CFA Level I · CFA Level I Exam · Investors and Other Stakeholders
An investor uses ESG integration in analyzing a manufacturing company that faces rising carbon regulation. Which approach is most consistent with ESG integration?
Adjusting forecast cash flows and the discount rate for expected carbon-compliance costs is ESG integration. It builds material ESG risks directly into the valuation. Excluding the sector is negative screening, and voting against every proposal is shareholder engagement rather than analytical integration.
- AExcluding the company from the portfolio because it operates in a carbon-intensive sector
- BAdjusting forecast cash flows and discount rate to reflect expected carbon-compliance costs and riskCorrect
- CVoting against all management proposals at the next shareholder meeting
Explanation
ESG integration incorporates material ESG factors into traditional financial analysis and valuation, such as adjusting cash flows or risk. Exclusion is negative screening, and blanket opposition votes are an engagement or activism tactic, not integration.
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