Changed ESG-Investing Exam Questions

Stranded asset risk refers to the financial risk associated with assets that may suffer from unanticipated or premature write-downs due to regulatory, environmental, or market shifts. Equity investors generally bear a higher risk than fixed-income investors because they are the residual claimants on a company’s assets. If an asset becomes stranded, equity investors absorb the losses first before bondholders or other creditors.

Equity holders are exposed to long-term sustainability risks, such as fossil fuel companies losing value due to climate policies, technological advancements, or consumer preferences shifting toward renewable energy. Fixed-income investors, particularly those holding investment-grade bonds, have priority in claims, and their risk is more directly tied to credit quality and duration rather than asset obsolescence.

References:

CFA Institute ESG Investing Handbook

Principles for Responsible Investment (PRI) Report on Climate Risks and Stranded Assets

TCFD (Task Force on Climate-related Financial Disclosures) Guidelines

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TheEquator Principlesare a widely recognized framework used by banks and financial institutions toassess environmental and social risks in project finance. These principles apply tolarge infrastructure and industrial projects.

TheHelsinki Principlesfocus on climate finance policies.

TheISSBdevelopscorporate sustainability disclosure standards, not project finance guidelines.

References:

Equator Principles Association Official Framework

World Bank Report on ESG Risks in Project Finance

CFA Institute Guide to ESG Risk in Infrastructure

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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.

References:

World Bank Sovereign ESG Risk Assessment Framework

Principles for Responsible Investment (PRI) ESG in Sovereign Debt Guide

IMF Reports on ESG Factors in Government Bonds

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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.

References:

World Economic Forum (WEF) Globalization Trends Report

OECD Report on Global Supply Chains

CFA Institute ESG Integration in Global Markets