CFA ESG Chapter 9 Exam Questions With Correct Answers

How should alignment between asset manager and client be achieved within ESG investment mandates? - Answer Alignment should be designed so that the time frames and structures of portfolio manager remuneration closely reflect the performance experienced by the clients. What did the founder of Vanguard mean when he said that asset management faces the 'double agency' challenge? How is this addressed? - Answer Corporations are duty-bound to represent their shareholders, while money managers are duty-bound to represent their mutual fund shareholders. This is addressed through accountability and alignment - which will be implemented through well designed mandates. How should the two A's work between asset managers and clients? - Answer Alignment: should be designed so that the timeframes and structures of portfolio manager assessment and remuneration closely reflect both the performance experienced by the clients and the timeframes over which they need performance to be delivered. Accountability: should mean that portfolio managers respond to the clearly expressed intentions of their clients and report as fully as required. What form do client mandate ESG objectives come in? - Answer Requests for proposal: investment consultant documents to identify the best managers. Statement of Investment Principles: now a requirement for boards of trustees in pensions to incorporate ESG in their statement of investment principles. What boards are helping with integrating ESG into requests for proposals and statements of investment principles? - Answer The PRI are helping to align expectations and how to fully integrate ESG. The Model Mandate Initiative 2015 form the ICGN is a helpful framework for ESG best practices and benchmark for accountability. What are the 5 steps in the effective design of a mandate? - Answer 1. Clarify clients' needs: defining the ESG investment strategy 2. Fully aligning investment with clients' ESG beliefs - so aligning the investment process with their needs 3. Developing client-relevant, ESG-aware investment mandates - finding the right investments, this is where a request for proposal comes in. 4. Tailoring ESG investment approach to client expectations - in terms of ESG expectations 5. Holding managers to account - making sure the manager is delivering in line with the mandate. Since October 2019, UK occupational pension schemes are required to do what? Is there something similar to this in the EU? - Answer Set out in their Statement of Investment Principles their policies on how they consider financially material ESG factors, as well as the extent to which they undertake stewardship. In the EU, this is being implemented through the EU Shareholder Rights Directive II and its new reporting requirements. What are the two fundamental questions that McKinsey suggests asset owners need to ask in developing their ESG investment philosophy? - Answer 1. Are ESG factors more important for risk management or value creation? 2. What ESG factors are material? Once the asset-owner client has developed its investment philosophy and beliefs, what must then happen? What then comes in? - Answer This then needs to be translated into the specifics of the mandates that it awards to fund managers. This is then where the McKinsey questions come in: 1. Are ESG factors more important for risk management or value creation? 2. What ESG factors are material? These form the starting points for how mandates are awarded to fund managers.