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

A materiality assessment to identify ESG issues impacting a company's financial performance is most effectively measured in terms of both likelihood and magnitude of impact. This approach provides a comprehensive view of potential risks and opportunities by evaluating how likely an issue is to occur and the extent of its potential impact on financial performance. This dual assessment helps in prioritizing ESG issues that are both probable and significant in their effects​​​​​​.

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Human rights are most likely categorized as an external social factor.

Human rights (A): Human rights issues pertain to the broader societal impacts and obligations of companies towards external stakeholders, including communities and individuals affected by the company's operations. These are external social factors because they involve the company’s interaction with the society at large.

Product liability (B): Product liability is typically considered an external factor but is more related to legal and regulatory compliance rather than social factors.

Working conditions (C): Working conditions are internal social factors as they pertain to the company's treatment of its employees and the internal work environment.

References:

CFA ESG Investing Principles

MSCI ESG Ratings Methodology (June 2022)​

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Excluding tobacco from the investment universe is an example of a conduct-related exclusion. This approach involves excluding industries or companies that are deemed to engage in unethical or harmful activities, such as tobacco production, based on their conduct or the nature of their business.ESG Reference: Chapter 7, Page 325 - ESG Analysis, Valuation & Integration in the ESG textbook.

Studies on carbon risk have not provided conclusive evidence linking a company's level of CO2 emissions directly to financial returns. While some studies suggest that companies with lower emissions may be better positioned for long-term success due to regulatory and market shifts, other research indicates that the relationship is complex and influenced by various factors. Therefore, it is not universally accepted that lower emissions consistently correlate with higher returns, nor that higher emissions necessarily lead to higher returns​​​​.

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