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CFA Institute Sustainable-Investing Exam Syllabus Topics:
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NEW QUESTION # 168
Over the past several years, the proportion of sustainable investing relative to total managed assets has fallen in:
- A. Canada
- B. the United States
- C. Europe
Answer: C
Explanation:
Over the past several years, the proportion of sustainable investing relative to total managed assets has fallen in the United States.
1. Sustainable Investing Trends: While sustainable investing has generally been growing globally, there have been regional variations in its adoption and growth rates. In the United States, there has been a noted decline in the proportion of assets managed under sustainable investing criteria relative to total managed assets.
2. Factors Contributing to the Decline: The decline in the US can be attributed to several factors, including regulatory uncertainties, shifts in investor preferences, and varying definitions and standards for sustainable investments.
3. Comparative Trends in Europe and Canada:
Europe (Option A): Europe has seen continued growth in sustainable investing, driven by strong regulatory support and investor demand for ESG-aligned investments.
Canada (Option B): Canada has also experienced growth in sustainable investing, although at a different pace compared to Europe.
Reference from CFA ESG Investing:
Regional Trends: The CFA Institute provides insights into the regional differences in sustainable investing trends, highlighting the decline in the proportion of sustainable investing in the United States relative to total managed assets.
Market Dynamics: Understanding the market dynamics and regulatory environment is crucial for interpreting the trends in sustainable investing across different regions.
In conclusion, over the past several years, the proportion of sustainable investing relative to total managed assets has fallen in the United States, making option C the verified answer.
NEW QUESTION # 169
Which of the following private equity investors is most susceptible to allegations of greenwashing? An investor that views ESG integration as a way of:
- A. Managing risk
- B. Adding value
- C. Attracting clients
Answer: C
Explanation:
Private equity investors who primarily view ESG integration as a way to attract clients are more susceptible to allegations of greenwashing. Greenwashing occurs when a company or investor overstates or falsely claims their commitment to sustainability, often for marketing purposes rather than genuine ESG improvements.ESG Reference: Chapter 7, Page 325 - ESG Analysis, Valuation & Integration in the ESG textbook.
NEW QUESTION # 170
According to most of the world's corporate governance codes, the expectation is that remuneration committees are populated by:
- A. non-executive directors only
- B. executive directors only
- C. both executive directors and non-executive directors
Answer: A
Explanation:
Corporate Governance Codes:
Most corporate governance codes around the world require that remuneration committees be composed solely of independent non-executive directors.
Role of the Remuneration Committee:
The committee is responsible for setting the pay and compensation packages for executive directors.
Having non-executive directors ensures objectivity and independence, reducing potential conflicts of interest.
Global Standards:
This practice is part of broader corporate governance reforms aimed at improving accountability and aligning executive compensation with long-term shareholder value.
The UK Corporate Governance Code and similar codes in other jurisdictions mandate that remuneration committees should be independent.
References:
The expectation for remuneration committees to be populated solely by non-executive directors is highlighted in the final ESG investing book.
NEW QUESTION # 171
Which of the following statements is most accurate? The Kyoto Protocol was created to:
- A. Encourage companies to make climate-related disclosures
- B. Commit industrialized countries to limit and reduce greenhouse gas emissions
- C. Mobilize private sector finance for sustainable development
Answer: B
Explanation:
TheKyoto Protocol(adopted in 1997) was the firstinternational treatyto legallycommit industrialized nationstoreduce greenhouse gas emissions. It setbinding targetsfor developed countries but did not impose obligations on developing nations.
Options A and B are incorrect becauseKyoto focused on emission reductionsrather than corporate disclosures or private finance mobilization.
Reference:
United Nations Framework Convention on Climate Change (UNFCCC) Kyoto Protocol Overview IPCC Reports on Kyoto and Climate Policy OECD Climate Governance Analysis
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NEW QUESTION # 172
ESG engagement is a two-way dialogue to share perspectives between:
- A. asset owners and fund managers
- B. senior executives and board of directors
- C. investors and investees
Answer: C
Explanation:
ESG engagement is a two-way dialogue to share perspectives between investors and investees.
Engagement Definition: ESG engagement involves active communication between investors (e.g., asset managers, shareholders) and investees (e.g., companies) to discuss ESG issues and improve sustainability practices.
Purpose: The goal is to influence company behavior, enhance ESG performance, and align business practices with sustainable investment objectives. This dialogue allows both parties to share perspectives, address concerns, and work towards common goals.
Two-Way Communication: Effective ESG engagement requires open and ongoing communication, ensuring that both investors and investees contribute to the conversation and decision-making process.
CFA ESG Investing Reference:
The CFA Institute's guidance on ESG engagement highlights the importance of two-way dialogue between investors and investees to foster better ESG practices and drive positive change in corporate behavior.
