CFA UK LEVEL 4 CERTIFICATE IN ESG INVESTING

Commented [A1]: Amended from V.2

V.3 TESTED FROM 1 October 2021 Commented [A2]: Amended from 2020

UNIT AIMS

By the end of this unit, learners should be able to demonstrate:

 An understanding of the context for different approaches to Responsible Investment and

specifically, consideration of Environmental, Social and Governance (ESG) factors

 An understanding of the underlying issues that constitute factors within each of the
Environmental, Social and Governance areas

 An understanding of the broader sustainability context and global initiatives

 An understanding of the ESG Market: relevance, size scope, key drivers and challenges,
and risks and opportunities

 An understanding of environmental factors, systemic relationships, material impacts, mega

trends and approaches to environmental analysis at country, sector, and company levels

 An understanding of social factors, systemic relationships, material impacts and

approaches to social analysis at country, sector and company levels

 An understanding of governance factors, key characteristics, main models and material

impacts

 An understanding of engagement and stewardship

 An understanding of ESG analysis, valuation and integration

 An ability to analyse how ESG factors may affect industry and company performance and
security valuation across a range of asset classes

 An understanding of ESG integrated portfolio construction and management

 An ability to apply a range of approaches to ESG analysis and integration across a range of
asset classes

 An understanding of investment mandates, portfolio analytics and client reporting

Question allocation across the syllabus is balanced on the guidance of psychometric and industry
specialists. The following question allocation for Version 3 of the Certificate in ESG Investing is Commented [A3]: Amended from Version 2
provided as a broad indication of the relative ‘weighting’ of different parts of the syllabus in
examinations from 1 October 2021. Commented [A4]: Amended from 2020

Topic Topic Name Question

Allocation

1 Introduction to ESG 4-8

2 The ESG Market 4-8

3 Environmental Factors 6-12

4 Social Factors 6-12

5 Governance Factors 6-12

6 Engagement & Stewardship 6-10

7 ESG Analysis, Valuation & Integration 20-32

8 ESG Integrated Portfolio Construction & Management 8-14

9 Investment Mandates, Portfolio Analytics & Client 4-8

Reporting

OTHERINFORMATION REGARDINGTHISUNIT:
Exam format: 100 questions
Online testing using standard multiple choice and item set
questions

Time allowed for exam: 2 hours and 20 minutes

Grades: Pass or Fail

Study Materials: Official Training Manual Edition 3 will be available from the Commented [A5]: Amended from Edition 2
CFA UK website; specimen exam available on CFA UK
website.

Recommended study hours: 130 hours

Availability of exam sessions: Every working day through Pearson VUE testing centres and
every day via OnVUE remote proctoring.
TOPIC 1 INTRODUCTION TO ESG
1.1 INTRODUCTION TO ESG
1.1.1 Define ESG

1.1.2 Define the following sustainability-based concepts in terms of their strengths and
limitations:

• Corporate Social Responsibility

• Triple bottom line (TBL) accounting

1.1.3 Define different approaches to ESG investing, their characteristics and the role that
ESG plays in each of them:

• Responsible investment
• Socially responsible investment (SRI)
• Sustainable investment
• Best-in-class investment
• Ethical / values-driven Investment
• Thematic investment
• Impact investment
• Green investment
• Social investment
• Shareholder engagement

1.1.4 Describe the benefits to organisations of adhering to good practice in ESG, and the
linkages between these practices and financial system stability Commented [A6]: Amended from:

1.1.4 Describe the benefits and challenges to organisations of

• Reduce costs and increase efficiency adhering to good practice in ESG and the arguments in
• Reduce risk of fines relation to financial system stability and effectiveness
• Avoid costs from repercussions of investee’s externalities
• Improve ability to benefit from sustainability megatrends

