Mock Exam Flashcards
A majority of the research papers on the topic find that companies with long standing good
practice in terms of sustainability tend to:
A. Outperform their peers in both accounting performance and stock markets returns.
B. Underperform their peers in accounting performance and stock markets returns.
C. Outperform their peers in accounting performance but underperform in stock market returns.
D. Underperform their peers in accounting performance and outperforms in stock markets
returns.
A. Outperform their peers in both accounting performance and stock markets returns
Justin runs an equity fund for a large insurance company which has signed on to the UN
Global Compact Principles and the Principles for Responsible Investment. His investment
strategy will need to:
i. avoid companies which do not adhere to Task Force on Climate-related Financial
Disclosures guidelines
ii. screen the portfolio on environmental issues
iii. incorporate ESG issues into the investment process
iv. invest in companies which adhere to human rights principles
A. iii.
B. i and ii.
C. ii and iii.
D. iii and iv.
A. iii. incorporate ESG issues into the investment process
Which UK body is responsible for issuing the Stewardship Code?
A. The Financial Conduct Authority (FCA).
B. The Financial Policy Committee (FPC).
C. The Financial Ombudsman Service (FOS).
D. The Financial Reporting Council (FRC).
D. The Financial Reporting Council (FRC)
A Sovereign Wealth Fund selecting an investment manager with an ESG strategy is likely
to focus more on the manager’s approach to:
A. ESG engagement and stewardship.
B. Integrating MSCI data while ESG scoring the portfolio.
C. Liquidity of the portfolio and short-term performance.
D. Quantitative analysis of portfolio attribution vs. the benchmark.
A. ESG engagement and stewardship.
Which of these least reflects how qualitative ESG data is used in company analysis?
A. By adjusting a valuation.
B. By adding an opinion to an investment thesis.
C. By modifying a financial model.
D. By determining the Value at Risk for the company.
D. By determining the Value at Risk for the company.
Adjusting the Discounted Cash Flow when integrating ESG into traditional financial
analysis is:
A. Not valid at country level.
B. Valid at the level of company, sector or country.
C. Valid only at the level of specific company.
D. Not valid at sector level.
B. Valid at the level of company, sector or country.
Which action would be undertaken first by an investor wanting to follow an engagement
strategy with a company in a cost-effective way?
A. Defining the scope of engagement and prioritizing engagement activities.
B. Developing a clear process which articulates realistic goals.
C. Adapting the engagement process to the local context.
D. Framing the engagement topic into a broader strategy discussion.
A. Defining the scope of engagement and prioritizing engagement activities.
Which of the following ESG factor adjustments should increase an analyst’s valuation
of a company relative to its peers?
A. Higher staff satisfaction.
B. Higher future impairments.
C. Higher safety breaches.
D. Higher carbon tax costs.
A. Higher staff satisfaction.
A private wealth manager uses a data provider to screen out companies involved with tobacco and finds that the process eliminates nearly all consumer companies. As consumer companies are a large percentage of the benchmark index, the manager would
prefer not to eliminate the whole sector.
What method would be the most precise to reduce the number of companies which are
screened out?
A. Global Industry Classification Standard focused on tobacco companies.
B. ESG rating agency data regarding the financial materiality of tobacco.
C. Percentage of company revenue related to tobacco as agreed with the client.
D. Standard industry classification for tobacco companies.
C. Percentage of company revenue related to tobacco as agreed with the client.
What is an indirect environmental impact of a paper company cutting trees and transporting them to its production plant?
A. Carbon emissions from the haulage lorries.
B. A natural regulator of carbon dioxide is destroyed.
C. Deforestation.
D. Local species are disturbed.
B. A natural regulator of carbon dioxide is destroyed.
Which approach is most likely to result in an analyst aggregating data into an ESG score?
A. Company specific research.
B. Fundamental analysis.
C. Stock picking.
D. Quantitative modelling.
D. Quantitative modelling.
What impact will a high ESG rating have on a company’s cost of capital?
A. A lower cost of capital.
B. No change to the cost of capital.
C. A higher cost of capital.
D. A more volatile cost of capital.
A. A lower cost of capital.
Which of the following sectors have the greatest risk of increased insurance costs due to
physical climate change?
A. Construction and materials.
B. Food and beverage.
C. Media and technology.
D. Travel and leisure.
D. Travel and leisure.
ABC Investment Management owns a 2% stake in a large telecom company, which is in
the media, about a surge of employee suicides attributed to pressures in the workplace.
Mary, a senior analyst at ABC Investment Management, would like to engage with the company on the issue and sees that a quarterly earnings conference call is coming up.
What should Mary do before the quarterly conference call?
A. Arrange a pre-meeting call with the company’s investor relations representative.
B. Contact the Investor Forum.
C. Establish clear objectives.
D. Request a meeting with the Chairperson of the Board.
C. Establish clear objectives.
Which of the following statements is generally accepted as not true for companies which
score well on ESG metrics relative to companies scoring less well?
