CFA Institute Sustainable-Investing - Sustainable Investing Certificate (CFA-SIC) Exam

The Official Training Manual (OTM) explains that although passive ESG strategies replicate indices, they have evolved to incorporate engagement and stewardship functions to influence corporate behavior. It states:

“While active managers have traditionally led on stewardship,passive managers are increasingly demonstrating that stewardship activity can be focused, consistent, and long termin nature. By holding positions indefinitely, they have a structural incentive to engage companies to enhance long-term value creation.”

This directly supports optionB, as passive ESG managers, such as those managing ESG ETFs, cannot “walk away” by selling and instead use stewardship as a primary tool. The OTM further notes that these strategies rely on “systematic engagement across all holdings” to improve ESG outcomes rather than short-term trading.

Options A and C are not universally correct: passive funds tend to belower cost(contradicting A), and while some exclusions occur, the OTM does not identify that as their most defining feature (contradicting C).

📘Reference:2021-Final-Book.pdf, Chapter 8 — ESG Integrated Portfolio Construction and Management (Passive ESG Strategies section).

Stock exchanges play a critical role in enhancing ESG transparency by mandating or encouraginghigher ESG disclosure standardsfor listed companies. This helps investors accessmaterial ESG informationfor better decision-making.

“Stock exchanges can increase disclosure requirements on ESG data by listed companies (as encouraged by the Sustainable Stock Exchange Initiative).”

While they may support ESG-related products, such as green bonds, theircore contributionlies inregulatory influenceover disclosures.

Positive alignment, or best-in-class investing, selects companies that rank highly on ESG criteria relative to their peers. One major challenge with this approach is thelack of consistency across ESG rating methodologies. Because different providers use different criteria, a company may score highly on one scale but poorly on another. Thislack of convergenceundermines the transparency and comparability needed for effective strategy implementation.

“The diversity of ESG ratings methodologies and lack of ratings convergence are a key challenge these strategies face… They may score highly based on the portfolio manager’s methodology but score more poorly on another set of ESG metrics.”

Thus, option B accurately reflects the central difficulty faced by investors employing a positive alignment strategy.

When companies integrate ESG into their operations, they are more likely to enhanceoperational efficiency. This happens through better resource management (e.g., energy and water use), streamlined processes, reduced regulatory risks, and improved stakeholder relationships. The ESG manual states:

“ESG integration in business practices often leads to reduced costs and improved efficiency due to reduced waste, optimized energy use, better supply chain management, and employee satisfaction.”

This integration also supports long-term value creation by aligning operations with sustainability trends, rather than increasing externalities or requiring state intervention.

The OTM discusses the phenomenon of “competence greenwashing,” defining it as:

“Situations where organizations claim to have the capacity or structures to manage ESG issues, such as appointing sustainability officers or teams, but demonstrate no substantive policy, strategy, or outcomes to justify those claims.”

This description matches the scenario exactly—a firm setting up a sustainability office without implementing or reporting genuine ESG actions. The manual contrasts this with “greenhushing,” where companies downplay sustainability activities, and “scopewashing,” where emissions or ESG boundaries are misrepresented.

Thus, competence greenwashing refers to overstating institutional readiness or capability without execution, makingoption Cthe correct and verified answer.

📘Reference:2021-Final-Book.pdf, Chapter 1 — Introduction to ESG; Section on ESG Misrepresentation and Greenwashing Types.

The Official Training Manual under the section on climate benchmarks states:

“The EUParis-Aligned Benchmark (PAB)… requires aninitial 50% reduction in carbon intensityrelative to the investable universe, and ongoingannual decarbonisation of at least 7%thereafter.”

This clearly aligns with optionC. Options A and B are partially true of other indices (e.g., Climate Transition Benchmark), but only thePABexplicitly includes the 50% emission reduction requirement.

📘Reference:2021-Final-Book.pdf, Chapter 8, ESG Integrated Portfolio Construction and Management.

Most companies, particularly those operating under strong corporate governance frameworks (e.g., UK Corporate Governance Code), are expected to maintainthree principal board committees: audit, nomination, and remuneration. These committees serve critical governance functions—financial oversight, board composition, and executive pay.

“Expectations and duties of the three principal board committees that almost all major companies have in place: the audit committee… the nominations committee… and the remuneration committee.”

While sustainability or risk committees may exist in some firms, they are not as universally established as the three mentioned above.

The manual notes:

“ESG integration can lead tonew investable universes(such as green bonds, social bonds, or renewable infrastructure) that behave differently from conventional asset classes. Hence, they canadd new sub-asset classesto traditional portfolio optimization frameworks.”

