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NEW QUESTION # 94
Technology and finance sectors are most likely to be underweighted when portfolios are screened for:
Answer: A
Explanation:
Scope 3 emissions (Option C) include indirect emissions from supply chains, investments, and consumer use, making finance and technology sectors particularly exposed because:
Finance: Banks and asset managers finance high-emission industries, leading to significant Scope 3 exposure.
Technology: Cloud computing, data centers, and supply chains generate significant Scope 3 emissions (e.g., electronics manufacturing).
Option A (Scope 1 emissions) refers to direct emissions, which are low for finance and tech.
Option B (Scope 2 emissions) involves purchased electricity, which is relevant but not a major exclusion factor.
References:
GHG Protocol - Scope 3 Emissions Guidance
CDP Climate Disclosures for Financial Institutions
PRI Guide to ESG Integration in Financial Sector
NEW QUESTION # 95
Which of the following subclasses is most likely to have the highest level of ESG integration using Mercer's ratings?
Answer: A
Explanation:
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.
Reference 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.
NEW QUESTION # 96
The signatories of the Kyoto Protocol are committed to:
Answer: C
Explanation:
Step 1: Understanding the Kyoto Protocol
The Kyoto Protocol is an international treaty that extends the 1992 United Nations Framework Convention on Climate Change (UNFCCC) and commits its parties to reduce greenhouse gas (GHG) emissions, based on the premise that global warming exists and human-made CO2 emissions have caused it.
Step 2: Commitments under the Kyoto Protocol
* The Kyoto Protocol was adopted in Kyoto, Japan, in December 1997 and entered into force in February
2005.
* It legally binds developed countries and economies in transition to emission reduction targets. The principle of "common but differentiated responsibilities" recognizes that developed countries are principally responsible for the current high levels of GHG emissions in the atmosphere.
Step 3: Comparing the Options
* Option A: Refers to transitioning investment portfolios to net-zero GHG emissions by 2050, which is not the commitment under the Kyoto Protocol but aligns more with current initiatives like the Paris Agreement.
* Option B: This option aligns with the Kyoto Protocol's commitment to limit and reduce GHG emissions according to individual targets.
* Option C: This option aligns with the Paris Agreement's goal rather than the Kyoto Protocol.
Step 4: Verification with ESG Investing References
The Kyoto Protocol's main aim is to control emissions of the main anthropogenic (human-emitted) greenhouse gases in ways that reflect underlying national differences in greenhouse gas emissions, wealth, and capacity to make the reductions: "The Kyoto Protocol commits its Parties by setting internationally binding emission reduction targets".
Conclusion: Signatories of the Kyoto Protocol are committed to limiting and reducing their greenhouse gas emissions in accordance with agreed individual targets.
answer: B. Limit and reduce their greenhouse gas (GHG) emissions in accordance with agreed individual targets
NEW QUESTION # 97
A pension fund concerned about climate change will most likely:
Answer: B
Explanation:
Many climate-conscious pension funds employ fossil fuel exclusion strategies to align with low-carbon investment goals.
Why B (Exclude fossil fuel investments) is correct:
Many pension funds divest from coal, oil, and gas due to regulatory, reputational, and financial risks.
Example: Norwegian Sovereign Wealth Fund and CalPERS have divested from coal companies.
Why not A or C?
A (Accept lower returns) is incorrect-climate-focused funds aim for competitive risk-adjusted returns.
C (Investing in high-risk sovereign debt) is unlikely, as these countries face climate risks that could weaken financial stability.
References:
Global Fossil Fuel Divestment Commitments Database
PRI's Climate Change Investment Framework (2022)
NEW QUESTION # 98
A social media company faces criticism from a consumer action group for selling user data to advertising clients. A potential lawsuit will have the greatest direct effect on the company's:
Answer: B
Explanation:
Direct Effect of a Potential Lawsuit:
When a company faces potential legal action, the primary financial impact is often reflected in its liabilities, as the company may need to account for potential legal costs, settlements, or fines.
1. Liabilities-to-Assets Ratio: A potential lawsuit will have the greatest direct effect on the company's liabilities-to-assets ratio. This ratio measures the proportion of a company's assets that are financed by liabilities. When a company anticipates or incurs legal liabilities, its total liabilities increase, which directly impacts this ratio.
2. Return on Equity Ratio (Option A): The return on equity (ROE) ratio measures a company's profitability relative to shareholders' equity. While a lawsuit can indirectly affect ROE through legal expenses and potential losses, the most immediate impact is on liabilities rather than profitability.
3. Creditors Turnover Ratio (Option B): The creditors turnover ratio measures how quickly a company pays off its creditors. This ratio is less directly impacted by a lawsuit compared to the liabilities-to-assets ratio, which reflects the increase in liabilities due to potential legal obligations.
References from CFA ESG Investing:
* Financial Impact of Legal Issues: The CFA Institute discusses how legal risks and potential liabilities can affect a company's financial statements, particularly by increasing liabilities, which in turn affects ratios that measure financial leverage and stability.
NEW QUESTION # 99
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