1.1.5 Describe the challenges to organisations of adhering to good practice in ESG Commented [A7]: New learning outcome statement
including:
Commented [A8]: Amended from:
• Investment mandate interpretation and screening application
1.1.5 Explain in outline the materiality of ESG issues in terms
• Isolating the impact of ESG of their key characteristics, risks and impact that they can
• Strategy definition: risk management versus value creation / materiality cause:
• Portfolio construction and management tools
• Environmental: climate change, infrastructure, natural
• Disclosure of internal standards and practices resources, nuclear energy, sustainability
• Data quality, variability and interpretation • Social: human capital, culture, customer engagement,
demographical and social change
• Identifying material ESG factors • Governance: employee relations, management structure,
executive remuneration
1.1.6 Explain the materiality of ESG issues in terms of their key characteristics, risks and • Disclosure and regulation
• Technological disruption
impact that they can cause • Globalisation of value chains
• Changes to the distribution and transfer of wealth
1.1.7 Explain different ESG megatrends, their systemic nature and potential impact on
companies and company practices Commented [A9]: Learning outcome statement moved
from 1.1.6 to 1.1.7
1.1.8 Explain how ESG investing is a strategy and a practice, and the three ways in which
investors typically reflect ESG considerations Commented [A10]: New learning outcome statement

1.1.9 Explain the aims, elements and progress achieved by key supranational ESG
Commented [A11]: Learning outcome statement moved
initiatives and organisations: from 1.1.7 to 1.1.9

• United Nations initiatives Amended from:

• Reporting initiatives 1.1.7 Explain the aims, elements and progress achieved by
• Other initiatives key supranational ESG initiatives and organisations:

•United Nations Global Compact (UNGC) Principles

• United Nations Environment Programme Finance Initiative
(UNEP FI)
• Principles for Responsible Investment (PRI)
• The Paris Agreement and United Nations Framework
TOPIC 2 THE ESG MARKET Convention on Climate
•Change (UNFCCC)
•United Nations Sustainable Development Goals (SDGs)
•International Corporate Governance Network (ICGN)
•Global Sustainable Investment Alliance (GSIA)
2.1 THE ESG MARKET •Financial Stability Board Task Force on Climate-related
Financial Disclosures (TCFD)
•Global Impact Investing Network (GIIN)
2.1.1 Explain the history of ESG investing in brief, including its roots and modern responsible •Corporate Reporting Dialogue (CRD)
investment
Commented [A12]: New learning outcome statement
Commented [A13]: Learning outcome statement moved
2.1.2 Explain the size and scope of ESG investing in relation to: from 2.1.1 to 2.1.2

Amended from:
• Geography
2.1.1 Explain the size and scope of ESG investing:
• Strategy
• Investor type • In relation to the economy
• Within financial markets
• Asset class • By asset class, investor type, geography and approach
• In relation to stakeholders

2.1.3 Explain key market drivers in favour of ESG integration:

Commented [A14]: Learning outcome statement moved
from 2.1.2 to 2.1.3
• Investor demand / intergenerational wealth transfer Commented [A15]: Learning outcome statement moved
• Regulation and “soft law” from 2.1.3 to 2.1.4
• Public awareness Amended from:
• Data sourcing and processing improvements
2.1.3 Explain the key drivers and challenges for ESG
integration among stakeholders within the investment
2.1.4 Explain the key drivers and challenges for ESG integration among stakeholders within industry:
the investment industry: • Governments and regulators
• Pension funds, investment consultants and trustees
• Investment and financial institutions
• Asset owners • Insurance companies
• Asset managers • Corporations
• Private wealth / retail clients
• Fund promoters • ESG rating and proxy voting service providers
• Financial services • Trade and non-profit organisations and academia
 • Policy makers and regulators
• Investees
• Government, civil society and academia

2.1.5 Explain how ESG issues are related to sustainability trends and themes within the
investment industry, including:

• the longer-term nature of ESG investing

• ESG-driven market, organisational and cultural changes Commented [A16]: Learning outcome statement moved
from 2.1.4 to 2.1.5

