CFM ESG & Sustainable Investing 2 — Questions and Answers
Question 1: Which international framework established Principles for Responsible Investment (PRI) that fund managers commonly sign onto?
- World Bank Group
- United Nations (Correct answer)
- OECD
- IMF
Correct answer: United Nations
The UN-backed PRI was launched in 2006 and provides six principles for incorporating ESG factors into investment decisions.
Question 2: In ESG integration, 'engagement' refers to:
- Selling shares of non-compliant companies
- Active dialogue with company management on ESG issues (Correct answer)
- Screening out entire industries from a portfolio
- Allocating capital exclusively to green bonds
Correct answer: Active dialogue with company management on ESG issues
Engagement means investors communicate directly with company leadership to encourage improved ESG practices rather than divesting.
Question 3: A fund manager evaluating 'stranded asset risk' is most concerned about:
- Portfolio illiquidity during market stress
- Assets that may lose value due to environmental regulatory changes (Correct answer)
- Currency mismatches in cross-border investments
- Physical damage to portfolio company facilities
Correct answer: Assets that may lose value due to environmental regulatory changes
Stranded assets are those whose economic value is impaired ahead of end of expected life due to policy, regulatory, or market changes related to sustainability.
Question 4: The EU Sustainable Finance Disclosure Regulation (SFDR) classifies 'dark green' funds under which article?
- Article 6
- Article 7
- Article 8
- Article 9 (Correct answer)
Correct answer: Article 9
Article 9 funds under SFDR have sustainable investment as their explicit objective, making them the most stringent category.
Question 5: Which ESG data challenge is most commonly cited by institutional fund managers?
- Overabundance of standardized global ESG metrics
- Lack of corporate ESG disclosure and inconsistent data (Correct answer)
- Excessive government regulation of ESG scoring agencies
- Negative correlation between ESG scores and financial returns
Correct answer: Lack of corporate ESG disclosure and inconsistent data
Inconsistent reporting standards and voluntary disclosure make ESG data quality and comparability a persistent challenge for fund managers.
Question 6: Carbon credits used in voluntary carbon markets most directly represent:
- A right to emit one metric ton of CO2 equivalent (Correct answer)
- An obligation to reduce emissions by 10% annually
- A financial instrument traded only on regulated exchanges
- A government-issued permit for industrial production
Correct answer: A right to emit one metric ton of CO2 equivalent
One carbon credit represents the reduction, removal, or avoidance of one metric ton of CO2 equivalent emissions.
Question 7: When a fund uses 'best-in-class' ESG screening, it:
- Excludes all companies in controversial industries regardless of ESG scores
- Selects top ESG performers within each sector, including otherwise controversial ones (Correct answer)
- Focuses exclusively on companies with net-zero commitments
- Requires all holdings to have third-party ESG certifications
Correct answer: Selects top ESG performers within each sector, including otherwise controversial ones
Best-in-class screening retains sector exposure but favors the highest ESG-rated companies within each industry, including oil & gas or defense.
CFM ESG & Sustainable Investing 2
Which international framework established Principles for Responsible Investment (PRI) that fund managers commonly sign onto?