A. They are better able to anticipate environmental change risks and opportunities.
B. They enjoy valuation premiums due to changing investor concerns and preferences.
C. They are more disposed to longer term strategic thinking and planning.
D. They are more likely to grow rapidly and offer higher short term returns
D. They are more likely to grow rapidly and offer higher short term returns
What is the result of an analyst failing to correctly model the risks and opportunities
associated with ESG?
A. Systematic underestimation of high ESG performers and overestimation of ESG under performers.
B. Systematic overestimation of both high ESG performers and ESG under performers.
C. Systematic underestimation of both high ESG performers and ESG under performers.
D. Systematic overestimation of high ESG performers and underestimation of ESG under performers.
A. Systematic underestimation of high ESG performers and overestimation of ESG under performers.
Several questions are associated with the following case study. The material given in the
case study will not change.
CBT’s Annual General Meeting (AGM) is two months away. Patrick Weeze is a portfolio
manager who owns a significant number of CBT shares in his portfolio. His fund is a
concentrated portfolio with high idiosyncratic risk and, as a result, Patrick believes that a
detailed analysis of the governance of each of his portfolio holdings is paramount to its
long-term performance. He reviews the relevant documentation regarding CBT’s AGM
and notes the following:
− CBT provides information on the total amount of CEO remuneration, but no detail on the Key Performance Indicators (KPIs) that influence variable compensation. The CEO’s total compensation last year was GBP 1.2 million, 30% of which comprised fixed salary.
− CBT currently has 10 individuals sitting on its board, 3 of whom are independent. The Chairman is the former CEO who stepped down last year.
− One of the resolutions to be voted at the AGM was put forward by a minority shareholder. The investor asks the company to produce a report on how climate change may affect the company’s strategy and financial stability in the long-term.
Patrick is discussing CBT’s financial model with his financial analyst. He asks the analyst to consider how the model may take into account the KPIs for the CEO’s variable remuneration which are not disclosed. He is presented with 4 options.
Which one is he most likely to select to implement?
A. Increase the company’s estimated costs for next year by an additional GBP 1.2 million to account for the lack of transparency regarding the KPIs.
B. Reduce the company’s current total costs by GBP 360,000, as there are no concerns
regarding the fixed salary portion of the compensation.
C. Increase the cost of capital from 4.6% to 4.8% to reflect the increased risk stemmed
from uncertainty around alignment of interest.
D. Decrease the cost of capital from 4.6% to 4.4% to reflect the reduced level of certainty
around alignment of interest.
C. Increase the cost of capital from 4.6% to 4.8% to reflect the increased risk stemmed
Patrick believes that the Chair cannot be considered as an independent member of the
board. He schedules an engagement meeting with the Chair to discuss the matter.
What could be the most favourable outcome from a governance perspective?
A. The Chair steps down and the CEO assumes the chairmanship, and one of the
independent directors becomes the lead independent director.
B. The Chair steps down and remains on the board, and one of the existing independent
directors is elected Chair.
C. An additional independent director is added to the board to increase the level of
independence.
D. The Chair steps down from the Chair role, and a newly elected independent
director is appointed Chair.
D. The Chair steps down from the Chair role, and a newly elected independent
director is appointed Chair.
When Patrick attempts to set up a call with CBT’s Investor Relations to discuss
governance matters, they push back suggesting that these have no relevance to the
company.
Which argument can Patrick use to best highlight the importance of appropriate governance to enterprises?
A. A meta study by Friede, Busch and Bassen has shown that the majority of studies showed a positive correlation between governance and corporate financial performance.
B. The CFA Institute’s 2017 ESG survey showed that governance has the strongest correlation with company margin growth.
C. Enron’s case provides evidence that governance is simple and failures usually link to one single factor.
D. Bernile, Bhagwat and Yonker’s 2017 study concludes that board diversity adds to governance complexity, thus destroying company value.
A. A meta study by Friede, Busch and Bassen has shown that the majority of studies
showed a positive correlation between governance and corporate financial performance.
What is Patrick least likely to take into consideration when making a decision regarding his vote on the shareholder resolution?
A. The extent to which the company and its business model is exposed to climate change risks.
B. To what extent, the company already provides information on the topic of climate change risk.
C. The company’s response on whether it supports the resolution and why.
D. Whether this resolution falls under the category of governance.
D. Whether this resolution falls under the category of governance.
What do corporate governance structures in France and the US have in common?
A. Chief Executive and Chairman of the Board are typically one person.
B. National corporate governance codes.
C. Statutory auditors in addition to independent auditors.
D. Two-tier boards.
A. Chief Executive and Chairman of the Board are typically one person.
Which of the following is an example of climate change mitigation?
