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Social issues impact different sectors uniquely, affecting investment risks and opportunities.

Why A is correct:

Examples of sector-specific social risks:

Retail & Apparel → Supply chain labor conditions, human rights.

Tech Industry → Data privacy, employee diversity.

Healthcare → Access to medicine, ethical drug pricing.

Why not B?

B is incorrect because not all companies in a sector face the same social risks—for example, some may have stronger supply chain policies than others.

Why not C?

C is incorrect because social materiality often starts at an industry level first, then narrows down to the company level.

References:

SASB (Sustainability Accounting Standards Board) Materiality Framework

World Economic Forum: Social Risks in Sustainable Investing (2022)

Conduct-related exclusions (Option C) filter out companies based on unethical or controversial business activities, such as:

Gambling, tobacco, weapons, fossil fuels, and human rights violations.

Used in ESG-focused and socially responsible investing (SRI) indices.

Option A (Faith-based exclusions) are religion-specific (e.g., Islamic finance avoiding alcohol or pork-related businesses).

Option B (Idiosyncratic exclusions) refer to custom exclusions tailored to investor preferences, not general ESG norms.

References:

MSCI ESG Exclusionary Screening Guidelines

S&P Dow Jones Sustainability Index Exclusion Criteria

PRI Guide to Negative Screening

The carbon offset market allows companies and individuals to purchase carbon credits to compensate for their emissions.

Why C (voluntary and regulated aspects) is correct:

Regulated markets: Compliance-based (e.g., EU Emissions Trading System, California Cap-and-Trade Program).

Voluntary markets: Used by companies seeking to offset their carbon footprints (e.g., via Verra, Gold Standard projects).

Why not A or B?

A (Very transparent) is incorrect—voluntary carbon markets often lack transparency and face greenwashing risks.

B (Rigorous scientific process) is partly true but varies widely between high-quality and low-quality offsets.

References:

Taskforce on Scaling Voluntary Carbon Markets (TSVCM) Report (2023)

World Bank’s State and Trends of Carbon Pricing (2023)

The Principles for Responsible Investment (PRI) is a voluntary initiative supported by the United Nations, aiming to promote responsible investment practices.

Why B (require annual reporting) is correct:

PRI signatories must report annually on how they implement the six PRI principles.

Reporting covers ESG integration, active ownership, and sustainability risks.

Why not A or C?

A is incorrect—while PRI supports climate action, it does not specifically operationalize the Paris Agreement for the investment industry.

C is incorrect—PRI is not mandatory, and there are no enforcement mechanisms for non-compliance.

References:

PRI Reporting Framework (2023)

UN PRI’s Principles for Responsible Investment