1
Q
Which element of governance MOST LIKELY has heightened importance in larger companies as opposed to smaller ones?
A. The effective operation of governance processes
B. The quality and thoughtfulness of board members
C. A culture of strong performance without excessive risk taking
A
A. The effective operation of governance processes
2
Q
In the evolution of corporate governance frameworks, which practice developed MOST recently?
A. Establishment of auditor oversight regulatory bodies
B. Decreasing prominence of combined CEO/chair roles
C. Establishment of, and regularly scheduled meetings of, audit committees
A
A. Establishment of auditor oversight regulatory bodies
3
Q
The interests of institutional investors are MOST LIKELY protected through:
A. pre-emptive rights.
B. related-party transactions.
C. dual-class share structures.
A
A. pre-emptive rights.
4
Q
Which of the following is considered a principal committee in place on the boards of most major companies?
A. Risk committee
B. Nominations committee
C. Social and ethics committee
A
B. Nominations committee
5
Q
The effectiveness of a board chair is BEST evaluated by:
A. engaging in direct dialogue with directors.
B. referring to a board self-assessment report.
C. assessing the quality of the directors on the board.
A
C. assessing the quality of the directors on the board.
6
Q
Which executive remuneration concern is MOST LIKELY expressed by board members?
A. Across the market as a whole, executive pay rates continue to ratchet up.
B. Executive pay does not reflect the market performance of the shares.
C. The executive pay structure does not incentivize executives to deliver maximum value.
A
C. The executive pay structure does not incentivize executives to deliver maximum value.
7
Q
French and US corporate governance practices are MOST LIKELY similar with respect to:
A. audit requirements.
B. institutional investor power.
C. board structure and type of chair.
A
C. board structure and type of chair.
8
Q
Which element of enhanced auditor reports MOST LIKELY provides insight into the auditor’s assessment of the company’s financial controls?
A. Key audit matters
B. Scope of the audit
C. Performance materiality number
A
C. Performance materiality number
9
Q
The governance analysis of a public equity investment will differ MOST significantly from that of an investment in:
A. fixed income.
B. sovereign debt.
C. property and infrastructure.
A
B. sovereign debt.
10
Q
To reduce its budget deficit, the state, which is the majority shareholder in a large utility company, is requesting the full distribution of annual profits to shareholders. The company is heavily indebted. Which behavior would be MOST appropriate for the independent members of the board of directors?
A. Abstaining from voting on the matter of profits distributed to shareholders
B. Complying with the request of the major shareholder to avoid the rise of agency problems
C. Voting against the request of the major shareholder due to the long-term impact on the company
A
C. Voting against the request of the major shareholder due to the long-term impact on the company
11
Q
Which of the following is specific to general mandate resolutions applying to companies established in Hong Kong SAR? Without seeking shareholders’ consent, a company’s board of directors can decide on additional share issuances of up to:
A. 5% of the share capital.
B. 10% of the share capital.
C. 20% of the share capital.
A
C. 20% of the share capital.
12
Q
Which of the following reflects the role of a sunset clause?
A. Enables minority shareholders to exercise stock warrants
B. Reduces the risk of negative company performance related to dual-class shares
C. Protects company founders from class action lawsuits initiated by activist investors
A
B. Reduces the risk of negative company performance related to dual-class shares
13
Q
A company in the oil and gas industry has 7 members on the board of directors with the following set of skills and experience:
Skills and Experience Number of Members
Oil and gas 4
Finance expertise 3
International business 3
Strategic planning 3
Audit and control 2
Public policy expertise 2
ESG issues related to oil & gas 1
To improve the structure of the board of directors, the company should seek to:
A. have all members knowledgeable in the oil and gas industry.
B. have a balanced number of members of the board for each set of skills.
C. hire another board member with expertise in ESG issues related to the oil and gas industry.
A
C. hire another board member with expertise in ESG issues related to the oil and gas industry.
14
Q
The responsibility for fairly reporting a company’s financial position lies with the company’s:
A. external auditor.
B. audit committee.
C. board of directors.
A
C. board of directors.
15
Q
One difference between the corporate governance practices in Japan and those in Germany (or Sweden) relates to the:
A. prevalence of single-tier versus two-tier boards.
B. requirement for appointing independent audit firms.
C. dominance of major shareholders in leading companies.
A
A. prevalence of single-tier versus two-tier boards.
16
Q
In line with best global corporate governance practices, which of the following committees could consist of both independent and non-independent members?
A. Audit committee
B. Nominations committee
C. Remuneration committee
A
B. Nominations committee
17
Q
According to the ICGN’s Global Governance Principles, which of the following would raise questions about the independence of a member of the board of directors? The director:
A. has been a member of the board for the last 3 years.
B. acted as the company’s executive before joining the board of directors.
C. has over 10 years of experience with one of the company’s competitors.
A
B. acted as the company’s executive before joining the board of directors.
18
Q
What are the “two A’s” that lie at the heart of corporate governance?
A. Advocacy and alignment
B. Accountability and advocacy
C. Accountability and alignment
A
C. Accountability and alignment
19
Q
Which of the following is LEAST LIKELY to explain why the role of the chair of a company’s board is important?
A. The chair sets the agenda for board discussions.
B. The chair helps ensure that all directors make their full contribution.
C. The chair will usually also be the CEO.
D. the chair leads the process of selecting and appointing new directors.
A
C. The chair will usually also be the CEO.
20
Q
Which of the following is NOT a board committee expected to be established at all companies?
A. Audit
B. Risk
C. Remuneration
A
B. Risk
21
Q
Which of the following scandals did NOT motivate the creation of the first corporate governance code?
A. Polly Peck
B. Enron
C. Caparo
A
B. Enron
22
Q
Which of the following phrases is commonly used to describe the model created by the Cadbury Code for adherence to its principles?
A. If not, why not?
B. Apply and explain.
C. Comply or explain.
A
C. Comply or explain.
23
Q
Which element of executive pay is MOST LIKELY to include some metric based on ESG performance?