TOPIC 3 ENVIRONMENTAL FACTORS

3.1 ENVIRONMENTAL FACTORS

3.1.1 Explain key concepts relating to climate change from an evidence-based perspective,
including:

• Climate change
• Climate change mitigation
• Climate change adaptation and resilience measures

3.1.2 Explain key concepts relating to other environmental issues from an evidence-based Commented [A17]: Amended from:
perspective, including:
3.1.2 Explain key concepts relating to other environmental
issues from an evidence-based perspective, including:
• Pressures on natural resources including depletion of natural resources, water,
biodiversity loss, land use and marine resources • Pressures on natural resources
• Pollution and waste
• Pollution, waste and a circular economy

3.1.3 Explain the systemic relationships between business activities and environmental Commented [A18]: Amended from:
issues including:
3.1.3 Explain the systemic relationships and activities
between business activities and ecosystem services,
• Systematic impact of climate risks on the financial system: climate-related including:
physical and transition risks
• Climate change and other environmental issues
• The relationship between natural resources and business • Supply, operational and resource management issues
• Supply chain transparency and traceability
• Supply, operational and resource management issues
• Systemic impact of climate risks on the financial system
• Supply chain transparency and traceability

3.1.4 Assess key “megatrends” influencing environmental change in terms of potential Commented [A19]: Amended from:
impact on companies and their environmental practices:
3.1.4 Assess key “megatrends” influencing environmental
change in terms of potential impact on companies and their
• Growth of environmental and climate policies environmental practices:
• International climate and environmental agreements and conventions • Growth of environmental and climate policies
• International regional and country-level policy and initiatives • International climate and environmental agreements and
conventions
• Carbon pricing • International initiatives
• Oceans and the blue economy
3.1.5 Assess material impacts of environmental issues on potential investment
opportunities, including the dangers of overlooking them:

• Corporate and project finance

• Public finance initiatives
• Asset management

3.1.6 Identify approaches to environmental analysis in both developed and emerging Commented [A20]: Amended from:
countries, including;
3.1.6 Identify approaches to environmental analysis at
country, sector and company levels in both developed and
• Company, project, sector, country and market level analysis emerging countries, including Natural Capital
• Environmental risks including carbon foot printing and other carbon metrics,
natural capital approach and climate scenario analysis

3.1.7 Apply material environmental factors to financial modelling, ratio analysis and risk Commented [A21]: Amended from:
assessment
3.1.7 Apply material environmental factors to:

3.1.8 Explain how companies and the investment industry can benefit from opportunities • Financial modelling
relating to climate change and environmental issues: • Ratio analysis
• Risk assessment
• Quality of management
• Circular economy
• Clean and technological innovation Commented [A22]: Amended from:
• Green and ESG-related products 3.1.8 Explain how companies and the investment industry can
• Blue economy benefit from opportunities relating to climate change and
environmental issues:

• Circular economy
• Green products
• Clean and technological innovation

TOPIC 4 SOCIAL FACTORS

4.1 SOCIAL FACTORS

4.1.1 Explain the systemic relationships and activities between business activities and social Commented [A23]: Learning outcome statement moved
issues, including: from 4.1.2 to 4.1.1

Amended from:
• Globalisation
4.1.2 Explain the systemic relationships and activities
• Automation and artificial intelligence (AI) between business activities and social issues, including:
• Inequality and wealth creation
• Inequality
• Digital disruption, social media and access to electronic devices • Globalisation
• Changes to work, leisure time and education • Automation and AI in manufacturing and service sectors
• Wealth creation
• Changes to individual rights and responsibilities and family structures • Work, family and leisure time
• Changing demographics, including health and longevity • City vs rural communities
• Health and welfare
• Urbanisation • Supply chain
• Religion
4.1.2 Assess key ‘megatrends’ influencing social change in terms of potential impact on Commented [A24]: Learning outcome statement moved
companies and their social practices: from 4.1.3 to 4.1.2

