CFA ESG Chapter 7 Exam 100%
Accurate!!
An investment firm's aims and objectives for integrating ESG into an investment process
- ANSWERS► meeting requirements under fiduciary duty or regulations,
► meeting client and beneficiary demands,
► lowering investment risk,
► increasing investment returns,
► giving investment professionals more tools and techniques to use in analysis,
► improving the quality of engagement and stewardship activities, and
► lowering reputational risk at a firm level and investment level.
Qualitative ESG Analysis - ANSWERSQualitative ESG analysis is likely to be used in
investment processes that are based on company-specific research, fundamental
analysis, and stock picking.
► Investment teams analyze ESG data to form an opinion on a firm's ability to manage
certain ESG issues.
► They combine this opinion with their financial analysis by linking specific aspects of
the company's ESG risk-management strategy to different value drivers (e.g., costs,
revenues, profits, and capital expenditure requirements).
► Analysts and portfolio managers then seek to integrate their opinion in a quantified
way into their financial models by adjusting assumptions used in the model (e.g.,
growth, margins, or costs of capital).
Quantitative ESG Analysis - ANSWERSQuantitative ESG (QESG) analysis is likely to
be used in investment processes that use quant models to identify attractive investment
opportunities. In such cases, the ESG data are typically aggregated into an ESG factor
(an ESG score), which is added to the quant models. This could be a screen that
creates the investment universe or a quant model used to adjust valuations based on
several factors (including ESG
AI in ESG - ANSWERSSome practitioners ► focus on using AI techniques to measure
ESG performance tied to measures developed by the Sustainability Accounting
Standards Board (SASB), ► attempt to provide immediate access to scores based on
, material ESG events as they occur, or ► focus on intangible ESG factors, such as
corporate culture, that could drive company value.
Investment strategies are typically classified as - ANSWERS► quantitative (systematic,
algorithmic), ► fundamental, ► active, ► passive, or ► beta
Tools of ESG ANALYSIS *** - ANSWERS► Red flag indicators
► Company questionnaires and management interviews
► Checks with outside experts
► Watch lists
►Internal ESG research
► External ESG research
► ESG agenda items at investment committee- or chief information officer- level
meetings -
elements of ESG INTEGRATION - ANSWERS► adjusting forecast financials (e.g.,
revenue, operating cost, asset book value, capital expenditure)
► adjusting valuation models or multiples (e.g., discount rates, terminal values, ratios)
► adjusting credit risk and duration
► managing risk, including exposure limits, scenario analysis, and value-at-risk models
► ESG factor tilts
► ESG momentum tilts
► strategic asset allocation, including thematic and ESG objective tilts
► tactical asset allocation
► ESG controversies and positive ESG events
Research Stage - ANSWERS1. The research stage typically includes a materiality
assessment to identify the ESG issues that are likely to have an impact on the
company's financial performance. Materiality is typically measured in terms of both the
likelihood and magnitude of impact.
Accurate!!
An investment firm's aims and objectives for integrating ESG into an investment process
- ANSWERS► meeting requirements under fiduciary duty or regulations,
► meeting client and beneficiary demands,
► lowering investment risk,
► increasing investment returns,
► giving investment professionals more tools and techniques to use in analysis,
► improving the quality of engagement and stewardship activities, and
► lowering reputational risk at a firm level and investment level.
Qualitative ESG Analysis - ANSWERSQualitative ESG analysis is likely to be used in
investment processes that are based on company-specific research, fundamental
analysis, and stock picking.
► Investment teams analyze ESG data to form an opinion on a firm's ability to manage
certain ESG issues.
► They combine this opinion with their financial analysis by linking specific aspects of
the company's ESG risk-management strategy to different value drivers (e.g., costs,
revenues, profits, and capital expenditure requirements).
► Analysts and portfolio managers then seek to integrate their opinion in a quantified
way into their financial models by adjusting assumptions used in the model (e.g.,
growth, margins, or costs of capital).
Quantitative ESG Analysis - ANSWERSQuantitative ESG (QESG) analysis is likely to
be used in investment processes that use quant models to identify attractive investment
opportunities. In such cases, the ESG data are typically aggregated into an ESG factor
(an ESG score), which is added to the quant models. This could be a screen that
creates the investment universe or a quant model used to adjust valuations based on
several factors (including ESG
AI in ESG - ANSWERSSome practitioners ► focus on using AI techniques to measure
ESG performance tied to measures developed by the Sustainability Accounting
Standards Board (SASB), ► attempt to provide immediate access to scores based on
, material ESG events as they occur, or ► focus on intangible ESG factors, such as
corporate culture, that could drive company value.
Investment strategies are typically classified as - ANSWERS► quantitative (systematic,
algorithmic), ► fundamental, ► active, ► passive, or ► beta
Tools of ESG ANALYSIS *** - ANSWERS► Red flag indicators
► Company questionnaires and management interviews
► Checks with outside experts
► Watch lists
►Internal ESG research
► External ESG research
► ESG agenda items at investment committee- or chief information officer- level
meetings -
elements of ESG INTEGRATION - ANSWERS► adjusting forecast financials (e.g.,
revenue, operating cost, asset book value, capital expenditure)
► adjusting valuation models or multiples (e.g., discount rates, terminal values, ratios)
► adjusting credit risk and duration
► managing risk, including exposure limits, scenario analysis, and value-at-risk models
► ESG factor tilts
► ESG momentum tilts
► strategic asset allocation, including thematic and ESG objective tilts
► tactical asset allocation
► ESG controversies and positive ESG events
Research Stage - ANSWERS1. The research stage typically includes a materiality
assessment to identify the ESG issues that are likely to have an impact on the
company's financial performance. Materiality is typically measured in terms of both the
likelihood and magnitude of impact.