A. Salary
B. Annual bonus
C. Long-term incentive or share scheme
A
B. Annual bonus
24
Q
Which of the following does NOT typically raise questions regarding an individual director’s independence?
A. A recent senior role as an adviser to the company
B. Receiving share options in the company as part of an incentive scheme
C. Not having been on the board long enough to fully understand the business
A
C. Not having been on the board long enough to fully understand the business
25
What US legislation led to the creation of the Public Company Accounting Oversight Board (PCAOB)?
A. The Glass-Steagall Act
B. The Sarbanes–Oxley Act
C. The Dodd–Frank Act
B. The Sarbanes–Oxley Act
26
Which European scandals in 2003 led to a reassessment of the continent’s approach to corporate governance?
A. Ahold and Parmalat
B. WorldCom and Enron
C. BCCI and Caparo
A. Ahold and Parmalat
27
Which area of ethical corporate behavior is MOST LIKELY to be subject to extraterritorial legislation?
A. Anti-corruption
B. Supplier payments
C. Lobbying activities
A. Anti-corruption
28
Which is the only major world market that does NOT, as of 2024, have a corporate governance code?
A. Japan
B. France
C. USA
C. USA
29
Which statement outlines the distinction between the auditor's role in relation to the financial statements and the auditor's role in relation to the rest of the annual report and accounts?
A. Assurance on the financial statements and a report on inconsistencies in narrative reporting
B. Guarantee of accuracy of the financial statements and a report on inconsistencies in narrative reporting
C. Assurance on the financial statements and on narrative reporting
A. Assurance on the financial statements and a report on inconsistencies in narrative reporting
30
For how long can an audit firm remain in that role at an EU public company?
A. 7 years
B. 10 years
C. 20 years
C. 20 years
31
Which of the following is NOT one of the three key elements of disclosure in the new enhanced auditor reports?
A. Scope of the audit
B. Skepticism
C. Key audit matters
B. Skepticism
32
Which of the following is NOT likely to be considered a G factor by a sovereign debt investor?
A. Approach to the rule of law
B. Regulatory effectiveness
C. Independence of board members
C. Independence of board members
33
Which of the following statements is LEAST accurate? The corporate governance framework in India requires that the board of directors of listed companies must:
A. include a female director.
B. include a resident director.
C. be composed entirely of non-executive directors.
C. be composed entirely of non-executive directors.
34
Which of the following countries introduced a corporate governance code in 2018?
A. India
B. Brazil
C. South Africa
B. Brazil
35
In which of the following countries is the use of “promoters” a key characteristic of ownership structure?
A. Sweden
B. India
C. Brazil
B. India
36
What was the model created by the Cadbury Code for adherence to its principles, still
followed in the UK code?
A. If not, why not.
B. Comply or else.
C. Apply and explain.
D. Comply or explain.
D. Comply or explain.
37
Compared to companies financed by public equity, those financed by private equity are most likely to face governance challenges arising from:
A. a small margin for error.
B. a lack of board responsiveness.
C. investor susceptibility to misinformation.
A. a small margin for error.
38
Which of the following best supports board members in large, complex companies
in fulfilling their responsibilities effectively?
A. Policies
B. Processes
C. Codes of conduct
B. Processes
39
The introduction of artificial intelligence and technological innovation into the
audit process is most likely to reduce:
A. the liability of the auditor.
B. human oversight of the audit process.
C. the number of undiscovered fraud cases resulting from the sampling approach to audit.
C. the number of undiscovered fraud cases resulting from the sampling approach to audit.
40
Which of the following companies was blacklisted by the World Bank over
charges of bribery?
A. Satyam
B. Olympus
C. Parmalat
A. Satyam
41
Which of the following refers to a lesson learned from a corporate governance failure?
A. External auditors should also provide non-audit services to a company.
B. Clear delineations should exist between finance and operations
management.
C. A majority shareholder should serve as the company’s chair and CEO to
protect his interests.
B. Clear delineations should exist between finance and operations
management.
42
An investee company implemented an innovative methodology for tracking GHG emissions. An investor wants to understand how the methodology can lower
GHG emissions for the investee. To accomplish this, the investor is most likely to engage in value-creating:
a. political dynamics.
b. learning dynamics.
c. communicative dynamics.
b. learning dynamics.
43
Successful investor engagement tends to have the most positive impact:
a. on restructuring and financial policies
b. on changes to remuneration policies.
c. within six months of the initial engagement contact.
a. on restructuring and financial policies
44
In private equity investments, the limited partners are most likely to:
a. fall outside the scope of principles of stewardship codes.
b. initiate direct ESG engagement with the investee company.
c. engage with the general partner, who monitors and acts on ESG issues across the portfolios.
c. engage with the general partner, who monitors and acts on ESG issues across the portfolios.
45
The most significant change in the 2020 version of the UK Stewardship Code is the:
a. increased emphasis on clear, robust policy statements.
b. addition of a principle requiring management of conflicts of interest.
c. requirement to report on the practical effects of engagement actions.
c. requirement to report on the practical effects of engagement actions.
46
Collective engagement activities are most likely to be controversial when they:
a. result in the creation of concert parties.
b. are outsourced to specialist stewardship providers.
c. are carried out through platforms such as the UK Investor Forum.
a. result in the creation of concert parties.
47
Which form of collaborative engagement is most likely to require greater formality
in approach?
a. Group meetings with the company
b. Collaborative letter-writing campaigns
c. Soliciting broader support for a shareholder resolution
a. Group meetings with the company
48
Which of the following activities is most likely associated with the early stages of a successful engagement action?
a. Ensuring that there is media interest
b. Registering to speak at an annual general meeting
c. Engaging in site visits to understand the company culture
c. Engaging in site visits to understand the company culture
49
A fund management entity that advances clients’ engagement activities even if not investing the clients’ funds is best described as:
a. a proxy firm.
b. an overlay service provider.
c. an ESG investment consultant.
b. an overlay service provider.
