CFA Institute Updated Sustainable-Investing Exam Questions and Answers by gethin

Conduct-related exclusionsrefer to situations where companies are excluded from investmentbased on specific behaviorsthat are unethical or violate fundamental standards, such as labor rights, corruption, or environmental abuse.

“When evaluating a company for investment, both social risks and the level of mitigation and management should be considered. When such issues persist, a consumer boycott or divestment by investors is possible…”

In this case, thesurveillance of employees to block union formationis a violation of social and labor standards. Divestment due to this conduct qualifies as aconduct-related exclusion.

TheESG Investment Strategiessection of the Official Training Manual (OTM) describes systematic ESG approaches, including long–short equity models. It states:

“Quantitative ESG long–short strategiestypically involve takinglong positions in top-decile ESG-rated stocksandshort positions in bottom-decile ESG-rated stockswithin the same sector or region, to neutralize market beta while capturing ESG-related alpha.”

This method uses ESG scores as a differentiating signal while maintaining overall factor neutrality (e.g., size, sector). The manual further notes that these strategies “allow investors to isolate ESG-driven return differentials, removing market or style bias.”

Sectors are not typically shorted directly (eliminating option C), and “non-ESG-rated” stocks (option A) would not fit within systematic ranking models since such firms lack data for quant selection.

Hence, the verified and precise answer isB, supported by direct methodological reference.

????Reference:2021-Final-Book.pdf, Chapter 8 — ESG Integrated Portfolio Construction (Quantitative ESG Approaches section).

The OTM defines engagement as a cornerstone of active ownership, describing it as:

“A structured process by which investorscommunicate expectations to investee companieson ESG practices and long-term value creation.”

It further notes:

“Engagement helps companiesbetter understand investor expectations and prioritieswhile giving investors insight into corporate governance and risk management practices.”

This explanation precisely reflectsoption A. Conversely, the manual emphasizes that engagement is least effective when a company shows resistance or lacks openness (contradicting option C) and that successful engagement islong-term and relationship-driven, not reactive to short-term price movements (contradicting option B).

Thus, engagement’s primary value lies in facilitating two-way understanding between investors and companies, confirming optionAas correct.

????Reference:2021-Final-Book.pdf, Chapter 6 — Engagement and Stewardship (Purpose and Benefits of Engagement section).

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).