CFA - Mock exam Correct 100%
Which of the following is a governance issue?
A. Tax transparency
B. Health and safety
C. Working conditions - ANSWER A is correct because "[e]xamples of the definition and
scope of ESG issues can be illustrated by the two widely-referenced organisations...Tax
Transparency [falls under the umbrella of] Governance".
B is incorrect because "[e]xamples of the definition and scope of ESG issues can be
illustrated by the two widely-referenced organisations...Health & Safety [falls under the
umbrella of] Social" by FTSE Russell.
C is incorrect because "[e]xamples of the definition and scope of ESG issues can be
illustrated by the two widely-referenced organisations...Working conditions [is an
example of] Social" in the taxonomy by PRI.
1-Introduction to ESG Investing
1.1.1
Triple bottom line accounting takes into account a company's financial performance and
its:
A. social and governance factors.
B. environmental and social factors.
C. environmental and governance factors. - ANSWER B is correct because "[t]he TBL
(Triple bottom line) accounting theory expands the traditional accounting framework
focused only on profit to include two other performance areas: the social and
environmental impacts of a company."
A is incorrect because "[t]he TBL (Triple bottom line) accounting theory expands the
traditional accounting framework focused only on profit to include two other
performance areas: the social and environmental impacts of a company."
C is incorrect because "[t]he TBL [Triple Bottom Line] accounting theory expands the
traditional accounting framework focused only on profit to include two other
performance areas: the social and environmental impacts of a company."
1-Introduction to ESG Investing
1.1.2
Which of the following investment styles often uses negative screening?
A. Impact investing
,B. Thematic investing
C. Faith-based investing - ANSWER C is correct because "faith-based investment refers
to investing in line with certain principles, often using negative screening to avoid
investing in companies whose products and services are deemed morally objectionable
by the investor or certain religions, international declarations, conventions and voluntary
agreements."
A is incorrect because "impact investing refers to investments made with the specific
intent of generating positive, measurable social and/or environmental impact alongside
a financial return." Therefore, impact investing uses the positive screening approach.
B is incorrect because "thematic investment refers to selecting companies that fall under
a sustainability-related theme, such as clean-tech, sustainable agriculture, healthcare or
climate change mitigation." Therefore, thematic investing uses the positive screening
approach.
1-Introduction to ESG Investing
1.1.2
Negative externalities:
A. result from internalization of costs.
B. result in private costs that are higher than societal costs.
C. result in societal costs that are not reflected in the prices of goods. - ANSWER C is
correct because "[t]he term externalities refers to situations where the production or
consumption of goods and services creates costs or benefits to others that are not
reflected in the prices charged for them...when externalities are negative, private costs
are lower than societal costs...leading to 'market failures'...[i]nternalisation refers to all
measures (public or private) to ensure that externalities become reflected in the prices
of commercial goods and services."
A is incorrect because "...governments should tax polluters an amount equivalent to the
cost of the harm incurred by others. Such a tax would yield the market outcome that
would have prevailed with adequate internalisation of all costs by polluters.
Internalisation refers to all measures (public or private) to ensure that externalities
become reflected in the prices of commercial goods and services." Hence,
internalization of costs would eliminate negative externalities.
B is incorrect because "when externalities are negative, private costs are lower than
societal costs, resulting in market outcomes which may not be efficient or, in other
words, leading to 'market failures'."
1-Introduction to ESG Investing
1.1.3
Which of the following statements about ESG integration is most accurate?
,A. Good ESG standards lower a company's cost of capital
B. ESG performance and fund performance are positively correlated
C. ESG performance and a company's stock price are negatively correlated - ANSWER
A is correct because "[t]he University of Oxford and asset manager Arabesque in 2014
reviewed the academic literature on sustainability and corporate performance, and
found that out of the 200 studies analyzed:... 90% conclude that good ESG standards
lower the cost of capital..."
B is incorrect because "[i]n most research papers, there was a positive correlation
between ESG performance and corporate financial performance, including stock prices.
This provides academic evidence for the financial materiality of ESG factors. This
correlation, however, does not hold for fund performance, suggesting that the asset
management industry in general has not been consistently able to translate ESG
analysis into alpha."
C is incorrect because "[i]n summary, these meta studies suggest that in most research
papers, there was a positive correlation between ESG performance and corporate
financial performance, including stock prices."
1-Introduction to ESG Investing
1.1.5
Which of the following statements is most accurate? The Principles for Responsible
Investment (PRI):
A. comprises six mandatory principles.
B. requires members to report quarterly on their responsible investment practices.
C. provides guidance on actions signatories can take to incorporate ESG issues into
investment practice. - ANSWER C is correct because "[t]he PRI developed six
principles, which are voluntary, but provide overarching guidance on actions members
can take to incorporating ESG issues into investment practice."
