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

Credit rating agencies tend to favor companies in regions with high ESG reporting standards (Option C) because:

More disclosure leads to better ESG assessments, reducing uncertainty.

Companies in regions with weaker ESG regulations (e.g., emerging markets) may face higher credit risk due to limited transparency.

Option A is incorrect because ESG factors (e.g., climate risks) can impact liquidity and asset values.

Option B is incorrect because industry weighting in ESG integration follows standard credit risk methodologies.

References:

Moody’s ESG Credit Ratings Report

S&P ESG and Sovereign Credit Ratings

PRI Guide on ESG Integration in Fixed Income

Scopewashing (Option C) occurs when a company highlights progress in one ESG area while underreporting or neglecting negative impacts in another. Example:

A company boasts about renewable energy investments but continues to expand fossil fuel projects without full disclosure.

A firm promotes diversity hiring but has poor labor practices in its supply chain.

Option A (Using hyperbole) refers more to greenwashing rather than scopewashing.

Option B (Keeping quiet) is not scopewashing, but rather a lack of transparency.

References:

OECD Report on ESG Misrepresentation

PRI Guide on Greenwashing Risks

EU Sustainable Finance Taxonomy: Misrepresentation Risks

Both Enron and WeWork faced governance failures due to excessive control and influence by their CEOs (Jeffrey Skilling for Enron, Adam Neumann for WeWork).

Why C (CEO dominance) is correct:

Enron’s CEO misled investors through fraudulent accounting practices.

WeWork’s CEO (Adam Neumann) had unchecked authority, leading to unethical corporate decisions that ultimately resulted in a failed IPO.

Why not A or B?

A (Auditor lapses) is relevant for Enron (Arthur Andersen scandal) but not a key factor in WeWork’s collapse.

B (Related-party deals) occurred at WeWork (e.g., CEO leasing buildings to his own company) but was not a central issue in Enron’s collapse.

References:

Harvard Business Review: "The Leadership Failures of WeWork and Enron"

SEC Case Studies on Corporate Governance Failures

Climate change (Option A) is a material financial risk that pension fund trustees must consider under their fiduciary duty. Failing to assess climate risks can lead to:

Legal liabilities and lawsuits from beneficiaries.

Financial losses due to stranded assets and regulatory shifts.

Option B (Choice of benchmarks) is relevant, but not the primary fiduciary risk.

Option C (Lack of ESG signals) affects engagement but does not constitute a direct legal risk.

References:

PRI: Fiduciary Duty in the 21st Century Report

UK Pensions Regulator: Climate Risk Guidance

EU IORP II Directive on ESG Integration in Pensions