This aligns with optionC, as ESG factors may alter the efficient frontier by introducing differentiated risk/return characteristics.

📘Reference:2021-Final-Book.pdf, Chapter 8, Portfolio Optimization and ESG Integration Section.

In theSocial and Economic Trendssection, the OTM describes long-term labor market shifts:

“Across advanced economies,working hours per capita have declined steadily, primarily because ofrising part-time and flexible employment, aging demographics, and increased participation in education.”

The manual references OECD labor data showing this trend correlates with service-sector growth and work–life balance policies. Remote working, though prevalent post-2020, has not reversed the multi-decade decline.

Therefore,option A—decrease due to increased part-time employment—is accurate and directly supported by empirical and contextual explanations from the ESG social dimension.

📘Reference:2021-Final-Book.pdf, Chapter 4 — Social Factors (Labor Market and Workforce Dynamics section).

Water scarcity is recognized as amajor global risk. Corporations that consume large volumes of water—especially in water-stressed areas—can severely limitaccess to clean and affordable waterfor local communities.

“Water scarcity is present on every continent… a decision to allocate more water to any one sector implies that less water will be available for other economic uses or for environmental protection.”

Wastewater treatment technology is not a complete solution, andmelting Arctic icedoesnotcontribute to usable freshwater supply.

Exclusionary preferencesare investment restrictions based on ethical, moral, or normative criteria, such as avoiding tobacco or weapons companies. These are most commonlyinitiated by asset owners, such as pension funds or sovereign wealth funds, due to their fiduciary or ethical mandates. While some asset managers also apply such screens, they typically do so only when managingcustomized mandatesfor asset owners.

“Exclusionary preferences are most commonly adopted and applied by asset owners rather than asset managers… Asset managers do manage dedicated mandates for asset owners that commonly impose some form of exclusionary screen.”

This is because asset owners are more directly accountable to their beneficiaries, who often hold specific ethical values that need to be reflected in their investments.

In theESG Data Sourcessection, the OTM differentiates between primary and secondary ESG data:

“Primary datacome directly from companies—reports, disclosures, or surveys—whereassecondary dataare derived from third-party processing and analysis of that information, such asESG ratings or scores.”

This means ESG ratings are considered secondary since they are synthesized from existing data rather than newly collected information. A survey of employees (C) would be primary, and a news article (A) is tertiary (media-based).

Therefore,option Bis the correct and verified classification.

📘Reference:2021-Final-Book.pdf, Chapter 7 — ESG Analysis, Valuation, and Integration (Data Quality and Sources section).

TheOfficial Training Manual (OTM)highlights significant limitations and inconsistencies in ESG ratings across providers. It notes:

“Theinformation provided by ESG rating agencies is relatively noisy, reflecting differences in methodologies, data sources, and weighting systems.”

This “noise” leads to low correlation among ESG scores from major providers (e.g., MSCI, Sustainalytics, Refinitiv), often as low as 0.3–0.6. The manual attributes these discrepancies to variations in materiality frameworks, sector weightings, and subjective analyst adjustments.

It further emphasizes that despite growing sophistication, ESG ratings remain “estimates rather than absolute measures,” making them an input—rather than a determinant—of investment decision-making.

Hence,option Bis verified as the correct choice, since the data’s inconsistency (noise) is a key theme in ESG analytics.

📘Reference:2021-Final-Book.pdf, Chapter 7 — ESG Ratings and Data Methodologies (Limitations of ESG Ratings section).

TheSustainable Industry Classification System (SICS)is developed by SASB (Sustainability Accounting Standards Board) and is specifically designed to classify companies based onsustainability-related characteristics, not just their financial or industry traits. These attributes includeresource intensity, sustainability risks, and innovation opportunities, which help investors evaluate how material ESG issues affect different industries.

“The SICS system organises companies according to their sustainability attributes such as resource intensity, sustainability risks and innovation opportunities.”

This contrasts with the Morningstar sustainability rating (which scores ESG performance), and the TCFD (which is a disclosure framework), makingSICSthe accurate choice.

One of the most cited issues in ESG data is thelow correlationbetween ESG ratings from different providers. This inconsistency arises from differing methodologies, weightings, and data sources.

“ESG ratings from different providers often show low correlation… making it difficult for investors to compare ratings and for companies to respond to a unified set of ESG expectations.”

Thus,option A is least accurate, while B and C reflect common observations.