SCR®

PRACTICE
EXAM
2023 EDITION
Table of Contents

Introduction to the 2023 SCR Practice Exam .........................................................................................2

Suggested Use of the Practice Exam ....................................................................................................3
Common Abbreviations and Acronyms ..................................................................................................4
Candidate Answer Sheet ......................................................................................................................5
2023 SCR Practice Exam ......................................................................................................................6
2023 SCR Practice Exam – Case Study ............................................................................................... 32
Answer Key ...................................................................................................................................... 34
Answers and Explanations ................................................................................................................. 35

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Introduction to the 2023 SCR Practice Exam

Congratulations on your decision to increase your awareness of sustainability and climate risk and join a
growing community of Sustainability & Climate Risk (SCR) certificate holders!

The SCR is practice oriented. Exam questions reflect the theory presented in program readings, and true-
to-life work experience. Candidates must understand sustainability and climate risk concepts and apply
these in real-life settings. The program curriculum covers essential skills and knowledge areas necessary
to understand today’s rapidly evolving climate risk landscape. The SCR Exam is comprehensive, testing
candidates on a number of sought-after sustainability and climate risk standards and practices.

In an effort to offer continually optimized study tools for our SCR exam candidates, we created the full-
length 2023 SCR Practice Exam to help candidates prepare for the 80-question multiple-choice SCR Exam
offered in 2023. The practice exam includes sample questions similar to those covered on prior SCR
Exams. Furthermore, the 2023 Practice Exam includes an example of a four-question case study that
covers content across several chapters. Each SCR Exam will feature one case study that explores how an
organization may approach climate and sustainability challenges by drawing from SCR concepts.

The 80 questions included in this practice exam do not necessarily cover all topics tested in the 2023 SCR
Exams, as the curriculum includes a wide array of learning objectives. These questions broadly reflect
material assigned for 2023 and represent a multiple-choice question style the SCR Advisory Committee
considers appropriate.

For a complete list of chapter topics, required online readings, and key learning objectives, candidates
should refer to the 2023 SCR Study Guide and Learning Objectives document available on
https://www.garp.org/scr/study-materials. Questions for the SCR Exam are supported by the curriculum
readings, and selected by the SCR Advisory Committee to guide candidates’ review of subjects covered
on the SCR Exam.

Best of luck in your study preparation. We appreciate your support of the SCR Program.

Regards,

Beth Gould Creller

SCR Program Manager

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Suggested Use of the Practice Exam

1. Plan a date and time to take the practice exam.

• Set your date appropriately, consider your target exam day date.
• Allow yourself sufficient study and review time before taking the practice exam.

2. Simulate the exam day environment as closely as possible

• Take the practice exam in a quiet place, free from interruption.
• Limit yourself to the 2023 SCR Practice Exam, Common Abbreviations and Acronyms, Candidate
Answer Sheet, and scratch paper.
• Minimize possible distractions from other people, cell phones, televisions, etc.
• Put away any study materials before beginning the practice exam.
• Keep track of your time while taking the exam. The actual SCR Exam is three (3) hours long.
Allocate three (3) hours to complete the 2023 SCR Practice Exam.

3. Calculate your score and adjust your study plan accordingly.

• After completing the practice exam, calculate your score by checking your candidate answer
sheet against the Answer Key included in this document.
• Use the practice exam answers and explanations to better understand your correct and incorrect
answers.
• Identify topics where you require additional review. Consult the chapters referenced with each
question to prepare for the exam.
• Remember: Pass/fail status for the actual exam is based on the distribution of scores from all
candidates. Only use your practice exam scores to gauge your own progress and level of
preparedness.

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Common Abbreviations and Acronyms

The list below includes abbreviations and acronyms commonly referenced within the 2023 SCR Certificate
Book and the SCR Required Online Readings found at https://www.garp.org/scr/readings/required. This
list will be available to SCR Exam candidates during the SCR exam.

CAR = carbon asset risk

CCS = carbon capture and storage
CEO = chief executive officer
CFO = chief financial officer
CO2 = carbon dioxide
CO2eq = carbon dioxide equivalent
COP = Conference of the Parties
COSO = Committee of Sponsoring Organizations of the Treadway Commission
CRO = chief risk officer
CSO = chief sustainability officer
CSR = corporate social responsibility
CVaR = Climate Value at Risk
ERM = enterprise risk management
ESG = environmental, social, and governance
ETS = emission trading system
EU Taxonomy = The EU Sustainable Finance Taxonomy
GHG = greenhouse gas
IAM(s) = integrated assessment model(s)
IEA = International Energy Agency
IIGCC = The Institutional Investors Group on Climate Change
IPCC = Intergovernmental Panel on Climate Change
KPI = key performance indicator
mm = million
NGFS = Network for Greening the Financial System
PRB = Principles for Responsible Banking
PRI = Principles for Responsible Investment
RCP = Representative Concentration Pathway
SDG = Sustainable Development Goal
SSP = Shared Socioeconomic Pathway
TCFD = Task Force on Climate-related Financial Disclosures
UN = United Nations
UNEP FI = United Nations Environment Programme Finance Initiative

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Candidate Answer Sheet

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2023 SCR Practice Exam

1. A large IT company in the northwest US uses the COSO ERM framework to address climate risk. The
initial ERM risk assessment revealed moderate flood risk for the company’s operations. The CRO
recommends embedding a review-and-revision mechanism in the ERM framework to address this
significant operational risk. What action should the company take to comply with the ERM review and
revision component to manage climate-related risks?

A. Inform senior management on a timely basis of flood risk to prepare risk management operations.
B. Promptly re-assess flood risk under the flood monitoring program and apply follow-up measures.
C. Identify potential risks arising from flood events and prepare an appropriate internal response.
D. Design an internal system to measure the climate risk impact on business operations.

2. A utility company on the Gulf of Mexico reviews a 20-year capital plan. During the review, the risk
management team expresses concern about physical climate impacts on the utility's capital and
operational expenditures. To further understand these risks, the team asks an in-house scientist to
explain how increasing global atmospheric concentrations of water vapor may contribute to
increasing climate risks for the utility. How should the scientist describe the climate impact of
additional water vapor in the atmosphere?

A. The Gulf Stream current will accelerate.

B. Heat waves in arid areas will moderate.
C. Evaporation will increase on all terrestrial areas.
D. Floods and droughts will become more intense.

3. An EU producer of wind turbine blades moves its headquarters to Canada and becomes a fully listed
company on the Toronto Stock Exchange. Furthermore, the producer applies for and receives
extraordinary government support during the COVID pandemic. In preparation for a new reporting
year, a company climate risk and regulatory manager reviews Canadian ESG and climate risk
reporting requirements to align company reporting policy. After the review, which action should the
manager identify as necessary to align with Canadian reporting requirements?

A. Conduct TCFD-aligned reporting, and report on diversity-related ESG parameters.

B. Implement ESG risk disclosures mandated by the Canadian securities regulator.
C. Report GHG emissions and a complete set of ESG parameters if the company employs more than
500 people.
D. Report GHG emissions and ESG parameters only for environment-related parameters.

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4. An EU-based multinational bank offers specialized sustainable building loans for innovative
technology that transforms waste into polymer composites that become superior building products.
The bank plans to expand its green loan offer to the Chinese green loan market and engages a green
finance analyst to perform a market assessment. The analyst writes a report on the state of the
market and its evolution. How should the analyst describe the evolution of the Chinese green loan
market in the report?

A. Investment banks introduced green loans in the early stages of green loan development primarily
through clean transport loans.
B. Local government initiatives introduced green loans in the late stages of green loan development.
C. Government policy introduced green loans in the early stages of green loan development.
D. Commercial banks introduced green loans in the late stages of green loan development primarily
through energy efficiency loans.

5. A group of institutional investors plans to divest from companies that have poor environmental track
records. The investors hire an ESG consultant to recommend a divestment strategy. As part of the
proposed strategy, the consultant describes the relationship among various institutions, ESG, and
sustainability. Which of the following explanations might the consultant include in the proposed
strategy?

A. Corporate-level climate risk management is considered part of sustainability, but not part of an
ESG framework.
B. Governmental climate change policies typically fall under the sustainable development scope, but
not under the ESG scope.
C. Financial institutions' climate finance is part of the ESG landscape, but not part of the sustainability
landscape.
D. Non-financial corporations primarily focus on ESG-related issues, but focus less on sustainability-
related issues.

6. A confectionary company that produces and sells chocolates operates in a region that recently
announced new carbon pricing regulations. The company establishes a sustainability committee that
will focus on reporting emissions and understanding the company’s social and environmental impact.
The director of the committee prepares for a risk mitigation strategy meeting by outlining the
benefits and drawbacks of carbon pricing policies, specifically, carbon taxes. Which of the following
should the director include in the outline?

A. Carbon tax levels are frequently changed in some countries, which can be unfavorable to
businesses making long-term capital investment decisions.
B. Carbon tax revenues are unable to create cash flows to facilitate long-term investment decisions
because emission permits tend to be broad.
C. Carbon taxes allow sectors that are more effective in reducing emissions to sell excess permits to
sectors where current emissions reduction technologies are unworkable.
D. Carbon taxes, which are typically favored by policymakers, impose a price per ton of CO2
emissions after emitters reach the regulatory authority’s limit.

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7. A risk manager at a US-based commercial bank asks for an independent external review of the bank's
green loan portfolio in response to greenwashing accusations from several stakeholders. The external
review report shows that the bank joined several green loan initiatives and pledged to introduce a
line of green financial products, which never happened. According to the external review report,
which type of greenwashing did the bank use?

A. Decoupling
B. Attention deflection
C. Avoidance
D. Risk response

8. The CSR lead at an aviation company advocates the company align business strategy with the UN
2030 Agenda for Sustainable Development. The company CEO is skeptical about the usefulness of
joining international sustainability initiatives and cites previous failures of related endeavors. What
unique attribute of the 2030 Agenda could the CSR lead emphasize to persuade the CEO?

A. It introduces a focus on economic growth and poverty alleviation.

B. It provides a widely accepted definition of sustainable development.
C. It contains broad goals with detailed and specific targets.
D. It establishes benchmarks to generate dialogue with governments.

9. A multinational food and drink manufacturer plans to conduct a climate scenario analysis to inform its
business strategy. The company risk team outlines the process to design and conduct climate risk
scenario analysis for senior management. Which of the following guidelines should the team consider
when designing climate risk scenario analysis?

A. Avoid incorporating climate change into regular stress testing and instead develop new testing
exclusively for climate change.
B. Apply the same assumptions to model physical and transition risk but choose relevant scenario
outputs after the design process is complete.
C. Use scenario results as the primary basis for decision-making when scenarios provide precise
forecasts.
D. Include overarching scenario assumptions such as a climate system sensitivity and allow for
additional variables to enter the model as further assumptions if desired.

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10. A film and entertainment company decides to expand its sustainability strategy. The company plans
to issue green, social, or sustainability bonds to finance projects such as reducing carbon emissions
and promoting recycling programs and community partnerships. At a strategic planning session, the
company’s sustainability team reviews available bond types and recommends a sustainability bond.
Why does the team recommend a sustainability bond?

A. Proceeds will be used exclusively for environmental projects and programs.

B. Projects will simultaneously address environmental and social objectives.
C. The bond will function as general-purpose borrowings where the proceeds can be used as needed.
D. The bond will come with second-opinion reports to show that the proceeds will bring social
benefits.

11. An investment firm specializes in managing equities globally in the healthcare sector. The firm aims
to improve portfolio performance while measuring exposure to physical climate risk. A risk analyst at
the firm researches how physical risk affects the firm's portfolio and recommends a necessary tool for
physical risk assessment. Which of the following metrics should the analyst use to measure physical
hazards in monetary terms?

A. Level of company preparedness

B. Portfolio warming potential
C. Exposure at default
D. Climate Value at Risk

12. A rapidly-expanding IT company establishes a net-zero goal for 2030. A major investor benchmarks
the company against peer net-zero goals. The investor criticizes the company transition plan as
vague and lacking actionable organizational decarbonization descriptions. In the benchmark report,
the investor recommends implementing a shadow carbon price. If the company accepts this
recommendation, what action should it take?

A. Calculate the percentage of revenue invested in low-carbon products.

B. Impose an internal tax to penalize carbon-intensive projects.
C. Select future projects based on an estimated cost of carbon.
D. Penalize projects that diverge from the benchmark carbon trajectory.

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13. After the COP27 meetings in Sharm El-Sheikh, Egypt, financial institutions with USD trillions in assets
under management strengthen net-zero commitments. Climate risk groups within these financial
institutions examine strategies to fulfill pledges in preparation for the COP28 conference in Dubai.
The groups review several RCP- and SSP-based trajectories upon which the net-zero calculations will
be based. Which of the following statements illustrates a correct understanding of the relationship
between SSPs and RCPs?

A. RCP names are based on the anticipated warming in degrees Celsius and are calculated via their
deviation from “business as usual,” whereas SSPs deliberately include climate policies, helping to
inform the RCPs.
B. SSP names are based on the anticipated warming in degrees Celsius and are calculated via their
deviation from “business as usual,” whereas RCPs deliberately include climate policies, helping to
inform the SSPs.
C. RCPs were developed first and represent plausible emissions pathways through 2100, whereas
SSPs were subsequently developed to provide plausible development-based scenarios used in
conjunction with RCPs.
D. SSPs were developed first and represent plausible emissions pathways through 2100, whereas
RCPs were subsequently developed to provide plausible development-based scenarios used in
conjunction with SSPs.

14. A global investment company becomes a signatory to the PRI. The sustainability director of the
company reviews the principles and prepares for their implementation in investment decisions. To
comply with the PRI, to which of the following changes will the company commit?

A. Accept audited ESG data only

B. Accept both audited and unaudited ESG data
C. Strictly adhere to the three mandatory principles of PRI
D. Seek disclosure on ESG issues from investee firms

15. A mid-size agricultural company in Ohio adopts the COSO ERM framework to evaluate climate risk
exposure. A climate risk analyst at the company tracks and measures the risks of a recent agricultural
project. Farming practices have depleted carbon in the soil, releasing carbon into the atmosphere.
The analyst recommends a risk response for the project team. Based on this recommendation, the
project team develops a method to recarbonize the soil, decreasing costs and increasing annual crop
yields. Under the standard COSO ERM framework, which risk response did the risk analyst
recommend for the project team?

A. Prioritization
B. Identification
C. Pursuit
D. Reduction

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16. A national science policy advisor reviews IPCC reports throughout the past several decades to inform
government communication on climate change. The advisor creates summaries of each report’s
statements on attribution of modern warming. How should the advisor describe a conclusion on
modern warming attribution from the 2021 IPCC Assessment Report (AR6)?

A. Humans are responsible for 100% of modern warming.

B. GHGs and natural variability equally contribute to modern warming.
C. Most modern warming is possibly due to anthropogenic activity.
D. The Earth has likely warmed since the second half of the 1800s.

17. A global market risk manager at a UK bank reviews cross-border investment and financial flows of
the climate-finance landscape to inform business strategy and accurately capture climate change risk.
The manager develops an assessment of global climate finance flows and presents it to the
management board. What trend will the manager most likely present?

A. In OECD countries, most tracked climate finance is funded by domestic sources.

B. In non-OECD countries, most tracked climate finance is funded by international sources.
C. In non-OECD countries, all tracked climate finance is equally split between domestic and
international sources.
D. In OECD countries, all tracked climate finance is equally split between domestic and international
sources.

18. A senior environmental policy advisor at a climate risk services company prepares a new joint
emission reduction policy proposal for three states in the midwestern US. To prepare the proposal,
the advisor examines implemented emissions reduction policies. Which of the following policies allows
for the easiest cross-sectoral emissions reductions?

A. Emissions-trading scheme
B. Low-carbon public procurement
C. Fuel tax for transport and heating
D. Fleet level CO2 emissions standard

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19. A commercial bank creates a climate risk team to incorporate climate factors into capital allocations,
loan approvals, and reporting. The team builds out scenario analysis capabilities covering physical
and transition risks to support these initiatives. A risk manager on the team outlines recommended
practices for the bank to consider when developing and applying climate scenario analysis, and the
associated challenges and benefits. What consideration does the manager recommend?

A. Organizations that are just starting to use scenario analysis should focus on quantitative scenarios
to safeguard accurate results.
B. Most reference scenarios have been developed for local assessments of potential climate-related
impacts.
C. A challenge in conducting scenario analysis in various industries is the lack of appropriate tools to
use in specific sectors.
D. Firms are increasingly using climate-related scenario analysis to assess potential business
implications of climate change.

20. A consultant prepares a report on climate risk for an electronics and consumer goods company. The
report notes the company is vertically integrated, resulting in a unique climate risk profile. How can
the report most accurately describe the company’s climate risk profile?

A. The company is exposed to a lower degree of transition risk than non-integrated companies.
B. The company is exposed to a higher degree of physical risk than non-integrated companies.
C. The company is exposed to a lower degree of supply chain risks than non-integrated companies.
D. The company is exposed to a higher degree of indirect risks than non-integrated companies.

21. The CSO at a global asset management firm works on a sustainability and climate risk report for a
forthcoming company strategy meeting. The meeting will prioritize potential risk exposures the
company may face as well as possible systemic financial effects. Which of the following should the
CSO include as an example of how climate risk translates into credit risk at the systemic level?

A. Climate policy regulations reveal climate risk information about the manufacturing sector; traded
assets in this sector experience downward price shocks and increases in volatility.
B. Chronic sea level rise steadily decreases profits in the hospitality industry; the financial stability of
institutions heavily exposed to this sector deteriorates.
C. New energy technologies outperform fossil fuel assets globally; the economy of a country reliant
on fossil fuel revenues becomes “stranded” as fossil fuel reserves become commercially unattractive.
D. Persistent regional flooding increases demand for disaster precautionary cash-flow acquisition on a
large scale; central bank intervention becomes necessary to support corporations and financial firms.

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22. A regulatory body for a national government develops taxonomies for sustainable activities. To assist
this process, regulators survey taxonomy templates from other jurisdictions and decide to model after
the EU Taxonomy. Which characteristic of the EU Taxonomy will the regulator most likely implement
in the new taxonomy?

A. Performance thresholds for economic activities by sector and subsector are set with highly
prescriptive details for every subsector covered.
B. The taxonomy prescribes that both the type of financial instrument and the economic activity
financed are critical in determining sustainability.
C. Specific “green” activities are defined that include allowance for clean coal and other types of
clean utilization of fossil fuels.
D. The taxonomy proposes that activities count as “green” only if substantive contributions are made
to all six environmental objectives.

