ESG Investing Certificate ESG-Investing Exam Questions and Answers PDF

ESG Integration using Mercer's Ratings:

Mercer’s ratings assess the level of ESG integration across various asset classes and subclasses. Investment-grade credit is most likely to have the highest level of ESG integration compared to sovereign debt and high-yield credit.

1. Investment-Grade Credit: Investment-grade credit typically involves higher-quality issuers with better credit ratings and stronger financial stability. These issuers are more likely to integrate ESG factors into their operations and disclosures, as they often face greater scrutiny from investors and regulatory bodies. Additionally, ESG integration is more prevalent in investment-grade credit due to the higher availability of ESG data and metrics for these issuers.

2. Sovereign Debt: While ESG considerations are increasingly applied to sovereign debt, the level of integration varies significantly by country. Some governments may prioritize ESG factors, while others may not, leading to a lower overall level of ESG integration compared to investment-grade credit.

3. High-Yield Credit: High-yield credit involves issuers with lower credit ratings and higher risk profiles. These issuers may have less capacity or incentive to integrate ESG factors compared to investment-grade issuers, leading to lower levels of ESG integration.

References from CFA ESG Investing:

ESG Integration in Credit Markets: The CFA Institute discusses how ESG integration varies across different segments of the credit market. Investment-grade credit typically exhibits higher levels of ESG integration due to better data availability and higher investor demand for sustainable practices.

Mercer’s Ratings: Mercer's ESG ratings emphasize the importance of integrating ESG factors into investment processes, with investment-grade credit generally leading in ESG integration efforts.

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Escalation of engagement refers to increasingly assertive actions taken by investors to address issues with investee companies that have not been resolved through initial engagement efforts.

1. Submitting Resolutions and Speaking at General Meetings: Submitting shareholder resolutions and speaking at general meetings are considered escalatory actions. These steps involve formal proposals that require a vote by shareholders and public statements at shareholder meetings, indicating a higher level of activism and pressure on the company to address the concerns raised by investors.

2. Other Engagement Actions:

Meeting with Investor Relations Team (Option A): This is a routine engagement action where investors seek information and dialogue but do not exert significant pressure.

Engaging Management through Operational Site Visit (Option B): While visiting operational sites and engaging management is important, it is generally seen as part of regular due diligence rather than an escalation of engagement.

References from CFA ESG Investing:

Escalation Strategies: The CFA Institute outlines various engagement and escalation strategies used by investors to influence corporate behavior. Submitting resolutions and speaking at general meetings are highlighted as more assertive actions taken when initial engagement efforts do not yield the desired results.

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Credit-rating agencies are most likely classified as “nontraditional" ESG data and research providers.

1. Traditional vs. Nontraditional Providers: Traditional ESG data and research providers typically focus exclusively on ESG factors, offering detailed analyses and ratings based on environmental, social, and governance criteria. Examples include MSCI, Sustainalytics, and ISS ESG.

2. Role of Credit-Rating Agencies: Credit-rating agencies like Moody's, S&P, and Fitch primarily provide credit ratings based on financial risk and creditworthiness. However, they have increasingly incorporated ESG factors into their credit rating processes, offering insights into how ESG issues might impact credit risk.

3. Nontraditional ESG Providers: Credit-rating agencies are considered nontraditional ESG data providers because their primary focus remains on credit risk, but they are integrating ESG factors into their existing frameworks rather than providing standalone ESG ratings.

References from CFA ESG Investing:

Integration of ESG Factors: The CFA Institute discusses the evolving role of credit-rating agencies in incorporating ESG factors into their credit assessments, positioning them as nontraditional ESG data and research providers.

Market Adaptation: Understanding the differentiation between traditional and nontraditional ESG data providers helps investors navigate the landscape of ESG information sources.

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The underlying principle of the corporate governance code in most markets is "comply or explain." This principle mandates that companies either comply with the established governance guidelines or explain why they have not done so. This approach allows for flexibility while encouraging transparency and accountability in corporate governance.

Flexibility and Adaptability: The "comply or explain" approach provides companies with the flexibility to adapt the guidelines to their specific circumstances. If a company believes that a certain recommendation is not suitable for its situation, it can choose not to comply, provided it explains the reasons for this decision.

Transparency: By requiring companies to explain their non-compliance, this approach promotes transparency. Stakeholders, including investors, can assess the company’s governance practices and make informed decisions based on the explanations provided.

Encouragement of Best Practices: This principle encourages companies to strive towards best practices in governance, while allowing for deviations when justified. It balances the need for high standards with the recognition that one size does not fit all.

References:

MSCI ESG Ratings Methodology (2022) - Discusses the principles of corporate governance codes and highlights the "comply or explain" approach as a common standard in various markets​​.

ESG-Ratings-Methodology-Exec-Summary (2022) - Provides insights into how corporate governance codes are designed to promote transparency and accountability through the "comply or explain" principle​​.