A. Building a flood defence.
B. Developing drought resistant crop.
C. Retrofitting a building.
D. Desalinating water.
C. Retrofitting a building.
Sienna reviews a large retailer faced with a sex equality law suit with a potential £4 billion
in pay out claims. How should she adjust her financial model?
A. Adjust the employee expense line to reflect £4 billion in pay out over 10 years.
B. Do nothing as the company has a good case and may not have to pay.
C. Lower the discount rate to reflect the risk of payouts.
D. Raise the cost of capital to reflect the risk of payouts.
D. Raise the cost of capital to reflect the risk of payouts.
Which of these statements best describes responsible investing?
A. Targeted investment returns with certain investments being negatively screened.
B. ESG factors taken into account to mitigate risk with a focus on financial return.
C. Investments made in a way that captures returns while achieving an intentional effect.
D. ESG factors taking into account to mitigate risk with a focus on capturing ESG opportunities
B. ESG factors taken into account to mitigate risk with a focus on financial return.
Bill is a philanthropist who is approached by four charitable organisations that each claim
to have a solution that reduces mortality by 15% in their specific area of focus if they receive $300 million. Bill’s aim is to reduce mortality rates as much as possible. Which one of the following charities should he choose?
A. A charity focusing on drought.
B. A charity focusing on malaria.
C. A charity focusing on pollution.
D. A charity focusing on violence.
C. A charity focusing on pollution.
How can climate-related scenario analysis be used as an effective tool in portfolio
management?
i. By pricing climate risk.
ii. By assessing the portfolio’s alignment with the Paris Agreement temperature target.
iii. By bottom-up analysis of individual companies in the portfolio.
iv. By producing standardised data for performance measurement.
A. i
B. i and ii
C. i, ii and iii
D. i, ii, iii and iv
C. i, ii and iii
i. By pricing climate risk.
ii. By assessing the portfolio’s alignment with the Paris Agreement temperature target.
iii. By bottom-up analysis of individual companies in the portfolio.
Several questions are associated with the following case study. The material given in the case study will not change.
Daniel Stinner was asked by the head of Research at Lopse Ratings to propose a methodology to rate sovereigns. Lopse Ratings is a well regarded rating agency, but it has been falling behind its peers because, whilst it has integrated ESG within corporate issuers, it has not yet integrated ESG within sovereign issuers.
After a few months of research in the industry and within Lopse, Daniel proposed the following to the Head of Research:
E, S and G weights to a final ESG score reflect the extent that the individual factor is a driver from a credit perspective.
Scores range from factors that individually are adequately managed or contributing to the sovereign’s financial capacity (5) to those which may impose a significant strain on financial streams (1). They do not make value judgments on whether a sovereign engages in ‘good’ or ‘bad’ ESG practices. Instead, they draw out how E, S and G factors
are influencing the credit rating decision.
Political risk, rule of law and corruption have been key drivers of rating actions in the past, indicating that governance was already playing a role in the rating model. It should be made explicit that these are governance-related matters, and thus considered as the ‘G’
within ESG. No other governance issue was deemed material across all types of sovereigns. Data could be gathered from the World Bank’s Governance Indicators (WBGI) and Transparency International.
Social factors also have an important influence on sovereign ratings. Certain factors are related to government’s accountability, while others impact the longer-term productivity, and thus growth (plus indirectly, taxing capability) of the country. These factors are considered as the ‘S’ within ESG. Environmental risks, the ‘E’ within ESG, were identified
as more idiosyncratic to each country based on their location and dependency.
Check pic pg. 18
Which of the below are most likely part of the description for each company?
A. 1
Country A: a developed country which is relatively small with a aging population.
Country B: An emerging economy with increasing labor force and rising deforestation
B. 2
Country A: a dictatorship with significant investments in basic needs but not environmental matters
Country B: a developed country with poor governance contributing to deteriorating living wage
C. 3
Country A: a developing country with significant expenditure in public service jobs and military
Country B: a BRIC country in line with the Paris Agreement but lagging on social matters
D. 4
Country A: a tiger economy, undergoing rapid economic growth accompanied by an increase in the standard of living
Country B: a parliamentary democracy with decentralized government and inefficient social and environmental polices
A. 1
Country A: a developed country which is relatively small with a aging population.
Country B: An emerging economy with increasing labor force and rising deforestation
What might be a reasonable distribution of weight among each of the E, S and G pillars?
A. E = 33.3%, S= 33.3%, G= 33.3%
B. E = 33.3%, S= 44.4%, G= 22.2%
C. E = 40%, S= 40%, G= 20%
D. E = 20%, S= 30%, G= 50%
D. E = 20%, S= 30%, G= 50%
What might explain a downward trend in Country B’s water score?