A is incorrect because the "PRI developed six principles, which are voluntary."
B is incorrect because the "PRI does require members to report annually on their
responsible investment practices."
1-Introduction to ESG Investing
1.1.7
Which of the following is a minimum requirement for signatories of the Principles for
Responsible Investment (PRI)?
A. Implementation of a responsible investment policy must be monitored by external
parties
, B. Senior-level commitment and accountability mechanisms for responsible investment
implementation must be in place
C. The investment policy that covers the firm's responsible investment approach must
apply to all assets under management - ANSWER B is correct because the three
requirements include that "[s]enior-level commitment and accountability mechanisms
[must be in place for responsible investment implementation]."
A is incorrect because "[i]nternal or external staff ... [may be] responsible for
implementing responsible investment policy" is the correct description of this minimum
requirement.
C is incorrect because it is required that the "[i]nvestment policy that covers the firm's
responsible investment approach ... [must cover] >50% of assets under management
(AUM)."
1-Introduction to ESG Investing
1.1.7
As policies on ESG and financial regulation mature, regulatory requirements will most
likely move from:
A. mandatory to voluntary.
B. implementation and reporting to policy.
C. 'comply or explain' to 'comply and explain'. - ANSWER C is correct because "it is
anticipated that as policies on ESG and financial regulation reach maturity, an
increasing number of governments will recognize the importance of moving to stronger
requirements, moving away from: 'comply or explain' to 'comply and explain'; voluntary
to mandatory; and policy to implementation and reporting."
A is incorrect because "it is anticipated that as policies on ESG and financial regulation
reach maturity, an increasing number of governments will recognize the importance of
moving to stronger requirements, moving away from ... voluntary to mandatory."
B is incorrect because "it is anticipated that as policies on ESG and financial regulation
reach maturity, an increasing number of governments will recognize the importance of
moving to stronger requirements, moving away from: ... policy to implementation and
reporting."
2-The ESG Market
2.1.3
When an asset manager receives an investment mandate from a pension fund, the
asset manager:
A. assumes a fiduciary duty to the pension fund's members.
B. becomes the legal owner of the assets under management.
Which of the following is a governance issue?
A. Tax transparency
B. Health and safety
C. Working conditions - ANSWER A is correct because "[e]xamples of the definition and
scope of ESG issues can be illustrated by the two widely-referenced organisations...Tax
Transparency [falls under the umbrella of] Governance".
B is incorrect because "[e]xamples of the definition and scope of ESG issues can be
illustrated by the two widely-referenced organisations...Health & Safety [falls under the
umbrella of] Social" by FTSE Russell.
C is incorrect because "[e]xamples of the definition and scope of ESG issues can be
illustrated by the two widely-referenced organisations...Working conditions [is an
example of] Social" in the taxonomy by PRI.
1-Introduction to ESG Investing
1.1.1
Triple bottom line accounting takes into account a company's financial performance and
its:
A. social and governance factors.
B. environmental and social factors.
C. environmental and governance factors. - ANSWER B is correct because "[t]he TBL
(Triple bottom line) accounting theory expands the traditional accounting framework
focused only on profit to include two other performance areas: the social and
environmental impacts of a company."
A is incorrect because "[t]he TBL (Triple bottom line) accounting theory expands the
traditional accounting framework focused only on profit to include two other
performance areas: the social and environmental impacts of a company."
C is incorrect because "[t]he TBL [Triple Bottom Line] accounting theory expands the
traditional accounting framework focused only on profit to include two other
performance areas: the social and environmental impacts of a company."
1-Introduction to ESG Investing
1.1.2
Which of the following investment styles often uses negative screening?
A. Impact investing
,B. Thematic investing
C. Faith-based investing - ANSWER C is correct because "faith-based investment refers
to investing in line with certain principles, often using negative screening to avoid
investing in companies whose products and services are deemed morally objectionable
by the investor or certain religions, international declarations, conventions and voluntary
agreements."
A is incorrect because "impact investing refers to investments made with the specific
intent of generating positive, measurable social and/or environmental impact alongside
a financial return." Therefore, impact investing uses the positive screening approach.
B is incorrect because "thematic investment refers to selecting companies that fall under
a sustainability-related theme, such as clean-tech, sustainable agriculture, healthcare or
climate change mitigation." Therefore, thematic investing uses the positive screening
approach.
