Free CFA Institute Sustainable-Investing Practice Exam with Questions & Answers | Set: 10

Facing significant environmental regulations may reduce a company's cash flow projections due to the costs associated with compliance, fines, or the need to invest in cleaner technologies. (ESGTextBook[PallasCatFin], Chapter 7, Page 325)

Jevon’s paradox describes the phenomenon where increased efficiency leads to a reduction in resource use per unit of consumption, but overall resource consumption rises due to increased demand. (ESGTextBook[PallasCatFin], Chapter 3, Page 153)

Smaller companies often receive lower ESG ratings due to their limited resources for ESG reporting and engagement, even if their actual practices are sustainable. (ESGTextBook[PallasCatFin], Chapter 7, Page 364)

The use of renewable energy is an environmental factor in real estate. Integrating renewable energy sources in real estate developments helps reduce greenhouse gas emissions and alignswith sustainability goals, making it a key factor in ESG assessments of real estate portfolios.ESG Reference: Chapter 3, Page 153 - Environmental Factors in the ESG textbook.

One of the key challenges asset managers face is the lack of methodologies for integrating ESG considerations for non-corporate issuers, such as sovereign bonds or real estate investments. While methodologies for corporate issuers are well developed, extending these frameworks to non-corporate issuers remains a challenge.ESG Reference: Chapter 9, Page 508 - Investment Mandates, Portfolio Analytics & Client Reporting in the ESG textbook.

Alignment of an investment manager’s performance with long-term ESG objectives is best achieved through early reporting of deviations from the expected investment process or style. This allows the investor to address any discrepancies quickly and ensure the portfolio remains aligned with their ESG goals.ESG Reference: Chapter 9, Page 510 - Investment Mandates, Portfolio Analytics & Client Reporting in the ESG textbook.

The LEAP framework developed by TNFD stands for "Locate, Evaluate, Assess, Prepare." It is designed to help organizations evaluate nature-related risks and integrate them into financial disclosures. (ESGTextBook[PallasCatFin], Chapter 3, Page 114)

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)

Collective engagement, where multiple investors collaborate to push for changes in a company, is typically the most powerful form of escalation as it brings greater pressure on the company to act. (ESGTextBook[PallasCatFin], Chapter 6, Page 285)

ESG investing in emerging markets is more challenging due to limited availability of data, variability in reporting standards, and differences in governance practices between countries and companies. (ESGTextBook[PallasCatFin], Chapter 2, Page 61)

One of the critical steps in developing an ESG scorecard is preparing a materiality map. This map identifies and prioritizes ESG issues based on their relevance and impact on the company’s performance, helping guide decision-making and resource allocation.ESG Reference: Chapter 7, Page 370 - ESG Analysis, Valuation & Integration in the ESG textbook.

Health and safety is a critical social factor for institutional investors as it impacts a company’s reputation, legal risks, and operational efficiency. (ESGTextBook[PallasCatFin], Chapter 4, Page 209)

If a company faces significant environmental litigation, an analyst would likely increase the discount rate to account for the higher risk and uncertainty. Litigation can result in financial penalties, operational disruptions, and reputational damage, all of which could negatively impact future cash flows.ESG Reference: Chapter 7, Page 361 - ESG Analysis, Valuation & Integration in the ESG textbook.

Human rights are a social factor that primarily affects external stakeholders, such as communities or populations impacted by a company's operations. (ESGTextBook[PallasCatFin], Chapter 4, Page 192)

Diversity of thought is crucial for a board's success as it brings in varied perspectives, innovative ideas, and a holistic approach to problem-solving. While age and gender diversity are important, diversity of thought ensures that the board benefits from a range of experiences and viewpoints, leading to better decision-making and governance.