NEW QUESTION # 173
ESG indices that exclude economically meaningful sectors will most likely:
- A. Have a lower cost structure than conventional index-based strategies
- B. Have stronger stewardship activities than actively managed ESG strategies
- C. Generate a higher tracking error than conventional index-based strategies
Answer: C
Explanation:
Exclusionary ESG indices oftenomit entire sectors(e.g., fossil fuels, tobacco, weapons), which leads tohigher tracking errorrelative to traditional benchmarks like theS&P 500 or MSCI World Index.
Tracking error measures how much a portfolio's returnsdeviatefrom its benchmark. Because ESG indices havesector biases, they tend to experiencegreater performance divergencethan conventional index funds.
Reference:
MSCI ESG Index Performance Report
CFA Institute ESG Investing Handbook
Morningstar ESG Fund Tracking Error Analysis
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NEW QUESTION # 174
Interest by retail investors in responsible investing has:
- A. been declining over time
- B. remained stable over time
- C. been growing over time
Answer: C
Explanation:
Interest by retail investors in responsible investing has been growing over time. This trend is driven by increased awareness of ESG issues and the recognition that sustainable investing can align with both personal values and financial goals.
Growth in interest: Surveys and market data consistently show that more retail investors are considering ESG factors in their investment decisions. This trend is supported by the increasing availability of ESG-related investment products and greater transparency from companies regarding their ESG practices.
Drivers: Factors contributing to this growth include heightened awareness of environmental and social issues, the impact of regulatory changes promoting ESG disclosures, and the perception that ESG investing can mitigate risks and uncover opportunities.
Reference:
CFA ESG Investing Principles
Market surveys and reports on trends in responsible investing
NEW QUESTION # 175
According to market reviews conducted by the Global Sustainable Investment Alliance at the start of 2022, the smallest sustainable investment strategy globally (in terms of assets) is:
- A. Norms-based screening.
- B. Impact investing.
- C. Best-in-class investing.
Answer: B
Explanation:
According to the Global Sustainable Investment Review 2022, impact investing represents the smallest share of sustainable investment assets.
Why A (Impact investing) is correct:
Impact investing is more niche and less common than ESG integration or screening strategies.
It focuses on generating measurable ESG impact alongside financial returns.
Why not B or C?
B (Best-in-class) and C (Norms-based screening) are more widely adopted strategies.
References:
Global Sustainable Investment Alliance (GSIA) 2022 Report
NEW QUESTION # 176
The adoption of ESG investing by retail investors has generally been:
- A. at the same pace as its adoption by institutional investors.
- B. faster than its adoption by institutional investors.
- C. slower than its adoption by institutional investors.
Answer: C
Explanation:
The adoption of ESG investing by retail investors has generally been slower than its adoption by institutional investors. Institutional investors have led the way in integrating ESG factors into their investment decisions due to their larger resources and regulatory pressures. In contrast, retail investors have been slower to adopt ESG investing, though interest is growing, especially among younger generations.
NEW QUESTION # 177
Weighted-average carbon intensity and attributed emissions of sovereign debt most likely measure ESG exposures at the:
- A. country level.
- B. portfolio level.
- C. security level.
Answer: B
Explanation:
CFA materials describeweighted-average carbon intensity and attributed emissionsasportfolio-level ESG measures. Theyaggregatecountry-level carbon intensities of sovereign issuersweighted by portfolio exposures. While the data reflects country-level emissions, the metric itself is reported at theportfolio levelto provide an integrated ESG exposure picture.
NEW QUESTION # 178
Which of the following statements best describes the greenium?
- A. The increased return required by investors to hold green bonds
- B. The premium paid by investors to exclude fossil fuel stocks from their portfolio
- C. The lower yield investors accept to hold green bonds compared to conventional bonds
Answer: C
Explanation:
Thegreeniumrefers to thelower yield ("green premium") investors accept when purchasing green bonds, as they prioritize sustainability over purely financial returns.
Green bonds often trade at lower yields than conventional bonds due to high demand from ESG-conscious investors.
Increased return required (A) is incorrect because green bonds generally offer lower yields.
Excluding fossil fuels (C) is part of negative screening, not greenium.
Reference:
Climate Bonds Initiative Greenium Research
Principles for Responsible Investment (PRI) Green Bond Market Analysis
CFA Institute ESG Fixed Income Report
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NEW QUESTION # 179
According to the "Shades of Green" methodology developed by the Center for International Climate Research (CICERO), which of the following colors best categorizes a green bond that reduces emissions in the near term without contributing to climate-resilient long-term solutions?
- A. Medium Green
- B. Yellow
- C. Light Green
Answer: C
Explanation:
Light Greenbonds supportshort-term emissions reductionsbut do not contribute significantly tolong-term climate resilience.
