Updated Feb-2026 Exam Materials for You to Prepare & Pass Sustainable-Investing Exam.
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NEW QUESTION # 103
Which of the following principles is most likely understated in stewardship codes drafted by the fund management industry? The principle requiring investors to:
- A. manage their conflicts of interest regarding stewardship matters.
- B. have a public policy regarding stewardship.
- C. regularly monitor investee companies.
Answer: A
Explanation:
Stewardship codes drafted by fund managers typically emphasizemonitoringandpublic policy commitmentsbut oftenunderstate the importance of managing conflicts of interest. Conflicts of interest can arise when asset managers act on behalf of different clients with potentially conflicting priorities, making explicit policies and governance structures for handling these conflicts crucial to effective stewardship.
NEW QUESTION # 104
Asset owners can reflect ESG considerations through corporate engagement by:
- A. using ESG criteria to identify investment opportunities through a thematic approach.
- B. working with regulators to design a more stable financial system.
- C. discussing ESG issues with an investee company's board.
Answer: C
Explanation:
Asset owners can reflect ESG considerations through corporate engagement by discussing ESG issues with an investee company's board. This direct engagement allows asset owners to influence corporate behavior, encourage better ESG practices, and address specific ESG concerns that may impact long-term value creation.
This approach is integral to active ownership and stewardship strategies.
NEW QUESTION # 105
A company is accused of surveying employees to prevent them from forming a union. The decision of an asset manager to divest from holding shares in the company is an example of:
- A. universal exclusion.
- B. idiosyncratic exclusion.
- C. conduct-related exclusion.
Answer: C
Explanation:
Conduct-related exclusions are applied when a company is excluded from an investment portfolio due to specific behaviors or incidents that violate certain ethical or legal standards. In this case, the exclusion is based on the company's actions rather than the nature of its business.
Conduct-Related Exclusion: This type of exclusion arises from specific behaviors or practices that are deemed unethical or illegal. Examples include violations of labor rights, corruption, environmental damage, or other significant breaches of conduct. The decision to divest from a company accused of preventing union formation fits this category as it directly relates to the company's conduct.
Universal Exclusion: This refers to broad-based exclusions applied to entire sectors or industries based on certain ethical principles or ESG criteria. It is not specific to the behavior of individual companies but rather to the nature of the industry.
Idiosyncratic Exclusion: These are exclusions that do not have broad consensus and are based on individual or specific institutional criteria. They are not generally applied universally or based on common ethical standards.
NEW QUESTION # 106
Which of the following statements is most accurate? For ESG credit scoring, credit rating agencies test how ESG factors affect an issuer's:
- A. qualification to issue green bonds.
- B. cost of capital.
- C. credit default swaps.
Answer: B
Explanation:
Credit rating agencies analyze how ESG risks and opportunities affect a company'screditworthiness, which is directly linked to itscost of capital. The CFA UK ESG Investing Training Manual explains that ESG factors can materially affect an issuer's ability to meet financial obligations and thus alter the perceived credit risk. This risk perception translates into the rate at which the company can borrow - its cost of capital.
"Credit rating agencies incorporate ESG into their analysis by assessing how environmental, social, and governance factors might influence the issuer's ability and willingness to meet financial obligations. For example, material environmental risks could impact a firm's future cash flows, which would in turn influence its cost of capital." There is no indication in the CFA UK ESG curriculum that ESG credit scoring is used to test for credit default swaps or green bond eligibility directly. These instruments may reflect ESG risks indirectly, but they are not the focus of ESG credit scoring.
NEW QUESTION # 107
Which of the following is an example of a secondary data source?
- A. A survey of employees
- B. A news article
- C. An ESG rating
Answer: C
Explanation:
In theESG Data Sourcessection, the OTM differentiates between primary and secondary ESG data:
"Primary datacome directly from companies-reports, disclosures, or surveys-whereassecondary dataare derived from third-party processing and analysis of that information, such asESG ratings or scores." This means ESG ratings are considered secondary since they are synthesized from existing data rather than newly collected information. A survey of employees (C) would be primary, and a news article (A) is tertiary (media-based).
Therefore,option Bis the correct and verified classification.
Reference:2021-Final-Book.pdf, Chapter 7 - ESG Analysis, Valuation, and Integration (Data Quality and Sources section).
