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

Asingle-tier boardstructure, where executive and non-executive directors sit ononeboard, istypical in the UKand many othercommon-law jurisdictions.

In contrast, Germany (C) follows atwo-tier board system, which separatesmanagement (executive board) from oversight (supervisory board). China (A) has a hybrid structure withmandatory Communist Party oversightin large firms.

Both stock exchanges and securities regulatorsplay a role inmandating ESG disclosures:

Stock exchanges(e.g., London Stock Exchange, NYSE) may require ESG disclosures as part oflisting requirements.

Securities regulators(e.g., SEC, European Securities and Markets Authority) enforce ESG reporting laws.

Weitzman'sdismal theoremsuggests that traditionalcost-benefit analysis failsto accurately measure the downside risks of climate change because ofuncertainty in extreme tail events. It argues thatlow-probability, high-impact events (e.g., catastrophic global warming)candominate economic risk calculations, making itdifficult to justify inactionbased on expected cost assessments alone.

This theorem challenges standard economic models thatdiscount future risks too heavily, advocating forprecautionary climate policieseven in cases ofuncertain probability distributions.

Morningstar is a large, for-profit ESG data provider, offering services such asESG ratings, fund analysis, and sustainability scores. It acquiredSustainalytics, a leading ESG research firm.

Thecircular economyfocuses onreducing waste and maximizing resource efficiency.Sustainable resource use (B)aligns directly with circular economy principles, as it promotesrecycling, renewable materials, and closed-loop production systems.

Pollution (A) and climate change (C) are environmental risks but do notdirectlysupport the transition to a circular economy.

TheUK Corporate Governance Codeemphasizesboard behaviors and corporate culture, focusing onaccountability, ethical leadership, and long-term value creation.

Board structure (A) and voting procedures (B) are important but not the primary emphasis of the UK code.

A major challenge in ESG integration iscultural resistance and biases within investment firms. Sometraditional investment managersview ESG as non-financialorirrelevant to performance, leading to resistance in fully embedding ESG into decision-making.

WhileESG reporting complexity (B)is a challenge, it does not outweigh the fundamentalorganizational and mindset barriersthat slow adoption. Standardized disclosures (C) actually help rather than hinder ESG integration.

Income inequality oftenreduces access to education, particularly for lower-income individuals who may struggle withtuition costs, lack of resources, and unequal schooling quality. This, in turn, canreduce upward social mobilityand widen wealth disparities over time.

Option C (tax optimization strategies) is a separate corporate governance issue and not adirectresult of income inequality. Option A (increase in social mobility) is incorrect ashigher inequality often reduces social mobility.

Thematic fundsfocus onspecific investment themes(e.g., renewable energy, clean tech, diversity-focused companies), often leading toconcentration riskandlimited portfolio diversification. Because they focus on anarrow subsetof industries or trends, their risk profile ishigherthan broadly diversified funds.

While some thematic funds may outperform in certain cycles (C),performance is not guaranteed, and they can underperform in downturns. Poor cash flow profiles (A) depend on the companies selected, not a universal characteristic of thematic funds.

Firms with agovernance heritageprioritizeengagement at the board levelbefore escalating issues to senior management. This approach aligns withbest practices in corporate governance, where oversight and decision-making originate at theboard levelrather than operational management.

Firms with asocial heritage (A)focus on labor rights and diversity, while those with anenvironmental heritage (C)prioritize sustainability and climate-related engagements.

Theclimate change transition(e.g., shift from fossil fuels to renewable energy) often results injob losses, reskilling needs, and economic displacement for workers.

Pollution (A) and water scarcity (B) affect public health but do not directly impact worker employment as much as climate policy shifts.

Themanagement gaprefers torisks that are known but not yet actively managed. This could includeESG risks that companies acknowledge but have not integrated into their governance or risk management processes.

Unrated credit positions (B) are a separate riskrelated to credit ratings.

All risks (A) can technically be managed, but some may beneglected due to lack of prioritization or resources.

ESG integration is most developed in corporate bonds, where ESG factorsdirectly affect credit ratings, risk assessment, and investment decisions.

Sovereign debt (A) ESG integration is growing but less standardized.

Securitized bonds (C) have lower ESG data transparency.

TheStockholm Resilience Centreidentifiesfreshwater useas one of theplanetary boundaries that has already been exceeded, threateningecosystems and biodiversity. Overuse of water resourcesdisrupts natural cyclesand leads todesertification and water scarcity.

Ocean acidification (B) is increasing but has not yetfully crossed the boundary, while ozone depletion (C) has beenpartially reversed due to global policy efforts (e.g., the Montreal Protocol).

Thegreeniumrefers to thelower yield ("green premium") investors accept when purchasing green bonds, as they prioritize sustainability over purely financial returns.

