Sustainable-Investing Exam Questions and Answers

QUESTION: 153 Exam Topic: 2, Exam Pool B

Which of the following is one of the four phases of activities contained by the LEAP assessment framework developed by the Taskforce on Nature-related Financial Disclosures (TNFD)?

Minimize their interface with nature
Maximize their dependence and impact on nature
Evaluate material risks and opportunities for their operations

Answer(s): C

Explanation:

The LEAP assessment framework developed by the Taskforce on Nature-related Financial Disclosures (TNFD) consists of four phases: Locate, Evaluate, Assess, and Prepare. This framework is designed to help organizations understand and address nature-related risks and opportunities.

Locate: This phase involves identifying and mapping the interface of the organization with nature. It includes understanding the dependencies and impacts of the organization's activities on nature.

Evaluate: In this phase, organizations evaluate the material risks and opportunities that arise from their interactions with nature. This includes assessing how these risks and opportunities could affect their operations, value chains, and financial performance.

Assess: Organizations conduct detailed assessments of the material risks and opportunities identified in the Evaluate phase. This involves deeper analysis to quantify and prioritize the risks and opportunities.

Prepare: The final phase involves preparing strategic responses to mitigate risks and capitalize on opportunities. Organizations develop plans and actions to manage nature-related risks and enhance resilience.

Option C, "Evaluate material risks and opportunities for their operations," aligns with the Evaluate phase of the LEAP framework, making it the correct answer.

Reference:

The detailed explanation of the LEAP framework and its phases can be found in the documents provided by the Taskforce on Nature-related Financial Disclosures (TNFD) and supported by various references within the CFA ESG Investing curriculum and other related ESG documentation .

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QUESTION: 154 Exam Topic: 2, Exam Pool B

Avoiding long-term transition risk can most likely be achieved by:

investing in companies with stranded assets.
divesting highly carbon-intensive investments in the energy sector.
reducing exposure to companies exposed to extreme weather events.

Answer(s): B

Explanation:

Avoiding long-term transition risk involves aligning investment strategies with the anticipated changes in regulations, market dynamics, and environmental sustainability goals. Transition risk refers to the financial risks associated with the transition to a low-carbon economy, which can impact the value of investments, particularly those in carbon-intensive industries.

Understanding Transition Risk: Transition risks are associated with the shift towards a low-carbon economy. These include changes in policy, technology, and market conditions that can affect the valuation of carbon-intensive assets.

Divesting Carbon-Intensive Investments: Divesting from highly carbon-intensive investments, particularly in the energy sector, is a key strategy to mitigate long-term transition risks. Carbon- intensive investments are likely to be adversely affected by stricter environmental regulations, carbon pricing, and shifts in consumer preferences towards more sustainable energy sources.

Examples and Case Studies: The urgency to respond to the climate crisis is driving both national and corporate commitments towards Paris-aligned net-zero carbon emissions targets. Reducing portfolio concentration in highly carbon-intensive sectors will decrease exposure to long-term transition risks. However, this may reduce the portfolio's income yield as the energy sector often provides above- market cash flow profiles and dividend income streams.

Strategic Asset Allocation: Effective asset allocation strategies involve reallocating investments to sectors with lower carbon footprints and higher resilience to transition risks. This approach ensures the sustainability of investment returns and aligns with long-term climate goals.

Therefore, the correct approach to avoiding long-term transition risk is divesting highly carbon- intensive investments in the energy sector.

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QUESTION: 155 Exam Topic: 2, Exam Pool B

Which of the following statements is aligned with the Pensions and Lifetime Savings Association (PLSA) Stewardship checklist?

Statement 1: Investors should seek to ensure that fund managers deliver effective separation of long-

term ESG factors from their investment approach.

Statement 2: Investors should work with their advisers to consider the level of resource available for stewardship activities.

Statement 1 only
Statement 2 only
Both Statement 1 and Statement 2

Answer(s): B

Explanation:

The Pensions and Lifetime Savings Association (PLSA) Stewardship checklist provides guidance for asset owners, including pension schemes, on how to effectively integrate stewardship into their investment strategies. Here's a detailed breakdown of the relevant statements:

Statement 1 Analysis: "Investors should seek to ensure that fund managers deliver effective separation of long-term ESG factors from their investment approach." This statement is not aligned with the PLSA Stewardship checklist. The checklist emphasizes integrating ESG factors into the investment approach rather than separating them. Effective stewardship involves considering ESG issues as an integral part of the investment strategy and decision-making process.

Statement 2 Analysis: "Investors should work with their advisers to consider the level of resource available for stewardship activities." This statement is aligned with the PLSA Stewardship checklist. The checklist highlights the importance of ensuring that adequate resources are allocated for stewardship activities. This includes working with advisers to assess and enhance the capability and resources dedicated to effective stewardship practices.

