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

The ocean (Option A) is the largest carbon reservoir, storing about 39,000 gigatons of carbon—far more than forests or the atmosphere. It absorbs:

About 30% of human CO₂ emissions annually, buffering climate change.

Carbon through the biological pump, where plankton absorb CO₂.

Option B (Rainforests) are crucial carbon sinks, but they store significantly less carbon than oceans.

Option C (Atmosphere) holds about 750 gigatons of carbon, much less than the ocean reservoir.

ESG performance attribution is used to measure the impact of ESG factors on investment returns.

Why C (Brinson and risk factor attribution) is correct:

The Brinson model decomposes portfolio returns into allocation and selection effects.

Risk factor models help determine whether ESG factors explain investment performance.

Why not A or B?

A is incorrect—ESG attribution in fixed-income portfolios is complex due to limited data and different risk structures.

B is incorrect—commercial ESG tools exist, but attribution still requires custom modeling.

Faith-based Islamic investors follow Shariah principles, which prohibit investments in industries such as gambling, alcohol, and those earning interest (riba). (ESGTextBook[PallasCatFin], Chapter 1, Page 31)

Environmental risks and opportunities impact both financial forecasts and valuation multiples (Option C) by:

Adjusting revenue and cost projections (e.g., higher carbon taxes or lower energy costs from renewables).

Affecting valuation multiples, as companies with strong ESG performance often receive higher price-to-earnings (P/E) or lower discount rates due to reduced risk.

Option A (Financial forecasts only) ignores the impact on valuation multiples.

Option B (Valuation multiples only) overlooks how environmental risks affect revenue, costs, and profitability.