ESG ESG Investment & Financial Integration 2 — Questions and Answers
Question 1: What is 'stranded asset risk' in ESG investing?
- Assets located in flood-prone areas
- Assets that may lose economic value due to ESG-related transitions such as carbon regulation (Correct answer)
- Investments that cannot be liquidated quickly
- Assets excluded from ESG indices
Correct answer: Assets that may lose economic value due to ESG-related transitions such as carbon regulation
Stranded asset risk refers to assets—especially fossil fuel reserves—that may become economically unviable before the end of their useful life due to climate policy, technology shifts, or changing demand.
Question 2: Which framework specifically guides investors in aligning portfolios with the Paris Agreement temperature goals?
- TCFD
- Science Based Targets initiative (SBTi)
- UNPRI Alignment Protocol
- Paris Aligned Investment Initiative (PAII) (Correct answer)
Correct answer: Paris Aligned Investment Initiative (PAII)
The Paris Aligned Investment Initiative provides investors with net-zero frameworks and benchmarks to align portfolios with limiting warming to 1.5°C.
Question 3: In sustainable finance, what does 'negative screening' mean?
- Penalizing companies with negative ESG scores
- Excluding companies or sectors that fail to meet minimum ESG standards from a portfolio (Correct answer)
- Shorting companies with poor ESG records
- Rating companies negatively in ESG databases
Correct answer: Excluding companies or sectors that fail to meet minimum ESG standards from a portfolio
Negative screening (exclusionary screening) removes companies involved in activities deemed harmful—such as tobacco, weapons, or coal—from investment consideration.
Question 4: What is shareholder engagement in the ESG context?
- Distributing ESG reports to shareholders
- Investors using their ownership position to influence corporate ESG behavior through dialogue and voting (Correct answer)
- Shareholders filing lawsuits over ESG disclosures
- Annual meetings focused on sustainability topics
Correct answer: Investors using their ownership position to influence corporate ESG behavior through dialogue and voting
Shareholder engagement means active investors use proxy voting, direct dialogue, and resolutions to push companies toward improved ESG practices.
Question 5: What does the UN Principles for Responsible Investment (PRI) require of its signatories?
- Divesting all fossil fuel holdings within 5 years
- Committing to incorporate ESG issues into investment analysis, ownership policies, and reporting (Correct answer)
- Allocating 10% of AUM to impact investments
- Publishing annual ESG audit reports
Correct answer: Committing to incorporate ESG issues into investment analysis, ownership policies, and reporting
PRI signatories commit to six principles covering ESG incorporation, active ownership, disclosure, and collaboration—without prescribing specific investment decisions.
Question 6: Which type of ESG fund explicitly measures and reports real-world environmental or social outcomes alongside financial returns?
- ESG-integrated fund
- Socially responsible investment (SRI) fund
- Impact investing fund (Correct answer)
- ESG-themed ETF
Correct answer: Impact investing fund
Impact investing funds are distinguished by their intentionality and measurement of specific, positive social or environmental outcomes in addition to financial performance.
ESG ESG Investment & Financial Integration 2
What is 'stranded asset risk' in ESG investing?