NEW QUESTION # 108
When evaluating the negative impact of rising temperatures on energy costs for an infrastructure project, an analyst should adjust future:
- A. provisions.
- B. financing costs.
- C. operating expenses.
Answer: C
Explanation:
Rising temperatures-driven by climate change-will directly affectenergy demand and costs. These areoperating expensesin an infrastructure project's cash flow model. Provisions (option A) refer to liabilities or reserves for uncertain losses, and financing costs (option B) relate to interest or credit, neither of which are directly impacted by temperature-driven energy costs.
NEW QUESTION # 109
Regrowing previously logged forests is most likely an example of climate:
- A. change mitigation.
- B. change adaptation.
- C. resilience.
Answer: A
Explanation:
Regrowing Previously Logged Forests:
Regrowing previously logged forests is an example of climate change mitigation.
1. Climate Change Mitigation: Climate change mitigation refers to efforts to reduce or prevent the emission of greenhouse gases. Regrowing forests contributes to mitigation by absorbing CO2 from the atmosphere through the process of photosynthesis, thereby reducing the overall concentration of greenhouse gases.
2. Climate Resilience and Adaptation:
Climate Resilience: Involves enhancing the ability of systems to withstand and recover from climate-related impacts.
Climate Adaptation: Refers to adjustments in systems or practices to reduce the negative effects of climate change and take advantage of new opportunities. While regrowing forests can contribute to adaptation by improving ecosystem services, its primary role is in mitigation by sequestering carbon.
Reference from CFA ESG Investing:
Climate Mitigation Strategies: The CFA Institute highlights various strategies for climate change mitigation, including afforestation and reforestation as key practices for sequestering carbon and reducing greenhouse gas concentrations in the atmosphere.
NEW QUESTION # 110
Which of the following is one of the four realms of nature described by the Taskforce on Nature-related Financial Disclosures (TNFD)?
- A. People
- B. Biodiversity
- C. Oceans
Answer: C
Explanation:
The Taskforce on Nature-related Financial Disclosures (TNFD) describes four realms of nature, and one of these is Oceans.
Oceans (B): Oceans are a critical realm of nature that the TNFD focuses on, recognizing their significant role in global ecosystems, climate regulation, and biodiversity.
People (A): While people are integral to sustainability discussions, they are not one of the four realms of nature defined by the TNFD.
Biodiversity (C): Biodiversity is a crucial concept within the TNFD framework, but the specific realms of nature referred to by the TNFD include Oceans as one of the main categories.
References:
Taskforce on Nature-related Financial Disclosures (TNFD) documentation
CFA ESG Investing Principles
NEW QUESTION # 111
Which of the following statements best describes Weitzman's dismal theorem?
- A. Standard cost-benefit analysis is inadequate to account for the potential downside from climate change.
- B. Economic asset value should be assigned to biodiversity to reverse its treatment as a free resource.
- C. Moral concerns about future climate damages demand the use of a low discount rate.
Answer: A
Explanation:
Weitzman's Dismal Theorem (Option C) argues that:
Extreme climate risks cannot be properly captured by traditional cost-benefit analysis.
High-impact, low-probability climate events (e.g., runaway warming, tipping points) mean economic models underestimate catastrophic risks.
Option A (Low discount rate for moral reasons) is incorrect because Weitzman focused on uncertainty, not ethics.
Option B (Economic value for biodiversity) is relevant but not the core of the dismal theorem.
Reference:
Weitzman's Dismal Theorem Research Paper (2009)
IPCC Report on Climate Catastrophe Risk
CFA Institute ESG Economics and Climate Uncertainty
NEW QUESTION # 112
Scorecards for ESG analysis are most likely used to translate:
- A. Quantitative judgments on material ESG factors into numerical scores.
- B. Qualitative judgments on material ESG factors into numerical scores.
- C. Qualitative judgments on only the mandatory ESG factors into numerical scores.
Answer: B
Explanation:
ESG scorecards are tools that convert subjective ESG assessments into quantitative scores, making them comparable across companies or industries.
Why A (Qualitative → Numerical) is correct:
ESG factors like board diversity, climate policies, and human rights commitments are qualitative, but they are scored numerically to aid investment decision-making.
Example: MSCI, Sustainalytics, and S&P Global use ESG scorecards to rank companies based on policy strength and risk exposure.
