Free Practice Questions for CFA Institute Sustainable-Investing Exam

Audited company reports areprimary data sourced directlybecause the information isoriginated and verified by the company itself. CFA materials classify this asdirect primary data, as it’s generated by the reporting company and reviewed by external auditors for assurance.

Wastewater treatment infrastructurerequireshigh upfront capital investmentfor planning, permitting, construction, and maintenance. CFA’s sustainable infrastructure modules highlighthigh capital intensityas a major challenge to financing such projects, despite ongoing demand for clean water treatment and environmental standards.

The official CFA Institute guidance states that the foundational step in developing any ESG investment mandate is to "clarify client needs and set them out in a clear statement of ESG investment beliefs." This clear statement forms the basis of the mandate. From this strong foundation, the ESG strategy can be tailored and implemented in ways that ensure alignment among the investor’s values, the investment process, and overall ESG objectives. It is therefore identified as the essential first step in the mandate's design.

Corporate sustainabilityreflects a holistic approach that integratesenvironmental, social, and ethical dimensionsinto a company’score purpose—focusing onlong-term stakeholder valuebeyond short-term financial returns. CFA materials note that corporate sustainability efforts embedmulti-dimensional considerationsinto operations, culture, and governance.

Statement 1 isincorrectbecauseinvestor engagement prioritizes long-term value creation, not just short-term gains.

Statement 2 iscorrect:lobbying through industry groupsor collective engagement initiatives is a recognized and effective method for investors to influence systemic ESG risks or sector-level improvements.

TheUnited Kingdomwas the first to introduce a formal corporate governance code, known as theCadbury Report (1992). This groundbreaking document established best practices for corporate governance, emphasizing theroles and responsibilities of boards, transparency, and accountability. It became the model for many global governance frameworks and was a direct response to financial scandals at the time.

This definition directly aligns with the CFA’s explanation ofdigital disruption—the process wherenew digital innovations or business models challenge and displace existing market players or product/service value propositions. Automation and AI are specific tools within digital disruption but do not encompass the broader concept.

PRI’s minimum requirements state that each signatory must haveformal senior-level oversight and accountability mechanismsin place for responsible investment policies and their implementation. This requirement ensures governance structures are aligned with ESG commitments.

Forced laboris expresslyprohibitedby theILO’s core labor standards. The fundamental conventions promote labor rights such as:

Elimination of forced labor(prohibition)

Freedom of association and collective bargaining

Equal remuneration and non-discriminationThus, while companies should support collective bargaining and equal remuneration,forced labor should not be supported—it is a violation of core labor standards.

Thecarbon budgetdefines themaximum cumulative amount of CO₂ emissionsallowed tolimit global warming to a specific temperature threshold, such as 1.5 °C or 2 °C above pre-industrial levels. CFA materials emphasize that this budget is afinite global allocationof emissions that can be emitted while still maintaining areasonable chanceof staying within these warming limits. It is distinct from reaching net zero at a specific date (A) or the broader planetary boundary concept (B), although it relates to climate stability within those boundaries.

The CFA Institute confirms thatESG indices have been developed for both equity and fixed income asset classes, providing investors with performance and risk data. While the specific criteria and weightings of these indices can vary widely (so option A is incorrect), and comprehensive back-testing across multiple cycles is often limited (option C is also not uniformly true), these indices do consistently extend acrossboth equities and bondsto enable portfolio-level ESG integration and benchmark comparisons.

Impact investingexplicitly aims to achievemeasurable social or environmental outcomesandgenerate afinancial return(not necessarily market-beating, but at least risk-adjusted and sustainable). CFA materials define this as adual objective: positive, measurable impact andadequate financial performance—not purely one or the other.

According to CFA’s sustainable investing materials,corporate bond issuersare generally the mostresponsive to investor engagement. They havedirect accountabilityto lenders, a shared interest in long-term viability, and governance structures that canfacilitate investor dialogues. Sovereign issuers (B) and municipal issuers (C) have more political layers and less flexibility to engage directly on sustainability-related demands.

Stewardship teams that evolved from governance practices generally start engagement bycommunicating with investor relations teams—the designated point of contact—and thenescalate discussions to senior executives or board membersif concerns persist or intensify. This phased escalation reflectstypical engagement protocolsand stewardship codes outlined by CFA.

Top-down engagementtypically occurs at amacro level, such as throughcollaborative initiativesorindustry-level policy dialogues. This approach is most suited tobroadly diversified portfolioswhere investors cannot engage deeply with every individual company but can influencesystem-level issues(like climate policy, supply chain labor standards) across many holdings.