Amended from:
• Climate change
4.1.3 Assess key ‘megatrends’ influencing social change in
• Transition risk terms of potential impact on companies and their social
• Water scarcity practices:
• Pollution • Climate change
• Mass migration • Transition risk
• Water scarcity
• Loss and / or degradation of natural resources and ecosystem services • Mass migration

4.1.3 Explain key social concepts from an evidence-based perspective: Commented [A25]: Learning outcome statement moved
from 4.1.1 to 4.1.3

• Human capital: development, employment standards, health and safety, product

liability / consumer protection: safety, quality, health and demographic risks, data
privacy and security
• Stakeholder opposition / controversial sourcing
• Social opportunities: access to communications, finance, health and nutrition
• Social and news media
• Animal welfare and microbial resistance

4.1.4 Assess material impacts of social issues on potential investment opportunities,

including the dangers of overlooking them:

• Changing demographics, including health and longevity

• Digital disruption, social media and access to electronic services
• Individual rights and responsibilities
• Family structures and roles
• Education and work
• Distinction between faith-based ESG investing and exercise of religion as a social
factor
• Inequality
• Globalisation

4.1.5 Identify approaches to social analysis at country, sector and company levels in both
developed and emerging economies

4.1.6 Apply material social factors to: Commented [A26]: Amended from:

4.1.6 Apply material social factors to:

• Risk assessment
• Quality of management • Financial modelling
• Ratio analysis
• Ratio analysis • Risk assessment
• Financial modelling • Quality of management
TOPIC 5 GOVERNANCE FACTORS
5.1 GOVERNANCE FACTORS

5.1.1 Explain the evolution of corporate governance frameworks and key motivators for step
change:

• Development of corporate governance

• Roles and responsibilities
• Systems and processes
• Shareholder engagement
• Minority shareholder alignment

5.1.2 Assess key characteristics of effective corporate governance, and the main reasons
why they may not be implemented or upheld:

• Board structure, diversity, effectiveness and independence

• Executive remuneration, performance metrics and KPIs
• Reporting and transparency
• Financial integrity and capital allocation
• Business ethics

5.1.3 Assess and contrast the main models of corporate governance in major markets and Commented [A27]: Amended from:
the main variables influencing best practice:
5.1.3 Assess and contrast the main models of corporate
governance in major markets and the main variables
• Major markets influencing best practice:

• Extent of variation of best practice • Markets: Germany, Japan, Netherlands, Scandinavia, UK

• Differences in legislation, culture and interpretation and USA
• Extent of variation of best practice
• Differences in legislation, culture and interpretation
5.1.4 Explain the role of auditors in relation to corporate governance and the challenges in
effective delivery of the audit:

• Independence of audit firms and conflicts of interest

• Auditor rotation
• Sampling of audit work and technological disruption
• Auditor reports
• Audit liability
• Internal audit

5.1.5 Assess material impacts of governance issues on potential investment opportunities,

including the dangers of overlooking them:

• Public finance initiatives

• Companies
 • Infrastructure / private finance vehicles
• Societal impact

5.1.6 Apply material corporate governance factors to: Commented [A28]: Amended from:

5.1.6 Apply material corporate governance factors to:

• Financial modelling
• Risk assessment • Financial modelling
• Ratio analysis
• Quality of management • Risk assessment
• Quality of management

TOPIC 6 ENGAGEMENT AND STEWARDSHIP

6.1 ENGAGEMENT AND STEWARDSHIP

6.1.1 Explain the purpose of investor engagement and stewardship

6.1.2 Explain why engagement is considered beneficial and some of the key criticisms of Commented [A29]: Amended from:
engagement
6.1.2 Explain why engagement is considered beneficial and
its relationship with fiduciary duty
6.1.3 Explain the main principles and requirements of Stewardship Codes as they apply
to institutional asset management firms:

• UK Walker Review (2009) and Stewardship Code (2020)

