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

CFA sustainable investing materials explain that after settingupper and lower boundsfor ESG constraints (like carbon intensity or ESG scores), optimization can be carried out either:

On an absolute basis: minimizing absolute risk/return outcomes while meeting ESG limits, or

On a benchmark-relative basis: minimizing tracking error to a benchmark while meeting ESG constraints.Thus, ESG constraints do notrequireeither approach—theypermitboth.

TheUnited Kingdomwas the first to introduce a formal corporate governance code, known as theCadbury Report (1992). This groundbreaking document established best practices for corporate governance, emphasizing theroles and responsibilities of boards, transparency, and accountability. It became the model for many global governance frameworks and was a direct response to financial scandals at the time.

Peer-group screeningusesrelative ESG performancewithin an industry, which meansindustries are not entirely excluded(option B). This preserves sector diversification while still identifying leaders and laggards in sustainability practices. Absolute screening (A) can eliminate entire sectors (like fossil fuels), but peer screening allows for nuanced exposure within a sector.

ESGscorecardsareflexible toolsused toassess ESG performanceacross bothpublic and private markets. They help investors identify ESG risks and opportunities regardless of ownership structure. While third-party data can inform scorecards, in practice they also includeproprietary data and company-specific engagement outcomes. These scorecards are typically designed to remain consistent in evaluating performance across different ownership structures.