CFA Institute ESG-Investing - Certificate in ESG Investing

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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Both stock exchanges and securities regulatorsplay a role inmandating ESG disclosures:

Stock exchanges(e.g., London Stock Exchange, NYSE) may require ESG disclosures as part oflisting requirements.

Securities regulators(e.g., SEC, European Securities and Markets Authority) enforce ESG reporting laws.

References:

Global Reporting Initiative (GRI) ESG Disclosure Standards

World Federation of Exchanges (WFE) ESG Reporting Guidance

CFA Institute Report on ESG Disclosure Regulation

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Berg, Koelbel, and Rigobon (2022) found thatESG ratings from different providers (e.g., MSCI, Sustainalytics, FTSE) have low correlation, makingcomparisons difficult. This inconsistencyhinders empirical researchandleads to investor confusion.

References:

Berg, Koelbel & Rigobon (2022) “Aggregate Confusion: The Divergence of ESG Ratings”

MSCI vs. Sustainalytics ESG Ratings Methodology Comparison

CFA Institute ESG Data Inconsistency Report

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General insurerstypically have theshortest investment time horizonbecause theirliability structureis shorter-term, requiring liquidity to pay claims quickly. For example,property and casualty (P&C) insurersmust hold liquid assets to cover unexpected claims fromnatural disasters or accidents.

In contrast,life insurers (A)manage long-term liabilities and have extended investment horizons, whilefoundations (B)invest with long-term endowment strategies.

References:

CFA Institute Report on ESG Investing for Insurers

OECD Guidelines on Insurance Investment Strategies

PRI ESG Integration in Insurance Asset Management

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.

References:

CFA Institute Greenwashing Risk Guide

Principles for Responsible Investment (PRI) ESG Transparency Report

EU Green Claims Directive

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.

References:

Carbon Tracker Initiative Stranded Assets Report

CFA Institute ESG Climate Risk Framework

World Bank Energy Transition & Asset Risk Guide

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

References:

UK Pensions & Lifetime Savings Association Stewardship Checklist

Principles for Responsible Investment (PRI) ESG in Fixed Income Guide

CFA Institute Fixed Income ESG Risk Report

ESG rating providersrely on multiple sources of public information, includingcompany reports, government databases, and nonprofit organizations.

They do not require company-reported ESG data to be audited (A).

Many ESG rating providers (e.g., MSCI, Sustainalytics) use CDP carbon data, making (C) incorrect.

References:

MSCI & Sustainalytics ESG Ratings Methodology

Carbon Disclosure Project (CDP) ESG Data Framework

CFA Institute ESG Data Transparency Report

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ESG indices exist forboth equity and fixed income, covering a range of investment vehicles such ascorporate bonds, sovereign bonds, and green bonds. Major providers likeMSCI, S&P, and FTSE Russelloffer ESG indices across asset classes.

Option A is incorrect because ESG index methodologies vary significantly between providers. Option C is misleading becausebacktesting ESG performanceis complex due tolimited historical ESG data.

References:

MSCI ESG Index Methodology

S&P Dow Jones ESG Index Framework

Morningstar ESG Fund Analysis

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.

References:

GRESB Real Estate Sustainability Benchmark Framework

MSCI ESG Real Estate Research Reports

Principles for Responsible Investment (PRI) ESG Real Assets Guide

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Carbon footprinting allows emissions data to be aggregated across geographies, supply chains, and business units,providing a holistic view of carbon impact.

It is typically backward-looking rather than forward-looking (A).

There are multiple carbon accounting methodologies (B), but they are not always standardized.

References:

Greenhouse Gas (GHG) Protocol Carbon Accounting Framework

CFA Institute ESG Carbon Footprint Measurement Guide

UNFCCC Carbon Accounting & Disclosure Standards

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Thematic fundsfocus onspecific investment themes(e.g., renewable energy, clean tech, diversity-focused companies), often leading toconcentration riskandlimited portfolio diversification. Because they focus on anarrow subsetof industries or trends, their risk profile ishigherthan broadly diversified funds.

While some thematic funds may outperform in certain cycles (C),performance is not guaranteed, and they can underperform in downturns. Poor cash flow profiles (A) depend on the companies selected, not a universal characteristic of thematic funds.

References:

MSCI Thematic Investing Report

Morningstar Thematic Fund Analysis

CFA Institute ESG Fund Characteristics Report

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Income inequality oftenreduces access to education, particularly for lower-income individuals who may struggle withtuition costs, lack of resources, and unequal schooling quality. This, in turn, canreduce upward social mobilityand widen wealth disparities over time.

Option C (tax optimization strategies) is a separate corporate governance issue and not adirectresult of income inequality. Option A (increase in social mobility) is incorrect ashigher inequality often reduces social mobility.

References:

OECD Report on Income Inequality and Education

World Economic Forum (WEF) Global Social Mobility Index

UN Sustainable Development Goal 10 (Reduced Inequality)

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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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Double materialitymeans a company must reportnot only how ESG risks impact financial performancebut alsohow the company’s activities impact society and the environment.

For example, under theEU Corporate Sustainability Reporting Directive (CSRD), companies must disclose:

Financial materiality(how ESG issues affect financial performance)

Impact materiality(how the company affects the environment and society)

References:

European Commission’sCSRD & Double Materiality Framework

Global Reporting Initiative (GRI) Standards

Principles for Responsible Investment (PRI) ESG Reporting Guidelines

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