23. A central bank conducts a policy strategy review and identifies climate change as a key component of
an upcoming policy update. The bank creates a climate risk team to conduct research to help
understand climate-related risks and possible remedial policy actions. The team recommends the
bank incorporate microprudential and macroprudential measures to embed climate change risk into
supervision practices. Which action should the central bank take?

A. Adhere to NGFS standards and comply with all reporting requirements, as this will ensure
microprudential climate change integration.
B. Review the scope of the bank mandate to maintain alignment with TCFD best practices, as
climate-related microprudential measures are globally regulated.
C. Conduct climate stress tests with distinct policy scenarios and feedback loops as a macroprudential
measure to analyze climate change risks.
D. Implement widely adopted, low-risk macroprudential measures such as lowering exposure limits to
carbon-intensive stranded assets.

24. A portfolio research analyst at an asset management firm performs a portfolio review to identify
which assets may experience climate risk impact. The analyst prepares a report for senior
management to recommend approaches to measure climate risk impact at the portfolio level. Which
approach to estimate transition risk at the portfolio level should the analyst recommend?

A. Corporate carbon footprints measuring the portfolio exposure to extreme weather

B. A carbon intensity metric corresponding to GHG emissions normalized by portfolio market value
C. Scenario analysis to model corporate alignment of an entire portfolio
D. A temperature score to obtain a financial loss estimate from climate risk

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25. A Greek investment banking and investment firm announces it will spend USD 12 billion on ESG and
sustainable finance over the next decade. The firm must reallocate spending projections around
issues of compliance, risk, and litigation using available data. Which of the following correctly
represents a data availability limitation when interpreting climate risk data?

A. Climate change data acquisition is based on which SSP is chosen for scenario representation.
B. Climate risks can occur when there is either a large exposure or vulnerability but not when both
occur simultaneously.
C. Climate risk exposure data is not available from open-source entities, making data acquisition
difficult.
D. Much of the available climate data is downscaled from global models with the resolution typically
restricted to 100km x 100km.

26. Increasingly unpredictable weather patterns threaten a large beverage distribution company
operation. To better understand how short-term threats affect company operations, company leaders
hire a climate change consultant to provide recommendations to mitigate the acute climate change
risks that threaten company operations. Which of the following actions should the consultant
recommend?

A. Purchase flood insurance for company assets

B. Upgrade cooling systems in company warehouses
C. Develop a company decarbonization plan
D. Install solar panels on company warehouse roofs

27. A global automaker issues a press release announcing it will be the most sustainable premium sports
car manufacturer by 2028. The automaker will issue its first green bond to finance the development
and production of its first fully electric vehicle. Which of the following company strategies should the
automaker’s CSO choose to align best with the core components of the Green Bond Principles?

A. The company establishes a formal internal process to credit net green proceeds to a sub-account
or move proceeds to a sub-portfolio.
B. When the company issues the green bond it can refrain from disclosing to investors any exclusion
criteria for project selection but must disclose internal processes.
C. The company can use green bond proceeds to finance new eligible green projects and general-
purpose borrowing.
D. The company uses qualitative sustainability performance targets for green projects to measure
improvements in the bond sustainability profile.

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28. The CRO for a large natural gas company reviews reference scenarios as part of an annual climate
scenario analysis exercise. The CRO creates a transition risk matrix that compares four different
reference scenarios (W, X, Y, Z) according to the scale of emissions cuts [Net-Zero by 2050, and
business-as-usual (BAU)], and the pace of emissions cuts [Orderly and Disorderly]. The CRO uses the
matrix below to explain transition risk to the company’s executive members and ranks the reference
scenarios according to transition risk.

Which reference scenario does the CRO rank as leading to the most transition risk for the company?

A. X
B. W
C. Y
D. Z

29. The minister for environmental protection of a North African country shares a plan to pursue national
Paris Agreement commitments with other internal government agencies. The plan introduces the
concept and importance of net zero. How should the plan describe the net zero concept?

A. Net zero requires a reduction in carbon flows across all spheres.

B. Net zero requires a reduction in carbon sinks across all spheres.
C. Reaching net zero is sufficient to limit warming to 1.5°C this century.
D. Reaching net zero is necessary to limit warming to 1.5°C this century.

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30. A large country joins the Paris Agreement and directs the national environmental department to
disseminate new policies and goals to relevant federal agencies. Most agencies are familiar with past
climate agreement principles and protocols but not those of the Paris Agreement. The environmental
department should educate federal agencies on what feature of the Paris Agreement?

A. An emissions trading program among wealthy nations

B. Voluntary national climate targets updated regularly
C. Investment in clean energy projects in exchange for emissions credits
D. Differentiated mitigation responsibilities according to national capabilities

31. A global think tank works with a small island nation to assess the cost-effectiveness of
geoengineering technologies that could mitigate global emissions. Upon completion of the
assessment, the think tank finds certain geoengineering techniques may have serious consequences.
Which of the following is a potential negative consequence of implementing a geoengineering
technique?

A. Exponential increase of carbon abatement cost per decade

B. Changes in global precipitation patterns
C. Carbon dioxide removal from the atmosphere becomes infeasible
D. Linear rise in costs each time geoengineering is used

32. A multinational food and beverage corporation has growing concerns that CO2 and other GHGs in the
atmosphere have a negative effect on agricultural productivity. The corporation may be subject to
higher costs and scarce availability for commodities necessary in its supply chain. The corporation will
disclose this scenario under which climate-related risk type?

A. Chronic
B. Market
C. Resilience
D. Technological

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33. The board of directors of a growing asset management firm recommends the firm expand its ERM
framework to incorporate climate risks. The risk team references the COSO ERM framework to
develop and propose a strategy to implement climate risks into the various ERM components. What
recommendation should the team make in the strategy proposal to align with ERM recommended
practices?

A. To employ climate risk into the strategy component, the firm should start with megatrend analysis
and then delve deeper with comparison and assessment tools.
B. To apply climate risk into risk governance, the firm should use a bottom-up approach so that
portfolio managers can make initial judgments on climate risks when making allocation decisions.
C. To track performance for climate risks, the firm should focus on one sub-component--risk
identification--which involves listing climate risk drivers relevant to the firm.
D. To implement the review and revision component, the firm should arrange annual external audits
to examine all potential climate risk drivers considered in decision making.

34. A large timber company in Brazil reviews a report identifying ecosystem degradation and a decrease
in timber stock. To determine potential risks for the ecosystem and the company, a company
sustainability analyst examines the ecosystem services securing species habitat and genetic diversity.
Which of the following ecosystem services does the analyst identify?

A. Supporting services
B. Provisioning services
C. Regulating services
D. Cultural services

35. After recent public pressure, a national government enacts a stringent set of automobile emissions
standards. Leaders of an automobile manufacturing company examine how this change may affect
the industry. Company leaders direct the sustainability team to propose strategies to address climate-
related risks the company may face in coming years. As part of the comprehensive analysis, the
sustainability team includes actions to mitigate technology risk. Which of the following strategies does
the team recommend?

A. Assess viability of the supply chain contingency plan annually

B. Participate in a voluntary carbon trading scheme
C. Improve electric vehicle battery storage capacity
D. Install retractable flood barriers at facilities near rivers

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36. The CSO at a large European consulting firm works on a sustainability and climate risk report for a
forthcoming company strategy meeting. The meeting will prioritize potential risk exposures company
clients may face and possible financial systemic effects. Which of the following should the CSO
include as an example of how climate risk translates into market risk at the systemic level?

A. Corporations and financial firms operating in an area affected by wildfires sharply increase demand
for precautionary cash flow on a scale that necessitates intervention by a central bank.
B. A group of food-processing component manufacturers is located in a geographic area affected by
increased flooding, affecting global production and supply chains.
C. An oil and gas company’s profits are affected by climate-related regulatory pressures, which poses
a threat to financial stability because of financial institutions heavily exposed to the sector through
loans.
D. A bank’s ability to manage risks actively is challenged by climate risk, leading to a partial
breakdown of typical correlation patterns between assets, which reduces the effectiveness of hedges.

37. An exchange-traded fund (ETF) product analyst researches sustainable finance products to determine
product eligibility to include in a summary memo. The memo will be reviewed and approved by a
senior analyst before listing. Which of the following would the senior analyst most likely approve as
an offering an ETF would invest in?

A. A green car loan that finances certified used cars that do not emit excess emissions at rates under
2.5%
B. A sustainable fund issued by a firm where over 50% of revenues are attributable to environmental
solutions
C. A green mortgage-backed security offered to purchasers of commercial and residential properties
in areas with low risk of flooding or wildfires
D. A sustainable credit card that offers cash back for purchases on green or sustainable products
from certified B-corporations

38. An oil and gas company with sizable GHG emissions operates in all parts of the world. The company
commissions a team of environmental consultants that specialize in climate risk to explore options for
minimizing GHG emissions from company operations. The consultants present several datasets and
highlight that 93% of heat trapped by GHGs heats one particular portion of the Earth. Which part of
the Earth absorbs most heat trapped by GHGs?

A. Rain forests
B. Glacier ice
C. Oceans
D. Atmosphere

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39. A beverage company considers undertaking scenario analysis for the first time. The company will
assess potential implications of climate change on water availability and management due to
changing water-use regulations and increased water stress. The company engages a consultant for
guidance on incorporating climate-related considerations into scenarios. The consultant prepares a
high-level overview of transition risk and physical risk climate scenarios. Which of the following
should the consultant include in the overview?

A. Physical scenarios allow organizations to assess historical climate change vulnerabilities to explore
past business resiliency.
B. Organizations should use physical scenarios to draw conclusions about energy supply and
consumption in the short and medium term.
C. Because physical risk affects a small part of the global economy, organizations should focus
primarily on transition scenarios to understand climate change implications.
D. Some transition scenarios use assumptions that achieve a low emission economy that
organizations can use in analyses.

40. A country in East Asia lags regional neighbors in reducing GHG emissions and reaching climate
objectives. To address this gap, the country government legislators agree to establish either a carbon
tax or cap-and-trade system. The government hires a climate change policy expert to write a report
and recommend the best course of action. Which policy might the expert propose to legislators and
why?

A. Cap-and-trade because it is considered more flexible than other policies

B. Cap-and-trade because it imposes a fixed price per ton of emitted CO2
C. Carbon tax because it remains consistent in scope across jurisdictions
D. Carbon tax because it provides a guaranteed fixed tax rate for investors

41. Organizers of an upcoming UN Climate Change Conference prepare a document highlighting

successes and failures of climate accords over the past 20 years. The document lists what success
from the 2009 Copenhagen Accord?

A. Binding short-term GHG emissions-reduction commitments

B. Promotion of flexibility in achieving climate targets
C. Acceptance of a quantitative long-term global warming limit
D. Submission of Nationally Determined Contributions to the UNFCCC

19
42. A Chinese international hydropower company owns and invests in multiple dams and related
infrastructure throughout the Mekong River Basin. After several years of increasing precipitation
irregularity in the region, the company’s risk team develops a comprehensive plan to reduce negative
financial effects of physical climate risks. The plan covers existing hydropower assets over a 20-year
period. The plan should recommend the company invest the most effort in reducing what aspect of
physical climate risk?

A. Hazards
B. Vulnerability
C. Drivers
D. Exposure

43. An activist hedge fund pressures leaders of a global energy company to reconsider company strategy
to align with SDGs. The company risk team identifies intangible stranded asset risks as part of a
strategy to develop a robust response. The team emphasizes risks related to human capital and
provides recommendations to support a just transition. Which of the following actions will the team
likely recommend?

A. Provide retraining programs to workers in carbon-intensive sectors

B. Engage younger consumers via social media campaigns
C. Increase the selection and availability of sustainable products
D. Establish a committee to assess reputational risk

44. Insurance companies in North America suffer from increases in losses from homeowner and business
clients in extreme weather-prone areas and need to better manage physical climate risk exposure. To
address this issue, a diverse group of insurers and reinsurers meets to discuss the impact of physical
climate risk on the insurance industry and share their experiences. Which example of physical climate
risk reduction common practice should be noted in the meeting outcomes?

A. Due to long renewal cycles, medium-sized companies pull coverage in a multi-year time span.
B. Regional companies reduce climate-related risks through geographical diversity.
C. Large companies with diversified exposure cross-subsidize climate risks.
D. Small companies fully offload climate-related risks to reinsurance companies.

20
45. A sustainability and climate risk team at a Polish development agency prepares a new report on
private-sector development and the role of development financial institutions (DFIs) in Poland. The
team assesses the purpose of DFIs through an overview of DFI missions to include in the report.
Which of the following should the team identify as the mission of DFIs?

A. Achieve financial self-sufficiency while supporting socioeconomic development.

B. Maximize long-term profits while reinforcing sustainable development action.
C. Optimize financial gains while investing in climate-related projects that raise climate awareness.
D. Reduce costs of mitigating climate change while supporting economic development.

46. An African financial services firm works with a regional climate change institute to implement
resilience projects that are paid for with proceeds from sustainable investments. A project under
consideration addresses the food and crop crisis in southern Madagascar. The region experienced a
severe lack of rain in recent years. Scientists at the institute conclude that regional climate variation,
rather than anthropogenic climatic change, is the main cause of the water shortage. Which of the
following provides evidence of the severe aridity of southern Madagascar as a non-anthropogenic
climatic change?

A. Tree rings
B. Precipitation forecasts
C. CO2 concentrations
D. Ozone concentrations

47. After significant growth in insurance premiums due to rising physical climate change risk and supply
chain disruptions, a newly-incorporated Tunisian sugar beet company plans to implement scenario
analysis for the first time. The company CRO intends to use scenario analysis to update corporate
development strategy for the next five years. Which of the following is a reason why the CRO may
use scenario analysis to set corporate strategy?

A. Scenario analysis can help chart opportunities and future demand for products.
B. Scenario analysis can help calibrate assumed emissions to roughly correspond to temperature
targets.
C. Corporate disclosure requires physical risk scenario analysis for use in forward planning.
D. Corporate disclosure recommended practices include historical-looking scenarios to design future
strategic directions.

21
48. The state of New York considers a Fashion Sustainability and Social Accountability Act requiring
apparel and footwear producers, with global revenues of USD 100 million or greater, to report
environmental and social disclosures publicly, including results from scenario analyses. Part of the
rationale for the Act stems from a lack of standardized governmental frameworks to calculate key
environmental risks. The proposed Act may use a set of yet-to-be-determined scenario parameters as
part of its future standardization. Which of the following is a scenario parameter that should be
included in the proposed Act?

A. Capital expenditure
B. Impact on productivity
C. Asset allocation
D. Carbon price

49. A commercial bank in North America increases the size and scope of its risk department. As part of
this process, bank leadership requests the risk department implement a methodology to evaluate
how climate change affects traditional risk types. A risk analyst recommends risk metrics for each
significant risk type and includes several ratios such as loan-to-deposit in a list of metrics for liquidity
risk. What additional metric should the analyst recommend that measures liquidity shock for business
clients?

A. Loss given default

B. Bid-ask spread
C. Probability of default
D. Insurance premium changes

50. An institutional investor in the energy sector experiences losses due to significant property damage
caused by a severe weather event. Additionally, the investor faces a cost increase due to a low-
carbon technology shift. To mitigate potential climate risk exposure in future investments, the risk
team reviews the reference scenarios developed by the IEA and IPCC . What should the team point
out regarding the use of reference scenarios in investment analysis?

A. Because these scenarios are designed to generate long-term financial forecasts, they should be
used for qualitative investment analysis.
B. These scenarios can be used to produce data for the company to extract and use as input for
investment analysis.
C. Because these scenarios focus on the energy sector, they capture both physical and transition risk
for comprehensive investment analysis.
D. This scenario methodology is based on energy potential and bottom-up investment analysis
approaches.

22
51. A sustainability analyst at a global auto manufacturer prepares an annual sustainability report for
North American operations. The analyst compares the annual Scope 2 CO2 emissions for four facilities
in 2015 and 2020 (in hundred metric tons):

Facility 2015 2020

Emissions Emissions
1 50 82
2 62 70
3 90 74
4 68 60

Assuming energy use levels remained constant for each facility, how should the analyst best explain
the change in emissions levels?

A. Nuclear energy replaced most coal use in the electric grid servicing Facility 1.
B. Facility 2 replaced some oil-fired purchased electricity with purchases of oil for onsite energy
generation.
C. A large utility servicing Facility 3 replaced natural gas use with renewable-powered battery
storage.
D. Facility 4 switched its onsite corporate fleet from cars that use oil to electric vehicles.

52. A risk analyst at a research institute joins a research team exploring the financial risks of climate
change. For inclusion in the institute’s monthly newsletter, the analyst prepares a high-level overview
of how climate change risk can lead to financial exposure. Which example of financial exposure
should the analyst include in the overview?

A. A construction company has an exposure to physical risk if the cost of carbon emissions needs to
be priced into cement production, thereby reducing profitability.
B. An automobile manufacturing company has an indirect exposure to transition risk if its supply
chain can be materially disrupted by climate-related physical events such as flooding elsewhere in the
world.
C. A retail company’s asset values are largely influenced by physical risk in the shorter term, while
transition risk is likely to be the main influence on the company’s asset values in the medium-to-
longer term.
D. A real estate investment firm has exposure to physical risk through gradual revaluation of its
holdings of waterfront property due to rising sea levels.

23
53. The sustainability director at a boutique asset management firm develops a sustainability framework
to build resilience and drive profitable and measurable growth. The director will incorporate the
framework into firm strategy and operations. At a strategy meeting, the director presents an effective
approach for boutique asset management firms to influence large, emissions-intensive corporations
to become more sustainable. Which approach does the director present?

A. ESG integration in the investment process

B. Divestment from emissions-intensive corporations
C. Exertion of pressure through shareholder coalitions
D. Shift portfolio composition through passive index funds

54. After achieving an ambitious goal to mitigate GHG emissions, a global technology company is
recognized by a major sustainability index. Company leaders use this achievement to boost company
recognition and direct the sustainability division to propose plans to enhance company reputation.
Under this scenario, which of the following opportunities is the division most likely to propose?

A. Develop innovative methods to reduce Scope 3 emissions

B. Use marketing campaign to publicize recent initiatives
C. Replace high-emission manufacturing technology
D. Adopt a company-wide internal carbon fee

55. A sustainability analyst at a textiles company works on a sustainability policy report for a forthcoming
company strategy meeting. The meeting will prioritize risk exposures the company may face for not
complying with various types of sustainability enforcement. Which example of policy enforcement of
sustainable investment and disclosure should the analyst include in the report?

