CFA Level I · CFA Level I Exam · Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits
A company's board ignores rising supply-chain labor violations and climate-related physical risks to its plants. An analyst is most likely to conclude that the company's:
The analyst would most likely conclude that governance weakness may raise the risk of reputational and financial losses. Ignoring labor and climate risks can lead to fines, disruptions and lost customers, affecting investors. This tends to raise, not lower, the cost of equity.
- Agovernance weakness may raise the risk of reputational and financial lossesCorrect
- BESG risks affect only non-financial stakeholders
- Ccost of equity should fall because costs are currently low
Explanation
Poor oversight of ESG risks can cause fines, disruptions, lost customers and reputational damage, which are financial effects. ESG risks affect investors too, and neglecting them would more likely raise, not lower, the cost of equity.
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