50
A portfolio has equal holdings of the following investments:
Credit Rating ESG Score
(1 is low, 10 is high)
Bond 1 BBB+ 2
Bond 2 AA− 8
Bond 3 AAA− 2
According to PRI’s guide ESG Engagement for Fixed Income Investors, which investment is most likely to be the highest priority for engagement?
a. Bond 1
b. Bond 2
c. Bond 3
a. Bond 1
51
The opportunity for fixed-income investors to engage on ESG issues is greatest with:
a. public debt.
b. private debt.
c. sovereign debt.
b. private debt.
52
One of the largest global investment firms holds US$1.5 trillion in AUM in over 400 actively managed mutual funds. One of the most challenging aspects of successful engagement with the investees is:
a. hiring external stewardship services.
b. resource constraints within the investment firm.
c. finding other asset managers to share the concerns regarding the individual investees.
b. resource constraints within the investment firm.
53
The best way to assess an investor’s engagement success is to consider:
a. the impact the engagement had on the investee’s stock price.
b. the improvements in the investee’s corporate governance policies and practices.
c. the outcome of the investor’s engagement actions against engagement objectives related to the investee.
c. the outcome of the investor’s engagement actions against engagement objectives related to the investee.
54
Which of the following is most accurate about stewardship in investments? Stewardship
is exercised:
a. via voting and engagement.
b. by a company’s stakeholders.
c. via short-term investor activism.
a. via voting and engagement.
55
An asset manager engages with an investee company with the objective of increasing its board’s gender diversity. During the engagement, two of the non-independent male board members expressed concerns regarding a forced restructuring of the board and resigned. They were replaced with two independent male members with superior skill sets. Does this outcome represent a successful form of engagement for the asset manager?
a. No
b. Yes, because the new board members are independent
c. Yes, because the new board members have superior skill sets
a. No
56
According to records in the Active Ownership study, successful ESG engagement generated, on average, abnormal financial returns of approximately:
a. 7% in the year after the initial engagement.
b. 9% in the year after the initial engagement.
c. 10% in the year after the initial engagement.
a. 7% in the year after the initial engagement.
57
Unlike stewardship delivered through engagement, stewardship delivered through monitoring is most likely to:
a. inform incremental investment decisions.
b. seek two-way communication between investors and investees.
c. avoid a dialogue with the investee companies to maintain the objectivity of the investor.
a. inform incremental investment decisions.
58
An investor with a history of governance-led engagement is most likely to start engagement with a company by entering into a dialogue with the:
a. board of directors.
b. investor relations team.
c. senior management.
a. board of directors.
59
Which of the following forms of engagement is most likely to have clear engagement objectives regarding an investee company?
a. The annual letter issued by a fund manager
b. Informal discussions with an investee’s senior management
c. A coalition of investors established for environmental research purposes
c. A coalition of investors established for environmental research purposes
60
Which of the following stewardship codes includes a principle stating that asset owners are encouraged to align the operation of the market-wide financial system
with the long-term interests of investors?
a. Singapore Stewardship Principles
b. Australian Asset Owner Stewardship Code
c. European Fund and Asset Management Association Stewardship Code
b. Australian Asset Owner Stewardship Code
61
Which of the following forms of engagement is most likely seen by engagement professionals as normal engagement dialogue with companies?
a. Requesting a general meeting
b. Expressing concerns through the investee’s advisers
c. Making public statements in advance of general meetings
b. Expressing concerns through the investee’s advisers
62
Investors engage in monitoring their investees to:
a. direct investees toward adopting improved ESG practices.
b. understand performance and business opportunities for the investees.
c. express their position on key issues and concerns related to the investees.
b. understand performance and business opportunities for the investees.
63
Which of the following is not among the seven areas typically covered by the top-level principles of a stewardship code?
a. Engagement and escalation
b. Reporting and transparency
c. Stock lending (or securities lending) policies
c. Stock lending (or securities lending) policies
64
Which principle is frequently neglected in regulatory codes developed by investor groups?
a. Voting
b. Conflicts of interest
c. Reporting and transparency
b. Conflicts of interest
65
Which of the following is not one of the prioritization decisions that an investor must make in relation to stewardship?
a. Which company to focus engagement attention on
b. Which annual general meeting (AGM) resolutions to vote on
c. What are the key engagement issues for a particular company?
b. Which annual general meeting (AGM) resolutions to vote on
66
Which of the following is a new area of focus in the 2020 version of the UK Stewardship Code?
a. Conflicts
b. Outcomes
c. Collaboration
b. Outcomes
67
Which of the following is not among the challenges to effective engagement as part of an investor coalition?
a. Conflicts of interest
b. Difficulty in reaching a consensus
c. Unwillingness to act without specific client instruction
c. Unwillingness to act without specific client instruction
68
Which of the following is least likely among the identified key mechanisms for the escalation of engagement?
a. Submitting a shareholder resolution
b. Operating collectively with other shareholders
c. Holding additional meetings with management
c. Holding additional meetings with management
69
An active investor concerned about the financial viability of a business is most likely to reflect that concern by voting on:
a. dividends.
b. auditor pay.
c. board director re-appointment.
a. dividends.
70
ESG engagement activities are typically:
a. carried out by asset owners.
b. most successful for social issues rather than environmental or governance issues.
c. associated with abnormal positive returns in the years after successful engagement.
c. associated with abnormal positive returns in the years after successful engagement.