A. Companies must rely on industry-specific norms to classify and disclose sustainable products
because no regulations currently define sustainable or “climate-friendly.”
B. Since establishment, the EU Taxonomy is the universal green taxonomy standard.
C. Audits are a form of consumer protection that can combat misleading advertising and help reveal if
funds or products are accurately marketed as sustainable.
D. A greenwashed product is a sustainable product or financial fund that has passed mandatory
regulatory requirements, designed to minimize environmental impacts.

24
56. A chemical manufacturer examines future climate-related regulatory risks for its products and fuels. A
risk assessment reveals most of the emissions from production processes contribute to global
warming. However, the assessment also highlights several emissions that can drive negative radiative
forcing. What should the report cite as a potential driver of negative radiative forcing?

A. Methane mixing with water vapor

B. Halocarbon renewal of the ozone layer
C. Aerosol interaction with clouds
D. Hydrocarbons concentrated at ground level

57. A climate specialist at a large European pension fund develops a brief on stranded asset risk for an
annual report. The specialist primarily focuses on energy assets across the continent and discusses
trends for several sectors. Which of the following assets display an increase in susceptibility to asset
stranding?

A. A wind farm operating in a country in which regulations increase the expense of turbine
decommissioning and retrofits.
B. A coal plant that operates within a cap-and-trade system experiencing a consistently higher-than-
expected supply of carbon permits.
C. A natural gas facility operating in a country in which the levelized cost of energy for renewables
increases.
D. A large solar farm located in a country that strengthens vehicle fossil fuel efficiency standards.

58. A group of environmental NGOs and shareholders of a mining company submits a resolution calling
for an update on the company’s long-term strategy. As part of the resolution, NGOs and shareholders
request the establishment of a committee. The committee will propose a new strategy that equally
weights social and environmental impacts with financial performance. NGOs and shareholders
exerting such pressure extend from what private sector development in the 1980s and 1990s?

A. Sustainability reporting
B. Social responsibility
C. Triple bottom line
D. Three scopes reporting

25
59. The sustainability department of a Brazilian city conducts an initial GHG inventory. The department
gathers and organizes 2022 emissions data by economic subsector (in tCO2 e):

Subsector Emissions
Residential building grid electricity use 500,000
Transboundary transport of sold goods 600,000
Biological treatment of waste 70,000
Fugitive emissions from energy extraction within city 30
Forestry and land use 20,000
Internal combustion engine on-road transportation 5,000,000
Solid waste disposal 1,000,000

All waste treatment and disposal occurs outside of the city limits. The department organizes GHG
emissions by scope according to the BASIC approach in the Protocol for Community-Scale GHG
Emissions Inventories. Using the BASIC approach, what should the department calculate as its total
Scope 3 emissions (in tCO2e)?

A. 690,030
B. 1,070,000
C. 1,590,000
D. 6,670,030

60. Council members for a large city in a low-lying country discuss local adaptation initiatives that also
contribute to national climate goals. The council narrows possible options to the following projects:

• An urban greening initiative that plants trees in unused lots

• An incentive program to whiten roofs on city buildings

A council member advocates the greening initiative. How should the council member describe an
advantage of planting trees over roof whitening?

A. A reduction in CO2 levels by increasing the region’s albedo

B. A slowing of long-term sea level rise by providing a carbon sink
C. An increase in positive warming feedbacks by absorbing solar radiation
D. A dilution of GHGs by increasing water vapor in the atmosphere

26
61. A diamond mining company operates internationally and increasingly incurs scrutiny for its
environmental and social impacts. In response, the company plans to adopt the SDGs. The
company's sustainability director begins this process by linking the SDGs to material concerns for the
company. Which strategy should the director suggest the company take to address one of the SDGs?

A. Rebuild the company's reputation after a series of mining accidents

B. Reduce income inequality between employees and executives
C. Ensure the company follows through on stated CSR commitments
D. Minimize scrutiny from regulators and creditors on environmental issues

62. After setting up a new passive ESG investment strategy, a hedge fund manager based in the US must
comply with a new set of reporting requirements. The manager looks for appropriate sources of
information to perform pre-trade analysis of investee companies. Which most commonly-used
information source could the manager use to assess investee companies?

A. Direct engagement with companies and ESG ratings

B. In-house research and corporate ESG rankings
C. ESG information disclosures in filings for securities authorities
D. Media sources specialized in ESG reporting

63. An industry association in Germany surveys members on business alignment with nationally
determined contributions (NDCs). The association members express concern about potential legal
repercussions or penalties if governments do not conform to Paris Agreement pledges. An attorney at
the association researches this issue and sends a memo to members. The memo should state the
Paris Agreement expects signatories to take what action?

A. Revise NDC targets annually

B. Strengthen NDC ambitions every five years
C. Penalize industries exceeding NDC emissions thresholds
D. Issue tariffs on countries significantly failing to meet NDC commitments

64. An investment bank examines climate risk-related investment opportunities. A junior analyst
researches and develops a report describing opportunities arising from physical and transition risks.
Which of the following should the analyst include in the report?

A. A utility company builds flood walls to increase resiliency of its operations

B. An insurer incorporates climate risk into existing insurance products
C. A manufacturer sells CCS equipment to fossil fuel companies
D. An agriculture company plants drought-resistant seeds to maintain competitiveness

27
65. A chip manufacturer in Indonesia experiences an increase in losses due to disruptions in the value
chain driven by extreme weather events. Recognizing the increased exposure to physical risks, the
company’s CRO examines and evaluates current physical risk assessment methodologies. Which of
the following should the CRO include in a final report to explain physical risk assessment
methodologies?

A. Most methodologies provide highly detailed predictions for future precipitation trends.
B. Methodologies are based on historically plausible scenarios for a given region.
C. Methodologies are most sensitive to widely diverging short-term emission projections.
D. Most methodologies are built on the same assumptions as transition risk assessment
methodologies.

66. The director of the sustainable finance department at a US bank considers introducing a new line of
sustainability-linked loans (SLLs) due to rising demand from bank clients. To inform the bank
management board, the director presents a report that explains the conditions of SLLs. What
condition should a loan fulfill to be considered an SLL?

A. The loan proceeds should have specific social and environmental performance targets.
B. The interest rate on the loan should be linked to predetermined SDG targets tied to an underlying
project.
C. The loan funds should be ring-fenced for use in a sustainable project by providing incentives to the
client.
D. The loan should improve the sustainability performance of the client using predetermined criteria.

67. As part of a national strategy to achieve Paris Agreement goals, a country enacts a policy that
requires all buildings to conform to rigorous energy efficiency standards. Multi-unit residential
properties that do not meet the new standards will no longer be eligible to rent. In preparation for
the new regulations, a property management company hires a team of climate risk consultants. The
consultants assess how the new policies may affect company plans to purchase additional properties.
Which of the following risk impacts do the consultants identify?

A. Buildings located near rivers will have lower insurance premiums

B. Tenants may refuse to pay more for renewable power
C. Higher average temperatures will require air conditioner installation
D. Inefficient buildings decrease company creditworthiness

28
68. A construction company develops a new roof product that increases albedo and decreases thermal
radiation. The company board of directors decides to introduce an internal life cycle assessment
(LCA) for the new roof product to reaffirm the planned marketing campaign. The company CSO
reviews the four LCA phases and starts the assessment process with the phase, “goal and scope
definition.” What action should the CSO perform as part of this first phase of the LCA?

A. Identify processes that contribute to the product’s environmental impact

B. Gather data on the inputs, outputs, and energy use of the product
C. Categorize all environmental impacts of the product
D. Develop metrics on which to evaluate completeness of the product LCA

69. An analyst joins the climate risk team at a financial institution. The team translates environmental
issues into finance-related metrics that inform investment decisions for clients worldwide. For an
initial report, the analyst reviews international climate negotiations to understand cumulative versus
current annual GHG emissions by country. Which of the following should the analyst include in the
report?

A. It is more important to examine countries’ annual emissions that reflect the current flow of CO 2,
which have a larger effect on the climate, than countries’ cumulative emissions.
B. There is a global consensus that countries accountable for greatest annual emissions should be
most accountable for climate change mitigation efforts.
C. Countries in North America and Europe account for over half of current annual emissions, while
countries in Asia and Africa account for the least.
D. Countries that steeply increased their emissions share in the recent decades are not the same
countries responsible for the most historical emissions, contributing to tensions in climate
negotiations.

70. The ERM team for a mid-size bank plans to use the Paris Agreement Capital Transition Assessment
(PACTA) tool to assess the transition risk of their loan book. The team plans to use PACTA’s two main
alignment metrics of Production Volume Trajectory and Technology/Fuel Mix. Due to a lack of clear
sectoral decarbonization pathways, an ERM analyst notes that an emissions intensity metric would be
a better measure of climate transition risk for some sectors. For which sector would the emissions
intensity metric be more appropriate?

A. Power generation
B. Automotive
C. Cement
D. Fossil fuels

29
71. The chief operating officer (COO) of a large manufacturing company observes the total quantity of
GHG emissions increased slightly over the previous year. The COO consults with the CSO, who
explains the company is making progress reducing its climate impact from emissions, despite the
quantity increase. What response could best justify the CSO’s claim?

A. Filters on industrial exhausts decreased aerosol emissions.

B. The company eliminated nitrous oxide emissions.
C. Methane emissions replaced CO2 emissions in terms of release percentage.
D. The company replaced use of nuclear energy with hydropower.

72. A large integrated energy company prepares its annual GHG inventory. The company’s sustainability
director organizes data according to the GHG Protocol. Which emissions should the director
categorize as Scope 2 for the company?

A. Emissions resulting from the generation of purchased electricity that is consumed during
transmission and distribution
B. Emissions resulting from the generation of electricity that has been purchased for resale to end-
users
C. Emissions resulting from the combustion of fuels in stationary sources
D. Emissions resulting from the combustion of fuels in company owned/controlled mobile combustion
sources

73. A global health institution seeks to understand the emerging variants of the COVID-19 disease as
updated strategies and activities increasingly tie into the SDGs of the 2030 Agenda. Due to increasing
stakeholder alignment pressure, the institution incorporates SDGs into an updated strategy. Which of
the following accurately identifies the key features of the 2030 Agenda that the health institution
recognizes?

A. The Agenda measures government alignment on environmental and social criteria.

B. The Agenda specifically targets economic development in developing regions and countries.
C. The Agenda focuses on habitat, health, hunger, and humanity to promote the Millennium
Development Goals.
D. The Agenda focuses on people, planet, prosperity, and peace, and is all-encompassing.

30
74. A large bank in Germany establishes a sustainability department after new research shows an
increasing stakeholder desire to implement sustainable practices in all parts of the bank. The bank's
CSO prepares a comprehensive sustainability framework for management consideration. The CSO
harmonizes definitions of sustainable finance subtypes and explains their application. What
sustainable finance subtype explanation should the CSO include in the proposal?

A. Climate finance refers to financial flows for mitigation and adaptation projects related to climate
change.
B. Climate finance identifies climate-related financial flows that historically put weight predominantly
on private sector activities.
C. Green finance encompasses all sustainable finance activities, but mostly emphasizes environmental
protection.
D. Green finance focuses on environment-related risks and opportunities specifically relating to
climate change.

75. An agricultural company in southern Europe evaluates crop yield. The evaluation reveals high
temperatures and water shortages will likely harm crop production. The company engages a team of
climate risk technology consultants to provide guidance on smart irrigation technologies to diagnose
when and how much a crop needs irrigating. To prepare for the new technology implementation, the
company’s senior risk director updates the company ERM strategy to include climate risk
considerations in the risk governance process. What recommendation should the director provide
about the implementation of a risk governance process?

A. Require accountability at all levels of the company, and the company should allocate
responsibilities on climate-related issues to specified senior executives.
B. Involve goal setting that revolves around climate change mitigation, driven by various risk
objectives such as CSR.
C. Risk department articulates any potential climate risk effects on business operations and strategy.
D. Senior management communicates climate risk exposure both internally and to external
stakeholders, and provides public disclosure of practices.

76. A newly established impact investing firm formulates its corporate strategy to generate investment
returns with social and environmental impacts for investors. A team of risk consultants is hired to
advise on investment structure and the potential risks the firm may face. The team prepares a report
to recommend data types and analytical tools to evaluate transition and physical risk impact at the
company level. How should the company evaluate company-level transition risk?

A. Use data from the Coupled Model Intercomparison Project, versions 5 or 6, to gauge climate
hazards.
B. Calculate CVaR to provide quantitative estimates of expected financial losses or gains from climate
risks and opportunities.
C. Categorize emissions as Scope 1, Scope 2, or Scope 3 as part of the GHG Protocol.
D. Develop company-level scores that combine proprietary methodologies to downscale and
normalize climate model data.

31
After reviewing the following case study, answer questions 77-80.

The Lowlands Pension Fund (LPF) in the United Kingdom manages approximately GBP 40 billion in
investments and provides two dozen portfolio options to clients. LPF manages investments for 13 local
government pension funds. LPF published its first TCFD disclosure last year with the following highlights:

An early adopter of sustainable investing among peers, LPF is a signatory of the PRI and member
of Climate Action 100+, among other initiatives. To understand exposure in high-carbon sectors,
LPF contracts with a data provider to understand the Scope 1 and Scope 2 emissions and several
categories of Scope 3 emissions of its portfolios. The sustainability team has identified carbon-
intensive holdings as a significant risk and developed several renewable and infrastructure
portfolios to take advantage of climate-related opportunities.

In 2022, LPF updated its climate policy to include the following objectives:

1. Commit to Net Zero by 2050;

2. After an annual portfolio review identifying holdings with high climate risk exposure, actively
engage investee companies on climate risks and opportunities;
3. Establish strategies to achieve science-based climate targets according to SBTi recommendations
for a sectoral decarbonization approach.

To achieve objective 2, LPF examines the weighted average carbon intensity (WACI) of four selected
holdings in a high-growth portfolio, using the information in the table below:

Company
Alpha Beta Gamma Delta
tCO2e 550,000 500,000 2,000,000 300,000
Revenue (GBP mm) 10,000 8,000 200,000 12,000
Portfolio weight 10% 8% 15% 12%

LPF will designate any company in the portfolio with a contribution to WACI of 5 or higher as a high-
WACI-contribution company. For these companies, LPF will review any available company

transition plans to recommend potential improvements, and if no transition plans are available LPF will
engage senior management by recommending they clarify or enhance the company’s climate transition
plan. One high-WACI-contribution company provides a transition plan, highlighted below:

Investee transition plan:

• Overall corporate pledge of Net Zero by 2050 covering Scope 1 and 2 emissions
o Reduce emissions steadily over the next 30 years, with the majority of emissions
reduction between 2040 and 2050;
o Continue pursuit of carbon offsets via investments in renewable energy;
o Provide additional training and resources on low-carbon transitions for operations in
developing countries;
o Consider ecological and social repercussions of any mitigation or adaptation projects.

32
77. What strategy could LPF take with existing portfolio companies to implement Objective 3?

A. Encourage portfolio companies in high-emission sectors to follow through on science-based

targets.
B. Align all companies within the portfolio with global temperature targets.
C. Divest from companies with unambitious carbon reduction targets.
D. Set emissions intensity targets and engage investment managers to influence companies in high-
emission sectors.

78. What companies, with a WACI-contribution higher than 5, will LPF engage?

A. Alpha, Beta
B. Alpha, Gamma
C. Gamma, Delta
D. Beta, Delta

79. How should LPF recommend the high-WACI-contribution company improve its transition plan?

A. Prioritize reductions in Scope 2 emissions over Scope 1.

B. Backload emission reductions closer to 2050.
C. Shift to carbon removal offsetting.
D. Consider factors beyond GHG emissions.

80. How can LPF improve disclosure to cover all four core elements of TCFD recommendations?

A. Describe how management reviews and incorporates climate risks into decision making.
B. Identify climate-related risks and opportunities.
C. Specify a process for identifying climate risks.
D. Highlight organizational climate targets and the metrics to achieve targets.

33
Answer Key

1. B 41. C
2. D 42. B
3. A 43. A
4. C 44. C
5. B 45. A
6. A 46. A
7. A 47. A
8. C 48. D
9. D 49. B
10. B 50. B
11. D 51. C
12. C 52. D
13. C 53. C
14. D 54. B
15. C 55. C
16. A 56. C
17. A 57. A
18. A 58. C
19. D 59. B
20. C 60. B
21. B 61. B
22. A 62. A
23. C 63. B
24. B 64. C
25. D 65. B
26. A 66. D
27. A 67. D
28. A 68. A
29. D 69. D
30. B 70. C
31. B 71. B
32. A 72. A
33. A 73. D
34. A 74. A
35. C 75. A
36. D 76. C
37. B 77. D
38. C 78. A
39. D 79. C
40. A 80. A

34
Answers and Explanations

1. A large IT company in the northwest US uses the COSO ERM framework to address climate risk. The
initial ERM risk assessment revealed moderate flood risk for the company’s operations. The CRO
recommends embedding a review-and-revision mechanism in the ERM framework to address this
significant operational risk. What action should the company take to comply with the ERM review and
revision component to manage climate-related risks?

A. Inform senior management on a timely basis of flood risk to prepare risk management operations.
B. Promptly re-assess flood risk under the flood monitoring program and apply follow-up measures.
C. Identify potential risks arising from flood events and prepare an appropriate internal response.
D. Design an internal system to measure the climate risk impact on business operations.

Correct Answer: B

Explanation: B is correct. Monitoring programs, risk re-assessment, and follow-up measures is a

component of the "review and revision" portion of the COSO framework (p. 140)

A is incorrect. This is a component of the COSO ERM framework's communication, reporting, and
disclosure component. (p. 140)

C is incorrect. Risk identification is a part of the "performance" component of the COSO ERM
framework. (p. 138)

D is incorrect. This step is part of the "strategy and objective-setting", and "performance"
components. (p. 136-138)

Learning Objective: Discuss how ERM frameworks are used in practice using case studies and
examples.

Reference: Chapter 6: Climate Risk Measurement and Management

35
2. A utility company on the Gulf of Mexico reviews a 20-year capital plan. During the review, the risk
management team expresses concern about physical climate impacts on the utility's capital and
operational expenditures. To further understand these risks, the team asks an in-house scientist to
explain how increasing global atmospheric concentrations of water vapor may contribute to
increasing climate risks for the utility. How should the scientist describe the climate impact of
additional water vapor in the atmosphere?