* Medium Green (C) supports more sustainable, long-term transitions.
* Yellow (A) is not a recognized CICERO category.
References:
CICERO Shades of Green Bond Ratings
Principles for Responsible Investment (PRI) Green Bond Evaluation Framework Climate Bonds Initiative Green Bond Certification Guide
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NEW QUESTION # 180
Which of the following statements is aligned with the Pensions and Lifetime Savings Association (PLSA) Stewardship checklist?
Statement 1: Investors should seek to ensure that fund managers deliver effective separation of long-term ESG factors from their investment approach.
Statement 2: Investors should work with their advisers to consider the level of resource available for stewardship activities.
- A. Statement 1 only
- B. Statement 2 only
- C. Both Statement 1 and Statement 2
Answer: B
Explanation:
The Pensions and Lifetime Savings Association (PLSA) Stewardship checklist provides guidance for asset owners, including pension schemes, on how to effectively integrate stewardship into their investment strategies. Here's a detailed breakdown of the relevant statements:
Statement 1 Analysis: "Investors should seek to ensure that fund managers deliver effective separation of long- term ESG factors from their investment approach." This statement is not aligned with the PLSA Stewardship checklist. The checklist emphasizes integrating ESG factors into the investment approach rather than separating them. Effective stewardship involves considering ESG issues as an integral part of the investment strategy and decision-making process.
Statement 2 Analysis: "Investors should work with their advisers to consider the level of resource available for stewardship activities." This statement is aligned with the PLSA Stewardship checklist. The checklist highlights the importance of ensuring that adequate resources are allocated for stewardship activities. This includes working with advisers to assess and enhance the capability and resources dedicated to effective stewardship practices.
PLSA Stewardship Principles: The PLSA Stewardship checklist outlines several key requirements for effective stewardship, including clarity on how stewardship fits within the investment strategy, ensuring adequate resources for stewardship, and actively engaging with fund managers to ensure they are effectively integrating ESG considerations into their investment processes.
NEW QUESTION # 181
Compared to credit rating agencies, the time horizon consideration for ESG rating providers is most likely:
- A. Shorter
- B. Longer
- C. Similar
Answer: B
Explanation:
ESG rating providerstypically uselonger time horizonsthan credit rating agencies because ESG factors (e.g., climate change, governance risks)unfold over extended periods.
Credit rating agencies focus onshort-term default risk, whereas ESG ratings assesslong-term sustainability risksthat may impactvaluation and performance over decades.
References:
MSCI & Sustainalytics ESG Ratings Methodology
CFA Institute ESG Risk Time Horizons Report
Principles for Responsible Investment (PRI) Guide to ESG Credit Risk
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NEW QUESTION # 182
Regime-switching models for strategic asset allocation:
- A. Fail to capture fat tails and skewness
- B. Are based on historical data rather than forward-looking data
- C. Have the potential to capture dramatic shifts in the investment environment
Answer: C
Explanation:
Regime-switching modelsare used instrategic asset allocationtocapture shifts in market conditions, such as economic recessions, financial crises, or climate-related disruptions. These models allow investors toadjust portfolio allocations based on different market regimes.
They do capture fat tails (A),meaning they can account for extreme events.
They incorporate both historical and forward-looking data (B).
Reference:
CFA Institute Guide to Regime-Switching Models
MSCI Strategic Asset Allocation in ESG Investing
Principles for Responsible Investment (PRI) Risk Management Framework
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NEW QUESTION # 183
Which of the following is an example of indirectly sourced primary ESG data?
- A. Bloomberg ESG Disclosure scores
- B. Company reports
- C. News articles
Answer: C
Explanation:
News articles are an example of indirectly sourced primary ESG data, as they gather information from multiple direct sources like company disclosures, public records, or events, and provide an external perspective. (ESGTextBook[PallasCatFin], Chapter 7, Page 364)
NEW QUESTION # 184
According to the International Corporate Governance Network (ICGN) Model Mandate:
- A. Stewardship engagement disclosure should follow a set or agreed format.
- B. Stewardship engagement disclosure is voluntary, while voting activity disclosure is required.
- C. Stewardship engagement and voting activity should be two separate disclosures.
Answer: C
Explanation:
The OTM outlines key expectations from theICGN Model Mandate, which sets global standards for responsible investment and stewardship transparency. It explains:
"TheICGN Model Mandatedistinguishesengagement activityfromvoting activityand recommends that these be disclosedseparatelyto ensure clarity over investor intentions and outcomes." The manual adds that engagement involves dialogue and long-term relationship building, while voting records represent formal governance actions. Combining them risks conflating stewardship objectives.
This approach aligns with global best practice under the UK Stewardship Code and PRI reporting requirements, both of which call for separate reporting of engagement outcomes and voting rationales.