71
Which of the following stewardship approaches is least likely to be applied by small investors in sovereign debt?
a. Exerting influence on the issuer to act on meeting the sustainable development goals
b. Tilting the portfolios toward fixed-income holdings issued by states with achievements in meeting the sustainable development goals
c. Screening the universe of sovereign fixed-income securities for issuers showing progress in meeting the sustainable development goals
a. Exerting influence on the issuer to act on meeting the sustainable development goals
72
An investor embarks on engagement with a mindset that respects the investee’s individual circumstances and seeks understanding. The PRI would suggest that her approach is most closely related to which ESG engagement dynamic?
a. Political
b. Learning
c. Communicative
a. Political
73
Which of the following is most likely an engagement dialogue according to the Investor Forum Framework?
a. An analyst asks the CFO to explain the impact of a bottom-of-the-pyramid initiative on a division’s cost structure
b. An investor asks the CEO to identify the current stage of the consultation process for a development on a native reserve and the likely completion date
c. A board member asks the purchasing executive about the labor audits underway and shares information about child labor detected in other firms’ supply chains
c. A board member asks the purchasing executive about the labor audits underway and shares information about child labor detected in other firms’ supply chains
74
In the United Kingdom, institutional engagement activities aimed at fulfilling stewardship responsibilities are most likely carried out by:
a. regulators.
b. asset owners.
c. fund managers.
c. fund managers.
75
Engagement teams organized by geography rather than by markets or sectors are most likely focused on:
a. social issues.
b. governance issues.
c. environmental issues.
b. governance issues.
76
Which principle in the Principles of Responsible Investment (PRI) is the “engagement principle”?
a. Principle 1
b. Principle 2
c. Principle 3
d. Principle 4
b. Principle 2
77
What are the origins of the term “stewardship”?
a. A butler, or steward, delivering food to the lord’s table
b. The steward responsible for mixing appropriate ingredients for a feast
c. The steward left in charge of an absentee landlord’s estate
d. A steward steering a ship
c. The steward left in charge of an absentee landlord’s estate
78
What is the most significant difference between monitoring dialogues and engagement?
a. Monitoring will influence trading decisions, engagement voting decisions
b. Monitoring is only done by portfolio managers, engagement only by stewardship
staff
c. Monitoring occurs with investor relations staff, engagement with board directors
d. Monitoring is one-way information seeking, engagement is two-way dialogue
d. Monitoring is one-way information seeking, engagement is two-way dialogue
79
What post-financial crisis report led to the creation of the first stewardship code?
a. The Walker Report.
b. The Oban Report.
c. The Kay Report.
d. The Arthur Report.
a. The Walker Report.
80
Which of the following is NOT among the main barriers to effective engagement?
a. Limited resources
b. Difficulty of reaching consensus
c. Unwillingness to act without specific client instruction
d. Conflicts of interest
c. Unwillingness to act without specific client instruction
81
When might escalation not be the right step in an engagement that has made no progress?
a. When collective engagement is prevented by regulatory standards
b. When no progress has been made and the objective does not warrant excess activity
c. When divestment is the likely step should no change be made
d. Pending a forthcoming shareholder resolution
b. When no progress has been made and the objective does not warrant excess activity
82
Which of the following is not a typical form of collective engagement?
a. Informal collaboration between investors
b. Specialist stewardship service providers
c. Investor associations aggregating member views
d. Internet campaigns aggregating consumer perspectives
d. Internet campaigns aggregating consumer perspectives
83
What is the major constraint on collective engagement approaches?
a. Acting in concert rules
b. Client best interests
c. Maintaining discretion over institutional shareholding
d. Investors are never in contact with each other
a. Acting in concert rules
84
Which of these is not a way for investors to make their voting activity more effective and influential?
a. Hold an active dialogue with the company ahead of the decision
b. Attend the AGM, perhaps to make a spoken intervention
c. Writing afterwards to highlight the reasons for the voting decision
d. Only vote on resolutions where they have a clear opinion
d. Only vote on resolutions where they have a clear opinion
85
Integrating ESG factors into the investment process decreases:
a. reputational risk.
b. the quality of engagement activities.
c. risk-adjusted investment returns.
a. reputational risk.
86
Tools of ESG analysis include:
a. ESG factor tilts.
b. red flag indicators.
c. ESG momentum tilts.
b. red flag indicators.
87
Which of the following represent stages of the investment process that use quantitative and qualitative approaches (The typical stages of an integrated ESG assessment are)?
a. Research, valuation, and portfolio construction
b. Materiality assessment, risk mapping, and valuation
c. Materiality assessment, risk mapping, and portfolio construction
a. Research, valuation, and portfolio construction
88
An analyst noticed that an investee company’s governance was worsening. To account for this, the analyst is most likely to increase:
a. the company’s equity value.
b. the future cash flows from the company’s operating activities.
c. the discount rates in the valuation model used to value the company.
c. the discount rates in the valuation model used to value the company.
89
High carbon intensity of a project most likely leads to lower:
a. cost of debt.
b. risk of default on debt.
c. fair value of a company’s equity.
c. fair value of a company’s equity.
90
Which of the following is an example of an ESG-integrated valuation adjustment?
Upward adjustment in:
a. sales growth due to high employee engagement
b. equity fair value due to the weak governance of a company
c. cost of debt for new project financing with lower carbon intensity compared to similar projects
a. sales growth due to high employee engagement
91
Which of the following is a criticism of ESG integration?
a. Rapid advances in ESG integration techniques
b. ESG screening emphasizes longer-term performance
c. ESG investment strategy being too inclusive of poor companies
c. ESG investment strategy being too inclusive of poor companies
92
Which of the following best describes the relationship between ESG ratings and credit ratings?
a. ESG ratings and credit ratings are positively correlated.
b. The link between ESG ratings and credit ratings is still hotly debated among
credit investors.
c. Surveys from credit investors suggest that the S factor remains more
important than E and G factors.
b. The link between ESG ratings and credit ratings is still hotly debated among credit investors.
