ESG-Investing Exam Questions Tutorials

The Freshfields Report argued that integrating ESG considerations is necessary from a fiduciary duty perspective, as failure to consider material ESG risks can undermine long-term financial performance. (ESGTextBook[PallasCatFin], Chapter 5, Page 236)

Scopewashing (Option C) occurs when a company highlights progress in one ESG area while underreporting or neglecting negative impacts in another. Example:

A company boasts about renewable energy investments but continues to expand fossil fuel projects without full disclosure.

A firm promotes diversity hiring but has poor labor practices in its supply chain.

Option A (Using hyperbole) refers more to greenwashing rather than scopewashing.

Option B (Keeping quiet) is not scopewashing, but rather a lack of transparency.

References:

OECD Report on ESG Misrepresentation

PRI Guide on Greenwashing Risks

EU Sustainable Finance Taxonomy: Misrepresentation Risks

Credit rating agencies tend to favor companies in regions with high ESG reporting standards (Option C) because:

More disclosure leads to better ESG assessments, reducing uncertainty.

Companies in regions with weaker ESG regulations (e.g., emerging markets) may face higher credit risk due to limited transparency.

Option A is incorrect because ESG factors (e.g., climate risks) can impact liquidity and asset values.

Option B is incorrect because industry weighting in ESG integration follows standard credit risk methodologies.

References:

Moody’s ESG Credit Ratings Report

S&P ESG and Sovereign Credit Ratings

PRI Guide on ESG Integration in Fixed Income

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