A. The Gulf Stream current will accelerate.

B. Heat waves in arid areas will moderate.
C. Evaporation will increase on all terrestrial areas.
D. Floods and droughts will become more intense.

Correct Answer: D

Explanation: D is correct. As temperatures increase, the rate of surface evaporation will also
increase. This process will result in more atmospheric water vapor. However, some regions will
experience more intense flooding, whereas other regions will experience droughts. (p. 14-15)

A is incorrect. Increased water vapor in the atmosphere will lead to warmer conditions and hasten
glacial melt. Some studies have indicated that larger pools of cold water in the North Atlantic could
shut down the Gulf Stream, leading to drastic climatic change. (p. 17)

B is incorrect. Heat waves in arid and humid areas are expected to increase as climate change
advances. (p. 14)

C is incorrect. Global warming, not more atmospheric water vapor, causes greater evaporation. (p.
14)

Learning Objective: Understand the distribution, frequency, and intensity of climate-driven

economic and ecological impacts across geography and time.

Reference: Chapter 1: Foundations of Climate Change

36
3. An EU producer of wind turbine blades moves its headquarters to Canada and becomes a fully listed
company on the Toronto Stock Exchange. Furthermore, the producer applies for and receives
extraordinary government support during the COVID pandemic. In preparation for a new reporting
year, a company climate risk and regulatory manager reviews Canadian ESG and climate risk
reporting requirements to align company reporting policy. After the review, which action should the
manager identify as necessary to align with Canadian reporting requirements?

A. Conduct TCFD-aligned reporting, and report on diversity-related ESG parameters.

B. Implement ESG risk disclosures mandated by the Canadian securities regulator.
C. Report GHG emissions and a complete set of ESG parameters if the company employs more than
500 people.
D. Report GHG emissions and ESG parameters only for environment-related parameters.

Correct Answer: A

Explanation: A is correct. In Canada, listed firms are required to report some ESG parameters
around diversity, and all companies receiving extraordinary government support in the COVID-19
pandemic are required, in return, to start TCFD reporting. (p. 109)

B is incorrect. China’s securities regulator has introduced rules to mandate all listed firms do disclose
ESG risks, not Canada. (p 109)

C is incorrect. The EU has a new disclosure requirement on all ESG-related matters for companies
with over 500 employees, not Canada. (p. 109)

D is incorrect. Canadian regulation asks for reporting on ESG parameters around diversity, not GHG
emissions or ESG parameters related to the environment. (p. 109)

Learning Objective: Explain the trends in ESG disclosure requirements for companies.

Reference: Chapter 5: Green and Sustainable Finance: Markets and Instruments

37
4. An EU-based multinational bank offers specialized sustainable building loans for innovative
technology that transforms waste into polymer composites that become superior building products.
The bank plans to expand its green loan offer to the Chinese green loan market and engages a green
finance analyst to perform a market assessment. The analyst writes a report on the state of the
market and its evolution. How should the analyst describe the evolution of the Chinese green loan
market in the report?

A. Investment banks introduced green loans in the early stages of green loan development primarily
through clean transport loans.
B. Local government initiatives introduced green loans in the late stages of green loan development.
C. Government policy introduced green loans in the early stages of green loan development.
D. Commercial banks introduced green loans in the late stages of green loan development primarily
through energy efficiency loans.

Correct Answer: C

Explanation: C is correct. China is a notable early adopter of green loans that stemmed from the
government's Green Credit Policy. (p. 100)

A is incorrect. In the early stages, the private-sector initiative was not a driver of green loans in
China. (p. 100)

B is incorrect. The central government introduced green loans through Green Credit Policy, not
through local government initiatives. (p. 100)

D is incorrect. Private sector did not introduce green loans to the Chinese market through clean
energy loans. (p. 100)

Learning Objective: Explain green loans and their markets.

Reference: Chapter 5: Green and Sustainable Finance: Markets and Instruments

38
5. A group of institutional investors plans to divest from companies that have poor environmental track
records. The investors hire an ESG consultant to recommend a divestment strategy. As part of the
proposed strategy, the consultant describes the relationship among various institutions, ESG, and
sustainability. Which of the following explanations might the consultant include in the proposed
strategy?

A. Corporate-level climate risk management is considered part of sustainability, but not part of an
ESG framework.
B. Governmental climate change policies typically fall under the sustainable development scope, but
not under the ESG scope.
C. Financial institutions' climate finance is part of the ESG landscape, but not part of the sustainability
landscape.
D. Non-financial corporations primarily focus on ESG-related issues, but focus less on sustainability-
related issues.

Correct Answer: B

Explanation: B is correct. Governments set climate policies to reduce emissions and adapt to
climate change, which is considered part of sustainable development but not of ESG per se. (p. 32)

A is incorrect. Companies communicate performance to shareholders, lenders, and other financial

stakeholders using ESG metrics that become standard in the financial industry. (p. 33)

C is incorrect. Climate finance falls under the ESG landscape per Figure 1. (p. 33)

D is incorrect. Non-financial corporations are more focused on sustainability than ever, the use of the
term "ESG" occurs for them mainly in an investor relations capacity. (p. 32)

Learning Objective: Explain the relationship and intersection among sustainability, ESG, and/or
climate change.

Reference: Chapter 2: Sustainability

39
6. A confectionary company that produces and sells chocolates operates in a region that recently
announced new carbon pricing regulations. The company establishes a sustainability committee that
will focus on reporting emissions and understanding the company’s social and environmental impact.
The director of the committee prepares for a risk mitigation strategy meeting by outlining the
benefits and drawbacks of carbon pricing policies, specifically, carbon taxes. Which of the following
should the director include in the outline?

A. Carbon tax levels are frequently changed in some countries, which can be unfavorable to
businesses making long-term capital investment decisions.
B. Carbon tax revenues are unable to create cash flows to facilitate long-term investment decisions
because emission permits tend to be broad.
C. Carbon taxes allow sectors that are more effective in reducing emissions to sell excess permits to
sectors where current emissions reduction technologies are unworkable.
D. Carbon taxes, which are typically favored by policymakers, impose a price per ton of CO 2
emissions after emitters reach the regulatory authority’s limit.

Correct Answer: A

Explanation: A is correct. In some countries, carbon tax levels are frequently changed, which can
be detrimental to investors or businesses that need certainty over multiple years to make investment
decisions. (p. 77-78)

B is incorrect. Carbon tax programs do not involve permitting procedures. (p. 77-78)

C is incorrect. This describes emissions trading, which allows industries or sectors that are more
successful in reducing emissions to sell excess permits to those in sectors where emissions reductions
are much more expensive or even technologically infeasible with current technologies. (p. 77-78)

D is incorrect. While economists may favor carbon taxes, taxes are not implemented once an industry
or country reaches a certain threshold. (p. 77-78)

Learning Objective: Explain the structure, benefits, and drawbacks of carbon pricing policies,
including carbon taxes and emissions trading schemes.

Reference: Chapter 4. Sustainability and Climate Policy, Culture, and Governance

40
7. A risk manager at a US-based commercial bank asks for an independent external review of the bank's
green loan portfolio in response to greenwashing accusations from several stakeholders. The external
review report shows that the bank joined several green loan initiatives and pledged to introduce a
line of green financial products, which never happened. According to the external review report,
which type of greenwashing did the bank use?

A. Decoupling
B. Attention deflection
C. Avoidance
D. Risk response

Correct Answer: A

Explanation: A is correct. Decoupling includes the promotion of empty green claims and policies
that will not be implemented. (p. 40)

B is incorrect. “Attention deflection is when organizations hide unsustainable practices from

stakeholder attention, prepare selective and inaccurate disclosures, make incomplete comparisons
with other products and services, and use vague and irrelevant statements.” (p. 40)

C is incorrect. Avoidance is a COSO ERM framework risk response, not a greenwashing type. (p. 139)

D is incorrect. Risk response is a part of the COSO ERM framework, not a greenwashing type. (p.
139)

Learning Objective: Describe how organizations can "greenwash" and "greenwish" sustainability
claims as well as actions to counteract these practices.

Reference: Chapter 2: Sustainability

41
8. The CSR lead at an aviation company advocates the company align business strategy with the UN
2030 Agenda for Sustainable Development. The company CEO is skeptical about the usefulness of
joining international sustainability initiatives and cites previous failures of related endeavors. What
unique attribute of the 2030 Agenda could the CSR lead emphasize to persuade the CEO?

A. It introduces a focus on economic growth and poverty alleviation.

B. It provides a widely accepted definition of sustainable development.
C. It contains broad goals with detailed and specific targets.
D. It establishes benchmarks to generate dialogue with governments.

Correct Answer: C

Explanation: C is correct. The 2030 Agenda produced the SDGs, the 17 SDGs are "subdivided into
169 targets, which provide specificity." (p. 34)

A is incorrect. This is an attributes of the MDGs, a precursor to the 2030 Agenda. p. (33-34)

B is incorrect. This definition was established in the late 1980s from the Brundtland Commission. That
definition has "since become the most cited and widely accepted definition of sustainable
development." (p. 31)

D is incorrect. This is an attribute of the MDGs, a precursor to the 2030 Agenda. (p. 33-34)

Learning Objective: Describe the United Nations (UN) Sustainable Development Goals (SDGs)
along with associated goals and targets.

Reference: Chapter 2: Sustainability

42
9. A multinational food and drink manufacturer plans to conduct a climate scenario analysis to inform its
business strategy. The company risk team outlines the process to design and conduct climate risk
scenario analysis for senior management. Which of the following guidelines should the team consider
when designing climate risk scenario analysis?

A. Avoid incorporating climate change into regular stress testing and instead develop new testing
exclusively for climate change.
B. Apply the same assumptions to model physical and transition risk but choose relevant scenario
outputs after the design process is complete.
C. Use scenario results as the primary basis for decision-making when scenarios provide precise
forecasts.
D. Include overarching scenario assumptions such as a climate system sensitivity and allow for
additional variables to enter the model as further assumptions if desired.

Correct Answer: D

Explanation: D is correct. Information about the physical factors that influence the global climate
system is a necessary aspect of climate risk scenario analyses. Other additional narrative assumptions
can be added. Variables can enter the model as assumptions or parameters, while others can be
determined within the model. (p. 156-157)

A is incorrect. Climate change risks can be incorporated into regular stress tests and potentially can
encourage more scenario-based analysis among institutions. (p. 162-164)

B is incorrect. Modeling transition risk and physical risk require different base assumptions, as each
risk type consists of a unique set of drivers and hazards. For example, transition risk is expected to
have a greater impact in the short and mid-term, whereas physical risk (especially chronic risk) is
expected to increase over longer timescales. (p. 156-159)

C is incorrect. Scenario analysis does not provide precise forecasts and should not form the sole basis
for corporate or investor decision-making. (p. 147-148)

Learning Objective: Describe how financial firms use climate scenario analysis for the investment
process and climate risk exposure management.

Reference: Chapter 7: Climate Models and Scenario Analysis

43
10. A film and entertainment company decides to expand its sustainability strategy. The company plans
to issue green, social, or sustainability bonds to finance projects such as reducing carbon emissions
and promoting recycling programs and community partnerships. At a strategic planning session, the
company’s sustainability team reviews available bond types and recommends a sustainability bond.
Why does the team recommend a sustainability bond?

A. Proceeds will be used exclusively for environmental projects and programs.

B. Projects will simultaneously address environmental and social objectives.
C. The bond will function as general-purpose borrowings where the proceeds can be used as needed.
D. The bond will come with second-opinion reports to show that the proceeds will bring social
benefits.

Correct Answer: B

Explanation: B is correct. Sustainability bonds are a combination of green and social bonds.
Sustainability bonds must simultaneously address both environmental and social objectives. (p. 100)

A is incorrect. Green bond proceeds are allocated for environmental projects, but that is not the case
for sustainability bonds. (p. 98-99)

C is incorrect. The answer choice describes a government bond that functions as general-purpose
borrowing where the issuer can use the proceeds as needed. (p. 98)

D is incorrect. Green bond issuers seek a rating or “second opinion” on the environmental credentials
of green bonds from organizations. Social bonds are bonds with earmarked proceeds for projects that
will bring social benefits. (p. 99)

Learning Objective: Describe green, social, and sustainable bonds.

Reference: Chapter 5: Green and Sustainable Finance: Markets and Instruments

44
11. An investment firm specializes in managing equities globally in the healthcare sector. The firm aims
to improve portfolio performance while measuring exposure to physical climate risk. A risk analyst at
the firm researches how physical risk affects the firm's portfolio and recommends a necessary tool for
physical risk assessment. Which of the following metrics should the analyst use to measure physical
hazards in monetary terms?

A. Level of company preparedness

B. Portfolio warming potential
C. Exposure at default
D. Climate Value at Risk

Correct Answer: D

Explanation: D is correct. CVaR gives a quantitative estimate of the expected financial losses or
gains from climate risks and opportunities. (p. 134-135)

A is incorrect. Level of company preparedness is a metric used to measure operational risk. (p. 122)

B is incorrect. Portfolio warming potential pins a temperature on an entire portfolio, not quantifiable
monetary estimates. (p. 133)

C is incorrect. Exposure at default is a credit risk metric. (p. 121)

Learning Objective: Describe CVaR and its uses.

Reference: Chapter 6: Climate Risk Measurement and Management

45
12. A rapidly-expanding IT company establishes a net-zero goal for 2030. A major investor benchmarks
the company against peer net-zero goals. The investor criticizes the company transition plan as
vague and lacking actionable organizational decarbonization descriptions. In the benchmark report,
the investor recommends implementing a shadow carbon price. If the company accepts this
recommendation, what action should it take?

A. Calculate the percentage of revenue invested in low-carbon products.

B. Impose an internal tax to penalize carbon-intensive projects.
C. Select future projects based on an estimated cost of carbon.
D. Penalize projects that diverge from the benchmark carbon trajectory.

Correct Answer: C

Explanation: C is correct. A shadow carbon price uses an estimate of the cost of carbon to aid in
project selection. Using this metric, a company may decide to select one project over a rival project
with a higher carbon intensity. (p. 188-189)

A is incorrect. This is a capital deployment metric. (p. 189)

B is incorrect. Establishing a company internal “tax” is a method for calculating an internal carbon
price, not a shadow price. This tax can be used to fund sustainability projects. (p. 189)

D is incorrect. This action is more in line with the portfolio alignment tool, “benchmark divergence,”
which measures an investee company’s performance against a portfolio benchmark. Furthermore,
portfolio managers couldn’t directly punish a company’s specific projects using this approach. (p.
188-191)

Learning Objective: Identify carbon-related metrics and discuss how carbon-related metrics are
used in reporting and project selection.

Reference: Chapter 8: Net Zero

46
13. After the COP27 meetings in Sharm El-Sheikh, Egypt, financial institutions with USD trillions in assets
under management strengthen net-zero commitments. Climate risk groups within these financial
institutions examine strategies to fulfill pledges in preparation for the COP28 conference in Dubai.
The groups review several RCP- and SSP-based trajectories upon which the net-zero calculations will
be based. Which of the following statements illustrates a correct understanding of the relationship
between SSPs and RCPs?

A. RCP names are based on the anticipated warming in degrees Celsius and are calculated via their
deviation from “business as usual,” whereas SSPs deliberately include climate policies, helping to
inform the RCPs.
B. SSP names are based on the anticipated warming in degrees Celsius and are calculated via their
deviation from “business as usual,” whereas RCPs deliberately include climate policies, helping to
inform the SSPs.
C. RCPs were developed first and represent plausible emissions pathways through 2100, whereas
SSPs were subsequently developed to provide plausible development-based scenarios used in
conjunction with RCPs.
D. SSPs were developed first and represent plausible emissions pathways through 2100, whereas
RCPs were subsequently developed to provide plausible development-based scenarios used in
conjunction with SSPs.

Correct Answer: C

Explanation: C is correct. RCPs were developed first, but additional socioeconomic context was
needed to explore climate policy outcomes. Therefore, SSPs were created to enable mix-and-matches
between the SSPs’ development-based scenarios and the RCPs’ emission pathway. (p. 150-151)

A is incorrect. RCP names are not based on the anticipated warming in degrees, but rather the
amount of radiative forcing. Additionally, SSPs deliberately do not include climate policies. (p. 150-
151)

B is incorrect. SSP names do not indicate anticipated level of warming. Rather, SSP names are used
to rank future climate scenarios from better to worse. (p. 150-151)

D is incorrect. As discussed above, RCPs were developed and used prior to SSPs. RCPs describe
physical climate scenarios, whereas SSPs describe the socioeconomic conditions under which RCPs
may or may not be feasible. (p. 150-151)

Learning Objective: Understand the difference between RCPs and SSPs.

Reference: Chapter 7: Climate Models and Scenario Analysis

47
14. A global investment company becomes a signatory to the PRI. The sustainability director of the
company reviews the principles and prepares for their implementation in investment decisions. To
comply with the PRI, to which of the following changes will the company commit?

A. Accept audited ESG data only

B. Accept both audited and unaudited ESG data
C. Strictly adhere to the three mandatory principles of PRI
D. Seek disclosure on ESG issues from investee firms

Correct Answer: D

Explanation: D is correct. The answer choice is indeed one of the six principles. (p. 43)

A is incorrect. To be correct, ESG data would need to be incorporated into investments rather than
accepting audited ESG data only. (p. 43)

B Is incorrect. To be correct, ESG data would need to be incorporated into investments rather than
accepting audited and unaudited data only. (p. 43)

C is incorrect. The PRI developed six voluntary principles, not three mandatory principles. (p. 43)

Learning Objective: Know the major sustainability frameworks and initiatives; their objectives and
to whom they are targeted.

Reference: Chapter 2: Sustainability

48
15. A mid-size agricultural company in Ohio adopts the COSO ERM framework to evaluate climate risk
exposure. A climate risk analyst at the company tracks and measures the risks of a recent agricultural
project. Farming practices have depleted carbon in the soil, releasing carbon into the atmosphere.
The analyst recommends a risk response for the project team. Based on this recommendation, the
project team develops a method to recarbonize the soil, decreasing costs and increasing annual crop
yields. Under the standard COSO ERM framework, which risk response did the risk analyst
recommend for the project team?

A. Prioritization
B. Identification
C. Pursuit
D. Reduction

Correct Answer: C

Explanation: C is correct. Risk pursuit is one of the possible risk responses under the standards
COSO ERM framework, which refers to converting risks into opportunities. (p. 139-140)

A is incorrect. Risk prioritization is not one of the five risk responses but a sub-component of the ERM
performance component. (p. 138)

B is incorrect. Risk identification is not one of the five risk responses but a sub-component of the
ERM performance component. (p. 138)

D is incorrect. Risk reduction is one of the risk responses, but reduction focuses on improvements on
processes, systems, or strategies, as opposed to creating new opportunities. (p. 140)

Learning Objective: Discuss how ERM frameworks are used in practice using case studies and
examples.

