CFM ESG & Sustainable Investing 3 — Questions and Answers
Question 1: Which organization publishes the annual Global ESG benchmark that many US institutional investors use as a reference for stewardship?
- Bloomberg Finance LP
- MSCI Inc.
- Principles for Responsible Investment (PRI) (Correct answer)
- Glass Lewis & Co.
Correct answer: Principles for Responsible Investment (PRI)
PRI produces annual signatory assessments and stewardship benchmarks that guide institutional investors on responsible ownership practices.
Question 2: The Task Force on Climate-related Financial Disclosures (TCFD) recommends disclosures in all of the following categories EXCEPT:
- Governance
- Strategy
- Risk Management
- Social Impact Scores (Correct answer)
Correct answer: Social Impact Scores
TCFD's four pillars are Governance, Strategy, Risk Management, and Metrics & Targets — social impact scores are not a TCFD category.
Question 3: A fund manager assessing 'transition risk' in climate investing is evaluating risk from:
- Physical damage caused by extreme weather events
- Policy, technology, and market shifts during the move to a low-carbon economy (Correct answer)
- Reputational damage from stakeholder activism
- Litigation costs associated with past pollution events
Correct answer: Policy, technology, and market shifts during the move to a low-carbon economy
Transition risks arise from the economic adjustments needed to shift to a lower-carbon world, including policy changes, new technologies, and shifting consumer preferences.
Question 4: ESG-themed exchange-traded funds (ETFs) that track an index have faced criticism primarily because:
- They charge higher fees than actively managed ESG funds
- Index-based ESG ETFs cannot engage with companies on governance issues (Correct answer)
- They are prohibited from holding US Treasury bonds
- ESG ETFs have consistently underperformed non-ESG ETFs
Correct answer: Index-based ESG ETFs cannot engage with companies on governance issues
Passive ESG ETFs track indices and rarely engage in active shareholder dialogue, limiting their ability to influence corporate behavior.
Question 5: Which metric is most commonly used to measure a portfolio's carbon footprint?
- Scope 1 emissions per unit of revenue (weighted average carbon intensity) (Correct answer)
- Scope 3 emissions as a share of market capitalization
- Total absolute Scope 2 emissions across all holdings
- Carbon offset credits purchased by portfolio companies
Correct answer: Scope 1 emissions per unit of revenue (weighted average carbon intensity)
Weighted Average Carbon Intensity (WACI) measures Scope 1 emissions normalized by revenue and portfolio weight, making it the standard portfolio-level carbon metric.
Question 6: In the context of ESG, 'proxy voting' is a governance tool used by fund managers to:
- Delegate ESG research to third-party rating agencies
- Vote on shareholder resolutions to influence corporate behavior (Correct answer)
- Proxy-test portfolio companies for greenwashing risk
- Substitute ESG scores for traditional credit ratings
Correct answer: Vote on shareholder resolutions to influence corporate behavior
Fund managers vote on shareholder resolutions — including on executive pay, board composition, and ESG proposals — as a key mechanism of corporate governance.
Question 7: A 'green bond' differs from a conventional bond primarily in that:
- It offers a higher yield due to additional ESG risk
- Proceeds are earmarked for environmentally beneficial projects (Correct answer)
- It is issued exclusively by sovereign governments
- It cannot be traded on secondary markets
Correct answer: Proceeds are earmarked for environmentally beneficial projects
Green bonds are standard debt instruments whose proceeds are specifically allocated to climate or environmental projects, verified against frameworks like ICMA's Green Bond Principles.
CFM ESG & Sustainable Investing 3
Which organization publishes the annual Global ESG benchmark that many US institutional investors use as a reference for stewardship?