Sustainable-Investing CFA Institute Sustainable Investing Certificate(CFA-SIC) Exam Free Practice Exam Questions (2025 Updated)

Determining the materiality of ESG issues involves judgment, as it depends on various factors, including the company’s industry, business model, and operating environment. Material ESG factors are those that have the potential to significantly impact a company’s long-term financial performance.ESG Reference: Chapter 7, Page 371 - ESG Analysis, Valuation & Integration in the ESG textbook.

Excluding certain companies based on ESG factors is consistent with an investment mandate focused on risk management. By excluding companies with poor ESG practices, investors can reduce their exposure to risks such as regulatory fines, reputational damage, and operational disruptions, all of which can negatively impact returns.ESG Reference: Chapter 9, Page 510 - Investment Mandates, Portfolio Analytics & Client Reporting in the ESG textbook.

ESG ratings are considered a primary source of ESG data. These ratings are generated by specialized ESG research firms and provide an assessment of a company’s ESG performance based on various metrics and methodologies. Research from consultants or regulatory scores may supplement these ratings but are not primary sources.ESG Reference: Chapter 7, Page 319 - ESG Analysis, Valuation & Integration in the ESG textbook.

The systematic approach involves deriving correlations between ESG factors and financial performance, then weighting those factors accordingly within the portfolio. This method is quantitative and aims to integrate ESG factors into the overall risk and return analysis.ESG Reference: Chapter 7, Page 325 - ESG Analysis, Valuation & Integration in the ESG textbook.

A company’s exposure to social trends and factors depends largely on its culture, systems, operations, and governance. While certain trends may affect entire sectors or countries, the way a company is structured and governed will determine how it responds to and is impacted by these trends.ESG Reference: Chapter 4, Page 206 - Social Factors in the ESG textbook.

As of early 2020, the Global Sustainable Investment Alliance reported that sustainable investing assets reached around USD 35 trillion, highlighting the growing adoption of ESG principles across global markets. (ESGTextBook[PallasCatFin], Chapter 2, Page 58)

Both the EU Paris-Aligned Benchmarks and the EU Climate Transition Benchmarks require an initial reduction in carbon emissions intensity in the starting year, to ensure alignment with climate goals and the Paris Agreement. (ESGTextBook[PallasCatFin], Chapter 3, Page 153)

In the United States, exclusionary screening remains the largest sustainable investment strategy, where companies or sectors are excluded from portfolios based on certain criteria, such as involvement in tobacco or firearms. (ESGTextBook[PallasCatFin], Chapter 2, Page 61)

Private equity investors who primarily view ESG integration as a way to attract clients are more susceptible to allegations of greenwashing. Greenwashing occurs when a company or investor overstates or falsely claims their commitment to sustainability, often for marketing purposes rather than genuine ESG improvements.ESG Reference: Chapter 7, Page 325 - ESG Analysis, Valuation & Integration in the ESG textbook.

Externalities refer to the unintended consequences of a project or asset, such as pollution, that affect its surrounding environment and society. These factors often have social or environmental impacts that are not reflected in the financial costs of the project. (ESGTextBook[PallasCatFin], Chapter 3, Page 114)

One of the critical steps in developing an ESG scorecard is preparing a materiality map. This map identifies and prioritizes ESG issues based on their relevance and impact on the company’s performance, helping guide decision-making and resource allocation.ESG Reference: Chapter 7, Page 370 - ESG Analysis, Valuation & Integration in the ESG textbook.

Trustees of pension funds hold a fiduciary duty to manage assets responsibly, making them vulnerable to legal risks if they fail to account for financial losses related to climate change. (ESGTextBook[PallasCatFin], Chapter 6, Page 285)

Good corporate governance recognizes that no single model is universally better than others. Corporate governance practices vary by region and industry, and what works best in one context may not be suitable for another. Effective governance practices are those that fit the specific needs and challenges of the company.ESG Reference: Chapter 5, Page 236 - Governance Factors in the ESG textbook.