• US ERISA Act guidelines
• EU EFAMA Stewardship Code

6.1.4 Explain how engagement is achieved in practice, including key differences in

objectives, style and tone

6.1.5 Apply appropriate methods to establish an engagement approach:

• Strategy and tactics: goal-setting

• Identifying who to talk with
• Formalities: hosting / agenda / managing expectations
• Communication: approach / tone / managing tensions
• Working towards agreement
• Escalation techniques, including collective engagement
• ESG investment forums
• Proxy voting
6.1.6 Distinguish between different types of engagement across a range of asset Commented [A30]: Amended from:
classes
6.1.6 Distinguish between different types of engagement
across a range of asset classes (alternatives; equities; fixed
income)

TOPIC 7 ESG ANALYSIS, VALUATION AND INTEGRATION

ESG ANALYSIS, VALUATION AND INTEGRATION Commented [A31]: Learning outcome statement moved
from 7.1.8 to 7.1.3

7.1.1 Explain the aims and objectives of integrating ESG into a firm’s investment process Amended from:

7.1.8 Describe qualitative approaches to ESG analysis across

7.1.2 Describe different approaches to integrating ESG analysis into a firm’s investment a range of asset classes: alternative investments; equities;
fixed income
process
Commented [A32]: Learning outcome statement moved
from 7.1.7 to 7.1.4
7.1.3 Describe qualitative approaches to ESG analysis across a range of asset classes
Amended from:

7.1.4 Describe quantitative approaches to ESG analysis across a range of asset classes 7.1.7 Describe quantitative approaches to ESG analysis
across a range of asset classes: alternative investments;
equities; fixed income
7.1.5 Identify tangible and intangible material ESG-related factors through both qualitative
Commented [A33]: Learning outcome statement moved
and quantitative approaches from 7.1.17 to 7.1.5
Commented [A34]: Learning outcome statement moved
7.1.6 Describe how scorecards may be developed and constructed to assess ESG factors from 7.1.19 to 7.1.6
Commented [A35]: Learning outcome statement moved
7.1.7 Assess ESG issues using risk mapping methodologies from 7.1.18 to 7.1.7
Commented [A36]: Learning outcome statement moved
from 7.1.4 to 7.1.8
7.1.8 Explain how ESG complements traditional financial analysis
Commented [A37]: Learning outcome statement moved
from 7.1.5 to 7.1.9
7.1.9 Analyse how ESG factors may affect industry and company performance
Commented [A38]: Learning outcome statement moved
from 7.1.6 to 7.1.10
7.1.10 Analyse how ESG factors may affect security valuation across a range of asset Commented [A39]: Learning outcome statement moved
classes from 7.1.20 to 7.1.11
Commented [A40]: Learning outcome statement moved
7.1.11 Interpret a company’s disclosure on selected ESG topics from 7.1.21 to 7.1.12
Commented [A41]: Learning outcome statement moved
from 7.1.16 to 7.1.13
7.1.12 Apply the range of approaches to ESG analysis and integration across a range of
asset classes Commented [A42]: Learning outcome statement moved
from 7.1.15 to 7.1.14

7.1.13 Describe the challenges of undertaking ESG analysis across different geographic Commented [A43]: Learning outcome statement moved
from 7.1.3 to 7.1.15
regions and cultures
Amended from:
7.1.14 Describe the challenges of identifying and assessing material ESG issues 7.1.3 Describe the challenges of integrating ESG analysis into
a firm’s investment process
7.1.15 Describe the challenges of integrating ESG analysis into a firm’s investment process
• Financial
• Operational
7.1.16 Explain the approaches taken across a range of ESG integration databases and • Cultural
software available, and the nature of the information provided Commented [A44]: Learning outcome statement moved
from 7.1.10 to 7.1.16
7.1.17 Identify the main providers of screening services or tools, similarities and differences in
their methodologies, and the aims, benefits and limitations of using them Commented [A45]: Learning outcome statement moved
from 7.1.12 to 7.1.17

