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

Screening involves excluding certain investments based on specific criteria. When exclusions are not supported by a global consensus, they are best described as idiosyncratic exclusions.

Universal exclusions (A): These are exclusions that are widely accepted and applied globally, such as the exclusion of companies involved in controversial weapons.

Idiosyncratic exclusions (B): These exclusions are specific to particular investors or investment strategies and are not based on a global consensus. They reflect the unique values or preferences of the investor or investment mandate.

Conduct-related exclusions (C): These are based on a company's behavior or actions, such as violations of human rights or environmental regulations. While these can be idiosyncratic, they are often based on broader accepted standards.

References:

CFA ESG Investing Principles

MSCI ESG Ratings Methodology (June 2022)​

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A discount retailer facing a consumer boycott due to poor working conditions will most likely face an adverse impact on revenues.

Adverse impact on revenues (C): A consumer boycott directly affects the retailer's sales and revenues. When consumers choose not to purchase from the retailer due to poor working conditions, the retailer experiences a decrease in sales, which negatively impacts its revenue stream. This can also affect the retailer's market share and brand reputation.

Significant liabilities (A): While poor working conditions might eventually lead to liabilities such as legal fines or compensation claims, the immediate effect of a consumer boycott is more directly felt in reduced revenues.

Greater operating costs (B): Poor working conditions can indirectly lead to higher operating costs due to potential inefficiencies, higher turnover, or the need to improve conditions in response to negative publicity. However, the primary immediate impact of a consumer boycott is on revenues.

References:

CFA ESG Investing Principles

Case studies of consumer boycotts and their financial impacts on companies

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Step 1: Overview of Asset Classes with Sustainability Strategies

Sustainability-themed strategies have been increasingly integrated into various asset classes. These strategies focus on investments that promote environmental, social, and governance (ESG) factors.

Step 2: Comparison of Availability in Asset Classes

Real Estate: High availability of sustainability-themed strategies, focusing on green buildings, energy efficiency, and sustainable urban development.

Private Debt: Emerging but less prevalent compared to real estate.

Infrastructure: Significant availability, but still generally less than real estate due to the higher complexity and long-term nature of infrastructure projects.

Step 3: Verification with ESG Investing References

According to Mercer Consulting, real estate is noted for having the highest availability of sustainability-themed strategies compared to its asset-class universe, primarily due to the tangible and direct impact of ESG practices on property value and operational efficiency: "Real estate offers numerous opportunities for integrating sustainability strategies, making it a leading asset class in this regard"​​​​.

Conclusion: Real estate has the highest availability of sustainability-themed strategies compared to its asset-class universe according to Mercer Consulting.

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To produce a rating, an ESG rating provider will most likely apply a weighting system to both qualitative data and quantitative data. ESG ratings are derived from a comprehensive analysis that includes various types of data to assess the overall ESG performance of a company.

Quantitative Data: This includes measurable data such as carbon emissions, energy consumption, employee turnover rates, and other numerical metrics that can be directly compared across companies.

Qualitative Data: This involves subjective assessments such as the quality of governance practices, corporate policies, stakeholder engagement, and other narrative information that provides context and insights beyond the numbers.

Weighting System: The ESG rating provider uses a weighting system to balance the relative importance of different ESG factors, combining both quantitative and qualitative data to form an overall rating. This approach ensures a holistic view of the company’s ESG performance.

References:

MSCI ESG Ratings Methodology (2022) - Explains the integration of both qualitative and quantitative data in the ESG rating process​​.

ESG-Ratings-Methodology-Exec-Summary (2022) - Discusses the use of a weighting system to combine various data types for comprehensive ESG ratings​​.