CFA Institute Sustainable-Investing Exam Questions Instant Access

Question 1

To address conflicts of interest and maintain the independence of audit firms, EU law requires firms to abide by:

AA list of allowable non-audit services only.

BA monetary limit on the overall value of non-audit services only.

CBoth a list of allowable non-audit services and a monetary limit on the overall value of non-audit services.

Answer : C

The European Union Audit Reform (Regulation (EU) No 537/2014) imposes strict rules on audit firms to ensure independence and reduce conflicts of interest.

Why C is correct:

The EU restricts non-audit services that auditors can provide to clients they audit.

A monetary cap of 70% of audit fees is imposed on permissible non-audit services to limit financial dependence.

These measures ensure auditors do not compromise audit quality by having financial incentives to approve misleading financial statements.

Why not A or B?

A is incomplete---a list of allowable services alone does not limit the financial influence of consulting fees.

B is incomplete---a monetary cap alone does not specify which services are prohibited.

EU Regulation No 537/2014 on Audit Reform

European Commission's Guidelines on Auditor Independence (2021)

Question 2

The Corporate Sustainability Reporting Directive (CSRD):

Aapplies to all entities with principal activities in the EU.

Brequires that reported sustainability issues are audited.

Cpre-dates the Non-Financial Reporting Directive (NFRD).

Answer : B

TheCSRDstrengthens and expands the EU's sustainability disclosure requirements. Key features include:

Mandatory assurance/audit of sustainability information(option B).

Broader application than NFRD (but doesnot apply to allentities; option A is incorrect).

The CSRDfollowsand replaces the NFRD (not predating it; option C is incorrect).Thus, the correct focus is therequirement for third-party verificationof sustainability reporting.

Question 3

ESG integration should be considered as part of:

Asystematic strategies only.

Bdiscretionary strategies only.

Cboth systematic strategies and discretionary strategies.

Answer : C

ESG integration can be applied to both systematic and discretionary strategies, as it enhances traditional investment processes by incorporating ESG factors to improve risk management and long-term returns. (ESGTextBook[PallasCatFin], Chapter 7, Page 319)

Question 4

In a linear economy:

Asome post-use materials are recycled.

Bproduction results in non-recyclable waste.

Call materials are recycled back into production.

Answer : B

Alinear economyfollows the ''take--make--dispose'' model: resources are extracted, manufactured into products, and ultimately discarded asnon-recyclable waste. In contrast, acircular economy(not described here) seeks to reuse, recycle, and recover materials. Only in a circular system (option A or C) are materials recycled or reused, whereas linear systems produce waste with minimal resource recapture.

Question 5

In contrast to engagement dialogues, monitoring dialogues most likely involve:

Aa two-way sharing of perspectives.

Bdiscussions intended to understand the company, its stakeholders and performance.

Cconversations between investors and any level of the investee entity including non-executive directors.

Answer : B

In responsible investment, engagement dialogues and monitoring dialogues are two distinct approaches used by investors to interact with investee companies regarding ESG issues.

1. Engagement Dialogues: Engagement dialogues are proactive and involve a two-way sharing of perspectives between investors and the investee company. The objective is to influence and improve the company's ESG practices and performance. These dialogues often focus on specific ESG issues and seek to bring about change through constructive feedback and recommendations.

2. Monitoring Dialogues: Monitoring dialogues, on the other hand, are more about gathering information and understanding the company's operations, stakeholders, and overall performance. These dialogues are intended to provide investors with insights into how the company ismanaging ESG risks and opportunities. The focus is on ensuring that the company adheres to its stated ESG policies and commitments.

3. Nature of Monitoring Dialogues: Monitoring dialogues are typically more passive compared to engagement dialogues. They involve discussions that aim to understand the company's approach to ESG matters, its interactions with stakeholders, and its performance metrics. These conversations can occur at any level of the investee entity, including with non-executive directors, but are primarily focused on information gathering rather than influencing change.

Reference from CFA ESG Investing:

Engagement and Monitoring: The CFA Institute outlines the differences between engagement and monitoring dialogues, emphasizing that monitoring is primarily about understanding and assessing the company's ESG performance and stakeholder interactions.

Investor-Company Interactions: Understanding the nature of these interactions helps investors effectively manage their ESG integration strategies and ensures that they are well-informed about the investee company's practices.

In conclusion, monitoring dialogues most likely involve discussions intended to understand the company, its stakeholders, and performance, making option B the verified answer.

Question 6

The EU Paris-Aligned Benchmarks:

AHave at least an equal green-to-brown investment ratio.

BPermit fossil fuel investment as part of a transition process.

CRequire a reduction of carbon emission intensity by at least 50% in their starting years.

Answer : C

The Official Training Manual under the section on climate benchmarks states:

''The EUParis-Aligned Benchmark (PAB)... requires aninitial 50% reduction in carbon intensityrelative to the investable universe, and ongoingannual decarbonisation of at least 7%thereafter.''

This clearly aligns with optionC. Options A and B are partially true of other indices (e.g., Climate Transition Benchmark), but only thePABexplicitly includes the 50% emission reduction requirement.

Reference:2021-Final-Book.pdf, Chapter 8, ESG Integrated Portfolio Construction and Management.

Question 7

According to market reviews conducted by the Global Sustainable Investment Alliance at the start of 2020, sustainable investing assets in the five major markets stood at approximately:

AUSD 20 trillion.

BUSD 35 trillion.

CUSD 60 trillion.

Answer : B

As of early 2020, the Global Sustainable Investment Alliance reported that sustainable investing assets reached around USD 35 trillion, highlighting the growing adoption of ESG principles across global markets. (ESGTextBook[PallasCatFin], Chapter 2, Page 58)

CFA Institute Sustainable Investing Certificate(CFA-SIC) Sustainable-Investing Exam Questions