7.1.18 Describe the limitations and constraints of information provided by ESG integration
databases Commented [A46]: Learning outcome statement moved
from 7.1.14 to 7.1.18

7.1.19 Describe primary and secondary sources of ESG data and information Commented [A47]: Learning outcome statement moved
from 7.1.9 to 7.1.19

7.1.20 Describe other uses of ESG and sustainability systems data Commented [A48]: Learning outcome statement moved
from 7.1.13 to 7.1.20
7.1.21 Explain how Credit Rating Agencies (CRAs) approach ESG Credit Scoring Commented [A49]: Learning outcome statement moved
from 7.1.11 to 7.1.21

Amended from:

7.1.11 Explain how Credit Rating Agencies (CRAs) approach

ESG Credit Scoring, and the extent to which CRA ratings can
TOPIC 8 ESG INTEGRATED PORTFOLIO CONSTRUCTION be relied upon for ESG investing:

• PRI Statement on ESG in Credit Ratings

AND MANAGEMENT • Main ESG CRA methodologies
• Quantitative ESG Scores (QESGs)
• Relationship between Scores and Ratings, and other
indicators e.g. credit default swap (CDS) Spread
8.1.1 ESG INTEGRATED PORTFOLIO CONSTRUCTION AND MANAGEMENT • Key challenges: transparency, consistency and
comparability
8.1.1 Explain the impact of ESG factors on strategic asset allocation

8.1.2 Describe approaches for integrating ESG into the portfolio management process

8.1.3 Explain approaches for how internal and external ESG research and analysis is used
by portfolio managers to make investment decisions

8.1.4 Explain how screening has evolved through different approaches to Responsible
Investment, and the benefits and limitations of the main approaches

8.1.5 Explain the main indices and benchmarking approaches applicable to sustainable and
ESG investing, noting potential limitations

8.1.6 Apply ESG screens to the main asset classes and their sub-sectors:

• Alternative investments
• Equities
• Fixed Income

8.1.7 Distinguish between ESG screening of individual companies and collective investment
funds:

• On an absolute basis
• Relative to sector / peer group data
8.1.8 Explain how the risk-return dynamic of portfolio optimisation is impacted by ESG-
integrated investing

8.1.9 Evaluate different types of ESG / SRI investment in terms of key objectives,
investment considerations and risks:

• Full ESG integration

• Exclusionary screening
• Positive alignment / Best-in-class
• Active ownership
• Thematic investing
• Impact investing
• Other

8.1.10 Describe approaches to managing passive ESG portfolios

TOPIC 9 INVESTMENT MANDATES, PORTFOLIO ANALYTICS

AND CLIENT REPORTING
9.1 INVESTMENT MANDATES, PORTFOLIO ANALYTICS AND CLIENT REPORTING

9.1.1 Explain why mandate construction is of particular relevance and importance to the
effective delivery of ESG investing

• Linking sustainable investing to the mandate

• Defining the sustainable investment strategy

9.1.2 Explain how ESG screens can be embedded within investment mandates / portfolio
guidelines to:

• Generate investment returns

• Manage portfolio risk

9.1.3 Explain the most common features of ESG investing that asset owners and
intermediaries, including Pension Consultants and Fund Selectors, are seeking to
identify through request for proposal (RFP) and selection processes:

• Voting
• Engagement
• Examples of decision-making
 • Screening process

9.1.4 Explain the different client types and their objectives which influence the type of ESG
investing strategy selected

9.1.5 Explain the key mechanisms for reporting on and monitoring performance and
mandate alignment with client objectives

9.1.6 Explain the key challenges in measuring and reporting ESG- related investment
performance:

• Active, passive and Smart Beta approaches

• Performance attribution
• Sensitivity analysis
• Risk measurement
• Engagement activity / impact
• Integrated reporting and investment review