CFA Institute Updated ESG-Investing Exam Questions and Answers by juniper

Stewardship codes share similar principles across different regions, emphasizing long-term value creation, accountability, and the active role of shareholders in corporate governance. (ESGTextBook[PallasCatFin], Chapter 6, Page 276)

Different ESG rating agencies (MSCI, Sustainalytics, Refinitiv, etc.) use different methodologies, leading to low correlation among ratings.

Why C (more difficult for companies) is correct:

Companies struggle to improve ESG scores because rating criteria differ significantly across providers.

Example: A company may score high on MSCI but low on Sustainalytics, making it harder to demonstrate ESG improvement.

Why not A or B?

A is incorrect because inconsistency creates challenges rather than making improvement easier.

B is incorrect because ESG ratings do influence corporate ambition to improve sustainability efforts.

References:

MIT Sloan: "The Inconsistency of ESG Ratings" (2022)

The performance impact of excluding certain sectors (such as tobacco or coal) can be more easily measured by comparing the portfolio's returns to a benchmark, showing the drag or enhancement due to this exclusion. (ESGTextBook[PallasCatFin], Chapter 7, Page 319)

GHG emissions are categorized into three scopes:

Scope 1: Direct emissions from a company’s owned facilities and vehicles.

Scope 2: Indirect emissions from purchased electricity, heating, or cooling.

Scope 3: Indirect emissions from the value chain, including leased assets, supply chain, employee commuting, and business travel.

Why C (Scope 3) is correct:

Leased assets are not directly owned but still contribute to a company’s carbon footprint.

Why not A or B?

A (Scope 1) applies to owned assets, not leased ones.

B (Scope 2) applies to purchased electricity, not leased buildings or vehicles.

References:

GHG Protocol Corporate Standard (2023 Update)