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

Corporate disclosures in line with the recommendations of the Corporate Sustainability Reporting Directive (CSRD) are a regulatory requirement for companies in the EU only.

CSRD Overview: The Corporate Sustainability Reporting Directive (CSRD) is an EU regulation aimed at improving and standardizing sustainability reporting across Europe. It requires companies to disclose information on how sustainability issues affect their business and the impact of their activities on people and the environment.

EU-Specific Regulation: The CSRD is applicable to EU member states and mandates that companies operating within the EU adhere to its reporting standards.

UK Exclusion: While the UK has its own sustainability reporting requirements, it is not bound by the CSRD following Brexit. The UK may have similar regulations but they are separate and distinct from the CSRD.

CFA ESG Investing References:

The CFA Institute’s guidance on regulatory requirements for sustainability reporting emphasizes the regional differences in ESG disclosure standards, noting that the CSRD is specific to the EU while the UK follows its own regulatory framework post-Brexit​​​​.

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Screening on both a relative basis and an absolute basis is most likely to result in a well-diversified portfolio.

Relative Screening: This involves comparing companies within the same industry or sector to identify the top or bottom performers based on ESG criteria. It ensures that the portfolio maintains exposure to various industries.

Absolute Screening: This sets fixed thresholds for ESG criteria that companies must meet to be included in the portfolio, regardless of their industry. It ensures that the portfolio includes only companies that meet a certain standard of ESG performance.

Diversification: Combining both methods allows for a broader and more balanced approach to ESG integration, ensuring that the portfolio is diversified across sectors while maintaining high ESG standards.

CFA ESG Investing References:

The CFA Institute’s ESG Investing materials emphasize the benefits of using both relative and absolute screening to achieve a well-diversified portfolio that aligns with ESG objectives. This combined approach helps in capturing a wide range of high-performing ESG companies across different industries​​​​.

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Modern fiduciary duty under the PRI requires investment managers to encourage high standards of ESG performance across the entire investment universe. This aligns with the view that integrating ESG factors is essential for protecting long-term returns and ensuring sustainable investments.ESG Reference: Chapter 9, Page 511 - Investment Mandates, Portfolio Analytics & Client Reporting in the ESG textbook.

Social factors that impact a company's external stakeholders include those that affect customers, local communities, and governments. Product liability and consumer protection directly influence external stakeholders by ensuring the safety, quality, and reliability of products, which in turn affects consumer trust and regulatory compliance. Working conditions, health and safety, and employment standards primarily impact internal stakeholders, such as employees​​​​​​​​.

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