93
When developing a scorecard to assess ESG risks and opportunities, which of the following is most likely a challenge for assessing a private company compared to a public company?
a. Difficulty in identifying company-specific ESG issues
b. Inability to convert qualitative factors into quantitative scores
c. Limited coverage of the ESG rating agencies of the private companies
c. Limited coverage of the ESG rating agencies of the private companies
94
An analyst assesses that a company’s new human resources policies will lead to less hiring and lower costs to train new employees. Based on this assessment, the analyst is most likely to adjust the discounted cash flow valuation model by:
a. decreasing the cost of capital.
b. increasing the expected operating margins.
c. reducing future capital expenditures in balance sheet forecasts.
b. increasing the expected operating margins.
95
An investor is considering investing in a company that leads its industry in adopting new environmentally friendly technologies. The investor expects this competitive advantage to last for three years while the rest of the industry adopts similar technology and believes the company will continue to be an innovation leader. Compared to the industry’s P/E multiple, for this company, the investor should
assign a multiple that is:
a. lower.
b. the same.
c. higher.
c. higher.
96
When compared to equity analysis, which of the following factors concerning ESG integration in fixed-income analysis is most accurate?
a. Future growth opportunities are less important.
b. Factors that impact balance sheet strength are less important.
c. ESG integration for fixed-income securities implies the use of the same techniques as for equities.
a. Future growth opportunities are less important.
97
An investment firm has decided to start integrating ESG factors into developing
its investment recommendations. The firm establishes a separate team of ESG analysts made up of recruits from the business sustainability programs at
several universities. Also, the firm subscribes to multiple ESG service providers for access to data and ratings. Which of the firm’s actions will best help the firm overcome the challenges of ESG integration?
a. The subscriptions for data sources
b. The recruitment of team members
c. The establishment of a separate team
a. The subscriptions for data sources
98
During which of the three steps an ESG rating provider typically follows to produce an ESG rating does the dispersal of opinion between ESG providers start?
From:
a. gathering data points for the indicators
b. quantifying data points via scoring or ranking
c. identifying material ESG indicators for the sector
a. gathering data points for the indicators
99
The objectives for integrating ESG factors into an investment process most likely include:
a. meeting internal audit demands.
b. increasing reputational risk at a firm and investment level.
c. improving the quality of engagement activities and increasing investment
returns.
c. improving the quality of engagement activities and increasing investment
returns.
100
In relation to materiality assessment, which of the following is correct?
a. The materiality assessment is typically conducted in the valuation stage.
b. Evidence shows that nonmaterial factors impact financials, valuations, and
company business models.
c. Materiality is measured in terms of likelihood and magnitude of impact on a
company’s financial performance.
c. Materiality is measured in terms of likelihood and magnitude of impact on a
company’s financial performance.
101
Which of the following best represents the order of the steps for developing an ESG scorecard?
Option A:
Step 1: Determine a scoring system
based on what good or best practice looks like for each indicator or issue.
Step 2: Assess a company, and give it a score.
Step 3: Identify sector- or
company-specific ESG items.
Step 4: Benchmark the company’s
performance against industry averages or peer group.
Step 5: Calculate aggregated scores at the issue level, dimension level, or total score level.
Step 6: Break down issues into a number of indicators.
Option B:
Step 1: Determine a scoring system
based on what good or best practice looks like for each indicator or issue.
Step 2: Break down issues into a number of indicators.
Step 3: Assess a company, and give it a score.
Step 4: Identify sector- or
company-specific ESG items.
Step 5: Calculate aggregated scores at the issue level, dimension level, or total score level.
Step 6: Benchmark the company’s
performance against industry averages or peer group.
Option C:
Step 1: Identify sector- or
company-specific ESG items.
Step 2: Break down issues into a number of indicators.
Step 3: Determine a scoring system based on what good or best practice looks like for each indicator or issue.
Step 4: Assess a company, and give it a score.
Step 5: Calculate aggregated scores at the issue level, dimension level, or total score level.
Step 6: Benchmark the company’s
performance against industry averages or peer group.
a. Option A
b. Option B
c. Option C
c. Option C
102
This question relates to the case study focusing on the beverage company. Which of the following are examples of material environmental factors that should be considered by an analyst?
a. Talent retention and recruitment strategy
b. Water efficiency and greenhouse gas (GHG) emissions
c. Supplier code-of-conduct protocols and product mix
b. Water efficiency and greenhouse gas (GHG) emissions
103
Which of the following factors are least likely to be considered by credit rating agencies (CRAs)?
a. Environmental risk and religious or ethical risk
b. Bankruptcy risk, litigation risk, and human capital risk
c. Environmental risk, standard credit ratio analysis, and governance risk
a. Environmental risk and religious or ethical risk
104
Which of the following factors is generally considered the most important when evaluating ESG considerations around sovereign debt?
a. Environmental factors
b. Social factors
c. Governance factors
c. Governance factors
105
Which of the following statements best describes a green bond?
a. Bonds that finance green projects
b. Bonds that are evergreen and continue for a specified duration
c. Bonds that get the green light based on governance guidelines
a. Bonds that finance green projects
106
Which of these is least likely to be an ESG-integrated valuation technique?
a. Adjusting cash flows due to cash tax adjustments
b. Adjusting cost of capital due to poor governance ratings
c. Adjusting sales growth assumptions due to weak employee engagement scores
a. Adjusting cash flows due to cash tax adjustments
107
An analyst assesses a company as below average on ESG metrics. All other matters being equal, the analyst is most likely to:
a. assign a P/E premium to the stock.
b. increase the company’s cost of capital.
c. reduce company’s risk of default in the forecast model.
c. reduce company’s risk of default in the forecast model.
108
Tools used by fund managers to evaluate companies based on their ESG-related
exposure or ESG-specific factors are best described as:
a. ESG data.
b. ESG ratings.
c. ESG screening.
c. ESG screening.
109
The ratings provided by different ESG rating agencies are most likely to:
a. be highly correlated with each other.
b. send clear signals to companies about valued ESG actions.
c. disperse the effect of ESG performance preferences on asset prices.
c. disperse the effect of ESG performance preferences on asset prices.