Reference: Chapter 6: Climate Risk Measurement and Management

49
16. A national science policy advisor reviews IPCC reports throughout the past several decades to inform
government communication on climate change. The advisor creates summaries of each report’s
statements on attribution of modern warming. How should the advisor describe a conclusion on
modern warming attribution from the 2021 IPCC Assessment Report (AR6)?

A. Humans are responsible for 100% of modern warming.

B. GHGs and natural variability equally contribute to modern warming.
C. Most modern warming is possibly due to anthropogenic activity.
D. The Earth has likely warmed since the second half of the 1800s.

Correct Answer: A

Explanation: A is correct. The Earth has warmed approximately 1.1°C since 1850. The IPCC
analysis of climate science presents a likely range of human-caused climate change of 0.8-1.3°C.
Given the high level of consistency, the IPCC has concluded that humans are responsible for 100% of
warming since the mid-19th century. (p. 11)

B is incorrect. Scientists have determined that natural variations have played a small if any role in
modern warming. (p. 10-11)

C is incorrect. This statement underplays the role of humans in modern warming. In 2021, the IPCC
concluded, “It is unequivocal that human influence has warmed the atmosphere, ocean, and land.
Widespread and rapid changes in the atmosphere, ocean, cryosphere, and biosphere have occurred.”
(p. 11)

D is incorrect. Based on multiple methods of observation, there is unequivocal evidence Earth has
warmed approximately 1.1°C since 1850. (p. 4, 11)

Learning Objective: Summarize how humans have contributed to atmospheric CO2 increases and
modern warming.

Reference: Chapter 1: Foundations of Climate Change

50
17. A global market risk manager at a UK bank reviews cross-border investment and financial flows of
the climate finance landscape to inform business strategy and accurately capture climate change risk.
The manager develops an assessment of global climate finance flows and presents it to the
management board. What trend will the manager most likely present?

A. In OECD countries, most tracked climate finance is funded by domestic sources.

B. In non-OECD countries, most tracked climate finance is funded by international sources.
C. In non-OECD countries, all tracked climate finance is equally split between domestic and
international sources.
D. In OECD countries, all tracked climate finance is equally split between domestic and international
sources.

Correct Answer: A

Explanation: A is correct. Domestic flows account for 78% of climate finance flows in OECD
countries. (p. 88)

B is incorrect. Most climate finance (74%) is domestically sourced in non-OECD countries. (p. 88)

C is incorrect. Most climate finance flows come from domestic sources in non-OECD countries and are
not equally split. (p. 88)

D is incorrect. Tracked climate finance flows are primarily from domestic sources in OECD countries,
and are not equally split. (p. 88)

Learning Objective: Identify trends and flows in sustainable, green, and climate finance.

Reference: Chapter 5: Green and Sustainable Finance: Markets and Instruments

51
18. A senior environmental policy advisor at a climate risk services company prepares a new joint
emission reduction policy proposal for three states in the midwestern US. To prepare the proposal,
the advisor examines implemented emissions reduction policies. Which of the following policies allows
for the easiest cross-sectoral emissions reductions?

A. Emissions-trading scheme
B. Low-carbon public procurement
C. Fuel tax for transport and heating
D. Fleet level CO2 emissions standard

Correct Answer: A

Explanation: A is correct. Emissions-trading schemes reduce emissions by facilitating carbon permit

trading among participants, within the same industry or across sectors. Industries or sectors “more
successful in reducing emissions” can sell carbon permits to companies in “sectors where emissions
reductions are much more expensive.” (p. 77)

B is incorrect. Low-carbon public procurement is primarily confined to transport and buildings. Some
sectors could be prioritized or ignored depending on the political priorities of the government. (p. 79)

C is incorrect. Although a fuel tax may affect multiple sectors in transport or industry, there are
industries that may not directly or indirectly depend on fuels for transport or heating, e.g. coal use
for industrial manufacturing. (p. 79)

D is incorrect. This is a policy that targets transport specifically. (p. 61)

Learning Objective: Describe sector-specific climate policies, such as the transportation and power
generation sectors.

Reference: Chapter 4. Sustainability and Climate Policy, Culture, and Governance

52
19. A commercial bank creates a climate risk team to incorporate climate factors into capital allocations,
loan approvals, and reporting. The team builds out scenario analysis capabilities covering physical
and transition risks to support these initiatives. A risk manager on the team outlines recommended
practices for the bank to consider when developing and applying climate scenario analysis, and the
associated challenges and benefits. What consideration does the manager recommend?

A. Organizations that are just starting to use scenario analysis should focus on quantitative scenarios
to safeguard accurate results.
B. Most reference scenarios have been developed for local assessments of potential climate-related
impacts.
C. A challenge in conducting scenario analysis in various industries is the lack of appropriate tools to
use in specific sectors.
D. Firms are increasingly using climate-related scenario analysis to assess potential business
implications of climate change.

Correct Answer: D

Explanation: D is correct. Many organizations are in the initial stages of using climate scenario
analysis. Some ways to advance the use of scenario analysis include information and experience
exchanges, collectively developing tools and data sets, and setting standards. (p. 147)

A is incorrect. Organizations in the early stages of scenario analysis may choose to utilize qualitative
scenario narratives/storylines and incorporate quantitative data as they becomes available. (p. 156)

B is incorrect. Most scenarios have been developed for global and macro assessments of potential
climate-related impacts that can inform scientists and policy makers. These climate-related scenarios
do not always provide micro-level outputs and are generally used for high-level decision making. (p.
147-148)

C is incorrect. Sector-specific scenarios exist (e.g., IEA, NGFS, DDPP) that are widely used throughout
their respective sectors. (p. 152-156)

Learning Objective: Define climate scenario analysis and explain how organizations use scenario
analysis.

Reference: Chapter 7: Climate Models and Scenario Analysis

53
20. A consultant prepares a report on climate risk for an electronics and consumer goods company. The
report notes the company is vertically integrated, resulting in a unique climate risk profile. How can
the report most accurately describe the company’s climate risk profile?

A. The company is exposed to a lower degree of transition risk than non-integrated companies.
B. The company is exposed to a higher degree of physical risk than non-integrated companies.
C. The company is exposed to a lower degree of supply chain risks than non-integrated companies.
D. The company is exposed to a higher degree of indirect risks than non-integrated companies.

Correct Answer: C

Explanation: C is correct. Because the company is fully integrated, it technically faces minimal
supply chain risks. It may experience the same amount of physical risks as a company that
outsources production or inputs; however, such risks are direct physical impacts. (p. 58)

A is incorrect. Although vertically integrated companies have less supply-chain risk than companies
that rely on outsourcing, lower supply-chain risk does not insulate companies from transition risk. (p.
58)

B is incorrect. The company could still face the same amount of physical risk, but risk would not be
generated through the supply chain. (p. 58)

D is incorrect. An integrated company can experience other indirect risks, such as liability or
systemic, as much as a non-integrated company. (p. 58)

Learning Objective: Define and provide examples of indirect risks.

Reference: Chapter 3: Climate Change Risk

54
21. The CSO at a global asset management firm works on a sustainability and climate risk report for a
forthcoming company strategy meeting. The meeting will prioritize potential risk exposures the
company may face as well as possible systemic financial effects. Which of the following should the
CSO include as an example of how climate risk translates into credit risk at the systemic level?

A. Climate policy regulations reveal climate risk information about the manufacturing sector; traded
assets in this sector experience downward price shocks and increases in volatility.
B. Chronic sea level rise steadily decreases profits in the hospitality industry; the financial stability of
institutions heavily exposed to this sector deteriorates.
C. New energy technologies outperform fossil fuel assets globally; the economy of a country reliant
on fossil fuel revenues becomes “stranded” as fossil fuel reserves become commercially unattractive.
D. Persistent regional flooding increases demand for disaster precautionary cash-flow acquisition on a
large scale; central bank intervention becomes necessary to support corporations and financial firms.

Correct Answer: B

Explanation: B is correct. This is an example of credit risk at the macro level. Changing demand and
cost structures resulting from climate-related pressures can affect companies’ revenues and profits,
as can physical climate impacts leading to business interruption, both of which can lead to
widespread increases in credit risk. For financial institutions heavily exposed to these sectors, this can
pose a risk to the financial institution’s soundness. If exposures run across the financial sector,
increased credit risk at the company level can become a threat to financial stability. (p. 121)

A is incorrect. This is an example of market risk at the macro level. Climate risk drivers, both physical
and transition risk, can reveal new information about future conditions, precipitating downward price
shocks and increases in market volatility in traded assets. (p. 122)

C is incorrect. This is an example of sovereign risk. As tighter climate policies, new technologies, and
preference changes reduce the demand for fossil fuels, this may turn states heavily reliant on fossil
fuel exports into “stranded nations” (like stranded assets). If this occurs, fossil fuel reserves become
commercially unattractive to extract and a substantial share of national wealth may permanently lose
its value, leading to a massive drop in sovereign creditworthiness and a corresponding increase in
sovereign risk. (p. 122)

D is incorrect. This is an example of liquidity risk at the macro level. If enough households,
corporations, and financial firms sharply increase their demand for precautionary liquidity after a
severe natural disaster, this can be at a systemic enough scale to necessitate intervention by the
central bank. (p. 121)

Learning Objective: Describe how climate risk affects company-level risks and other risk types,
including operational, credit, liquidity, and underwriting risks and whether these risk types pose
macro-level risks.

Reference: Chapter 6: Climate Risk Measurement and Management

55
22. A regulatory body for a national government develops taxonomies for sustainable activities. To assist
this process, regulators survey taxonomy templates from other jurisdictions and decide to model after
the EU Taxonomy. Which characteristic of the EU Taxonomy will the regulator most likely implement
in the new taxonomy?

A. Performance thresholds for economic activities by sector and subsector are set with highly
prescriptive details for every subsector covered.
B. The taxonomy prescribes that both the type of financial instrument and the economic activity
financed are critical in determining sustainability.
C. Specific “green” activities are defined that include allowance for clean coal and other types of
clean utilization of fossil fuels.
D. The taxonomy proposes that activities count as “green” only if substantive contributions are made
to all six environmental objectives.

Correct Answer: A

Explanation: A is correct. The EU Taxonomy sets performance thresholds (referred to as “technical

screening criteria”) for economic activities, by sector and subsector. The taxonomy is agnostic to
financial instruments or means of funding. The EU taxonomy is notable for its high level of
prescriptive detail for each, and every subsector covered. (p. 110)

B is incorrect. The EU taxonomy is agnostic to financial instruments or means of funding. Once the
taxonomy is in force, any investment or lending for a recognized activity, whether through a loan, a
green bond, or project financing, would count as sustainable. (p. 110)

C is incorrect. The EU Taxonomy excludes clean fossil fuels from underlying financed economic
activities. (p. 110)

D is incorrect. To count as “green,” activities must make a substantive contribution to at least one of
six environmental objectives. They must also explicitly do no harm to any of the other five objectives
and must meet a series of minimum safeguards. (p. 110)

Learning Objective: Identify regulatory trends in sustainable and green finance.

Reference: Chapter 5: Green and Sustainable Finance: Markets and Instruments

56
23. A central bank conducts a policy strategy review and identifies climate change as a key component of
an upcoming policy update. The bank creates a climate risk team to conduct research to help
understand climate-related risks and possible remedial policy actions. The team recommends the
bank incorporate microprudential and macroprudential measures to embed climate change risk into
supervision practices. Which action should the central bank take?

A. Adhere to NGFS standards and comply with all reporting requirements, as this will ensure
microprudential climate change integration.
B. Review the scope of the bank mandate to maintain alignment with TCFD best practices, as
climate-related microprudential measures are globally regulated.
C. Conduct climate stress tests with distinct policy scenarios and feedback loops as a macroprudential
measure to analyze climate change risks.
D. Implement widely adopted, low-risk macroprudential measures such as lowering exposure limits to
carbon-intensive stranded assets.

Correct Answer: C

Explanation: C is correct. Among macroprudential measures, stress tests are among the most
important at central banks’ disposal. Various central banks are currently developing climate stress
tests with differing degrees of granularity, distinct climate and policy scenarios, time horizons, and
feedback loops. (p. 85)

A is incorrect. This is not an example of a microprudential measure. The NGFS is an initiative that
brings together central banks and regulators to work on climate integration to help spread best
practices. It promotes collaboration and sharing expertise on climate risk among supervisory
institutions. It does not require members to disclose reporting requirements nor bind members to any
agreements. (p. 84)

B is incorrect. Some countries are mandating TCFD-aligned reporting, but climate-related micro-
prudential policies are not globally regulated and differ somewhat across countries due to the
different mandate scopes of relevant institutions and systematic differences in the use of prudential
tools. Bodies like the NGFS are helping to spread best practices. (p. 84-85)

D is incorrect. This incorrectly states an example of a macroprudential measure. Increasing the

exposure limit to carbon intensive assets, not lowering it is a proposed but not widely adopted
measure. (p. 86)

Learning Objective: Discuss how central banks have incorporated climate change into supervision
practices.

Reference: Chapter 4: Sustainability and Climate Policy, Culture, and Governance

57
24. A portfolio research analyst at an asset management firm performs a portfolio review to identify
which assets may experience climate risk impact. The analyst prepares a report for senior
management to recommend approaches to measure climate risk impact at the portfolio level. Which
approach to estimate transition risk at the portfolio level should the analyst recommend?

A. Corporate carbon footprints measuring the portfolio exposure to extreme weather

B. A carbon intensity metric corresponding to GHG emissions normalized by portfolio market value
C. Scenario analysis to model corporate alignment of an entire portfolio
D. A temperature score to obtain a financial loss estimate from climate risk

Correct Answer: B

Explanation: B is correct. Carbon intensity is an approach to measure transition risk at the portfolio
level. (p. 133)

A is incorrect. Corporate carbon footprint offers carbon emissions data useful for company-level
transition risk, but cannot determine physical risk such as extreme weather. (p. 130)

C is incorrect. Scenario analysis describes future plausible narrative stories, and is not used as a
corporate alignment tool. (p. 147)

D is incorrect. Temperature scores do not provide a quantitative estimate of financial losses. To

determine a quantitative estimate of expected financial losses or gains from climate risks and
opportunities, the analyst should use the CVaR metric. (p. 128)

Learning Objective: Understand how to measure transition and physical risks at the portfolio level.

Reference: Chapter 6: Climate Risk Measurement and Management

58
25. A Greek investment banking and investment firm announces it will spend USD 12 billion on ESG and
sustainable finance over the next decade. The firm must reallocate spending projections around
issues of compliance, risk, and litigation using available data. Which of the following correctly
represents a data availability limitation when interpreting climate risk data?

A. Climate change data acquisition is based on which SSP is chosen for scenario representation.
B. Climate risks can occur when there is either a large exposure or vulnerability but not when both
occur simultaneously.
C. Climate risk exposure data is not available from open-source entities, making data acquisition
difficult.
D. Much of the available climate data is downscaled from global models with the resolution typically
restricted to 100km x 100km.

Correct Answer: D

Explanation: D is correct. Much of the available climate data is only available in vast, 100km x
100km chunks, which can suffer from a lack of data robustness. (p. 57)

A is incorrect. Data acquisition is not based on which socioeconomic pathway is chosen; rather,
obtained data can be used within the scenario chosen. (p. 150-151)

B is incorrect. Climate risks and more specifically physical risks, occur when there are exposures and
vulnerability, but this does not necessitate mutual exclusivity for one over the other. (p. 58)

C is incorrect. Data is available from open-source entities. However, not all data is straightforward, or
ready-to-use. (p. 57)

Learning Objective: Identify data challenges modeling direct physical risk. Understand the current
state of climate hazard data availability and what issues asset owners must consider when
interpreting climate risk data.

Reference: Chapter 3: Climate Change Risk

59
26. Increasingly unpredictable weather patterns threaten a large beverage distribution company
operation. To better understand how short-term threats affect company operations, company leaders
hire a climate change consultant to provide recommendations to mitigate the acute climate change
risks that threaten company operations. Which of the following actions should the consultant
recommend?

A. Purchase flood insurance for company assets

B. Upgrade cooling systems in company warehouses
C. Develop a company decarbonization plan
D. Install solar panels on company warehouse roofs

Correct Answer: A

Explanation: A is correct. In many regions of the world, flooding events are expected to increase.
Extreme precipitation events/flooding is an example of acute climate change risk. Many insurance
policies do not cover flood damage, so additional coverage is needed to mitigate loss. (p. 54)

B is incorrect. Temperatures across the globe are expected to increase. Higher average temperatures
is an example of chronic climate change risk. (p. 54)

C is incorrect. Developing a decarbonization plan is an appropriate response to mitigating transition

risk, especially as policy environments shift. (p. 61)

D is incorrect. Installing solar panels is a response to various forms of transition risk, including, but
not limited to policy, technology, or reputational risks. (p. 59)

Learning Objective: Define and differentiate acute and chronic hazards. Provide examples.

Reference: Chapter 3: Climate Change Risk

60
27. A global automaker issues a press release announcing it will be the most sustainable premium sports
car manufacturer by 2028. The automaker will issue its first green bond to finance the development
and production of its first fully electric vehicle. Which of the following company strategies should the
automaker’s CSO choose to align best with the core components of the Green Bond Principles?

A. The company establishes a formal internal process to credit net green proceeds to a sub-account
or move proceeds to a sub-portfolio.
B. When the company issues the green bond it can refrain from disclosing to investors any exclusion
criteria for project selection but must disclose internal processes.
C. The company can use green bond proceeds to finance new eligible green projects and general-
purpose borrowing.
D. The company uses qualitative sustainability performance targets for green projects to measure
improvements in the bond sustainability profile.

Correct Answer: A

Explanation: A is correct. The net proceeds of a green bond, or an amount equal to these net
proceeds, should be credited to a sub-account, moved to a sub-portfolio, or otherwise tracked by the
issuer in an appropriate manner, and attested to by the issuer in a formal internal process linked to
the issuer’s lending and investment operations for green projects. (p. 99)

B is incorrect. The issuer of a green bond should clearly communicate to investors the related
eligibility criteria, including, if applicable, exclusion criteria or any other process applied to identify
and manage potentially material environmental and social risks associated with the projects. (p. 99)

C is incorrect. Green bond proceeds are used for environmental projects that differ from typical
corporate or government bonds that can be used toward general-purpose borrowing. (p. 98)

D is incorrect. The borrower’s sustainability performance is measured using sustainability

performance targets (SPTs) used to measure improvements in the borrower’s sustainability profile for
sustainability linked loans and bonds, not green bonds. (p. 102)

Learning Objective: Explain the core components of the Green Bond Principles.

