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Which of the following would most likely be the initial step when drafting a client's investment mandate?
The first step in drafting an investment mandate is understanding the client's ESG investment beliefs, which will guide the overall strategy, including performance measurement and implementation. (ESGTextBook[PallasCatFin], Chapter 9, Page 494)
The management gap best describes a risk that:
The management gap refers to risks that can be addressed through management actions but are not yet being fully managed. This gap can lead to potential future impacts on performance. (ESGTextBook[PallasCatFin], Chapter 7, Page 325)
The role of auditors is to assess the financial reports prepared by management and to provide assurance that:
The role of auditors is to assess the financial reports prepared by management and to provide assurance that the reports fairly represent the performance and position of the business. Auditors do not guarantee that the numbers are correct or that there is no fraud; rather, they provide an opinion on the overall fairness and accuracy of the financial statements.
Audit Opinion: Auditors provide an independent opinion on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.
Reasonable Assurance: Auditors aim to obtain reasonable assurance that the financial statements are free from material misstatement, whether due to fraud or error. This involves evaluating the appropriateness of accounting policies and the reasonableness of significant estimates made by management.
Stakeholder Confidence: By providing assurance on the fairness of financial reports, auditors enhance the confidence of stakeholders, including investors, creditors, and regulators, in the financial information provided by the company.
MSCI ESG Ratings Methodology (2022) - Discusses the role of auditors in providing assurance on financial statements and enhancing stakeholder trust.
ESG-Ratings-Methodology-Exec-Summary (2022) - Highlights the importance of auditors in ensuring the fair representation of a company's financial performance and position.
Which of the following statements is most accurate? Faith-based Islamic investors:
Faith-based Islamic investors follow Shariah principles, which prohibit investments in industries such as gambling, alcohol, and those earning interest (riba). (ESGTextBook[PallasCatFin], Chapter 1, Page 31)
The correlation between ESG ratings of issuers by different ESG rating providers is:
The correlation between ESG ratings of issuers by different ESG rating providers tends to be lower compared to the correlation between credit ratings of issuers by different credit rating providers.
1. ESG Ratings Variability: ESG rating providers often use different methodologies, criteria, and weightings to assess companies' ESG performance. This can lead to significant variations in the ratings assigned to the same issuer by different ESG rating providers. Factors such as the choice of indicators, data sources, and the subjective nature of some ESG criteria contribute to these differences.
2. Credit Ratings Consistency: In contrast, credit rating providers like Moody's, S&P, and Fitch use more standardized and widely accepted methodologies to assess credit risk. While there may still be some variation, the correlation between credit ratings from different providers is generally higher because they follow similar fundamental principles and financial metrics in their assessments.
3. Empirical Studies: Empirical studies have shown that the correlation between ESG ratings from different providers is lower compared to the correlation between credit ratings. This is due to the subjective and evolving nature of ESG criteria versus the more established and quantitative nature of credit risk assessment.
Reference from CFA ESG Investing:
ESG Ratings Methodologies: The CFA Institute discusses the differences in methodologies used by various ESG rating providers and the resulting variability in ratings. Understanding these differences is crucial for investors when interpreting and using ESG ratings.
Credit Rating Consistency: The CFA curriculum highlights the higher consistency and correlation between credit ratings from different providers, which is attributed to the standardized approaches used in credit risk assessment.
