close attention to voting decisions on the reappointment of members of the audit committee

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Correct Answer: C
C

Explanation:

Importance of Voting in Governance:

Voting is a critical tool for shareholders to influence corporate governance. It allows them to approve or reject decisions that can impact the company’s long-term viability.

According to the CFA Institute, effective voting practices are a fundamental aspect of good stewardship, ensuring that companies are managed in the best interests of shareholders and other stakeholders.

Role of the Audit Committee:

The audit committee plays a crucial role in overseeing the integrity of financial reporting, compliance with legal and regulatory requirements, and the effectiveness of internal controls.

The CFA Institute emphasizes that the audit committee’s effectiveness is vital for maintaining investor confidence, particularly in companies with financial viability concerns.

Investor Attention to Audit Committee Reappointments:

When there are concerns about a company’s financial health, it is essential for investors to scrutinize the reappointment of audit committee members. These members are responsible for ensuring that financial statements are accurate and that there is adequate oversight of the auditing process.

Investors should consider voting against the reappointment of audit committee members if they believe that these individuals have not adequately fulfilled their responsibilities or if there are significant issues with financial reporting.

Voting as a Stewardship Tool:

Voting decisions related to the audit committee can reflect broader concerns about governance practices and financial transparency. By exercising their voting rights, investors can signal their expectations for higher standards and accountability.

The CFA Institute notes that voting against certain board members or committees can be a powerful way to drive improvements in corporate governance and financial oversight.

Reference: CFA Institute, "Environmental, Social, and Governance Issues in Investing: A Guide for Investment Professionals."

MSCI ESG Ratings Methodology, which highlights the importance of voting in addressing governance concerns.

Question #58

In which country is the proposal of shareholder resolutions most common?

A . UK
B . US
C . Australia

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Correct Answer: B
B

Explanation:

Prevalence in the US:

Shareholder resolutions are a prominent feature of the corporate governance landscape in the United States. They allow shareholders to propose changes or raise concerns about a company’s policies, practices, and governance.

According to the CFA Institute, the US has a well-established tradition of shareholder activism, with a significant number of resolutions submitted annually on various issues, including ESG matters.

Regulatory Framework:

The regulatory framework in the US, particularly the rules enforced by the Securities and Exchange Commission (SEC), provides shareholders with the right to propose resolutions and ensures that these proposals are included in the company’s proxy materials if they meet certain criteria.

The CFA Institute notes that the US regulatory environment is conducive to shareholder activism, facilitating the submission and consideration of shareholder resolutions.

Engagement and Influence:

Shareholder resolutions are an important engagement tool for investors in the US, allowing them to influence corporate behavior and advocate for changes in policies related to environmental, social, and governance issues.

The MSCI ESG Ratings Methodology highlights that shareholder resolutions can drive significant changes in company practices, particularly when they garner substantial support from investors.

Comparison with Other Countries:

While shareholder resolutions are also used in other countries such as the UK and Australia, the frequency and impact of these resolutions are more pronounced in the US.

The CFA Institute indicates that the shareholder resolution process in the US is more formalized and widely used compared to other jurisdictions, making it the most common country for the proposal of shareholder resolutions.

Reference: CFA Institute, "Environmental, Social, and Governance Issues in Investing: A Guide for Investment Professionals."

MSCI ESG Ratings Methodology, which discusses the role of shareholder resolutions in corporate governance.

Question #59

Which of the following emphasizes that short-term investment performance will be of limited significance in evaluating the manager?

A . Brunel Asset Management Accord
B . International Corporate Governance Network (ICGN) Model Mandate
C . Principals for Responsible Investment’s (PRI) Practical Guide to ESG Integration for Equity Investing

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Question #60

One of the mam principles of stewardship codes calls for institutional investors to:

A . regularly monitor investee companies
B . avoid considering conflicts of interest regarding stewardship matters.
C . act independently of other investors when escalating stewardship activity

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Correct Answer: A
A

Explanation:

Principle of Monitoring:

Regular monitoring of investee companies is a fundamental principle in stewardship codes, ensuring that institutional investors remain informed about the companies in which they invest and can effectively engage with them on ESG and performance issues.

According to the CFA Institute, continuous monitoring allows investors to identify potential risks and opportunities, engage with company management, and advocate for improvements in governance and practices.

Stewardship Codes:

Stewardship codes, such as the UK Stewardship Code and the International Corporate Governance Network (ICGN) Global Stewardship Principles, emphasize the importance of regular monitoring as part of responsible investment practices.

The CFA Institute highlights that these codes provide frameworks and guidelines for institutional investors to follow, promoting transparency, accountability, and proactive engagement with investee companies.

Engagement and Escalation:

Regular monitoring enables investors to engage with companies on a continuous basis, addressing issues as they arise and escalating concerns if necessary. This ongoing engagement is crucial for effective stewardship and long-term value creation.

The Principles for Responsible Investment (PRI) also advocate for regular monitoring and engagement, encouraging investors to take an active role in improving corporate behavior and

sustainability practices.

Examples of Monitoring Activities:

Monitoring activities include reviewing financial statements, ESG reports, meeting with company management, and participating in shareholder meetings. These activities help investors stay informed and influence corporate strategies and practices.

The CFA Institute notes that effective monitoring involves a comprehensive approach, integrating financial analysis with ESG considerations to provide a holistic view of investee companies.

Reference: CFA Institute, "Environmental, Social, and Governance Issues in Investing: A Guide for Investment Professionals."

UK Stewardship Code and ICGN Global Stewardship Principles documents, which outline the principles of regular monitoring and engagement.