Company management often has wide discretion over ESG disclosures. While certain jurisdictions have mandatory ESG reporting requirements, much of the reporting remains voluntary, allowing management to choose which ESG factors to disclose and how to report on them. This discretion can lead to inconsistencies in the quality and comparability of ESG disclosures.ESG Reference: Chapter 9, Page 501 - Investment Mandates, Portfolio Analytics & Client Reporting in the ESG textbook.

McKinsey & Company emphasizes transparency as part of an asset manager’s tools and processes. Effective tools and processes help ensure that ESG data is accurately collected, analyzed, and reported, making the decision-making process clear and accountable.ESG Reference: Chapter 7, Page 325 - ESG Analysis, Valuation & Integration in the ESG textbook.

FactSet is a for-profit data provider that offers a wide range of ESG-related products and services, helping investors integrate ESG data into their decision-making processes. (ESGTextBook[PallasCatFin], Chapter 9, Page 518)

ESG investing in emerging markets is more challenging due to limited availability of data, variability in reporting standards, and differences in governance practices between countries and companies. (ESGTextBook[PallasCatFin], Chapter 2, Page 61)

Carbon footprinting allows investors and companies to compare their emissions to global benchmarks, providing a standard metric for measuring environmental performance and identifying areas for improvement. (ESGTextBook[PallasCatFin], Chapter 3, Page 139)

The external auditor reports to the audit committee, ensuring independence from management and enhancing the credibility of the financial statements. (ESGTextBook[PallasCatFin], Chapter 5, Page 252)

Shadow carbon pricing is an internal tool used by companies to assign a theoretical cost to their carbon emissions. This cost is factored into decision-making, especially in energy-intensive sectors, to guide investments and operational choices toward more sustainable options, even in the absence of external carbon pricing mechanisms like taxes or trading systems.ESG Reference: Chapter 3, Page 142 - Environmental Factors in the ESG textbook.

ESG integration can be applied to both systematic and discretionary strategies, as it enhances traditional investment processes by incorporating ESG factors to improve risk management and long-term returns. (ESGTextBook[PallasCatFin], Chapter 7, Page 319)

To outperform the market, an ESG fund manager focuses on companies that not only meet financial criteria but also recognize and adapt to social trends, positioning themselves as long-term leaders in their industry. (ESGTextBook[PallasCatFin], Chapter 8, Page 406)

A family office is typically categorized as an asset owner, managing the wealth of a high-net-worth family. They often direct investment strategies, which may include ESG considerations. (ESGTextBook[PallasCatFin], Chapter 7, Page 316)

Corporate social responsibility (CSR) refers to the practice of businesses engaging in initiatives that benefit society. The term emphasizes the company's commitment to conduct business in an ethical manner by considering social, environmental, and economic factors. CSR goes beyond compliance, encouraging companies to engage in activities that can positively impact their stakeholders. (ESGTextBook[PallasCatFin], Chapter 1, Page 6)

Implementing a stronger ESG risk management framework can reduce a company's risk profile, potentially justifying a higher P/E ratio as investors are willing to pay more for a company with lower ESG risks. (ESGTextBook[PallasCatFin], Chapter 7, Page 361)

Smaller companies often receive lower ESG ratings due to their limited resources for ESG reporting and engagement, even if their actual practices are sustainable. (ESGTextBook[PallasCatFin], Chapter 7, Page 364)

Alignment of an investment manager’s performance with long-term ESG objectives is best achieved through early reporting of deviations from the expected investment process or style. This allows the investor to address any discrepancies quickly and ensure the portfolio remains aligned with their ESG goals.ESG Reference: Chapter 9, Page 510 - Investment Mandates, Portfolio Analytics & Client Reporting in the ESG textbook.

Climate change mitigation involves reducing greenhouse gas emissions and fostering economic development in a way that ensures sustainability for future generations. (ESGTextBook[PallasCatFin], Chapter 3, Page 153)

Positive screening, or best-in-class investing, involves selecting companies that rank highly on ESG criteria relative to their peers within the same sector, rather than excluding entire sectors. (ESGTextBook[PallasCatFin], Chapter 7, Page 325)