Why not B or C?
B is incorrect-quantitative ESG data (e.g., carbon emissions) is already numerical.
C is incorrect-scorecards apply to all ESG factors, not just mandatory ones.
Reference:
Sustainalytics ESG Ratings Methodology
MSCI ESG Research Scorecard Framework
NEW QUESTION # 113
Carbon intensity is calculated as Scope 1 plus Scope 2 emissions divided by:
- A. revenue
- B. profit
- C. market capitalization
Answer: A
Explanation:
Carbon intensity is calculated as Scope 1 plus Scope 2 emissions divided by revenue.
Revenue (B): Carbon intensity is a measure of a company's carbon emissions relative to its economic output, typically calculated as the sum of Scope 1 and Scope 2 emissions divided by revenue. This provides a standardized way to compare the carbon efficiency of companies across different sizes and industries.
Profit (A): Using profit for this calculation is less common and would not provide a consistent measure of carbon intensity, as profits can vary widely due to factors unrelated to emissions.
Market capitalization (C): Market capitalization reflects the company's market value, which is influenced by investor perceptions and market conditions, rather than the direct economic output of the company.
Reference:
CFA ESG Investing Principles
Standard methodologies for calculating carbon intensity
NEW QUESTION # 114
Analyzing a portfolio's social impact exposure is best achieved by first understanding material social topics at:
- A. the company and sector levels, then the country level
- B. the country and sector levels, then the company level
- C. the company and country levels, then the sector level
Answer: B
Explanation:
Analyzing a portfolio's social impact exposure involves understanding the broader social context before drilling down to individual company specifics. The best approach is to first understand the material social topics at the country and sector levels, then the company level.
Country and sector levels, then the company level (B): Starting at the country level provides insight into the social issues prevalent in the region, influenced by local laws, regulations, and cultural norms. Next, analyzing at the sector level helps to identify sector-specific social risksand opportunities. Finally, understanding these issues at the company level allows for a more detailed analysis of how individual companies manage these social impacts.
Company and country levels, then the sector level (A): This approach might miss out on sector-specific social issues that are critical for a comprehensive analysis.
Company and sector levels, then the country level (C): This approach overlooks the broader country-level social context, which can significantly influence sector and company-level social impacts.
Reference:
CFA ESG Investing Principles
MSCI ESG Ratings Methodology (June 2022)
NEW QUESTION # 115
Which of the following statements regarding the effects of an aging population is most accurate?
- A. Older people have lower accumulated savings per person than younger people.
- B. The ratio of active to inactive workers increases.
- C. Older people spend less on consumer goods.
Answer: C
Explanation:
As populations age, older individuals generally spend less on consumer goods (Option A) because:
They shift spending toward healthcare, services, and retirement-related expenses.
They buy fewer durable goods (e.g., cars, electronics).
Option B is incorrect because the ratio of active to inactive workers decreases as the proportion of retirees grows.
Option C is incorrect because older people typically have higher accumulated savings than younger individuals.
References:
World Bank: Aging and Economic Growth Report
OECD Report: The Impact of Aging on Consumption and Savings
United Nations: Demographic Trends and Economic Implications
NEW QUESTION # 116
When an external auditor's performance materiality level is 60% of its overall materiality threshold, the auditor most likely:
- A. Will apply tailored audit procedures for the smallest 40% of the company's segments
- B. Has a low level of confidence in the company's financial controls
- C. Uses a sample that covers 60% of the total number of the company's transactions during the financial year
Answer: B
Explanation:
If the auditor sets performance materiality at 60% of the overall materiality threshold, it indicates a low level of confidence in the company's financial controls. This suggests that the auditor believes there is a higher risk of misstatements, requiring more conservative thresholds during the audit.ESG Reference: Chapter 5, Page
252 - Governance Factors in the ESG textbook.
NEW QUESTION # 117
The launch of the European Green Deal in 2020 is intended to:
- A. reduce greenhouse gas emissions in the European Union by 55% by 2030.
- B. mobilize $372 billion across the European Union of which 30% will contribute to climate objectives.
- C. make the European Union climate neutral by 2050.
Answer: C
Explanation:
TheEuropean Green Deal'score ambition is to make the EUclimate neutral by 2050. This overarching objective shapes its entire policy framework, including emission reduction targets (55% by 2030) and significant funding allocations, but climate neutrality by 2050 is theultimate goal.
