CFA® ESG Practice Questions
offered by AnalystPrep

In March 2021, the European Union (EU)’s Sustainable Finance Disclosure Regulation (SFDR) came into force. The SFDR is designed to support institutional asset owners and retail clients to compare, select and monitor the sustainability characteristics of investment funds’ by standardizing sustainability disclosures.

The correct answer is: B).

Phosphorus is typically used in modern agriculture. As a results, the fertilizer producers are most likely to be impacted. Food producers may also be exposed as they likely use fertilizers in their production, however food producers are in the staples sector, not materials. Iron ore producers are not exposed.

The correct answer is: B).

Asset owners, but also individual retail investors, have questioned why certain stocks, either involved in significant controversies or with controversial activities, are part of the top holdings of ESG funds, which has at times impacted the credibility of efforts in responsible investment.

The correct answer is: C).

The Kyoto Protocol was adopted in 1997 and became effective in 2005. It was the first international convention to set targets for emissions of the main GHGs. It established top-down, binding targets, but only for developed nations, while in Paris a landmark agreement was reached to mobilize a global response to the threat of climate change in the form of the Paris Agreement. Although the Paris Agreement is not legally binding under international law, it serves as a significant landmark in tackling climate change on a global scale.

Climate change and the neighboring effect of transition risk has social implications. A widespread call is that the transition should be a ‘just’ transition. In the process of adjusting to an economy that does not adversely affect the climate, sectors that employ millions of workers (such as energy, coal, manufacturing, agriculture, and forestry) must restructure. It is feared that the period of economic structural change will result in ordinary workers bearing the costs of the transition, leading to unemployment, poverty, and exclusion for the working class.

The correct answer is: A)

The 2003 failures at Ahold and Parmalat, in the Netherlands and Italy respectively, led to pressure for heightened standards of corporate governance and both board and auditor independence across Europe.

The correct answer is: B)

Engagement is the way in which investors put into effect their stewardship responsibilities in line with the Principles for Responsible Investment (PRI) principle 2 (“We will be active owners and incorporate environmental, social and governance (ESG) issues into our ownership policies and practices”). It is often described as purposeful dialogue with a specific objective in mind; that purpose will vary from engagement to engagement but often relates to improving companies’ business practices, especially in relation to the management of ESG issues.

The correct answer is: A)

Case study: Morningstar takes a ‘holdings-based approach’–a weighted average of portfolio companies’ ESG scores.

The correct answer is: A)

Generally speaking, institutional investors apply two popular approaches towards decomposing performance attribution: Brinson attribution and risk factor attribution. Attribution models serve to quantify and demonstrate the effects of asset allocation and selection decisions on investment returns. Brinson attribution decomposes performance returns based on a portfolio’s active weights. For a given time series, this generally represents performance returns attributed to the regional, sector, and stock-specific exposure. There are efforts to embed ESG within risk factor analysis, combining fundamental risk factors – value, yield, growth, quality, size, volatility, and momentum – alongside an approximation of ESG risk in both composites and disaggregated (E/S/G) formats. Leveraging external data sources, Style Analytics produces this factor by inferring ESG qualities from the top and bottom, ESG-ranked companies within a given index.