PLSA Stewardship Principles: The PLSA Stewardship checklist outlines several key requirements for effective stewardship, including clarity on how stewardship fits within the investment strategy,

ensuring adequate resources for stewardship, and actively engaging with fund managers to ensure they are effectively integrating ESG considerations into their investment processes.

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QUESTION: 156 Exam Topic: 2, Exam Pool B

Which of the following social factor scenarios is most likely to affect revenue forecasting?

Consumer boycotts related to controversial sourcing
Fines related to occupational health and safety failures
High employee turnover related to poor human capital management

Answer(s): A

Explanation:

Social Factor Scenarios Affecting Revenue Forecasting:

Revenue forecasting can be influenced by various social factors that impact a company's sales and customer base. Among the given options, consumer boycotts related to controversial sourcing are most likely to directly affect revenue forecasting.

1. Consumer Boycotts: Consumer boycotts occur when customers refuse to purchase a company's products or services due to disagreements with its practices or policies. In the case of controversial sourcing, if a company is perceived to engage in unethical or unsustainable sourcing practices, it can lead to significant public backlash and consumer boycotts. This directly affects the company's revenue as it loses sales and market share.

2. Fines Related to Occupational Health and Safety Failures: While fines due to occupational health and safety failures represent a financial cost and can damage a company's reputation, they typically have a more direct impact on expenses and liabilities rather than immediate revenue.

3. High Employee Turnover: High employee turnover due to poor human capital management affects operational efficiency and costs related to hiring and training. However, its impact on revenue is more indirect compared to consumer boycotts.

Reference from CFA ESG Investing:

Revenue Impact of Social Factors: The CFA Institute discusses how social factors, such as consumer perceptions and behaviors, can significantly impact a company's revenue. Consumer boycotts can lead to immediate and noticeable reductions in sales, making this scenario particularly relevant for revenue forecasting.

ESG Integration: Understanding the direct and indirect effects of social factors on financial performance is crucial for integrating ESG considerations into revenue forecasting and overall financial analysis.

In conclusion, consumer boycotts related to controversial sourcing are most likely to affect revenue forecasting, making option A the verified answer.

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QUESTION: 157 Exam Topic: 2, Exam Pool B

A company's emission reduction commitments are best evaluated using:

Scope 3 emissions.
science-based targets.
financial modelling of material environmental factors.

Answer(s): B

Explanation:

Evaluating Emission Reduction Commitments:

A company's emission reduction commitments can be evaluated using various methods, but science- based targets provide the most robust framework for assessing these commitments.

1. Scope 3 Emissions: Scope 3 emissions include all indirect emissions that occur in a company's value chain, such as emissions from purchased goods and services, business travel, and waste disposal.
While important, focusing solely on Scope 3 emissions does not provide a complete picture of a company's overall emission reduction strategy.

2. Science-Based Targets: Science-based targets (SBTs) are emission reduction targets that are aligned with the level of decarbonization required to meet the goals of the Paris Agreement, which aims to limit global warming to well below 2 degrees Celsius above pre-industrial levels. SBTs provide a clear and scientifically validated pathway for companies to reduce their greenhouse gas emissions in line with global climate goals.

3. Financial Modelling of Material Environmental Factors: Financial modelling of material environmental factors can provide insights into the financial impacts of environmental risks and opportunities. However, it is not as directly linked to evaluating the specific commitments and pathways for emission reduction as science-based targets are.

Reference from CFA ESG Investing:

Science-Based Targets: The CFA Institute highlights the importance of science-based targets in providing a credible and transparent framework for companies to set and achieve their emission reduction commitments. SBTs ensure that companies' goals are aligned with global climate science and policy objectives.

Emission Reduction Strategies: Understanding and evaluating emission reduction strategies through the lens of science-based targets allows investors to assess the credibility and effectiveness of a company's commitments.

In conclusion, a company's emission reduction commitments are best evaluated using science-based targets, making option B the verified answer.

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QUESTION: 158 Exam Topic: 2, Exam Pool B

Which of the following scenarios best illustrates the concept of a 'just' transition?

A region transitioning to solar power subsidizes businesses to install solar arrays
A region transitioning to a smaller public sector workforce funds outplacement programs for displaced office workers
A region transitioning away from iron ore mining helps displaced miners to work in the safe decommission of abandoned mines

Answer(s): C

Explanation:

Concept of a 'Just' Transition:

A 'just' transition refers to the process of shifting to a more sustainable economy in a way that is fair and inclusive, ensuring that the benefits and opportunities of the transition are shared widely while minimizing the negative impacts on workers and communities.

1. Supporting Displaced Workers: A 'just' transition involves providing support and opportunities for workers and communities that are adversely affected by the shift to a more sustainable economy. This includes retraining, reskilling, and ensuring that there are alternative employment opportunities available.