NEW QUESTION # 118
ESG portfolio optimization most likely:
- A. Accepts lower active risk when optimizing for multiple factors.
- B. Applies a fixed decision to specific securities.
- C. Requires defining an upper and lower bound for a given variable.
Answer: C
Explanation:
ESG portfolio optimization involves setting upper and lower bounds for ESG-related variables (Option C) to balance financial performance with ESG impact. For example:
Carbon footprint constraints: Ensuring portfolio emissions stay within a target range.
Sector exposure limits: Avoiding excessive concentration in high-emission industries.
Option A is incorrect because optimization is dynamic and does not apply rigid decisions.
Option B is incorrect because ESG optimization does not necessarily accept lower active risk-it depends on investor preferences.
Reference:
MSCI ESG Portfolio Construction Framework
BlackRock ESG Optimization Research
PRI Guide to ESG Integration in Portfolio Management
NEW QUESTION # 119
The risk-return dynamic of ESG portfolio optimization most likely:
- A. organizes the securities by their individual ESG profile to solve a specific optimization.
- B. applies a fixed decision to specific securities.
- C. accepts lower active risk for multiple factor optimization.
Answer: A
Explanation:
When ESG is integrated into portfolio optimization, it does not typically follow a fixed or rigid process for individual securities. Instead, portfolios areorganized based on the ESG characteristics of individual securities, which are then used to construct an efficient portfolio under aspecific ESG optimization approach. This may include aligning portfolios with particular sustainability goals, managing ESG-related risks, or maximizing ESG scores within acceptable levels of risk and return.
"Much of the research focuses on the correlation between a particular ESG criterion and individual securities... ESG integration should not be seen as detrimental to the risk-return dynamic of portfolio optimisation. Rather, it should be understood as simply another factor that potentially may enhance the risk and return profile." This approach leverages ESG as anadditional factor in the optimizationprocess, not merely as a constraint.
NEW QUESTION # 120
Which of the following is one of the main principles of stewardship codes?
- A. Avoid considering conflicts of interest regarding stewardship matters
- B. Escalation of stewardship activity must include a willingness to act independently of other investors
- C. Thoughtfully intelligent voting
Answer: B
Explanation:
Stewardship codes emphasizeactive ownership, which includes engaging with companies on ESG issues and escalating actions when necessary. A key principle of many stewardship codes (such as theUK Stewardship Code 2020) is that investors must be willing toact independently of other investorswhen necessary to ensure effective stewardship.
This principle prevents "herding behavior" and ensures that stewardship decisions align withfiduciary dutiesrather than collective pressures.
References:
UK Stewardship Code 2020
CFA Institute Stewardship Principles
Principles for Responsible Investment (PRI)
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NEW QUESTION # 121
The "Protect, Respect, and Remedy" framework is the foundation for the:
- A. United Nations Guiding Principles on Business and Human Rights (UNGPs).
- B. Corporate Human Rights Benchmark (CHRB).
- C. OECD Guidelines for Multinational Enterprises (MNEs).
Answer: A
Explanation:
The UN Guiding Principles on Business and Human Rights (UNGPs) (Option C) are based on the "Protect, Respect, and Remedy" framework, which outlines:
State duty to protect human rights.
Corporate responsibility to respect human rights.
Access to remedies for victims of human rights violations.
Option A (CHRB) assesses company performance but is not the foundation of this framework.
Option B (OECD MNE Guidelines) also address corporate responsibility but are broader than human rights.
Reference:
United Nations Human Rights Office: UNGPs (2011)
OECD Due Diligence Guidelines on Human Rights
PRI Investor Toolkit on Human Rights
NEW QUESTION # 122
Human rights violations are most likely to affect workers employed
- A. by first-tier suppliers to publicly traded companies
- B. by second-tier suppliers to publicly traded companies.
- C. deep within the supply chain of publicly traded companies.
Answer: C
Explanation:
Human rights violations are most likely to occur deep within the supply chain of publicly traded companies.
Here's why:
First-tier Suppliers:
First-tier suppliers are those that directly supply products or services to a company. These suppliers are often under greater scrutiny from the company and external stakeholders, including auditors and regulatory bodies.