Green bonds often trade at lower yields than conventional bonds due to high demand from ESG-conscious investors.

Increased return required (A) is incorrect because green bonds generally offer lower yields.

Excluding fossil fuels (C) is part of negative screening, not greenium.

Corporate governance analysisserves as arisk assessment tool, helping investors gauge a company’slong-term stability and earnings reliability. Companies withstrong governance (e.g., transparent reporting, independent oversight, ethical management)tend to havemore predictable earningsand lower financial risk.

Poor governance, by contrast,increases earnings volatilityand raises concerns aboutfraud or mismanagement, making future earningsless predictableandriskier.

Pension trustees mustassess ESG risks in credit ratingswhen selectingfixed-income managers, asESG factors affect bond pricing, default risk, and credit spreads.

One of the common challenges in ESG integration is the long time horizon required to assess material ESG factors. Many ESG risks and opportunities unfold over extended periods, whereas traditional investment strategies often focus on short-term financial performance.

For example, climate change mitigation efforts, governance reforms, and improvements in social responsibility may take years to influence financial performance. Some investors, particularly those managing portfolios with shorter holding periods, may find it difficult to align ESG considerations with their investment mandates.

Sovereign debt investors typically applyexclusionary screeningas a primary ESG approach. Unlike corporate bond investors, sovereign debt investors have limited direct engagement opportunities with governments. Therefore, they often use exclusionary screening to filter out countries with poor ESG performance, such as those involved in human rights violations, corruption, or weak environmental policies.

For example, many sustainable bond funds exclude investments in countries with poor governance indicators (e.g., high corruption, low press freedom) or those that fail to meet international environmental agreements such as the Paris Agreement.

Stewardship codes emphasizeactive ownership, which includes engaging with companies on ESG issues and escalating actions when necessary. A key principle of many stewardship codes (such as theUK Stewardship Code 2020) is that investors must be willing toact independently of other investorswhen necessary to ensure effective stewardship.

This principle prevents "herding behavior" and ensures that stewardship decisions align withfiduciary dutiesrather than collective pressures.

ESG integrationis the dominant approach forsovereign debt investing, as investors evaluatemacroeconomic ESG risks, such asclimate policies, governance stability, and human rights records, alongside financial metrics.

Engagement (C) is difficultin sovereign debt, andscreening (A) is less common than integration, as investors prefer arisk-basedapproach rather than exclusions.

Incap-and-tradeemissions trading systems, companiesreceive or buy permits to emit greenhouse gases. Some permitsmay be allocated free of charge, especially in the early phases of programs like theEU Emissions Trading System (ETS)to help industriestransition to lower emissions.

TheUK Stewardship Code 2020requiresservice providers(such as proxy advisors and ESG data providers) to conductreview and assuranceof their stewardship activities. This ensuresaccuracy, transparency, and accountabilityinengagement and proxy voting recommendations.

Escalation (A)applies to investors increasing engagement pressure on companies.

Collaboration (B)relates to joint investor efforts rather than service provider responsibilities.

Achange in investment style (A) is least concerningif the manager remainsaligned with the long-term ESG mandate. In contrast:

Underperformance (B)raises questions aboutwhether ESG integration is effective.

Portfolio turnover (C) outside the expected rangecould indicatea misalignment with ESG strategy.

Regime-switching modelsare used instrategic asset allocationtocapture shifts in market conditions, such as economic recessions, financial crises, or climate-related disruptions. These models allow investors toadjust portfolio allocations based on different market regimes.

They do capture fat tails (A),meaning they can account for extreme events.

They incorporate both historical and forward-looking data (B).

Offshoringis directly linked toglobalization, as it involves shifting production or services tolower-cost countries. This trend has been driven bytechnological advancements, supply chain optimization, and cost reductions.

Urbanization (A) relates more tocity expansion, and changes to work and education (C) focus onjob flexibility and learning trends, rather than corporate relocation strategies.

Ajust transitionensures that the move toward alow-carbon economy is fair, particularly forworkers in carbon-intensive industries. It promotessocial inclusion, retraining programs, and economic supportfor affected communities.

Carbon taxes (B) and immediate divestment (C) are strategies but do not define a just transition.

TheOECD COPE 2015 reportfound that therichest 10% earned about 9 times more than the poorest 10%across OECD countries, highlightingincome inequality as a major social issue.

In some developing nations, the gap can be even wider (14x or more), but across OECD countries,9x is the average disparity.

Light Greenbonds supportshort-term emissions reductionsbut do not contribute significantly tolong-term climate resilience.

Medium Green (C) supports more sustainable, long-term transitions.

Yellow (A) is not a recognized CICERO category.