Therefore,option Bcorrectly reflects the ICGN framework as referenced in the manual.
Reference:2021-Final-Book.pdf, Chapter 6 - Engagement and Stewardship (Stewardship Reporting and ICGN Standards section).
NEW QUESTION # 185
Environmental analysis will potentially determine adjustments to:
- A. Valuation multiples only.
- B. Financial forecasts only.
- C. Both financial forecasts and valuation multiples.
Answer: C
Explanation:
Environmental risks and opportunities impact both financial forecasts and valuation multiples (Option C) by:
Adjusting revenue and cost projections (e.g., higher carbon taxes or lower energy costs from renewables).
Affecting valuation multiples, as companies with strong ESG performance often receive higher price-to-earnings (P/E) or lower discount rates due to reduced risk.
Option A (Financial forecasts only) ignores the impact on valuation multiples.
Option B (Valuation multiples only) overlooks how environmental risks affect revenue, costs, and profitability.
Reference:
PRI ESG Valuation Guide
MSCI ESG and Equity Valuation Report
S&P Global: ESG Integration in Equity Analysis
NEW QUESTION # 186
Which of the following is a minimum requirement for Principles for Responsible Investment (PRI) membership?
- A. Implementation of Task Force on Climate-related Financial Disclosures (TCFD) recommendations
- B. Participation in a shareholder engagement platform
- C. The establishment of accountability mechanisms for responsible investment implementation
Answer: C
Explanation:
A minimum requirement for PRI membership is the establishment of accountability mechanisms to ensure that responsible investment policies are effectively implemented within the organization. (ESGTextBook
[PallasCatFin], Chapter 9, Page 509)
NEW QUESTION # 187
According to the Brunel Asset Management Accord, which of the following is least likely a cause for concern when conducting an annual performance evaluation of a manager against a long-term ESG investment mandate?
- A. The turnover in the portfolio outside the expected turnover range
- B. Underperformance relative to the market benchmark
- C. A change in investment style
Answer: C
Explanation:
Achange in investment style (A) is least concerningif the manager remainsaligned with the long-term ESG mandate. In contrast:
* Underperformance (B)raises questions aboutwhether ESG integration is effective.
* Portfolio turnover (C) outside the expected rangecould indicatea misalignment with ESG strategy.
References:
Brunel Pension Partnership ESG Investment Guidelines
CFA Institute ESG Manager Selection Framework
Principles for Responsible Investment (PRI) Asset Manager Accountability Report
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NEW QUESTION # 188
According to the Principles for Responsible Investment, which of the following isnotan ESG engagement dynamic creating value for investors and companies?
- A. Cultural dynamics
- B. Communicative dynamics
- C. Learning dynamics
Answer: A
Explanation:
Cultural dynamics are not a primary engagement dynamic identified by PRI.The key dynamics that drive engagement value include:
Learning dynamics (B): Mutual knowledge-sharing between investors and companies Communicative dynamics (C): Effective dialogue leading to ESG improvements Reference:
Principles for Responsible Investment (PRI) ESG Engagement Guide
CFA Institute Investor Engagement & ESG Performance Report
MSCI Active Ownership & Stewardship Study
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NEW QUESTION # 189
An unfavorable corporate governance assessment would most likely be incorporated in valuation through reduced:
- A. levels of confidence in the valuation range.
- B. discount rates.
- C. risk premia in the cost of capital.
Answer: C
Explanation:
An unfavorable corporate governance assessment would most likely be incorporated in valuation through increased risk premia in the cost of capital. Poor governance practices can increase the perceived risk of a company, leading investors to demand higher returns for taking on that risk. This results in a higher cost of capital for the company, which can negatively affect its valuation. Adjusting the discount rate to reflect governance risks is a common practice in valuation models.
NEW QUESTION # 190
Using the "shades of green" methodology developed by the Center for International Climate Research (CICERO), a project that does not explicitly contribute to the transition to a low carbon and climate resilient future is given the shading of:
- A. light green
- B. yellow
- C. red
Answer: C
Explanation:
Using the "shades of green" methodology developed by the Center for International Climate Research (CICERO), a project that does not explicitly contribute to the transition to a low carbon and climate resilient future is given the shading of red.
Red (A): In the CICERO "shades of green" methodology, projects that do not contribute to climate goals and may even counteract them are given a red shading. This indicates that the project is not aligned with the transition to a low-carbon and climate-resilient future.
Yellow (B): Yellow is used for projects with some positive environmental impacts but with certain risks or uncertainties about their overall contribution to climate goals.
Light green (C): Light green is used for projects that contribute to climate goals but are not fully aligned with a long-term vision for a low-carbon and climate-resilient future.
Reference:
CFA ESG Investing Principles
CICERO "Shades of Green" methodology documentation
NEW QUESTION # 191
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