ESG-Investing Premium Exam Questions

 Corporate Governance Codes:

Most corporate governance codes around the world require that remuneration committees be composed solely of independent non-executive directors.

 Role of the Remuneration Committee:

The committee is responsible for setting the pay and compensation packages for executive directors.

Having non-executive directors ensures objectivity and independence, reducing potential conflicts of interest.

 Global Standards:

This practice is part of broader corporate governance reforms aimed at improving accountability and aligning executive compensation with long-term shareholder value.

The UK Corporate Governance Code and similar codes in other jurisdictions mandate that remuneration committees should be independent.

 References:

The expectation for remuneration committees to be populated solely by non-executive directors is highlighted in the final ESG investing book​​​​.

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Free, Prior, and Informed Consent (FPIC) is most applicable in situations where developments or projects affect indigenous peoples and their lands. For example, if a company plans to construct a fish farm next to a native waterfront community, it must obtain FPIC from the community. This ensures that the community is adequately informed about the project, has the opportunity to voice their concerns, and consents to the project without any coercion​​​​​​​​.

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Compared to social and environmental factors, governance has a greater materiality for public companies than for private companies. Here’s a detailed explanation:

Governance and Financial Performance: Governance factors, such as board composition, executive compensation, and shareholder rights, have been shown to have a strong link to financial performance. Good governance practices can enhance a company’s transparency, accountability, and decision-making, which in turn can lead to better financial outcomes.

Traditional Investment Analysis: Governance factors have traditionally been given greater consideration in investment analysis compared to social and environmental factors. Investors have long recognized the importance of governance in assessing the risk and return profile of companies.

Materiality for Public vs. Private Companies:

Public Companies: Governance is particularly material for public companies due to the need for transparency, regulatory compliance, and the scrutiny of a larger pool of investors. Public companies are subject to more rigorous reporting requirements and shareholder engagement practices.

Private Companies: While governance is important for private companies, it is generally considered less material compared to public companies because private companies are not subject to the same level of public scrutiny and regulatory requirements.

CFA ESG Investing References:

The CFA Institute notes that governance factors are crucial for public companies, impacting their financial performance and investor confidence (CFA Institute, 2020).

The emphasis on governance in traditional investment analysis reflects its critical role in ensuring sound management and oversight practices, which are essential for public companies​​​​.

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Determining the materiality of ESG issues involves judgment, as it depends on various factors, including the company’s industry, business model, and operating environment. Material ESG factors are those that have the potential to significantly impact a company’s long-term financial performance.ESG Reference: Chapter 7, Page 371 - ESG Analysis, Valuation & Integration in the ESG textbook.