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CFA Institute ESG-Investing Exam Syllabus Topics:

Topic	Details
Topic 1	Environmental Factors: This section examines environmental elements, covering systemic links, material impacts, and major trends for ESG Consultants. This section also reviews techniques for evaluating environmental impacts at the national, sectoral, and organizational levels.
Topic 2	Investment Mandates and Portfolio Analytics: This domain explains to ESG Analysts the importance of constructing mandates to support effective ESG investment results. This section highlights key aspects, such as transparency and accountability, which are essential for asset owners and intermediaries to align portfolios with ESG priorities.
Topic 3	ESG Analysis, Valuation, and Integration: Targetted for ESG Consultants, this domain covers methods for embedding ESG factors into the investment process, the obstacles that may arise, and the impact of ESG considerations on valuations across various asset classes.
Topic 4	Engagement and Stewardship: This section explores the foundations of investor engagement and stewardship, emphasizing their importance and practical application.
Topic 5	Social Factors: This section focuses on analyzing social factors, including their systemic effects and material impacts. This section also provides methodologies for assessing social risks and opportunities at country, sector, and organizational levels.
Topic 6	Overview of ESG Investing and the ESG Market: This section tests ESG Investment Managers and delves into responsible investment strategies, examining how environmental, social, and governance (ESG) elements shape the investment ecosystem.

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CFA Institute Certificate in ESG Investing Sample Questions (Q192-Q197):

NEW QUESTION # 192
Which of the following ESG investing approaches aims to drive positive change in the way investee companies are governed and managed?

A. Active ownership
B. Positive alignment
C. Impact investing

Answer: A

Explanation:
Active ownership refers to the practice where investors use their rights and positions as shareholders to influence the governance and behavior of companies. This approach aims to drive positive changes in the way investee companies are governed and managed, often focusing on ESG (Environmental, Social, and Governance) factors.
Step-by-Step Explanation:
Definition and Purpose:
Active Ownership: Involves engaging with company management and using voting rights to influence corporate practices. The aim is to improve company performance on ESG factors which can lead to long-term value creation and risk mitigation.
According to the CFA Institute, active ownership is a key strategy for investors to address ESG issues by directly engaging with companies and voting on shareholder resolutions.
Mechanisms of Influence:
Engagement: This involves direct dialogue with company management to address ESG issues, set targets, and track progress.
Proxy Voting: Investors use their voting rights to support or oppose management proposals and shareholder resolutions related to ESG practices.
The MSCI ESG Ratings Methodology also highlights the role of active ownership in managing ESG risks and opportunities, emphasizing that investors can drive improvements through sustained engagement and voting strategies.
Impact on Governance and Management:
Governance Improvements: Active ownership can lead to better governance practices, such as improved board diversity, enhanced transparency, and stronger accountability.
Management Practices: Through active ownership, investors can encourage companies to adopt sustainable business practices, improve labor conditions, and reduce environmental impacts.
Case Studies and Examples:
Several studies and real-world examples illustrate the effectiveness of active ownership. For instance, engagements by large institutional investors like pension funds have led to significant changes in corporate policies and practices related to climate change, human rights, and executive compensation.
ESG Frameworks and Standards:
The CFA Institute's ESG Investing guide provides detailed frameworks for integrating active ownership into investment strategies. These include guidelines on effective engagement, proxy voting policies, and case studies demonstrating the impact of active ownership on company performance.
References:
CFA Institute, "Environmental, Social, and Governance Issues in Investing: A Guide for Investment Professionals." MSCI ESG Ratings Methodology documents, which describe the role of active ownership in addressing ESG risks and opportunities.

NEW QUESTION # 193
According to the Brunel Asset Management Accord, which of the following is least likely a cause for concern when evaluating an asset manager against an ESG investment mandate?

A. Short term underperformance compared to benchmark
B. Change in investment style
C. Loss of key personnel in the organization

Answer: A

Explanation:
When evaluating an asset manager against an ESG investment mandate, several factors can cause concern.
According to the Brunel Asset Management Accord, the following points are evaluated for adherence to ESG principles:
Change in investment style (A): A change in investment style can significantly alter the risk and return profile of the portfolio and potentially misalign it with the ESG mandate initially set by the client. This is a critical factor as consistency in investment style ensures that the ESG objectives are continuously met.
Loss of key personnel in the organization (B): Key personnel often drive the ESG integration within investment processes. Their departure could disrupt the consistency and quality of ESG analysis and integration, which is crucial for maintaining the standards of the ESG mandate.
Short term underperformance compared to benchmark (C): Short-term underperformance is not typically a major concern when evaluating an asset manager against an ESG mandate. ESG investing often focuses on long-term outcomes and sustainability. The performance of ESG strategies may fluctuate in the short term due to various factors, including market conditions and the inherent characteristics of ESG investments, which might not always align with short-term market movements. The emphasis is usually placed on long-term performance and the consistency of ESG integration rather than short-term results.
In the context of the Brunel Asset Management Accord and CFA ESG Investing principles, maintaining a long-term perspective and adhering to the agreed-upon ESG criteria are paramount. The primary focus is on the systematic and ongoing application of ESG principles rather than short-term performance metrics.
References:
Brunel Asset Management Accord
CFA ESG Investing Principles
MSCI ESG Ratings Methodology (June 2022).

NEW QUESTION # 194
Which of the following countries have a joint audit requirement that all public interest entities must engage at least two independent accounting firms to perform an annual audit?

A. Germany
B. France
C. United Kingdom

Answer: B

Explanation:
France has a joint audit requirement where public interest entities must engage at least two independent auditors, increasing transparency and reducing audit risk. (ESGTextBook[PallasCatFin], Chapter 5, Page 252)

NEW QUESTION # 195
Which of the following is an example of the internalization of negative externalities?

A. A farmer paying taxes based on the level of soil degradation on its farmland
B. An electronics manufacturer retaining more employees after improving working conditions
C. A car manufacturer receiving subsidies for electric car production

Answer: A

Explanation:
Internalizing negative externalities refers to a situation where a company must bear the costs of the negative environmental or social impacts it causes. In this case, a farmer paying taxes based on soil degradation reflects internalization, as the farmer is being penalized for harming the environment.
ESG Reference: Chapter 3, Page 169 - Environmental Factors in the ESG textbook.

NEW QUESTION # 196
A challenge to ESG integration at the asset allocation level when using mean-variance optimization is that it:

A. is highly sensitive to baseline assumptions
B. could introduce an additional source of estimation errors due to the need for dynamic rebalancing
C. requires specialist knowledge to make informed judgments about future risk

Answer: A

Explanation:
A challenge to ESG integration at the asset allocation level when using mean-variance optimization is that it is highly sensitive to baseline assumptions.
* Baseline Assumptions: Mean-variance optimization relies on assumptions about expected returns, volatilities, and correlations among assets. Small changes in these inputs can lead to significantly different asset allocation outcomes.
* Estimation Risk: The sensitivity to assumptions increases the risk of estimation errors, which can result in suboptimal asset allocation decisions and increased portfolio risk.
* ESG Data Integration: Integrating ESG factors adds another layer of complexity, as ESG data can be inconsistent or incomplete, further complicating the optimization process.
CFA ESG Investing References:
The CFA Institute's materials on portfolio management and asset allocation discuss the challenges of mean-variance optimization, including its sensitivity to baseline assumptions and the difficulties in integrating qualitative ESG data into quantitative models.

NEW QUESTION # 197
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