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

Monitoring focuses on tracking a company’s performance and ensuring that the investment aligns with ESG objectives, leading to more efficient capital allocation based on data-driven insights. (ESGTextBook[PallasCatFin], Chapter 6, Page 283)

According to the Capitals Coalition, the stock of renewable and non-renewable natural resources that combine to yield a flow of benefits to people is best described as natural capital. Here’s a detailed explanation:

Natural Capital:

Natural capital refers to the world's stocks of natural assets including geology, soil, air, water, and all living things. It is from this natural capital that humans derive a wide range of ecosystem services that make human life possible.

The Capitals Coalition defines natural capital as the stock of renewable and non-renewable natural resources (such as plants, animals, air, water, soils, and minerals) that combine to yield a flow of benefits to people​​​​.

CFA ESG Investing References:

The CFA Institute’s ESG curriculum discusses natural capital extensively, emphasizing its importance in sustainable investing and the need for integrating natural capital considerations into financial decision-making​​​​.

Gender diversity on a company’s board is often seen as an indicator of strong corporate governance, as it promotes diverse perspectives and better decision-making. (ESGTextBook[PallasCatFin], Chapter 5, Page 236)

A challenge to ESG integration at the asset allocation level when using mean-variance optimization is that it is highly sensitive to baseline assumptions. Here's why:

Baseline Assumptions:

Mean-variance optimization relies on assumptions about expected returns, risks, and correlations among different asset classes. These assumptions are often based on historical data, which may not accurately predict future performance, especially when integrating ESG factors .

Sensitivity:

Small changes in the baseline assumptions can lead to significantly different portfolio allocations. This sensitivity can be problematic when integrating ESG factors, as the data and methodologies for assessing ESG risks and opportunities are still evolving and can introduce additional variability .

Dynamic Rebalancing:

While dynamic rebalancing can introduce estimation errors, the primary challenge remains the sensitivity to initial assumptions. Specialist knowledge is essential for making informed judgments about future risks, but this is secondary to the issue of assumption sensitivity .

CFA ESG Investing References:

The CFA ESG Investing curriculum covers the complexities of integrating ESG factors into asset allocation models, particularly the challenges posed by the sensitivity of mean-variance optimization to baseline assumptions .