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

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.

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.

ESG investing in emerging markets faces several well-documented challenges, especially concerningdata disclosureandvariability across countriesdue to regulatory and cultural differences. However,data variability between companiesis common in both developed and emerging markets and is not a defining challenge specific to emerging markets.

“A key challenge in emerging markets is the inconsistent application of ESG reporting standards, which leads to high data variability between countries and often poor disclosure levels. While company-level variability exists globally, it is less pronounced as a distinguishing issue for emerging markets.”

Thus,data variability between companiesis the least significant challenge in the emerging market context.

The manual distinguishes firm-specific (idiosyncratic) risk from systematic (market/sector) risk: “Risk also appears as either idiosyncratic or systematic risk:▶Idiosyncratic risk describes firm- or stock-specific risk.”

It also notes sector-wide environmental risks “may affect the discount rate used,” showing that systematic (sector/market) risks can be reflected in the discount rate.

For company-specific assessments, the manual’s DCF case study explains the team “prefers DCF and explicit model scenarios for sales, margins and asset turns … rather than an adjustment to a discount rate … for a company specific assessment.”

Together, these extracts support that company-specific (idiosyncratic) ESG risk is not well suited to be embedded in the discount rate, whereas sector- or market-wide risks are.