Environmental, social, and governance (ESG) investing is a rapidly growing field, and the CFA Institute has introduced a new exam on the subject in 2019. The CFA ESG Investing Exam is designed to assess candidates' knowledge and skills in ESG investing, and it is a valuable credential for anyone who wants to work in this field. According to the CFA Institute, over 41,000 candidates have registered for the CFA ESG exam since it was first introduced in 2019.
What is ESG Investing?
ESG investing is a type of investment that considers environmental, social, and governance factors when making investment decisions. ESG investors believe that these factors can have a significant impact on a company's long-term performance, and they seek to invest in companies that are well-managed and have a positive impact on society.
Why is ESG Investing Growing?
There are a number of reasons why ESG investing is growing. First, there is a growing awareness of the environmental and social challenges facing the world today. Investors are increasingly interested in investing in companies that are working to address these challenges.
Second, there is a growing body of evidence that suggests that ESG investing can be good for financial performance. Studies have shown that ESG funds tend to outperform traditional funds over the long term.
Finally, there is a growing demand for ESG products and services from institutional investors. Pension funds, endowments, and other institutional investors are increasingly allocating capital to ESG funds.
ESG Investment Data
The following data shows that ESG investing is a growing field:
Global ESG assets under management reached $2.5 trillion in 2022, up from $2.24 trillion in 2021.
ESG funds outperformed traditional funds in 2022, returning 8.1% compared to 6.7% for the S&P 500.
Institutional investors are increasingly allocating capital to ESG funds. In 2022, institutional investors accounted for 85% of all ESG investment flows.
Do you have the skills and knowledge to be an ESG expert? Test yourself with these five sample CFA ESG Practice Questions selected by FutureGreenWorld. Answers below.
1. How does climate change mitigation differ from climate change adaptation?
A) Climate change mitigation reduces the earth's added warming caused by human activities, while climate change adaptation adapts human practices to function better in a warming world.
B) Climate change mitigation creates actions that are able to function even though the climate is changing, while climate change adaptation reduces the earth's added warming caused by human activities.
C) Climate change mitigation adapts human practices to function better in a warming world, while climate change adaptation creates actions that are able to function even though the climate is changing.
2. In 2015 a car manufacturer admitted to cheating emissions tests by fitting various vehicles with a "defect" device, with software that could detect when it was undergoing an emissions test and alter the performance to reduce the emissions level. This was going on for a while. To the public, the company was touting its vehicles' low-emissions and eco-friendly features in marketing campaigns. Which of the following options best describes this car manufacturer's low-emissions and eco-friendly claims?
A) Greenwashing
B) Stewardship and engagement
C) Tilting strategies
3. A non-profit group releases a report that names companies with a big plastic footprint. A portfolio manager thinks this report will affect the value of a company in their portfolio. According to the Investor Forum, the best way for the portfolio manager to respond to this report is to:
A) Discussing the report with the company during their annual meeting and requesting additional details about their plastic footprint.
B) Writing a tailored letter to the company.
C) Participating in a collective engagement in collaboration with other investors to address the report.
4. Which of the following organizations provides company-focused ESG ratings?
A. Global Reporting Initiative (GRI)
B. Morgan Stanley Capital International (MSCI)
C. Sustainability Accounting Standards Board (SASB)
5. What is the best description for screening for ESG factors based on global norms?
A) Universal excluasion
B) Idiosyncratic exclusion
C) Conduct-related exclusion
Answers:
1. A. Climate change is the alteration of the earth's climate patterns due to increases in heat-trapping gases in the atmosphere and changes in the reflectivity of some of the earth's surfaces. Climate change mitigation involves taking actions to reduce the added warming caused by human activities. Climate change adaptation is the practice of adapting human activities to function better in a warming world with rising seas, more frequent and intense droughts, precipitation, and storms. Climate resilience measures are adaptation actions that can work effectively even in changing climates.
2. A. Greenwashing is the practice of making misleading or false claims about the environmental benefits of a product, service, or company. In this case, the car manufacturer was touting its vehicles' low-emissions and eco-friendly features in marketing campaigns, when in reality, the vehicles were emitting more pollutants than advertised. This is a clear example of greenwashing.
Stewardship and engagement is the practice of investing in companies and encouraging them to adopt sustainable practices. Tilting strategies are investment strategies that seek to generate financial returns while also achieving a positive social or environmental impact. Neither of these options accurately describes the car manufacturer's low-emissions and eco-friendly claims.
3. C. This is because a collective engagement is most likely to fulfill all six success factors of effective engagement published by the Investor Forum. These success factors are:
SF1: Objective(s) should be specific and targeted to enable clarity around delivery.
SF2: Objectives should be strategic or governance-led, or linked to material strategic and/or governance issues.
SF3: The engagement approach should be bespoke (tailored) to the target company.
SF4: The participants should have clear leadership with appropriate relationships, skills, and knowledge.
SF5: The scale of coalition gathered (both the scale of shareholding and the overall AUM of the group) should be meaningful.
SF6: The coalition should have a prior relationship and/or cultural awareness of the target company.
The other answer choices are not as likely to fulfill all of these success factors. Option A, discussing the report with the company during their annual meeting, is an example of a "housekeeping engagement," which is an "annual dialogue to help maintain and enhance a relationship with a company, but with only limited objectives." Housekeeping engagements are not as likely to be strategic or to have a meaningful impact on the company. Option B, writing a tailored letter to the company, is somewhat likely to fulfill the Investor Forum success factors of "SF1: Clear Objective" and "SF2: Material and strategic," but it is not as likely to meet the other success factors, such as "SF4: Clear leadership" and "SF5: Scale of coalition."
4. B. MSCI is one of the largest and well-known ESG rating providers. In 2018, MSCI and Sustainalytics had the largest market shares in company-focused ESG ratings.
The Global Reporting Initiative (GRI) does not publish company ratings but instead publishes the GRI Standards, which provide guidance on disclosure across environmental, social, and economic factors (ESGs).
The Sustainability Accounting Standards Board (SASB) does not publish company ratings but instead provides frameworks such as materiality maps and reporting standards.
5. A. "Universal exclusions represent exclusions supported by global norms and conventions like those from the United Nations (UN) and the World Health Organization (WHO)."
"Idiosyncratic exclusions are exclusions that are not supported by global consensus. For example, New Zealand's pension funds are singularly bound by statutory law to exclude companies involved in the processing of whale meat products."
Conduct-related exclusions are generally company or country-specific, and often not a statement against the nature of the business itself."
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