110
Research published by the Bank for International Settlements revealed that GHG emissions of borrowing firms have affected bank lending to these firms, but bank-by-bank disparities are high. Based on this information, an analyst is looking
to develop a scorecard for three banks by assigning a score on a scale from 1 (poor GHG emission policies and practices) to 5 (strong GHG emission policies and practices). Bank A has a GHG emission policy and reports total GHG emissions/million revenue ($)
Bank B does not have a GHG emission policy and reports Scope 1 GHG emissions/ million revenue ($)
Bank C has a GHG emission policy and reports total GHG emissions/million revenue ($) and Scope 1, 2, and 3 GHG emissions/million revenue ($)
Which of the three banks is most likely to receive the highest score?
a. Bank A
b. Bank B
c. Bank C
c. Bank C
111
Which of the following represents a challenge for ESG integration in emerging markets compared to developed markets?
a. Challenges in benchmarking ESG performance
b. Fewer opportunities for investors to engage with companies and improve ESG stance
c. Limited scope for advancing ESG factors through capital allocation and active ownership
a. Challenges in benchmarking ESG performance
112
Company X currently trades at a P/E of 4×, and an ESG rating agency rated the company with an ESG score of A (best in class). Company Y, a peer of Company X, is rated with an ESG score of B by the same ESG rating agency. Which of the
following is the most likely fair-value P/E assigned by an analyst to Company Y?
a. 3×
b. 4×
c. 5×
a. 3×
113
A company in the technology sector contracted an ESG rating agency for an evaluation of its ESG performance. The ESG rating agency assigned the company
an ESG risk rating of 24 (medium risk) on a scale from 0 (negligible risk) to 40+ (severe risk). The same company learned that it was also rated by another ESG rating agency and assigned an ESG score of 83 on a scale from 0 (defaulting ESG
performance) to 100 (perfect ESG performance). This ESG score places the company among the 10 best ESG performing companies in the technology sector. The difference in methodologies and the outcomes of the rating process of the two ESG rating agencies is most likely to:
a. inform the company’s management on actions to improve ESG performance.
b. hinder the ESG performance of the company from being reflected in the stock price.
c. reduce the variability in findings of empirical research focusing on assessment of ESG scores.
b. hinder the ESG performance of the company from being reflected in the stock price.
114
After a meeting with the representatives of a pension fund, a potential new limited partner, ABC Private Equity Fund decided to divest from a profitable utility
company that has a policy enforcing a mandatory 65-year-age retirement. The fund’s divestment decision is most likely to seek:
a. value creation for the managed portfolio of funds.
b. a differentiating factor in attracting clients conscious of age discrimination.
c. to manage risks that could impact the financial performance of its portfolio companies.
b. a differentiating lowerfactor in attracting clients conscious of age discrimination.
115
Elements of ESG integration include:
a. watch lists.
b. scenario analysis.
c. ESG momentum tilts.
c. ESG momentum tilts.
116
ESG risk mapping refers to:
a. positive or best-in-class screening.
b. testing a portfolio against different climate scenarios.
c. identifying the ESG issues that are likely to have an impact on the company’s financial performance
b. testing a portfolio against different climate scenarios.
117
Weak governance identified in a private company mostly likely leads to higher:
a. valuation.
b. future cash flows.
c. risk of negative capital allocation decisions.
c. risk of negative capital allocation decisions.
118
Amongst 1) the Black-Litterman model, 2) the Brinson attribution model, 3) risk
factor attribution, which is/are metric(s) to measure the effectiveness of ESG
integration?
a. 1 and 3
b. 2 and 3
c. None
d. 1, 2, and 3
b. 2 and 3
119
Qualitative ESG analysis is likely to be used in investment processes that are based on:
a. company-specific research.
b. fundamental analysis.
c. stock picking.
d. all of the above.
d. all of the above.
120
Qualitative analysts and portfolio managers seek to integrate their qualitative investment opinion by incorporating:
a. negative screening.
b. quantitative adjustments to financial models and valuations.
c. qualitative measures only.
d. none of the above.
b. quantitative adjustments to financial models and valuations.
121
Which of these statements is not true?
a. The ESG integration framework is not meant to illustrate the perfect
ESG-integrated investment process.
b. The ESG integration techniques of one firm are not necessarily the right techniques for all firms.
c. There is a consensus amongst firms on which techniques to use to identify and assess ESG factors
d. Every firm is unique and will use a selection of the techniques referenced in the ESG Integration Framework.
c. There is a consensus amongst firms on which techniques to use to identify and assess ESG factors
122
Disclosure and data-related challenges for ESG integration include:
a. data consistency.
b. data scarcity.
c. data incompleteness and lack of audited data.
d. all of the above.
d. all of the above.
123
Which of the following is NOT used by a fixed-income practitioner when evaluating ESG aspects?
a. Bankruptcy risk
b. Proxy voting
c. Negative credit events
d. Time horizons
b. Proxy voting
124
Which is the most common ESG factor considered in strategic asset allocation?
a. Climate risk
b. Exclusionary screening
c. Active stewardship
a. Climate risk
125
Which of the following statements best describes discretionary ESG investment strategies?
a. Discretionary investment strategies impose a custom index with ESG exclusion criteria.
b. Discretionary investment strategies complement bottom-up financial analysis with consideration of ESG factors.
c. Discretionary investment strategies are rule-based approaches to drive security
selection in ESG-integrated portfolio construction.
b. Discretionary investment strategies complement bottom-up financial analysis with consideration of ESG factors.
126
A bond that an issuer uses the proceeds from the sale of the bond to improve raw material sourcing to comply with ESG criteria is a:
a. transition bond.
b. sustainability bond.
c. sustainability-linked bond.
b. sustainability bond.