Reference: Chapter 5: Green and Sustainable Finance: Markets and Instruments

61
28. The CRO for a large natural gas company reviews reference scenarios as part of an annual climate
scenario analysis exercise. The CRO creates a transition risk matrix that compares four different
reference scenarios (W, X, Y, Z) according to the scale of emissions cuts [Net-Zero by 2050, and
business-as-usual (BAU)], and the pace of emissions cuts [Orderly and Disorderly]. The CRO uses the
matrix below to explain transition risk to the company’s executive members and ranks the reference
scenarios according to transition risk.

Which reference scenario does the CRO rank as leading to the most transition risk for the company?

A. X
B. W
C. Y
D. Z

Correct Answer: A

Explanation: A is correct. A disorderly transition, sudden or short in duration, would leave a

company with fossil fuel assets with little time to plan; coupled with a large scale back in fossil fuel
use (i.e., Net-Zero), reference scenario X poses the most risk. (p. 155)

B is incorrect. Although Net-Zero would lead to some transition risk, an "orderly" process would allow
organizations with carbon assets to plan better. (p. 155)

C is incorrect. This would likely be the least risky. BAU would pose little transition risk to carbon
assets. (p. 155)

D is incorrect. Disorderly policy is never good, but a BAU would incur less costs/transition risk than a
Net-Zero outcome. (p. 155)

Learning Objective: Describe IAMs and their uses.

Reference: Chapter 7: Climate Models and Scenario Analysis

62
29. The minister for environmental protection of a North African country shares a plan to pursue national
Paris Agreement commitments with other internal government agencies. The plan introduces the
concept and importance of net zero. How should the plan describe the net zero concept?

A. Net zero requires a reduction in carbon flows across all spheres.

B. Net zero requires a reduction in carbon sinks across all spheres.
C. Reaching net zero is sufficient to limit warming to 1.5°C this century.
D. Reaching net zero is necessary to limit warming to 1.5°C this century.

Correct Answer: D

Explanation: D is correct. Reaching net zero (by the early 2050s) is necessary to limit warming to
2°C this century according to the IPCC. (p. 175)

A is incorrect. Carbon flows should be increased into “sinks” such as forests in the land biosphere and
decreased to the atmosphere. But, carbon flows do not need to be uniformly decreased to realize net
zero. (p. 173-174)

B is incorrect. Carbon sinks should be increased to absorb carbon from the atmosphere to realize a
“durable” net zero. (p. 173)

C is incorrect. Net zero is “necessary” to reach global climate goals, but not sufficient. Negative
emissions must occur in order to reach climate goals by the end of the century. (p. 22, 59-60)

Learning Objective: Explain the concept of net-zero and how it relates to global climate goals.

Reference: Chapter 8: Net Zero

63
30. A large country joins the Paris Agreement and directs the national environmental department to
disseminate new policies and goals to relevant federal agencies. Most agencies are familiar with past
climate agreement principles and protocols but not those of the Paris Agreement. The environmental
department should educate federal agencies on what feature of the Paris Agreement?

A. An emissions trading program among wealthy nations

B. Voluntary national climate targets updated regularly
C. Investment in clean energy projects in exchange for emissions credits
D. Differentiated mitigation responsibilities according to national capabilities

Correct Answer: B

Explanation: B is correct. Parties to the Paris Agreement submit pledges (NDCs) on their mitigation
plans regularly, every five years. This is a major component and innovation of the agreement. The
agreement does not rely on legally binding commitments but the tools of “inclusion and peer
pressure.” (p. 77)

A is incorrect. This describes a plan in the Kyoto Protocol to allow Annex I countries to sell surplus
emissions to other Annex I countries. (p. 76)

C is incorrect. This describes the Clean Development Mechanism (CDM). Under this approach, Annex
I countries could obtain emissions credits by conducting emissions projects in non-Annex I countries.
(p. 76)

D is incorrect. This describes the “common but differentiated responsibilities” principle in the Kyoto
Protocol, which subjected developing countries to no emissions reduction obligations. (p. 76)

Learning Objective: Summarize the history, outcomes, and obligations of major international
climate agreements, and distinguish from the goals set in the Paris Agreement.

Reference: Chapter 4: Sustainability and Climate Policy, Culture, and Governance

64
31. A global think tank works with a small island nation to assess the cost-effectiveness of
geoengineering technologies that could mitigate global emissions. Upon completion of the
assessment, the think tank finds certain geoengineering techniques may have serious consequences.
Which of the following is a potential negative consequence of implementing a geoengineering
technique?

A. Exponential increase of carbon abatement cost per decade

B. Changes in global precipitation patterns
C. Carbon dioxide removal from the atmosphere becomes infeasible
D. Linear rise in costs each time geoengineering is used

Correct Answer: B

Explanation: B is correct. Geoengineering can cause changes in global precipitation pattern changes
in the form of flooding, drought, and the like even for countries not implementing the
geoengineering. (p. 21-22)

A is incorrect. The costs of carbon abatement are currently very high, rendering it infeasible, As
investment into this technology leads to advancement, costs may decline, but this has not been
proven. (p. 21-22)

C is incorrect. For this issue to occur, researchers and decision-makers would need to prove the
scalability of CO2 removal. Large scale CO2 reduction has not been achieved yet, and currently
remains cost prohibitive. (p. 21-22)

D is incorrect. Many of the most-discussed geoengineering approaches are still under development,
so determining the rate of price changes is difficult. (p. 21-22)

Learning Objective: Understand the opportunities and drawbacks of implementing geoengineering

techniques to combat climate change.

Reference: Chapter 1: Foundations of Climate Change

65
32. A multinational food and beverage corporation has growing concerns that CO2 and other GHGs in the
atmosphere have a negative effect on agricultural productivity. The corporation may be subject to
higher costs and scarce availability for commodities necessary in its supply chain. The corporation will
disclose this scenario under which climate-related risk type?

A. Chronic
B. Market
C. Resilience
D. Technological

Correct Answer: A

Explanation: A is correct. This is an example of a chronic (physical) risk. The risk of changes in
precipitation patterns caused by CO2 and other GHGs can lead to increased operating costs for the
corporation. (p. 120)

B is incorrect. An example of market (transition) risk is changing customer behavior, uncertainty in

market signals, or increased cost of raw materials. (p. 122)

C is incorrect. Resilience is not a risk type, but the company’s ability to respond and prepare for
various climate events. (p. 148, 162)

D is incorrect. Though technology changes are often seen as a benefit, technological changes are
also considered a transition risk for laggard firms. (p. 62)

Learning Objective: Explain how climate risk manifests as financial risk through micro and
macroeconomic transmission channels.

Reference: Chapter 6: Climate Risk Measurement and Management

66
33. The board of directors of a growing asset management firm recommends the firm expand its ERM
framework to incorporate climate risks. The risk team references the COSO ERM framework to
develop and propose a strategy to implement climate risks into the various ERM components. What
recommendation should the team make in the strategy proposal to align with ERM recommended
practices?

A. To employ climate risk into the strategy component, the firm should start with megatrend analysis
and then delve deeper with comparison and assessment tools.
B. To apply climate risk into risk governance, the firm should use a bottom-up approach so that
portfolio managers can make initial judgments on climate risks when making allocation decisions.
C. To track performance for climate risks, the firm should focus on one sub-component--risk
identification--which involves listing climate risk drivers relevant to the firm.
D. To implement the review and revision component, the firm should arrange annual external audits
to examine all potential climate risk drivers considered in decision making.

Correct Answer: A

Explanation: A is correct. For strategy and setting objectives, goals, and targets, megatrend
analysis is often the first step, followed by deeper analysis through the use of tools such as SWOT
analysis, impact mapping, and materiality assessment. (p. 136)

B is incorrect. Risk governance is a top-down approach. Successful risk governance starts at the
highest level, with the board and senior executives. While best practice governance arrangements
tend to involve multiple layers of employees and internal processes, making portfolio managers
responsible for initial judgments, risk governance should still begin at the highest level. (p. 136)

C is incorrect. According to the COSO ERM framework, tracking performance for ESG and climate
risks consists of three sub-components: risk identification, risk assessment and prioritization, and the
implementation of risk responses. Beyond simply listing pertinent risks, risk identification involves
articulating the potential impact on business operations and strategy. (p. 138)

D is incorrect. The review and revision component of the COSO framework mainly refers to additional
checks and balances on the ERM framework, but it does not require annual external audits. A
periodic internal audit in addition to normal, continuous risk management is recommended for ERM
checks and balances. (p. 140)

Learning Objective: Examine how climate risk drivers can be incorporated into existing ERM
frameworks.

Reference: Chapter 6: Climate Risk Measurement and Management

67
34. A large timber company in Brazil reviews a report identifying ecosystem degradation and a decrease
in timber stock. To determine potential risks for the ecosystem and the company, a company
sustainability analyst examines the ecosystem services securing species habitat and genetic diversity.
Which of the following ecosystem services does the analyst identify?

A. Supporting services
B. Provisioning services
C. Regulating services
D. Cultural services

Correct Answer: A

Explanation: A is correct. “Supporting services, such as species habitat and genetic diversity, are
fundamental conditions that enable the existence of all other services.” (p. 37)

B is incorrect. Provisioning services generate resources, and they depend on supporting services. (p.
37)

C is incorrect. Regulating services protect or enhance ecosystems, and depend on supporting

services. (p. 37)

D is incorrect. Cultural services represent non-material benefits that humans enjoy, and are enabled
by supporting services. (p. 37)

Learning Objective: Define ecosystem services, and subcomponents, and natural capital.
Demonstrate how organizations depend upon and can impact ecosystem services.

Reference: Chapter 2: Sustainability

68
35. After recent public pressure, a national government enacts a stringent set of automobile emissions
standards. Leaders of an automobile manufacturing company examine how this change may affect
the industry. Company leaders direct the sustainability team to propose strategies to address climate-
related risks the company may face in coming years. As part of the comprehensive analysis, the
sustainability team includes actions to mitigate technology risk. Which of the following strategies does
the team recommend?

A. Assess viability of the supply chain contingency plan annually

B. Participate in a voluntary carbon trading scheme
C. Improve electric vehicle battery storage capacity
D. Install retractable flood barriers at facilities near rivers

Correct Answer: C

Explanation: C is correct. Improving battery storage capacity is an element of helping drive down
costs. Technological advances resulting in less expensive batteries drive down the cost of electric
vehicles, which places combustion engines at risk of being stranded. (p. 62-63)

A is incorrect. Assessing and addressing risks to supply chains is an aspect of managing physical
risks. (p. 58)

B is incorrect. Participating in a carbon trading scheme can help a firm avoid policy risks, especially as
governments explore options to limit carbon emissions. (p. 61)

D is incorrect. Installing flood barriers helps minimize acute physical risk. (p. 54)

Learning Objective: Identify the drivers of transition risk. Categorize transition risks (e.g.
technology, market) and provide examples of each.

Reference: Chapter 3: Climate Change Risk

69
36. The CSO at a large European consulting firm works on a sustainability and climate risk report for a
forthcoming company strategy meeting. The meeting will prioritize potential risk exposures company
clients may face and possible financial systemic effects. Which of the following should the CSO
include as an example of how climate risk translates into market risk at the systemic level?

A. Corporations and financial firms operating in an area affected by wildfires sharply increase demand
for precautionary cash flow on a scale that necessitates intervention by a central bank.
B. A group of food-processing component manufacturers is located in a geographic area affected by
increased flooding, affecting global production and supply chains.
C. An oil and gas company’s profits are affected by climate-related regulatory pressures, which poses
a threat to financial stability because of financial institutions heavily exposed to the sector through
loans.
D. A bank’s ability to manage risks actively is challenged by climate risk, leading to a partial
breakdown of typical correlation patterns between assets, which reduces the effectiveness of hedges.

Correct Answer: D

Explanation: D is correct. This is an example of market risk at the macro level. Climate risk can lead
to a (partial) breakdown of a typical correlation pattern between assets, reducing the effectiveness of
hedges and challenging banks’ abilities to actively manage their risks. (p. 127)

A is incorrect. This is an example of liquidity risk at the macro level. If enough households,
corporations, and financial firms sharply increase their demand for precautionary liquidity after a
severe natural disaster, this can be at a systemic enough scale to necessitate intervention by the
central bank. (p. 127)

B is incorrect. This is an example of operational risk at the macro level. The climate change-
exacerbated Thai floods of 2011, which significantly affected global semiconductor production and
had ripple effects across supply chains, are a good example of the macro effects of operational risk.
They only had a macro effect because so many intermediate components for the global
semiconductor manufacturers specifically came from Thailand. (p. 126-127)

C is incorrect. Financial institutions heavily exposed to sectors experiencing climate-related pressures

on their revenues and profits, a risk is posed to the financial institution’s soundness. If exposures run
across the financial sector, increased credit risk at the company level can become a threat to financial
stability. (p. 123-124)

Learning Objective: Understand the potential for climate risk to cause systemic risk and a threat to
financial stability. Describe the risk types that can have systemic effects, including market, sovereign,
etc.

Reference: Chapter 6: Climate Risk Measurement and Management

70
37. An exchange-traded fund (ETF) product analyst researches sustainable finance products to determine
product eligibility to include in a summary memo. The memo will be reviewed and approved by a
senior analyst before listing. Which of the following would the senior analyst most likely approve as
an offering an ETF would invest in?

A. A green car loan that finances certified used cars that do not emit excess emissions at rates under
2.5%
B. A sustainable fund issued by a firm where over 50% of revenues are attributable to environmental
solutions
C. A green mortgage-backed security offered to purchasers of commercial and residential properties
in areas with low risk of flooding or wildfires
D. A sustainable credit card that offers cash back for purchases on green or sustainable products
from certified B-corporations

Correct Answer: B

Explanation: B is correct. This is an example of a green bond fund or sustainable fund offered by a
firm determined to be sustainable. This determination can be revealed by ESG scores or ratings or by
exchanges with their green labels. (p. 103)

A is incorrect. A green car loan is a consumer-facing, sustainable finance product that is dedicated to
financing environmentally friendly cars, such as electric vehicles. A used car would not qualify the car
under a green car loan. (p. 103)

C is incorrect. This does not correctly describe a green mortgage ETF. Green mortgages are
mortgages for energy-efficient houses. (p. 103)

D is incorrect. Sustainable credit cards tend to donate a small percentage of purchases to

environmental charities. They are more aligned with philanthropy than with the financial system. (p.
103)

Learning Objective: Describe sustainable funds, green funds, and other sustainable finance
products.

Reference: Chapter 5: Green and Sustainable Finance: Markets and Instruments

71
38. An oil and gas company with sizable GHG emissions operates in all parts of the world. The company
commissions a team of environmental consultants that specialize in climate risk to explore options for
minimizing GHG emissions from company operations. The consultants present several datasets and
highlight that 93% of heat trapped by GHGs heats one particular portion of the Earth. Which part of
the Earth absorbs most heat trapped by GHGs?

A. Rain forests
B. Glacier ice
C. Oceans
D. Atmosphere

Correct Answer: C

Explanation: C is correct. Ocean heat content measures the energy content of the top 2,000 meters
of the world’s ocean, relative to the 1974-1994 mean. 93% of the heat trapped by GHGs goes into
heating the oceans. (p. 3-4)

A is incorrect. The land biosphere, which includes rain forests, does not absorb 93% of the heat
emitted by GHGs. Rather, the land biosphere absorbs nearly 30% of emitted CO2, which enhances
plant growth. (p. 8)

B is incorrect. Glacial ice is not responsible for absorbing 93% of heat trapped and released by GHGs.
However, glacier ice does melt from warmer air and ocean temperatures. (p. 3)

D is incorrect. The atmosphere does not absorb 93% of the heat trapped by GHGs. However, the
atmosphere is responsible for the circulation of ocean water. (p. 4)

Learning Objective: Know the general trends of modern climate change, such as observed surface
temperature and sea ice coverage.

Reference: Chapter 1: Foundations of Climate Change

72
39. A beverage company considers undertaking scenario analysis for the first time. The company will
assess potential implications of climate change on water availability and management due to
changing water-use regulations and increased water stress. The company engages a consultant for
guidance on incorporating climate-related considerations into scenarios. The consultant prepares a
high-level overview of transition risk and physical risk climate scenarios. Which of the following
should the consultant include in the overview?

A. Physical scenarios allow organizations to assess historical climate change vulnerabilities to explore
past business resiliency.
B. Organizations should use physical scenarios to draw conclusions about energy supply and
consumption in the short and medium term.
C. Because physical risk affects a small part of the global economy, organizations should focus
primarily on transition scenarios to understand climate change implications.
D. Some transition scenarios use assumptions that achieve a low emission economy that
organizations can use in analyses.

Correct Answer: D

Explanation: D is correct. In constructing scenarios about the potential impact of the transition to a
low-carbon economy on an organization, organizations may use one or more publicly available
climate-related scenarios as well as their own scenarios. Several published scenarios are available
that lay out various plausible pathways to target outcomes and that have varying assumptions factors
to achieve a low emission economy. (p. 155)

A is incorrect. The purpose of scenario analysis is to consider forward-looking analyses to better

understand how a business might perform under different future states. (p. 147-148)

B is incorrect. Transition scenarios should be used in this instance, not physical scenarios. Transition
risk scenarios (e.g., IEA and NGFS) draw conclusions about policy and technology regarding energy
supply and GHG emissions interact with economic activity, energy consumption, and GDP, among
other key factors. Such scenarios may have material consequences for organizations in certain
sectors of the economy in the short and medium term as well as longer term. (p. 152-155)

C is incorrect. Physical and transition risks are expected to have substantial impacts on various
sectors of the global economy. Both types of scenarios should be used by organizations to
understand the implications of climate change. (p. 150-151)

Learning Objective: Describe IEA scenarios and other key global reference scenarios.

Reference: Chapter 7: Climate Models and Scenario Analysis

73
40. A country in East Asia lags regional neighbors in reducing GHG emissions and reaching climate
objectives. To address this gap, the country government legislators agree to establish either a carbon
tax or cap-and-trade system. The government hires a climate change policy expert to write a report
and recommend the best course of action. Which policy might the expert propose to legislators and
why?

