CFA Institute ESG Investing Certificate in ESG Investing Online Training

Question #61

Wastewater treatment facilities:

A . are highly capital intensive to develop
B . require minimal ongoing maintenance expenditures.
C . can be maintained by lower-skilled workers once developed

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Question #62

With respect to the current state of ESG disclosure globally, issuer reporting frameworks for ESG information are

A . mandatory
B . fragmented.
C . harmonized.

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Question #63

A portfolio manager may need to adopt a more appropriate ESG benchmark rather than a broad market benchmark if the degree of exclusions results in:

A . low active share and low tracking error
B . low active share and high tracking error.
C . high active share and high tracking error.

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Question #64

Fund labelers are most likely classified as:

A . regulators
B . fund promoters.
C . financial advisers

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Question #65

Which of the following is most likely categorized as an external social factor?

A . Human rights
B . Product liability
C . Working conditions

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Question #66

According to the Taskforce on Nature-related Financial Disclosures (TNFD), the four realms of nature include

A . land
B . pollution.
C . biodiversity

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Correct Answer: A
A

Explanation:

According to the Taskforce on Nature-related Financial Disclosures (TNFD), the four realms of nature include land, which is a critical aspect of the natural environment that businesses must consider in their sustainability and risk management strategies.

Step-by-Step Explanations:

TNFD Framework:

The TNFD was established to develop a framework for organizations to report and act on evolving nature-related risks. This framework is intended to help financial institutions and companies manage risks related to biodiversity and natural capital.

The CFA Institute highlights that the TNFD framework is essential for integrating nature-related financial risks into corporate and investment decision-making processes.

Four Realms of Nature:

The TNFD identifies four realms of nature that are critical for understanding and managing nature-related risks:

Land

Oceans

Freshwater

Atmosphere

These realms encompass the major natural systems that support life on Earth and are crucial for maintaining biodiversity and ecosystem services.

Significance of Land:

Land is a fundamental realm as it encompasses terrestrial ecosystems, forests, and agricultural areas.

It is crucial for biodiversity, carbon sequestration, and providing resources for human activities.

The CFA Institute notes that sustainable land management practices are vital for mitigating risks related to deforestation, habitat loss, and soil degradation, which can have significant financial and environmental impacts.

Integration into ESG Strategies:

Companies and investors are increasingly recognizing the importance of integrating land-related risks into their ESG strategies. This includes assessing the impacts of their operations on land use, biodiversity, and ecosystem health.

The TNFD framework provides guidance on how to assess and report on land-related risks, helping organizations to enhance their sustainability practices and improve transparency.

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

Taskforce on Nature-related Financial Disclosures (TNFD) documents, which outline the four realms of nature and their significance for ESG integration.

Question #67

Which of the following statements about ESG integration in fixed income is most accurate?

A . Municipal bonds cannot be considered for ESG integration
B . Credit rating agencies attempt to capture the risk of contingent liabilities in their sovereign credit ratings
C . Equity investors typically place greater emphasis on ESG factors that affect balance sheet strength compared to fixed-income investors

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Correct Answer: B
B

Explanation:

The most accurate statement about ESG integration in fixed income is that credit rating agencies attempt to capture the risk of contingent liabilities in their sovereign credit ratings.

Step-by-Step Explanations:

ESG Integration in Fixed Income:

ESG integration in fixed income involves assessing how environmental, social, and governance factors can impact the creditworthiness of issuers. This is important for both corporate and sovereign bonds.

According to the CFA Institute, ESG factors can affect the default risk and overall credit profile of issuers, making them critical components of fixed income analysis.

Role of Credit Rating Agencies:

Credit rating agencies, such as Moody’s, S&P, and Fitch, incorporate ESG factors into their rating methodologies to capture the risks that could affect an issuer’s ability to meet its financial obligations.

The CFA Institute notes that these agencies consider a range of ESG risks, including contingent liabilities, which are potential obligations that may arise from uncertain future events.

Contingent Liabilities in Sovereign Ratings:

Contingent liabilities, such as guarantees on loans or potential costs from environmental disasters, can significantly impact a sovereign’s financial stability and creditworthiness.

Credit rating agencies attempt to assess the likelihood and potential impact of these contingent liabilities when determining sovereign credit ratings. This helps investors understand the risks associated with investing in sovereign bonds.

Importance for Investors:

For fixed-income investors, understanding how ESG factors and contingent liabilities affect credit ratings is crucial for making informed investment decisions. It helps them identify potential risks and opportunities in the bond market.

The CFA Institute emphasizes that integrating ESG factors into fixed income analysis can improve risk management and enhance long-term returns.

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

Reports from major credit rating agencies on ESG integration in sovereign credit ratings.

Question #68

The Cadbury Commission proposed that:

A . transparency around drivers of performance pay should be increased
B . the Public Company Accounting Oversight Board should be established.
C . every public company should have an audit committee meeting at least twice a year

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Correct Answer: C
C

Explanation:

The Cadbury Commission proposed that every public company should have an audit committee meeting at least twice a year.

Step-by-Step Explanations:

Background of the Cadbury Commission:

The Cadbury Commission, established in the UK in 1991, aimed to address issues of corporate governance in the wake of several high-profile corporate scandals.

According to the CFA Institute, the commission’s recommendations have had a lasting impact on corporate governance practices globally.

Key Recommendations:

One of the key recommendations of the Cadbury Commission was that every public company should establish an audit committee composed of independent non-executive directors. This committee should meet at least twice a year to review the company’s financial reporting and internal controls.

The CFA Institute highlights that this recommendation was intended to enhance the oversight and accountability of financial reporting processes, reducing the risk of financial misstatements and fraud.

Importance of Audit Committees:

Audit committees play a critical role in ensuring the integrity of a company’s financial statements. They provide an independent review of the financial reporting process, internal controls, and the external audit process.

The MSCI ESG Ratings Methodology emphasizes the importance of robust audit committee practices in maintaining investor confidence and protecting shareholder value.

Implementation and Global Influence:

The recommendations of the Cadbury Commission have been widely adopted and incorporated into corporate governance codes around the world. The requirement for regular audit committee meetings has become a standard practice in many jurisdictions.

The CFA Institute notes that effective audit committees are a cornerstone of good corporate governance, helping to ensure transparency, accountability, and the accuracy of financial reporting.

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

Historical documents and reports on the Cadbury Commission’s recommendations and their impact on corporate governance.

Question #69

Which of the three ESG factors is most often taken into consideration by traditional investment analysts?

A . Social
B . Governance
C . Environmental

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Question #70

Which of the following factors is most relevant to the performance outlook of a military equipment manufacturer?

A . Offshoring
B . Gender equality
C . Artificial intelligence

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