127
Which type of bond provides financing for sustainable fishing projects?
a. Marine bond
b. Sustainability bond
c. Sustainability-linked bond
c. Sustainability-linked bond
128
Which type of ESG investing bond provides financing for sustainable fishing projects?
a. Blue bond
b. Green bond
c. Sustainability bonds
a. Blue bond
129
Which of the following is a World Bank indicator for country governance?
a. Control of corruption
b. Affiliation with investor initiatives
c. Length of time government has been in power
a. Control of corruption
130
Investors typically address the effects to risk-adjusted returns of ESG integration in portfolio management through:
a. risk mitigation and alpha generation.
b. risk mitigation and dynamic asset allocation.
c. factor risk allocation and dynamic asset allocation.
a. risk mitigation and alpha generation.
131
Which of the following is a form of idiosyncratic exclusionary screening?
a. Exclusion of investments in firms that sell tobacco products
b. Exclusion of companies involved in the processing of whale meat products
c. Exclusion of firms involved in use, stockpiling, production, and transfer of cluster munitions
b. Exclusion of companies involved in the processing of whale meat products
132
Which of the following statements about exclusionary screening is most likely to be true?
a. Imposing an exclusion screen may introduce high tracking error against a broad market.
b. Exclusionary screening imposes sustainability-related themes on a portfolio investment universe
c. Exclusionary screening considers more qualitative forms of responsible investment, such as stewardship and engagement activities
a. Imposing an exclusion screen may introduce high tracking error against a broad market.
133
Which of the following statements about exclusionary screening is true?
a. Imposing an exclusion screen may introduce unintended factor exposure
b. Exclusionary screening imposes sustainability-related themes to a portfolio investment universe
c. Exclusionary screening considers more qualitative forms of responsible investment, such as stewardship and engagement activities
a. Imposing an exclusion screen may introduce unintended factor exposure
134
Which of the following about thematic investing is true?
a. It focuses on sustainability-related areas, with which to build a portfolio of companies.
b. It imposes normative criteria to a portfolio investment universe.
c. It describes investments made with the intention of producing positive, measurable socio-environmental impacts without sacrificing financial
returns.
a. It focuses on sustainability-related areas, with which to build a portfolio of companies.
135
Which of the following is NOT a challenge surrounding ESG?
a. Data availability and credibility
b. Diversification of portfolio
c. Characterization of risk–return profile of ESG funds
d. Standardization of cross-industry ESG definition and measurability metrics
b. Diversification of portfolio
136
Which of the following about thematic investing is true?
a. It sacrifices the diversification benefits of portfolio investing
b. It imposes normative criteria to a portfolio investment universe
c. It describes investments made with the intention of producing positive,
measurable socio-environmental impacts without sacrificing financial
returns
a. It sacrifices the diversification benefits of portfolio investing
137
Which of the following ESG factors is most often considered in strategic asset allocation?
a. Environmental
b. Social
c. Governance
a. Environmental
138
Which of the following is true about the Mean–variance optimization model for strategic asset allocation?
a. It is relevant for considering ESG issues where an abrupt shift is expected over time.
b. It could introduce an additional source of estimation errors due to the need for dynamic rebalancing.
c. It is highly dependent on historical data as the baseline, with adjustments made to reflect future expectations.
c. It is highly dependent on historical data as the baseline, with adjustments made to reflect future expectations.
139
A portfolio manager would optimize their portfolio for ESG considerations for the purpose of:
a. enhancing the risk–return profile.
b. eliminating correlations between risk premiums.
c. benchmarking.
d. tackling skewness in ESG datasets.
a. enhancing the risk–return profile.
140
Which of the following considers ESG risk as a bottom-up risk factor for ESG integration in strategic asset allocation?
a. Factor risk allocation
b. Total portfolio analysis
c. Dynamic asset allocation
a. Factor risk allocation
141
What is the typical role of the portfolio manager in ESG integration in the portfolio
management process?
a. Perform credit and ESG analysis of the individual security.
b. Estimate the security’s intrinsic value based on the security’s earnings growth and ESG cash flow profile.
c. Widen the focus of research for security analysis, and understand how ESG factors contribute to risk-adjusted returns in asset allocation.
c. Widen the focus of research for security analysis, and understand how ESG factors contribute to risk-adjusted returns in asset allocation.
142
Which of the following is one of the popular approaches institutional investors apply to appraise portfolio performance?
a. Risk mitigation
b. Bayesian inference
c. Brinson attribution
c. Brinson attribution
143
If an investor believes ESG risk represents a top-down risk factor, then it should be integrated at the:
a. asset allocation level.
b. security-selection level.
c. company-selection level.
a. asset allocation level.
144
If a portfolio includes different asset classes, which of the following statements about ESG integration is most accurate?
a. The manager will be using a discretionary approach to portfolio
construction.
b. ESG integration is marked by a high degree of variation depending on asset class.
c. The asset classes will be limited to public equity, fixed income, and
infrastructure.
b. ESG integration is marked by a high degree of variation depending on asset class.
145
An asset management firm manages pooled funds and individual segregated portfolios. One of the managers proposes that the firm start evaluating the ESG
composition of client portfolios by uploading the portfolios onto a third-party ESG platform. Which of the following is least likely an advantage of the proposal?
a. It is suitable for all the firm’s clients.
b. It can produce a picture of each client’s carbon exposure.
c. It can approximate an overall controversy or risk score for the portfolio.
a. It is suitable for all the firm’s clients.
146
At the request of the asset owner, an asset manager has revised the equity portion of a client’s portfolio to exclude companies involved in the extraction and processing
of fossil fuels. The fossil fuel sector makes up a significant portion of the economy and equity markets in the client’s country. In light of the revision, the manager should:
a. create a new custom benchmark.
b. continue to use the current equity market benchmark for consistency purposes.
c. adopt the ESG equity benchmark from a major market data provider, such as FTSE Russell.
a. create a new custom benchmark.
147
Classes of ESG-oriented fixed-income debt issuance include:
a. green bonds.
b. blue bonds.
c. green collateralized loan obligations (CLOs).
d. all of the above.
d. all of the above.