A. Cap-and-trade because it is considered more flexible than other policies

B. Cap-and-trade because it imposes a fixed price per ton of emitted CO2
C. Carbon tax because it remains consistent in scope across jurisdictions
D. Carbon tax because it provides a guaranteed fixed tax rate for investors

Correct Answer: A

Explanation: A is correct. A cap-and-trade scheme is considered more flexible than carbon taxes,
even if the limit on quantity also imposes a price. (p. 77-78)

B is incorrect. Cap-and-trade caps the amount of emissions, but carbon tax imposes a price per ton
of CO2 emitted. (p. 77)

C is incorrect. Carbon taxes exist in many jurisdictions, but the price imposed can vary considerably
from USD 10 to USD 125 per ton in different countries. (p. 77)

D is incorrect. Tax levels are frequently tweaked in some countries, which can be detrimental to
investors of business that need certainty over multiple years to make investment decisions. (p. 77)

Learning Objective: Explain the structure, benefits, and drawbacks of carbon pricing policies,
including carbon taxes and emissions trading schemes.

Reference: Chapter 4: Sustainability and Climate Policy, Culture, and Governance

74
41. Organizers of an upcoming UN Climate Change Conference prepare a document highlighting
successes and failures of climate accords over the past 20 years. The document lists what success
from the 2009 Copenhagen Accord?

A. Binding short-term GHG emissions-reduction commitments

B. Promotion of flexibility in achieving climate targets
C. Acceptance of a quantitative long-term global warming limit
D. Submission of Nationally Determined Contributions to the UNFCCC

Correct Answer: C

Explanation: C is correct. The accord accepted that global temperatures should not rise 2°C above
pre-industrial levels. The first COP was to “establish the aspirational goal that global warming be kept
below 2°C.” (p. 76)

A is incorrect. There was no agreement on a binding treaty or short-term commitments at COP15. (p.
76)

B is incorrect. Promoting flexibility was a main component of the Kyoto Protocol. The protocol
attempted to establish emissions trading schemes and announced the clean development mechanism
to offer countries and industries different paths to achieve emissions reductions (p. 76)

D is incorrect. This innovation was part of the Paris Agreement, in which countries submit and
periodically re-evaluate national mitigation plans. (p. 77)

Learning Objective: Summarize the history, outcomes, and obligations of major international
climate agreements, and distinguish from the goals set in the Paris Agreement.

Reference: Chapter 4: Sustainability and Climate Policy, Culture, and Governance

75
42. A Chinese international hydropower company owns and invests in multiple dams and related
infrastructure throughout the Mekong River Basin. After several years of increasing precipitation
irregularity in the region, the company’s risk team develops a comprehensive plan to reduce negative
financial effects of physical climate risks. The plan covers existing hydropower assets over a 20-year
period. The plan should recommend the company invest the most effort in reducing what aspect of
physical climate risk?

A. Hazards
B. Vulnerability
C. Drivers
D. Exposure

Correct Answer: B

Explanation: B is correct. The company has the most control over how vulnerable its dams are. At a
facility level, “vulnerability to physical climate risk typically depends on physical infrastructure.” The
company could invest in additional engineering/infrastructure that could hold higher waters, spillways
that facilitate overflows, or other retrofits that increase asset resilience. (p. 52)

A is incorrect. A single company will have little impact on hazards (e.g. long-term precipitation
levels). (p. 52-53)

C is incorrect. A company will have little impact on drivers (e.g. policies); further, drivers are related
to transition risk. (p. 52-53)

D is incorrect. Because the dams are in place and will remain for at least 30 years, there is very little
the company can do to decrease “exposure” to climate impacts/hazards. If the company were
building new dams, it could reduce exposure by selecting sites less exposed to hazards. For instance,
a company with extensive supply chains has more opportunity to reduce exposure (e.g., contracting
with more climate-resilient manufacturers). (p. 52)

Learning Objective: Understand how hazards/drivers, exposure, and vulnerability interact to

manifest physical and transition risks and provide examples of each.

Reference: Chapter 3: Climate Change Risk

76
43. An activist hedge fund pressures leaders of a global energy company to reconsider company strategy
to align with SDGs. The company risk team identifies intangible stranded asset risks as part of a
strategy to develop a robust response. The team emphasizes risks related to human capital and
provides recommendations to support a just transition. Which of the following actions will the team
likely recommend?

A. Provide retraining programs to workers in carbon-intensive sectors

B. Engage younger consumers via social media campaigns
C. Increase the selection and availability of sustainable products
D. Establish a committee to assess reputational risk

Correct Answer: A

Explanation: A is correct. As companies decarbonize, workers’ skills and knowledge become

obsolete, and can become a stranded asset. Without training programs, workers who depend on the
wages gained through labor in carbon-intensive sectors will likely suffer. (p. 64)

B is incorrect. Theoretically, a social media campaign could help improve company image, it runs the
risk of accusations of greenwashing among savvy consumers. (p. 86)

C is incorrect. This action may help mitigate market risks, as consumer patterns change, or improve
company image. However, increasing products without enhancing employees’ skills and knowledge
does not promote a just transition. (p. 63-64)

D is incorrect. The company has already likely experienced heightened reputational risk, due to
involvement from the activist hedge fund. Although assessing the potential for other reputational
risks can be a valuable exercise, it does not address the goals of a just transition. (p. 63-64)

Learning Objective: Discuss human capital as a stranded asset and the challenges associated with
asset stranding and a just transition.

Reference: Chapter 3: Climate Change Risk

77
44. Insurance companies in North America suffer from increases in losses from homeowner and business
clients in extreme weather-prone areas and need to better manage physical climate risk exposure. To
address this issue, a diverse group of insurers and reinsurers meets to discuss the impact of physical
climate risk on the insurance industry and share their experiences. Which example of physical climate
risk reduction common practice should be noted in the meeting outcomes?

A. Due to long renewal cycles, medium-sized companies pull coverage in a multi-year time span.
B. Regional companies reduce climate-related risks through geographical diversity.
C. Large companies with diversified exposure cross-subsidize climate risks.
D. Small companies fully offload climate-related risks to reinsurance companies.

Correct Answer: C

Explanation: C is correct. Large insurers with diversified exposure can and do cross-subsidize to an
extent. (p. 126)

A is incorrect. Most types of insurance available to individuals or corporations are on one-year

renewal cycles so that insurers can pull coverage with relatively short notice. (p. 125-126)

B is incorrect. Regional insurers do not have geographical diversity to diversify exposure successfully.
(p. 126)

D is incorrect. Insurance companies can offload a portion of their risk to reinsurers, but these firms
are also becoming warier of taking on climate risk. (p. 126)

Learning Objective: Examine the effects of climate risk on company-level risks such as operational,
credit, liquidity, and insurance.

Reference: Chapter 6: Climate Risk Measurement and Management

78
45. A sustainability and climate risk team at a Polish development agency prepares a new report on
private-sector development and the role of development financial institutions (DFIs) in Poland. The
team assesses the purpose of DFIs through an overview of DFI missions to include in the report.
Which of the following should the team identify as the mission of DFIs?

A. Achieve financial self-sufficiency while supporting socioeconomic development.

B. Maximize long-term profits while reinforcing sustainable development action.
C. Optimize financial gains while investing in climate-related projects that raise climate awareness.
D. Reduce costs of mitigating climate change while supporting economic development.

Correct Answer: A

Explanation: A is correct. The double bottom line mission of development financial institutions is to
achieve financial self-sufficiency with a mandate to support socio-economic development. (p. 82)

B is incorrect. Maximizing profits is not a mission of development financial institutions, it is financial

self-sufficiency. (p. 82)

C is incorrect. This does not represent the mission of the development financial institutions. EIB
issued in 2007 the world's first "Climate awareness bond" dedicated to climate-related issues, which
helped launch the global market in green bonds. (p. 82)

D is incorrect. This is too narrow a scope for a DFI. William Nordhaus developed models to assess the
costs and benefits of mitigating climate change through emissions reductions, but this is not a
primary objective of financial institutions discussed in the chapter. (p. 82)

Learning Objective: Differentiate the types of private-sector sustainability and climate investment
policies, and how public policy has been used to promote adoption of green finance.

Reference: Chapter 4: Sustainability and Climate Policy, Culture, and Governance

79
46. An African financial services firm works with a regional climate change institute to implement
resilience projects that are paid for with proceeds from sustainable investments. A project under
consideration addresses the food and crop crisis in southern Madagascar. The region experienced a
severe lack of rain in recent years. Scientists at the institute conclude that regional climate variation,
rather than anthropogenic climatic change, is the main cause of the water shortage. Which of the
following provides evidence of the severe aridity of southern Madagascar as a non-anthropogenic
climatic change?

A. Tree rings
B. Precipitation forecasts
C. CO2 concentrations
D. Ozone concentrations

Correct Answer: A

Explanation: A is correct. Tree rings can “reveal climate variations in regions where trees grow and
experience seasons for the last millennium.” This allows researchers to understand a location’s
climate before human manipulation and interaction. (p. 5)

B is incorrect. Precipitation forecasts predict future rain, but are not proxies to verify non-
anthropogenic climatic change. (p. 14)

C is incorrect. Chemical analyses of CO2 isotope concentrations are a proxy for anthropogenic climatic
change. (p. 7-8)

D is incorrect. Ozone concentration near ground level is a measure of air quality but is not used to
verify non-anthropogenic climatic change in a particular region. (p. 8-9)

Learning Objective: Describe how the earth's climate has changed over long periods of time and
different methods for measuring non-anthropogenic climatic changes at different time frames.

Reference: Chapter 1: Foundations of Climate Change

80
47. After significant growth in insurance premiums due to rising physical climate change risk and supply
chain disruptions, a newly-incorporated Tunisian sugar beet company plans to implement scenario
analysis for the first time. The company CRO intends to use scenario analysis to update corporate
development strategy for the next five years. Which of the following is a reason why the CRO may
use scenario analysis to set corporate strategy?

A. Scenario analysis can help chart opportunities and future demand for products.
B. Scenario analysis can help calibrate assumed emissions to roughly correspond to temperature
targets.
C. Corporate disclosure requires physical risk scenario analysis for use in forward planning.
D. Corporate disclosure recommended practices include historical-looking scenarios to design future
strategic directions.

Correct Answer: A

Explanation: A is correct. Scenario analysis can help chart opportunities and future demand for
products, both of which are closely linked to setting corporate strategies. (p. 147)

B is incorrect. This is describing physical climate models (e.g., RCPs from the IPCC) and the rationale
behind their usage. (p. 160)

C is incorrect. Physical risk scenario analysis cannot predict incidence precisely enough to be of use
for forward planning, especially not for acute physical hazards. (p. 162)

D is incorrect. Climate scenario analysis is a forward-looking analysis, not historical looking. (p. 147)

Learning Objective: Examine how all types of corporations (financial and non-financial) use climate
scenario analysis.

Reference: Chapter 7: Climate Models and Scenario Analysis

81
48. The state of New York considers a Fashion Sustainability and Social Accountability Act requiring
apparel and footwear producers, with global revenues of USD 100 million or greater, to report
environmental and social disclosures publicly, including results from scenario analyses. Part of the
rationale for the Act stems from a lack of standardized governmental frameworks to calculate key
environmental risks. The proposed Act may use a set of yet-to-be-determined scenario parameters as
part of its future standardization. Which of the following is a scenario parameter that should be
included in the proposed Act?

A. Capital expenditure
B. Impact on productivity
C. Asset allocation
D. Carbon price

Correct Answer: D

Explanation: D is correct. Carbon price is an example of a parameter used to build climate scenario
outputs. (p. 156-157).

A is incorrect. Capital expenditure is a potential output of a climate scenario analysis. (p. 156-157)

B is incorrect. Potential impact on productivity is a potential output of a climate scenario analysis. (p.
156-157)

C is incorrect. Asset allocation is a potential output of a climate scenario analysis. (p. 156-157)

Learning Objective: Understand the parameters that organizations need to consider for scenario
development and analysis.

Reference: Chapter 7: Climate Models and Scenario Analysis

82
49. A commercial bank in North America increases the size and scope of its risk department. As part of
this process, bank leadership requests the risk department implement a methodology to evaluate
how climate change impacts traditional risk types. A risk analyst recommends risk metrics for each
significant risk type and includes several ratios such as loan-to-deposit in a list of metrics for liquidity
risk. What additional metric should the analyst recommend that measures liquidity shock for business
clients?

A. Loss given default

B. Bid-ask spread
C. Probability of default
D. Insurance premium changes

Correct Answer: B

Explanation: B is correct. Abrupt physical and transition risk-related events can lead to sharp
repricing and sudden market re-evaluation of a firm's viability, leading to liquidity shocks. These
events can lead to deposit withdrawals raising their loan-to-deposit ratio or widening the bid-ask
spreads. (p. 121)

A is incorrect. Loss given default measures credit risk. (p. 121)

C is incorrect. Probability of default measures credit risk. (p. 121)

D is incorrect. Insurance premium changes measure insurance/underwriting risk. (p. 121)

Learning Objective: Understand the associated risk metrics for and components
of each risk type.

Reference: Chapter 6: Climate Risk Measurement and Management

83
50. An institutional investor in the energy sector experiences losses due to significant property damage
caused by a severe weather event. Additionally, the investor faces a cost increase due to a low-
carbon technology shift. To mitigate potential climate risk exposure in future investments, the risk
team reviews the reference scenarios developed by the IEA and IPCC . What should the team point
out regarding the use of reference scenarios in investment analysis?

A. Because these scenarios are designed to generate long-term financial forecasts, they should be
used for qualitative investment analysis.
B. These scenarios can be used to produce data for the company to extract and use as input for
investment analysis.
C. Because these scenarios focus on the energy sector, they capture both physical and transition risk
for comprehensive investment analysis.
D. This scenario methodology is based on energy potential and bottom-up investment analysis
approaches.

Correct Answer: B

Explanation: B is correct. To make scenarios usable for practical investment purposes, investors
need to extract data points or other information from scenario outputs that can be used to
investigate strategies that align with emission trajectories. (p. 148)

A is incorrect. Scenarios such as those made by the IEA and IPCC do not produce financial forecasts
that are used for qualitative investment analysis. IEA scenarios focus on the impact of current and
potential policies, whereas IPCC scenarios model potential physical and socioeconomic futures (p.
150, 155)

C is incorrect. IEA reference scenarios that cover the energy sector address only transition risk,
whereas IPCC scenarios cover all sectors and all risk types to create scenarios outputs. (p. 150, 155)

D is incorrect. IEA and IPCC scenarios produce data for the analysis at various levels. (p. 150, 155)

Learning Objective: Describe IPCC scenarios and associated representative concentration

pathways (RCPs) and shared socioeconomic pathways (SSPs).

Reference: Chapter 7: Climate Models and Scenario Analysis

84
51. A sustainability analyst at a global auto manufacturer prepares an annual sustainability report for
North American operations. The analyst compares the annual Scope 2 CO2 emissions for four facilities
in 2015 and 2020 (in hundred metric tons):

Facility 2015 2020

Emissions Emissions
1 50 82
2 62 70
3 90 74
4 68 60

Assuming energy use levels remained constant for each facility, how should the analyst best explain
the change in emissions levels?

A. Nuclear energy replaced most coal use in the electric grid servicing Facility 1.
B. Facility 2 replaced some oil-fired purchased electricity with purchases of oil for onsite energy
generation.
C. A large utility servicing Facility 3 replaced natural gas use with renewable-powered battery
storage.
D. Facility 4 switched its onsite corporate fleet from cars that use oil to electric vehicles.

Correct Answer: C

Explanation: C is correct. The total emissions of Facility 3 declined from 2015 to 2020. If energy
use remained the same, the most likely explanation is that some of the electricity generation
switched from a higher CO2-emitting energy source to a lower one. In this case, batteries would likely
store energy produced by renewables, which have no emissions factors. Even though natural gas has
the lowest emissions factor of the fossil fuels, replacing gas with renewables and batteries would
reduce the overall annual emission profile of facility. (p. 18)

A is incorrect. Nuclear making up a higher proportion of the electric grid would decrease emissions
because nuclear energy does not have an emission factor. (p. 19)

B is incorrect. This is wrong because switching to onsite generation should reduce the Scope 2
emissions. In this case, the Scope 2 emissions generated by Facility 2 increased between 2015 and
2020. (p. 80-81).

D is incorrect. This would be a reasonable assumption if this was Scope 1 data, but Scope 2 reflects
purchased electricity. (p. 80-81)

Learning Objective: Discuss trends in the energy system and how energy sources can contribute to
or mitigate climate change. Understand relative carbon intensities of energy sources.

Reference: Chapter 1: Foundations of Climate Change

85
52. A risk analyst at a research institute joins a research team exploring the financial risks of climate
change. For inclusion in the institute’s monthly newsletter, the analyst prepares a high-level overview
of how climate change risk can lead to financial exposure. Which example of financial exposure
should the analyst include in the overview?

A. A construction company has an exposure to physical risk if the cost of carbon emissions needs to
be priced into cement production, thereby reducing profitability.
B. An automobile manufacturing company has an indirect exposure to transition risk if its supply
chain can be materially disrupted by climate-related physical events such as flooding elsewhere in the
world.
C. A retail company’s asset values are largely influenced by physical risk in the shorter term, while
transition risk is likely to be the main influence on the company’s asset values in the medium-to-
longer term.
D. A real estate investment firm has exposure to physical risk through gradual revaluation of its
holdings of waterfront property due to rising sea levels.

Correct Answer: D

Explanation: D is correct. The impact of rising sea levels on the value of holdings of waterfront
property for the real estate firm is an example of physical risk. (p. 54)

A is incorrect. In this scenario, the construction company has an exposure to transition risk, not
physical risk. The transition to a low-carbon economy can have indirect impacts on many industries,
such as the construction industry due to the use of coal for cement production. If the cost of carbon
emissions needs to be priced into cement production, construction costs will also increase from the
use of coal in the process. (p. 59-60)

B is incorrect. The firm would have an indirect exposure to physical risk. As discussed in the text,
floods in Thailand in 2011 directly affected computer hard-disc drive manufacturers and car
manufacturers. This disruption, in turn, affected the manufacturers of electronic goods in a range of
companies, from phone manufacturers to electronic equipment manufacturers in the EU, Japan, and
the US. (p. 58)

C is incorrect. The inverse is correct. Asset values are likely to be influenced by transition risk in the
shorter term, and in the medium to longer term by physical risk. (p. 156)

Learning Objective: Differentiate physical and transition risks.

