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

Investment mandates should reflectboth ESG factors and their prioritization, ensuring alignment withclient beliefs, risk tolerance, and sustainability goals.

Materiality alone (A) is not enough, andrationale (B) is part of the process but not the defining criterionfor structuring investment mandates.

References:

Principles for Responsible Investment (PRI) ESG Investment Mandates Guide

CFA Institute ESG Investment Governance Framework

Morningstar ESG Portfolio Integration Report

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TheUK Stewardship Code 2020requiresservice providers(such as proxy advisors and ESG data providers) to conductreview and assuranceof their stewardship activities. This ensuresaccuracy, transparency, and accountabilityinengagement and proxy voting recommendations.

Escalation (A)applies to investors increasing engagement pressure on companies.

Collaboration (B)relates to joint investor efforts rather than service provider responsibilities.

References:

UK Financial Reporting Council (FRC) Stewardship Code 2020

CFA Institute Guide to Stewardship in Investment Management

Principles for Responsible Investment (PRI) Stewardship Best Practices

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Stranded asset risk refers to the financial risk associated with assets that may suffer from unanticipated or premature write-downs due to regulatory, environmental, or market shifts. Equity investors generally bear a higher risk than fixed-income investors because they are the residual claimants on a company’s assets. If an asset becomes stranded, equity investors absorb the losses first before bondholders or other creditors.

Equity holders are exposed to long-term sustainability risks, such as fossil fuel companies losing value due to climate policies, technological advancements, or consumer preferences shifting toward renewable energy. Fixed-income investors, particularly those holding investment-grade bonds, have priority in claims, and their risk is more directly tied to credit quality and duration rather than asset obsolescence.

References:

CFA Institute ESG Investing Handbook

Principles for Responsible Investment (PRI) Report on Climate Risks and Stranded Assets

TCFD (Task Force on Climate-related Financial Disclosures) Guidelines

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Alternative Performance Metrics (APMs)refer tonon-GAAP (Generally Accepted Accounting Principles) financial measuresthat companies use toadjust reported earnings(e.g., EBITDA adjustments, pro forma earnings). The use of APMs raises concerns aboutreporting transparency, as they may be used tomask poor financial performanceormanipulate investor perceptions.

Strong corporate governance requires companies toclearly disclose the rationale for APMs, ensuring consistency and avoiding misleading representations.

References:

IFRS Guidelines on APM Disclosures

CFA Institute Corporate Governance Handbook

SEC Regulations on Non-GAAP Financial Measures

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