148
A portfolio manager is creating a bond fund with an ESG tilt. In constructing the portfolio, the manager will:
a. be limited to short-term maturities to avoid climate risk.
b. be able to select green bonds based on a universally accepted ranking system.
c. have a smaller investable universe to select from for sovereign bonds compared
to corporate bonds.
c. have a smaller investable universe to select from for sovereign bonds compared
to corporate bonds.
149
A hedge fund manager wanting to offer a sector-neutral portfolio has decided to adopt a quantitative ESG long–short equity strategy. To implement this strategy, her exposures will include going:
a. long the top decile of ESG-rated stocks.
b. short the top decile of ESG-rated stocks.
c. long the bottom decile of ESG-rated stocks.
a. long the top decile of ESG-rated stocks.
150
Which of the following statements concerning full ESG integration in a portfolio is most accurate?
a. It can be accomplished using negative screening.
b. It is based on internally developed research and data.
c. It may combine quantitative approaches and active engagement.
c. It may combine quantitative approaches and active engagement.
151
Compared to a traditional index-based portfolio, an index-based portfolio constructed by excluding meaningful sectors or industries in an index will most likely have a lower:
a. fee structure.
b. tracking error.
c. level of diversification.
c. level of diversification.
152
Which of these does not describe an approach to ESG integration in a portfolio?
a. Impact investing
b. Green securitization
c. Negative screening
b. Green securitization
153
Which of these topics is not generally expected to be addressed by the portfolio management–related section of a fund’s ESG policy?
a. Stewardship and active engagement efforts
b. Corporate social responsibility activities, such as community volunteering
c. ESG risk in the risk management function
b. Corporate social responsibility activities, such as community volunteering
154
Which of the following statements is true?
a. Sovereign debt is susceptible to distortion effects based on ESG ratings.
b. ESG is a standalone component within the entire investment process.
c. It is well understood that the long-term returns on equities outweigh the short-term risks associated with the adoption of ESG by companies as well as funds.
d. Proprietary ESG data are often a real differentiator for investment firms.
a. Sovereign debt is susceptible to distortion effects based on ESG ratings.
155
Which of the following is not a reason for an asset owner to implement an exclusionary
screening approach?
a. It reflects fundamental values of the asset owner’s beneficiaries.
b. It improves the portfolio’s diversification benefits.
c. It is the simplest approach to responsible investment.
b. It improves the portfolio’s diversification benefits.
156
Which of the following by itself is the LEAST naturally-suited investment strategy
to accommodate the United Nations’ Sustainable Development Goals (SDGs)?
a. Thematic investment fund
b. Impact fund
c. Negative screening
d. Positive screening
c. Negative screening
157
Which of the following is most likely an active systematic approach to embedding ESG analysis in a portfolio?
a. Weighting ESG as an idiosyncratic factor in a proprietary multi-factor stock selection algorithm
b. Consideration of ESG scoring and relevant metrics in security-specific
investment decisions
c. Minimizing tracking error against ESG benchmark indexes
a. Weighting ESG as an idiosyncratic factor in a proprietary multi-factor stock selection algorithm
158
What ESG feature is often overlooked in screening approaches for collective
investment funds?
a. Exclusions, such as those that are “socially conscious”
b. Position-weighted ESG portfolio score
c. Stewardship
c. Stewardship
159
Why have ESG index funds been criticized as being more active than they are made out to be?
a. They have lower costs than traditional index-based strategies.
b. The opaque methodology and construction of ESG indexes may include space for human judgment and bias.
c. Index inclusion may create crowding and overvaluation in specific securities.
b. The opaque methodology and construction of ESG indexes may include space for human judgment and bias.
160
Which of the following is most likely to develop an investment recommendation for a security that may be suitable for an ESG-integrated portfolio?
a. A portfolio manager
b. A fundamental analyst
c. An asset owner
b. A fundamental analyst
161
An ESG integration approach that focuses on more concentrated holdings of fewer securities is best described as:
a. a discretionary strategy.
b. an index-based strategy.
c. a quantitative multi-factor strategy.
a. a discretionary strategy.
162
A pension fund whose beneficiaries prohibit holdings of investments involved with controversial arms and nuclear weapons is best described as applying:
a. universal exclusions.
b. conduct-related exclusions.
c. faith-based exclusions.
a. universal exclusions.
163
What is an advantage of a multi-factor model over a smart beta or beta plus strategy
for ESG integration in portfolios?
a. Lower cost
b. Diversification
c. Risk mitigation
b. Diversification
164
Which of the following is NOT a macro-economic climate consideration?
a. Asset class sensitivity to interest rates
b. Heterogeneity and wide-ranging risk/return profile
c. Weighted-average carbon intensity for a single issuer position
d. Ability to add low or inverse correlation relative to market returns
c. Weighted-average carbon intensity for a single issuer position
165
Which of the following statements is false?
a. ESG integration at the equity selection level automatically ensures ESG compliance at portfolio and asset-allocation levels.
b. Lack of standardization of ESG measurability methods negatively impacts unified investor consensus.
c. There is little academic proof of positive correlations between ESG integration in the portfolio and positive returns.
d. Sub-components of ESG are uncorrelated, orthogonal factors.
166
Which of the following does NOT represent the function(s) of ESG indexes?
a. Investing to facilitate cash management at the multi-asset level
b. To measure the sustainability of non-conventional ESG companies
c. To allow seamless deconstruction and reconstruction of benchmarking tools
to include ESG screening
d. All of the above
d. All of the above
167
Why have passive ESG index funds been criticized as being more active than they
are presented?
a. They have higher costs than traditional passive indexes
b. The opaque methodology and construction of ESG indexes may include
space for human judgment and bias
c. Index inclusion may create crowding and overvaluation in specific securities
d. Carbon constraints represent a higher tracking error than ESG score
constraints
b. The opaque methodology and construction of ESG indexes may include
space for human judgment and bias
ESG
flashcards
Decks in class (4)
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