2. Example of Iron Ore Mining: The scenario where a region transitioning away from iron ore mining helps displaced miners to work in the safe decommission of abandoned mines best illustrates the concept of a 'just' transition. This approach ensures that the affected workers are provided with new employment opportunities that leverage their existing skills while contributing to environmental remediation.

3. Other Scenarios:

Solar Power Subsidies (Option A): While subsidizing solar power installations supports the transition to renewable energy, it does not directly address the needs of displaced workers.

Outplacement Programs for Office Workers (Option B): Funding outplacement programs for displaced public sector workers helps to some extent but does not directly relate to the broader industrial and environmental implications of a 'just' transition.

Reference from CFA ESG Investing:

Just Transition Principles: The CFA Institute emphasizes the importance of a just transition in ensuring that the shift to a sustainable economy is inclusive and equitable. This includes providing support to affected workers and communities.

Case Studies and Examples: The concept of a just transition is illustrated through various case studies and examples where regions and industries have successfully managed the social and economic impacts of transitioning to more sustainable practices.

In conclusion, a region transitioning away from iron ore mining helping displaced miners to work in the safe decommission of abandoned mines best illustrates the concept of a 'just' transition, making option C the verified answer.

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QUESTION: 159 Exam Topic: 2, Exam Pool B

Which of the following is a success factor characteristic of investor collaboration? Investors should have:

an engagement approach that is bespoke to the target company.
clear leadership with appropriate relationships, skills, and knowledge.
objectives that are linked to material strategic and governance issues.

Answer(s): B

Explanation:

Effective investor collaboration is crucial for achieving meaningful outcomes in ESG engagements and initiatives. Clear leadership with appropriate relationships, skills, and knowledge is a key characteristic of successful investor collaboration.

1. Clear Leadership: Having clear leadership ensures that the collaboration is well-coordinated and directed towards common goals. Leaders with the right relationships, skills, and knowledge can navigate complex stakeholder environments, build consensus, and drive the collaboration forward.

2. Engagement Approach (Option A): While having an engagement approach that is bespoke to the target company is important, it is more specific to individual engagements rather than a general characteristic of investor collaboration success.

3. Objectives Linked to Strategic Issues (Option C): Objectives that are linked to material strategic and governance issues are important for the focus and relevance of the collaboration. However, clear leadership is fundamental to ensuring that these objectives are effectively pursued and achieved.

Reference from CFA ESG Investing:

Investor Collaboration: The CFA Institute discusses the importance of leadership in investor collaboration, highlighting that successful collaborations often depend on leaders who can leverage their expertise and relationships to achieve common goals.

Characteristics of Successful Collaborations: Understanding the critical success factors, such as clear leadership, helps investors design and participate in effective collaborative initiatives that can drive positive ESG outcomes.

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QUESTION: 160 Exam Topic: 2, Exam Pool B

Natural language processing (NLP) is employed as a tool in ESG investing to:

backtest short time series of ESG data.
quantify online text relating to ESG risk areas.
interpret satellite imagery to assess deforestation.

Answer(s): B

Explanation:

Natural Language Processing (NLP) is a tool used in ESG investing to analyze and quantify large amounts of textual data related to environmental, social, and governance (ESG) factors. The technology involves the automatic manipulation of natural language by software, enabling the extraction of meaningful information from unstructured text such as news articles, reports, and social media posts.

NLP in ESG Investing: NLP helps investors process and analyze large volumes of textual data to identify trends, risks, and opportunities associated with ESG factors. This capability is crucial for assessing the sentiment and context of ESG-related information, which can impact investment decisions.

Quantifying Online Text: NLP quantifies online text by identifying and categorizing relevant ESG risk areas. This includes monitoring media sources, regulatory filings, and corporate disclosures to capture real-time data on ESG issues. By quantifying these texts, investors can better understand the potential impact of ESG risks on their investments.

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CFA Sustainable-Investing Exam (page: 20) CFA Sustainable Investing Certificate(-SIC) Updated on: 09-Feb-2026

QUESTION: 153 Exam Topic: 2, Exam Pool B

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QUESTION: 154 Exam Topic: 2, Exam Pool B

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QUESTION: 155 Exam Topic: 2, Exam Pool B

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QUESTION: 156 Exam Topic: 2, Exam Pool B

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QUESTION: 157 Exam Topic: 2, Exam Pool B

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QUESTION: 158 Exam Topic: 2, Exam Pool B

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QUESTION: 159 Exam Topic: 2, Exam Pool B

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QUESTION: 160 Exam Topic: 2, Exam Pool B

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CFA Sustainable-Investing Exam (page: 20)
CFA Sustainable Investing Certificate(-SIC)
Updated on: 09-Feb-2026