Chapter 7 - ESG Analysis Valuation & Integration Flashcards
The aims and objectives for integrating ESG into an investment process may include:
(a) Meeting requirements under Principles for Responsible Investment (PRI) regulations.
(b) Increasing reputational risk at a firm and investment level.
(c) Meeting internal audit demands.
(d) Improving the quality of engagement and stewardship activities, and increasing investment
returns.
(d) Improving the quality of engagement and stewardship activities, and increasing investment
returns.
Qualitative ESG analysis is likely to be used in investment processes that are based on:
(a) Company-specific research.
(b) Fundamental analysis.
(c) Stock-picking.
(d) All of the above.
(d) All of the above.
Qualitative analysts and portfolio managers seek to integrate their qualitative investment
opinion by incorporating:
(a) Negative screening.
(b) Quantitative adjustments to financial models and valuations.
(c) Qualitative measures only.
(d) None of the above.
(b) Quantitative adjustments to financial models and valuations.
Elements of ESG integration include:
(a) ESG factor tilts.
(b) Red flag indicators.
(c) Company questionnaires and management interviews.
(d) Watch lists.
(a) ESG factor tilts.
Which of these statements is NOT true?
(a) The ESG integration framework is not meant to illustrate the perfect ESG-integrated
investment process.
(b) The ESG integration techniques of one firm are not necessarily the right techniques for all firms.
(c) There is a consensus amongst firms on which techniques to use to identify and assess ESG
factors
(d) Every firm is unique and will use a selection of the techniques referenced in the ESG
Integration Framework
(c) There is a consensus amongst firms on which techniques to use to identify and assess ESG
factors
In relation to materiality assessment, which of the following is correct?
(a) The materiality assessment is typically contained in the valuation stage.
(b) Materiality is measured in terms of likelihood and magnitude of impact on a company’s financial performance.
(c) There is evidence that non-material factors impact financials, valuations and company business models.
(d) Ethical or impact investors judge material factors affecting social, environmental and maximum financial returns.
(b) Materiality is measured in terms of likelihood and magnitude of impact on a company’s financial performance.
Which of the following best represents the chronological order for ESG scorecard
development?
(a) Step 1: Determine a scoring system based on what good or best practice looks like for each
indicator or issue.
Step 2: Assess a company and give it a score.
Step 3: Identify sector or company specific ESG items.
Step 4: Benchmark the company’s performance against industry averages or peer group.
Step 5: Calculate aggregated scores at issue level, dimension level, or total score level.
Step 6: Breakdown issues into a number of indicators.
(b) Step 1: Determine a scoring system based on what good or best practice looks like for each
indicator or issue.
Step 2: Breakdown issues into a number of indicators.
Step 3: Assess a company and give it a score.
Step 4: Identify sector or company specific ESG items.
Step 5: Calculate aggregated scores at issue level, dimension level, or total score level.
Step 6: Benchmark the company’s performance against industry averages or peer group.
(c) Step 1: Identify sector or company specific ESG items.
Step 2: Breakdown issues into a number of indicators.
Step 3: Determine a scoring system based on what good or best practice looks like for each
indicator or issue.
Step 4: Assess a company and give it a score.
Step 5: Calculate aggregated scores at issue level, dimension level, or total score level.
Step 6: Benchmark the company’s performance against industry averages or peer group.
(d) Step 1: Identify sector or company specific ESG items.
Step 2: Assess a company and give it a score.
Step 3: Breakdown issues into a number of indicators.
Step 4: Determine a scoring system based on what good or best practice looks like for each
indicator or issue.
Step 5: Calculate aggregated scores at issue level, dimension level or total score level.
Step 6: Benchmark the company’s performance against industry averages or peer group.
(c) Step 1: Identify sector or company specific ESG items.
Step 2: Breakdown issues into a number of indicators.
Step 3: Determine a scoring system based on what good or best practice looks like for each
indicator or issue.
Step 4: Assess a company and give it a score.
Step 5: Calculate aggregated scores at issue level, dimension level, or total score level.
Step 6: Benchmark the company’s performance against industry averages or peer group.
Disclosure and data-related challenges for ESG integration include:
(a) Data consistency.
(b) Data scarcity.
(c) Data incompleteness and lack of audited data.
(d) All of the above
(d) All of the above
This question relates to the case study focusing on the beverages company. Which of the following are examples of material environmental factors that should be considered?
(a) Talent retention; recruitment strategy.
(b) Water efficiency; greenhouse gas emissions (GHG).
(c) Supplier code-of-conduct protocols; product mix.
(d) Human rights strategy; anti-bribery policy.
(b) Water efficiency; greenhouse gas emissions (GHG).
Which of the following is NOT utilised by a fixed income practitioner when evaluating ESG
aspects?
(a) Bankruptcy risk.
(b) Proxy voting.
(c) Negative credit events.
(d) Time horizons.
(b) Proxy voting.
Which of the following best represents factors least considered by credit ratings agencies
(CRAs)?
(a) Bankruptcy risk, standard credit ratio analysis, litigation risk.
(b) Bankruptcy risk, litigation risk, human capital risk.
(c) Environmental risk, religious or ethical risk.
(d) Environmental risk, standard credit ratio analysis, governance risk.
(c) Environmental risk, religious or ethical risk.
Which of the following factors is generally considered the most important when evaluating ESG considerations around sovereign debt?
(a) Environmental factors.
(b) Social factors.
(c) Governance factors.
(d) Human capital factors.
(c) Governance factors.
Which of the following statements best describes a green bond?
(a) Bonds that finance green projects.
(b) Bonds that meet certain ratings criteria.
(c) Bonds that get the green light based on governance guidelines.
(d) Bonds that are evergreen and roll on for a specified duration.
(a) Bonds that finance green projects.
Which of these is NOT an ESG-integrated valuation technique?
(a) Adjusting sales growth assumptions due to weak employee engagement scores.
(b) Adjusting cost of capital due to poor governance ratings.
(c) Adjusting cash flows due to cash tax adjustments.
(d) Changing fair value price/earnings (PE) ratio due to strong sustainability scores.
(c) Adjusting cash flows due to cash tax adjustments.
An analyst assesses a company as below average on ESG metrics. All other matters being
equal, she is most likely to:
(a) Give a PE premium to the stock.
(b) Increase the company’s cost of capital.
(c) Increase the terminal growth rate assumption in a DCF model.
(d) Reduce the risk of default in her forecast models.
(b) Increase the company’s cost of capital.
