ESG Investing Certificate ESG-Investing Dumps PDF

Political stability and governance risksarecritical for sovereign debt, as they impact a country’screditworthiness, policy stability, and economic resilience.

Cybersecurity risks (A) are significant for corporates but less so for sovereigns.

Executive compensation (C) is a corporate governance issue, not a sovereign risk factor.

References:

World Bank Sovereign ESG Risk Assessment Report

IMF Governance & Debt Sustainability Guide

CFA Institute ESG in Fixed Income Analysis

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Credit rating agencies (such asMoody’s, S&P, and Fitch) assessESG risksby analyzing a company’sinterest coverage ratio(how well earnings cover interest expenses) andcapital structure(debt-equity mix). These metrics help determinecreditworthinessand the impact of ESG-related changes on borrowing costs.

For example, a company facing environmental fines or governance scandals may see itscredit spreads widen, increasing itscost of debt.

References:

Moody’s ESG and Credit Analysis Framework

S&P Global Ratings ESG Risk Assessment Report

CFA Institute Guide to ESG in Fixed Income

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Anenvironmental litigation costis afirm-specificrisk that increases uncertainty in a company’s cashflows, thereby raising itscost of capital (discount rate)in a DCF model.Higher discount rates reflect higher risk perceptions, reducing the present value of future earnings.

In contrast, asector-wide carbon tax (B)affects all firms in the industry and is often incorporated into pricing structures, reducing itsfirm-specific impact on discount rates.Launching a sustainable product (A)might lower risk perception, potentially reducing the discount rate instead.

References:

CFA Institute Guide to Valuation & ESG Risks

MSCI ESG Ratings Methodology on Cost of Capital Adjustments

Principles for Responsible Investment (PRI) Report on Climate Risk in Financial Models

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Governments and corporations can take steps to internalize externalities,such ascarbon pricing, emissions regulations, or corporate sustainability initiatives.

Externalities (A) are not always reflected in market prices.

Negative externalities mean societal costs exceed private costs, not the other way around (B).

References:

OECD Report on Environmental Externalities & Market Failures

CFA Institute ESG Impact Measurement Guide

UNFCCC Climate Policy & Externalities Report

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