Publicly traded companies typically enforce stricter compliance and monitoring mechanisms at this level.
Second-tier Suppliers:
Second-tier suppliers supply products or services to the first-tier suppliers. While there is still some level of oversight, the scrutiny diminishes as the layers in the supply chain increase. Human rights violations can occur here, but they are less frequent compared to deeper levels in the supply chain.
Deep within the Supply Chain:
Suppliers deeper within the supply chain, such as third-tier and beyond, are the least visible and have the least amount of oversight. These suppliers often operate in regions with weaker regulatory frameworks and less stringent enforcement of labor laws. Consequently, they are more prone to human rights violations, including poor working conditions, forced labor, and child labor.
Companies may not have direct business relationships with these deeper-tier suppliers, making it challenging to enforce ethical practices and human rights standards.
CFA ESG Investing References:
The CFA Institute's ESG curriculum highlights the importance of supply chain transparency and the risks associated with human rights violations at different levels of the supply chain. The curriculum emphasizes that deeper tiers within the supply chain are often where the mostsignificant human rights risks are found, and it encourages investors to assess and address these risks in their ESG evaluations.
NEW QUESTION # 123
All else equal, a higher discount rate applied to a company's discounted cash flow (DCF) analysis will lead to:
- A. a lower estimate of intrinsic value
- B. the same estimate of intrinsic value
- C. a higher estimate of intrinsic value
Answer: A
Explanation:
A higher discount rate applied to a company's discounted cash flow (DCF) analysis will lead to a lower estimate of intrinsic value.
Higher discount rate: The discount rate is used to calculate the present value of future cash flows. A higher discount rate reduces the present value of those cash flows.
Intrinsic value: The intrinsic value of a company is the sum of the present values of its expected future cash flows. As the discount rate increases, the present values decrease, resulting in a lower estimate of intrinsic value.
Reference:
CFA ESG Investing Principles
Standard finance and valuation textbooks explaining DCF analysis
NEW QUESTION # 124
Regarding ESG issues, which of the following sets the tone for the investment value chain?
- A. Investment consultants
- B. Asset owners
- C. Asset managers
Answer: B
Explanation:
Regarding ESG issues, asset owners set the tone for the investment value chain. Asset owners, such as pension funds, endowments, and insurance companies, have significant influence over the incorporation of ESG factors in investment strategies due to their large capital allocations and long-term investment horizons.
Investment Mandates: Asset owners often set ESG-related mandates and guidelines for asset managers, influencing how ESG factors are integrated into investment decisions. Their requirements shape the strategies and practices of the entire investment value chain.
Demand for ESG Integration: By prioritizing ESG considerations, asset owners drive demand for sustainable investment products and services. This, in turn, encourages asset managers and investment consultants to develop and offer ESG-integrated solutions.
Leadership Role: Asset owners play a leadership role in promoting sustainable investing practices. Their commitment to ESG issues can lead to broader adoption and standardization of ESG integration across the investment industry.
Reference:
MSCI ESG Ratings Methodology (2022) - Highlights the critical role of asset owners in setting ESG priorities and influencing the investment value chain.
ESG-Ratings-Methodology-Exec-Summary (2022) - Discusses the impact of asset owners' ESG mandates on the practices of asset managers and the broader investment ecosystem
NEW QUESTION # 125
Growing income inequality most likely leads to:
- A. More educational opportunities.
- B. Higher purchasing power among the middle class.
- C. Less social mobility.
Answer: C
Explanation:
Growing income inequality is associated with reduced social mobility (Option A), meaning that individuals from lower-income backgrounds face greater challenges in moving up the economic ladder. This happens because:
Lower-income families often have limited access to quality education, healthcare, and job opportunities, making it harder for individuals to improve their economic status.
Wealth concentration among the elite leads to a decline in broad-based economic opportunity.
More educational opportunities (Option B) is incorrect because education tends to become more expensive and less accessible as income inequality increases.
Higher purchasing power among the middle class (Option C) is incorrect because growing inequality usually means that the middle class shrinks, and wealth is concentrated among the wealthy, reducing overall purchasing power.
References:
OECD Report: "Inequality and Social Mobility" (2022)
World Economic Forum (WEF) - Global Social Mobility Index
UN Sustainable Development Goal (SDG) 10: Reduced Inequality
NEW QUESTION # 126
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