A. Rising sea levels close to industrial zones.
B. Increased drought in agricultural areas.
C. Reduced access of low-income populations to water and sanitation.
D. Increased river discharge due to longer rainy season.
B. Increased drought in agricultural areas.
How might Country A improve its score for Climate Resilience in the short to medium-term?
A. Improve adaptation methods.
B. Improve mitigation methods.
C. Reduce the number of stranded assets.
D. Align itself with the Paris Agreement
A. Improve adaptation methods.
What might explain the different trends Country A and Country B are experiencing with
regards to demographics?
A. In developed markets, such as Country A, the ratio between the active and inactive part of the workforce drops.
B. In developed markets, such as Country B, the ratio between the active and inactive part of the workforce rises.
C. In developing markets, such as Country B, the ratio between the active and inactive part of the workforce drops.
D. In developing markets, such as Country A, the ratio between the active and inactive part of the workforce drops.
A. In developed markets, such as Country A, the ratio between the active and inactive part of the workforce drops.
A company which produces bottled water and pledges to use 50% recycled plastics is using
A. A circular economy approach.
B. A natural capital approach.
C. A supply chain disruption approach.
D. A use, make, dispose economy approach.
A. A circular economy approach.
Which comment on the data included in ESG integration databases is most accurate?
A. ESG data must be audited to be valid.
B. Input data across similar asset classes is consistent.
C. Data outputs will correlate with data from other ESG databases.
D. Incomplete ESG data used can be material.
D. Incomplete ESG data used can be material.
Alex is a corporate bond analyst at AVX Investment Management and is responsible for a £4 billion portfolio of utility bonds with a range of credit ratings and ESG scores. He has been directed to engage with all the utility companies, whose bonds TBD holds, on their plans to reduce carbon emissions.
Using the PRI’s guide for ESG engagement, Alex should start with the
A. Largest holdings with high credit ratings.
B. Largest holdings with low ESG scores.
C. Smallest holdings with low credit ratings.
D. Smallest holdings with high ESG scores.
B. Largest holdings with low ESG scores.
Several questions are associated with the following case study. The material given in the case study will not change.
Lemon is a Japanese telecommunications company which recently acquired a local company, TTN, that manufactures smart phones, in an effort to integrate vertically and provide clients with a better offer. A significant part of Lemon’s clientele acquisition strategy is a focus on older individuals, and it wants to provide them with phones that better address their needs.
TTN, unlike most of its peers, owns the manufacturing plants which supply parts for its phones. 80% of TTN’s manufacturing personnel are contractors, while the industry average is 40%. Two years ago, TTN was subject to a non-governmental organisation (NGO) campaign requesting that it offered contractors working conditions and pay similar to that of employees. TTN agreed to most of the NGO’s requests.
Which social mega trend is most likely to affect Lemon’s revenues?
A. TTN is most likely to benefit from increased demand from offshoring as globalisation increases.
B. Costs will decrease as manufacturing jobs are cut due to increased automation.
C. The innovation of additional services demanded by an older clientele that lives longer.
D. Increase in social media will naturally lead to increased advertisement sale by TTN.
C. The innovation of additional services demanded by an older clientele that lives longer.
Which of the following company-specific characteristics, describe how Lemon’s risks to labour rights are impacted?
A. Its risks are lower than industry average because a lower percentage of its work force is directly employed.
B. Its risks are fully mitigated by addressing concerns raised by NGO’s.
C. Risks are reduced because older individuals have less concerns about corporate social responsibility than the younger generation.
D. Insourcing its manufacturing enables retention of greater control of its supply chain and thus, risks.
D. Insourcing its manufacturing enables retention of greater control of its supply chain and thus, risks.
How might a portfolio manager interpret the financial implications of TTN agreeing to offer contractors the same working conditions as employees?
A. Cost increases in the short and long-term, and lower share price volatility due to reduced risk of labour disruption
B. Potential financial implications cannot be estimated without the company disclosing the change to contractors’ salaries.
C. Only employees’ salary and working conditions impact the company, hence costs and risks remain the same.
D. The cost of capital is increased in the financial model as a result of providing greater labour rights to contractors.
A. Cost increases in the short and long-term, and lower share price volatility due to reduced risk of labour disruption
Which of the following actions would be a breach of the Standards?
A. Taking a pro-union stance while negating the right of employees to negotiate individually.
B. Advocate the implementation of equal remuneration for equal work.
C. Abolishing child labour even though that would generate jobs.
D. Publishing a policy against discrimination in employment or
occupation.
A. Taking a pro-union stance while negating the right of employees to negotiate individually.
Exclusionary screening is historically most common in which of these regions?
A. Europe.
B. United States.
C. Asia.
D. Canada.
A. Europe.
The Bangladesh Investor Initiative is intended to address which social factor?
A. Forced labour.
B. Freedom of association.
C. Health and safety.
D. Living wage.
C. Health and safety.