1-Introduction to ESG Investing
1.1.2
Negative externalities:
A. result from internalization of costs.
B. result in private costs that are higher than societal costs.
C. result in societal costs that are not reflected in the prices of goods. - ANSWER C is
correct because "[t]he term externalities refers to situations where the production or
consumption of goods and services creates costs or benefits to others that are not
reflected in the prices charged for them...when externalities are negative, private costs
are lower than societal costs...leading to 'market failures'...[i]nternalisation refers to all
measures (public or private) to ensure that externalities become reflected in the prices
of commercial goods and services."
A is incorrect because "...governments should tax polluters an amount equivalent to the
cost of the harm incurred by others. Such a tax would yield the market outcome that
would have prevailed with adequate internalisation of all costs by polluters.
Internalisation refers to all measures (public or private) to ensure that externalities
become reflected in the prices of commercial goods and services." Hence,
internalization of costs would eliminate negative externalities.
B is incorrect because "when externalities are negative, private costs are lower than
societal costs, resulting in market outcomes which may not be efficient or, in other
words, leading to 'market failures'."
1-Introduction to ESG Investing
1.1.3
Which of the following statements about ESG integration is most accurate?
,A. Good ESG standards lower a company's cost of capital
B. ESG performance and fund performance are positively correlated
C. ESG performance and a company's stock price are negatively correlated - ANSWER
A is correct because "[t]he University of Oxford and asset manager Arabesque in 2014
reviewed the academic literature on sustainability and corporate performance, and
found that out of the 200 studies analyzed:... 90% conclude that good ESG standards
lower the cost of capital..."
B is incorrect because "[i]n most research papers, there was a positive correlation
between ESG performance and corporate financial performance, including stock prices.
This provides academic evidence for the financial materiality of ESG factors. This
correlation, however, does not hold for fund performance, suggesting that the asset
management industry in general has not been consistently able to translate ESG
analysis into alpha."
C is incorrect because "[i]n summary, these meta studies suggest that in most research
papers, there was a positive correlation between ESG performance and corporate
financial performance, including stock prices."
1-Introduction to ESG Investing
1.1.5
Which of the following statements is most accurate? The Principles for Responsible
Investment (PRI):
A. comprises six mandatory principles.
B. requires members to report quarterly on their responsible investment practices.
C. provides guidance on actions signatories can take to incorporate ESG issues into
investment practice. - ANSWER C is correct because "[t]he PRI developed six
principles, which are voluntary, but provide overarching guidance on actions members
can take to incorporating ESG issues into investment practice."
A is incorrect because the "PRI developed six principles, which are voluntary."
B is incorrect because the "PRI does require members to report annually on their
responsible investment practices."
1-Introduction to ESG Investing
1.1.7
Which of the following is a minimum requirement for signatories of the Principles for
Responsible Investment (PRI)?
A. Implementation of a responsible investment policy must be monitored by external
parties
, B. Senior-level commitment and accountability mechanisms for responsible investment
implementation must be in place
C. The investment policy that covers the firm's responsible investment approach must
apply to all assets under management - ANSWER B is correct because the three
requirements include that "[s]enior-level commitment and accountability mechanisms
[must be in place for responsible investment implementation]."
A is incorrect because "[i]nternal or external staff ... [may be] responsible for
implementing responsible investment policy" is the correct description of this minimum
requirement.
C is incorrect because it is required that the "[i]nvestment policy that covers the firm's
responsible investment approach ... [must cover] >50% of assets under management
(AUM)."
1-Introduction to ESG Investing
1.1.7
As policies on ESG and financial regulation mature, regulatory requirements will most
likely move from:
A. mandatory to voluntary.
B. implementation and reporting to policy.
C. 'comply or explain' to 'comply and explain'. - ANSWER C is correct because "it is
anticipated that as policies on ESG and financial regulation reach maturity, an
increasing number of governments will recognize the importance of moving to stronger
requirements, moving away from: 'comply or explain' to 'comply and explain'; voluntary
to mandatory; and policy to implementation and reporting."
A is incorrect because "it is anticipated that as policies on ESG and financial regulation
reach maturity, an increasing number of governments will recognize the importance of
moving to stronger requirements, moving away from ... voluntary to mandatory."
B is incorrect because "it is anticipated that as policies on ESG and financial regulation
reach maturity, an increasing number of governments will recognize the importance of
moving to stronger requirements, moving away from: ... policy to implementation and
reporting."
2-The ESG Market
2.1.3
When an asset manager receives an investment mandate from a pension fund, the
asset manager:
A. assumes a fiduciary duty to the pension fund's members.
B. becomes the legal owner of the assets under management.
