Free CFA Institute Sustainable-Investing Practice Exam with Questions & Answers | Set: 13

In Sweden, the nominations committee is drawn from shareholders rather than being a committee of the board.

Sweden (B): In Sweden, the nominations committee is typically composed of representatives of the largest shareholders and is responsible for proposing board members. This approach ensures that shareholder interests are directly reflected in the selection of board candidates.

Italy (A): In Italy, the nominations committee is generally a committee of the board rather than being drawn from shareholders.

The Netherlands (C): In the Netherlands, the nominations committee is also generally a committee of the board.

A technology company in the research and development stage with no commercially marketed products is most likely to have low risk exposure to data security and customer privacy issues in the short run.

Stage of Development: At the R&D stage, the company is primarily focused on developing and testing new technologies, which typically involves limited interaction with customers and minimal handling of customer data.

Data Security and Privacy Risks: Since the company is not yet commercialized, it is less exposed to risks related to data breaches or privacy violations. These risks become more significant once the company starts marketing its products and collecting customer data.

Short-Term Risk: In the short run, the primary focus is on innovation and development rather than data security and privacy, resulting in lower exposure to these risks.

CFA ESG Investing References:

The CFA Institute’s materials on risk management and ESG factors in technology companies highlight that data security and customer privacy become more critical as companies move from R&D to commercialization stages​​​​.

=================

Carbon intensity is calculated as Scope 1 plus Scope 2 emissions divided by revenue.

Revenue (B): Carbon intensity is a measure of a company’s carbon emissions relative to its economic output, typically calculated as the sum of Scope 1 and Scope 2 emissions divided by revenue. This provides a standardized way to compare the carbon efficiency of companies across different sizes and industries.

Profit (A): Using profit for this calculation is less common and would not provide a consistent measure of carbon intensity, as profits can vary widely due to factors unrelated to emissions.

Market capitalization (C): Market capitalization reflects the company’s market value, which is influenced by investor perceptions and market conditions, rather than the direct economic output of the company.

A mature ESG regulatory framework is one where companies are required to either comply with ESG standards or provide explanations for why they have not done so, known as "comply or explain." This approach encourages transparency and accountability while allowing some flexibility for companies based on their specific circumstances.ESG Reference: Chapter 9, Page 499 - Investment Mandates, Portfolio Analytics & Client Reporting in the ESG textbook.

An aging population affects various sectors differently. The sector most likely to experience slower growth as a result of an aging population is consumer goods.

Healthcare (A): This sector is likely to experience growth due to increased demand for healthcare services, products, and related support as the population ages.

Consumer goods (B): Consumer goods, particularly those targeted at younger demographics or non-essential items, may see slower growth. An aging population typically spends less on consumer goods and more on healthcare and services tailored to their needs.

Wealth management (C): This sector might experience growth as older populations often require wealth management services to handle retirement funds, estate planning, and other financial services.

Step 1: ESG Considerations in Sovereign Debt

Integrating ESG factors into sovereign debt involves assessing a country's environmental, social, and governance characteristics. This process can reveal structural differences between countries, especially between developed and emerging economies.

Step 2: Key Differences in ESG Ratings

Little Correlation between ESG Risk and Credit Ratings: There is some correlation, but not enough to negate the importance of ESG factors.

Similar Levels of ESG Integration: ESG integration in sovereign debt is generally not as advanced as in listed equities and corporate debt.

Structural Differences: Emerging countries often have lower ESG ratings due to governance issues, environmental challenges, and social factors compared to developed economies.

Step 3: Verification with ESG Investing References

ESG ratings for emerging countries are typically lower due to various structural challenges, which affect their overall ESG scores: "Emerging economies tend to have lower ESG ratings compared to developed countries, reflecting ongoing governance, environmental, and social issues"​​​​.

Conclusion: ESG ratings tend to be structurally lower for emerging countries relative to developed economies.

=================

Investment mandates should reflectboth ESG factors and their prioritization, ensuring alignment withclient beliefs, risk tolerance, and sustainability goals.

Materiality alone (A) is not enough, andrationale (B) is part of the process but not the defining criterionfor structuring investment mandates.

Anenvironmental litigation costis afirm-specificrisk that increases uncertainty in a company’s cashflows, thereby raising itscost of capital (discount rate)in a DCF model.Higher discount rates reflect higher risk perceptions, reducing the present value of future earnings.

In contrast, asector-wide carbon tax (B)affects all firms in the industry and is often incorporated into pricing structures, reducing itsfirm-specific impact on discount rates.Launching a sustainable product (A)might lower risk perception, potentially reducing the discount rate instead.

Competence greenwashingoccurs when a companymisrepresents its ESG knowledge or expertise, such asoverstating the board’s sustainability qualifications.

Option C describes “selective disclosure” greenwashingrather than competence greenwashing.

TheEU Green Taxonomyprovides aclassification system that defines which economic activities are environmentally sustainable, ensuringinvestors and companies align with EU climate goals.

It does not classify all businesses by ESG scores (A).

It does not mandate investment in climate solutions (C), but encourages it.

TheUK Corporate Governance Codeemphasizesboard behaviors and corporate culture, focusing onaccountability, ethical leadership, and long-term value creation.

Board structure (A) and voting procedures (B) are important but not the primary emphasis of the UK code.

GRESB scoresreal estate assets based on both management practices (I) and performance KPIs (II). Themanagementcomponent includescorporate policies, governance, and sustainability commitments, while theperformancecomponent evaluatesenergy efficiency, carbon footprint, and resource usage.

Pension trustees mustassess ESG risks in credit ratingswhen selectingfixed-income managers, asESG factors affect bond pricing, default risk, and credit spreads.

A coal power plant forced to close due to carbon regulationsis astranded asset, as it loses economic value due toregulatory, environmental, or market changes.

A tech company losing market share (B) is a business risk, not asset stranding.

Short-term stock price declines (C) are normal market fluctuations.

A major challenge in ESG integration iscultural resistance and biases within investment firms. Sometraditional investment managersview ESG as non-financialorirrelevant to performance, leading to resistance in fully embedding ESG into decision-making.

WhileESG reporting complexity (B)is a challenge, it does not outweigh the fundamentalorganizational and mindset barriersthat slow adoption. Standardized disclosures (C) actually help rather than hinder ESG integration.