Pass ESG-Investing Exam Guide

Collective engagement can be seen as controversial because it involves multiple investors working together to influence a company, which may raise concerns about coordinated actions and their regulatory implications. However, it is an important tool in addressing significant ESG issues across industries.ESG Reference: Chapter 6, Page 280 - Engagement and Stewardship in the ESG textbook.

As policies on ESG issues and financial regulation across countries reach maturity, the least likely occurrence is moving away from “comply and explain” regulation to “comply or explain” regulation.

Current Trend: The current trend in ESG policies and regulations is toward more stringent requirements, often moving from voluntary to mandatory disclosures (A) and from policy formulation to implementation and reporting (B).

Regulatory Frameworks: "Comply or explain" regulation typically requires companies to either comply with the set regulations or explain why they have not done so. This approach is generally seen as a flexible yet accountable method, encouraging adherence to ESG standards while allowing for some flexibility.

“Comply and Explain” Approach: Moving away from “comply and explain” to “comply or explain” would reduce this flexibility. As regulations mature, the trend is towards ensuring more stringent compliance rather than offering more leniency, making it unlikely that there would be a shift away from the more rigorous “comply or explain” approach.

CFA ESG Investing References:

The CFA Institute's discussions on regulatory developments highlight the evolution of ESG regulations towards more accountability and transparency. The trend is towards enhancing compliance mechanisms rather than loosening them​​​​.

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One of the six environmental factors in the “Materiality Map" by the Sustainability Accounting Standards Board (SASB) is ecological impacts.

SASB Materiality Map: SASB's Materiality Map identifies sustainability issues that are likely to affect the financial condition or operating performance of companies within an industry. The map includes environmental, social, and governance (ESG) factors.

Environmental Factors: The six environmental factors identified by SASB include:

GHG Emissions

Air Quality

Energy Management

Water & Wastewater Management

Waste & Hazardous Materials Management

Ecological Impacts

Ecological Impacts: This factor addresses how company operations affect ecosystems and biodiversity, which can have significant implications for environmental sustainability and regulatory compliance.

CFA ESG Investing References:

The CFA Institute’s materials on ESG integration discuss the importance of understanding various environmental factors, including ecological impacts, as identified by frameworks such as SASB’s Materiality Map​​​​.

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Philanthropy is most likely associated with corporate social responsibility (CSR).

Impact investing (A): Impact investing focuses on generating social or environmental impact alongside financial returns. While philanthropy can be a form of impact investing, it is more commonly linked to CSR.

Shareholder engagement (B): This involves shareholders actively engaging with companies to influence their ESG practices. Philanthropy is not a direct form of shareholder engagement.

Corporate social responsibility (C): CSR encompasses a company's efforts to contribute positively to society, including philanthropic activities such as donations and community involvement.

References:

CFA ESG Investing Principles

Definitions and distinctions between CSR, impact investing, and shareholder engagement

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