Reference: Chapter 3: Climate Change Risk

86
53. The sustainability director at a boutique asset management firm develops a sustainability framework
to build resilience and drive profitable and measurable growth. The director will incorporate the
framework into firm strategy and operations. At a strategy meeting, the director presents an effective
approach for boutique asset management firms to influence large, emissions-intensive corporations
to become more sustainable. Which approach does the director present?

A. ESG integration in the investment process

B. Divestment from emissions-intensive corporations
C. Exertion of pressure through shareholder coalitions
D. Shift portfolio composition through passive index funds

Correct Answer: C

Explanation: C is correct. Larger coalitions like Climate Action 100+ have been found to exert more
pressure on management than smaller investors. There is strong evidence of the power and results
achieved by shareholder engagement in the academic literature, including the use of shareholder
proposals. (p. 106)

A is incorrect. ESG integration is useful for investment decisions and portfolio analysis. Shareholder
engagement is what directly exerts influence on corporates. (p. 104, 106)

B is incorrect. Divestment carries more weight when affected by larger asset managers with market
power. (p. 108)

D is incorrect. Passive index funds follow an index and therefore cannot divest by their own choice,
but rather when the index rebalances. It would not be an effective strategy for small managers. (p.
108)

Learning Objective: Understand how shareholders impact sustainability strategy of a company.

Reference: Chapter 5: Green and Sustainable Finance: Markets and Instruments

87
54. After achieving an ambitious goal to mitigate GHG emissions, a global technology company is
recognized by a major sustainability index. Company leaders use this achievement to boost company
recognition and direct the sustainability division to propose plans to enhance company reputation.
Under this scenario, which of the following opportunities is the division most likely to propose?

A. Develop innovative methods to reduce Scope 3 emissions

B. Use marketing campaign to publicize recent initiatives
C. Replace high-emission manufacturing technology
D. Adopt a company-wide internal carbon fee

Correct Answer: B

Explanation: B is correct. Though the company has already been recognized for its climate change
mitigation efforts, broader publicity of this achievement may enhance its public profile. Transparent
reporting can help consumers select environmentally friendly options. (p. 63-64)

A is incorrect. Reducing Scope 3 emissions is a difficult task. Firms often struggle to avoid double
counting Scope 3 emissions, which complicates efforts to fully communicate how company efforts
impact downstream emissions. (p. 81)

C is incorrect. Proactively replacing old equipment may help decrease a company’s exposure to
technology risk. However, this is often a prudent strategy, not an opportunity. (p. 62-63)

D is incorrect. Several companies have publicized the internal carbon prices that have been set.
However, this is often in anticipation of a carbon tax levied by regional or national governments, and
is one method to mitigate policy risk. (p. 61-62)

Learning Objective: Discuss how physical and transition risks can provide opportunities for
companies and sectors.

Reference: Chapter 3: Climate Change Risk

88
55. A sustainability analyst at a textiles company works on a sustainability policy report for a forthcoming
company strategy meeting. The meeting will prioritize risk exposures the company may face for not
complying with various types of sustainability enforcement. Which example of policy enforcement of
sustainable investment and disclosure should the analyst include in the report?

A. Companies must rely on industry-specific norms to classify and disclose sustainable products
because no regulations currently define sustainable or “climate-friendly.”
B. Since establishment, the EU Taxonomy is the universal green taxonomy standard.
C. Audits are a form of consumer protection that can combat misleading advertising and help reveal if
funds or products are accurately marketed as sustainable.
D. A greenwashed product is a sustainable product or financial fund that has passed mandatory
regulatory requirements, designed to minimize environmental impacts.

Correct Answer: C

Explanation: C is correct. Audits take place to determine if an advertised product that claims to be
sustainable is sustainable. This is in response to the threat of greenwashing, a type of marketing that
portrays products or activities as producing positive environmental outcomes when it is not the case.
(p. 86)

A is incorrect. Some jurisdictions have moved to create public policy that clearly defines, from the top
down, what counts as a sustainable or climate-friendly investment. An example of this is the EU
Taxonomy. (p. 83)

B is incorrect. Attempts to establish a common green taxonomy across the world is “likely a long way
off.” (p. 84)

D is incorrect. This is an incorrect statement of what greenwashing is. Greenwashing is a type of

marketing that portrays products or activities as producing positive environmental outcomes when it
is not the case. (p. 86)

Learning Objective: Identify methods used to enforce sustainable investment and disclosure
policies.

Reference: Chapter 4: Sustainability and Climate Policy, Culture, and Governance

89
56. A chemical manufacturer examines future climate-related regulatory risks for its products and fuels. A
risk assessment reveals most of the emissions from production processes contribute to global
warming. However, the assessment also highlights several emissions that can drive negative radiative
forcing. What should the report cite as a potential driver of negative radiative forcing?

A. Methane mixing with water vapor

B. Halocarbon renewal of the ozone layer
C. Aerosol interaction with clouds
D. Hydrocarbons concentrated at ground level

Correct Answer: C

Explanation: C is correct. Many aerosols have a negative radiative forcing. The total aerosol effect
is negative, though positive radiative forcing from GHGs has a greater magnitude. (p. 9-10)

A is incorrect. Methane alone has a positive radiative forcing, but water vapor enhances radiative
forcing. (p. 9)

B is incorrect. Halocarbons are a powerful class of GHGs, with high GWPs. Though halocarbons exist
in very small quantities, they have a disproportionately high influence on radiative forcing. (p. 8-9)

D is incorrect. Ground-level hydrocarbons, when mixed with oxides of nitrogen, contribute to the
development of ozone, which is a powerful greenhouse gas. (p. 8)

Learning Objective: Understand how the earth's energy balance, greenhouse effect, and radiative
forcing affect the climate.

Reference: Chapter 1: Foundations of Climate Change

90
57. A climate specialist at a large European pension fund develops a brief on stranded asset risk for an
annual report. The specialist primarily focuses on energy assets across the continent and discusses
trends for several sectors. Which of the following assets display an increase in susceptibility to asset
stranding?

A. A wind farm operating in a country in which regulations increase the expense of turbine
decommissioning and retrofits.
B. A coal plant that operates within a cap-and-trade system experiencing a consistently higher-than-
expected supply of carbon permits.
C. A natural gas facility operating in a country in which the levelized cost of energy for renewables
increases.
D. A large solar farm located in a country that strengthens vehicle fossil fuel efficiency standards.

Correct Answer: A

Explanation: A is correct. A higher decommissioning cost would make the project lifecycle cost of
adding new turbines and decommissioning them higher. This ultimately devalues the asset and could
lead to stranding. (p. 61-62)

B is incorrect. More carbon permits will likely lead to lower carbon prices, which would make coal
energy production cost relatively less expensive. (p. 77-78)

C is incorrect. A higher levelized cost of energy for renewables makes natural gas less expensive than
renewables. Natural gas and renewables can be interchangeable as a source of electricity production,
so more expensive renewables would not increase the risk of natural gas becoming stranded. (p. 61-
62)

D is incorrect. This scenario would make solar farms more valuable (assuming solar energy can be
stored in electric vehicle batteries). Regardless of EVs, higher ICE fuel standards would not likely
make solar energy more costly in any way. (p. 61-62)

Learning Objective: Define stranded assets and discuss how different sectors may experience
stranded asset risk.

Reference: Chapter 3: Climate Change Risk

91
58. A group of environmental NGOs and shareholders of a mining company submits a resolution calling
for an update on the company’s long-term strategy. As part of the resolution, NGOs and shareholders
request the establishment of a committee. The committee will propose a new strategy that equally
weights social and environmental impacts with financial performance. NGOs and shareholders
exerting such pressure extend from what private sector development in the 1980s and 1990s?

A. Sustainability reporting
B. Social responsibility
C. Triple bottom line
D. Three scopes reporting

Correct Answer: C

Explanation: C is correct. The triple bottom line framework was developed in the late 20 th century,
and equally places environmental and social impact with financial performance. (p. 38)

A is incorrect. Sustainability reporting is not a specific terminology that has its roots in using
shareholder pressure for good. (p. 44)

B is incorrect. The CSR concept was developed during the 1990s using the "notion" of shareholder
pressure for "good." (p. 38)

D is incorrect. The GHG protocol contains reporting of three emission scopes, and was developed
after the 1990s. (p. 81)

Learning Objective: Trace the evolution of sustainability in governments, corporations, and

financial institutions.

Reference: Chapter 2: Sustainability

92
59. The sustainability department of a Brazilian city conducts an initial GHG inventory. The department
gathers and organizes 2022 emissions data by economic subsector (in tCO2 e):

Subsector Emissions
Residential building grid electricity use 500,000
Transboundary transport of sold goods 600,000
Biological treatment of waste 70,000
Fugitive emissions from energy extraction within city 30
Forestry and land use 20,000
Internal combustion engine on-road transportation 5,000,000
Solid waste disposal 1,000,000

All waste treatment and disposal occurs outside of the city limits. The department organizes GHG
emissions by scope according to the BASIC approach in the Protocol for Community-Scale GHG
Emissions Inventories. Using the BASIC approach, what should the department calculate as its total
Scope 3 emissions (in tCO2e)?

A. 690,030
B. 1,070,000
C. 1,590,000
D. 6,670,030

Correct Answer: B

Explanation: B is correct. Any waste disposal should be considered Scope 3 because it occurs
outside of the city boundaries. This includes only 1) biological treatment of waste and 2) solid waste
disposal (70,000 + 1,000,000 = 1,070,000, highlighted in grey below). These are GHG emissions that
“occur outside the city boundary as a result of activities taking place within the city boundary.”
Because this is BASIC and not BASIC+, the calculation does not include transboundary transport. (p.
180-181)

Scope 1 Scope 2 Scope 3

Subsectors
Residential building grid 500,000
electricity use
Transboundary transport of 600,000
sold goods
Biological treatment of waste 70,000
Fugitive emissions from 30
energy extraction within city
Forestry and land use 20,000
Internal combustion engine 5,000,000
on-road transportation
Solid waste disposal 1,000,000

93
A is incorrect. This incorrectly excludes Solid waste disposal, which should be Scope 3, but includes,
incorrectly, Transboundary transport of sold goods, Forestry and land use and Fugitive emissions
from energy extraction within city. Transboundary transport should only be used as Scope 3 for
BASIC+, Forestry and land use is Scope 1, and Fugitive emissions are Scope 1. (p. 180-181 and p. 27
of the GHG Protocol)

C is incorrect. This includes both Scope 3 emissions under the BASIC approach, however, it
incorrectly adds Residential building electricity use (a Scope 2 emission) and Forestry and land use (a
Scope 1 emission). (p. 180-181).

D is incorrect. This calculation incorrectly includes Internal combustion engine on-road transportation
(a Scope 1 emission), Transboundary transport of sold goods (a BASIC+ Scope 3 emission), and
Fugitive emissions from energy extraction within city (as Scope 1 emission). (p. 180-181 and p. 27 of
the GHG Protocol).

Learning Objective: Summarize how the GHG Protocol can be used by subnational governments.

Reference: Chapter 8: Net Zero

94
60. Council members for a large city in a low-lying country discuss local adaptation initiatives that also
contribute to national climate goals. The council narrows possible options to the following projects:

• An urban greening initiative that plants trees in unused lots

• An incentive program to whiten roofs on city buildings

A council member advocates the greening initiative. How should the council member describe an
advantage of planting trees over roof whitening?

A. A reduction in CO2 levels by increasing the region’s albedo

B. A slowing of long-term sea level rise by providing a carbon sink
C. An increase in positive warming feedbacks by absorbing solar radiation
D. A dilution of GHGs by increasing water vapor in the atmosphere

Correct Answer: B

Explanation: B is correct. As trees grow and greened areas expand, carbon dioxide is removed from
the atmosphere. Roof whitening can impact local temperatures through increasing albedo but is not a
carbon sink. (p. 16-17, 21)

A is incorrect. Roof whitening would increase an area’s albedo. However, albedo is not directly
related to CO2 levels, but is a measure of the amount of energy a surface reflects. (p. 16)

C is incorrect. Positive warming feedbacks do not mitigate climate change and enhance already
occurring warming. (p. 16)

D is incorrect. Water vapor is a greenhouse gas and increases warming. (p. 9)

Learning Objective: Understand and describe how positive feedbacks influence climate change.

Reference: Chapter 1: Foundations of Climate Change

95
61. A diamond mining company operates internationally and increasingly incurs scrutiny for its
environmental and social impacts. In response, the company plans to adopt the SDGs. The
company's sustainability director begins this process by linking the SDGs to material concerns for the
company. Which strategy should the director suggest the company take to address one of the SDGs?

A. Rebuild the company's reputation after a series of mining accidents

B. Reduce income inequality between employees and executives
C. Ensure the company follows through on stated CSR commitments
D. Minimize scrutiny from regulators and creditors on environmental issues

Correct Answer: B

Explanation: B is correct. Adjusting (most likely reducing) executive pay can directly impact SDG 10
"reduce inequalities." (p. 41)

A is incorrect. By not acting on an SDG or addressing it, a company may experience reputational risk.
But, the purpose of the "sustainable development goals" is not to increase corporate reputations. (p.
63)

C is incorrect. This is a reputational risk. The CSR commitment may relate to the SDGs, but corporate
"follow-through" does not directly address an SDG. (p. 31,38)

D is incorrect. This is an indirect benefit of having a good sustainability record/SDG alignment, but,
not a direct action. (p. 43)

Learning Objective: Discuss strategies for implementing and aligning with the SDGs (including case
studies) and how the SDGs and sustainability can be material to companies.

Reference: Chapter 2: Sustainability

96
62. After setting up a new passive ESG investment strategy, a hedge fund manager based in the US must
comply with a new set of reporting requirements. The manager looks for appropriate sources of
information to perform pre-trade analysis of investee companies. Which most commonly-used
information source could the manager use to assess investee companies?

A. Direct engagement with companies and ESG ratings

B. In-house research and corporate ESG rankings
C. ESG information disclosures in filings for securities authorities
D. Media sources specialized in ESG reporting

Correct Answer: A

Explanation: A is correct. Direct engagement with companies and ESG ratings represent the most
used sources of ESG information on investee companies. (p. 107)

B is incorrect. In-house research and corporate ESG rankings are less used than direct engagement
with companies and ESG ratings. (p. 107)

C is incorrect. ESG information disclosure in filings for securities authorities like SEC or ESMA are less
used than direct engagement with companies and ESG ratings. (p. 107)

D is incorrect. Media sources are rarely used to source ESG information on investee companies. (p.
107)

Learning Objective: Understand the integration of ESG and climate issues into investment and
lending decisions.

Reference: Chapter 5: Green and Sustainable Finance: Markets and Instruments

97
63. An industry association in Germany surveys members on business alignment with nationally
determined contributions (NDCs). The association members express concern about potential legal
repercussions or penalties if governments do not conform to Paris Agreement pledges. An attorney at
the association researches this issue and sends a memo to members. The memo should state the
Paris Agreement expects signatories to take what action?

A. Revise NDC targets annually

B. Strengthen NDC ambitions every five years
C. Penalize industries exceeding NDC emissions thresholds
D. Issue tariffs on countries significantly failing to meet NDC commitments

Correct Answer: B

Explanation: B is correct. The Paris Agreement established a mechanism in which participants are
expected to strengthen NDCs every five years. (p. 77)

A is incorrect. This action would be part of the NDC submission and tightening process, which occurs
every five years. (p. 77)

C is incorrect. This is not mentioned in the reading and contrasts the voluntary and flexible nature of
the Paris Agreement. (p. 77)

D is incorrect. This is a possible policy option, but not one the Paris Agreement advocates. The
agreement seeks to encourage countries to do better, but does not suggest punishing countries
according to their NDCs. (p. 77)

Learning Objective: Understand characteristics of the Paris Agreement.

Reference: Chapter 4: Sustainability and Climate Policy, Culture, and Governance

98
64. An investment bank examines climate risk-related investment opportunities. A junior analyst
researches and develops a report describing opportunities arising from physical and transition risks.
Which of the following should the analyst include in the report?

A. A utility company builds flood walls to increase resiliency of its operations

B. An insurer incorporates climate risk into existing insurance products
C. A manufacturer sells CCS equipment to fossil fuel companies
D. An agriculture company plants drought-resistant seeds to maintain competitiveness

Correct Answer: C

Explanation: C is correct. This is a clear revenue stream originating from a transition climate risk,
(e.g. carbon-emitting companies want to decrease emissions either from reputational or regulatory
risks). (p. 60)

A is incorrect. This action “avoids large losses that would have otherwise happened.” This does not
represent a new opportunity or revenue stream. (p. 58-59)

B is incorrect. If the insurer developed a new climate product that gives it a competitive advantage,
that would approximate an opportunity. However, incorporating risk into existing products is akin to
due diligence, just minimizing risk in the business stream. (p. 58-59)

D is incorrect. This could represent an opportunity if the company had produced and sold drought-
resistant seeds. However, in this case, it simply minimizes risk to remain competitive. (p. 58-59)

Learning Objective: Discuss how physical and transition risks can provide opportunities for
companies and sectors.

Reference: Chapter 3: Climate Change Risk

99
65. A chip manufacturer in Indonesia experiences an increase in losses due to disruptions in the value
chain driven by extreme weather events. Recognizing the increased exposure to physical risks, the
company’s CRO examines and evaluates current physical risk assessment methodologies. Which of
the following should the CRO include in a final report to explain physical risk assessment
methodologies?

A. Most methodologies provide highly detailed predictions for future precipitation trends.
B. Methodologies are based on historically plausible scenarios for a given region.
C. Methodologies are most sensitive to widely diverging short-term emission projections.
D. Most methodologies are built on the same assumptions as transition risk assessment
methodologies.

Correct Answer: B

Explanation: B is correct. Historically plausible scenarios are a critical part of developing climate
scenario analyses because firms need to know how to prepare for and build resilience against
physical threats. (p. 160)

A is incorrect. Given the limitations of climate models, precise predictions are currently impossible. At
present, though models agree precipitation trends are expected to change in the future, the
magnitude of these changes is still uncertain. (p. 160)

C is incorrect. In many cases, outputs do not vary widely across different emission scenarios prior to
2050, but greater divergence often shows up by 2100. (p. 160-161)

D is incorrect. Physical risk assessment methodologies always start at the facility level, whereas
transition risk methodologies can base assumptions on a wider range of domains. (p. 160)

Learning Objective: Explain how scenario analysis is used for assessing physical risk.

Reference: Chapter 7: Climate Models and Scenario Analysis

100
66. The director of the sustainable finance department at a US bank considers introducing a new line of
sustainability-linked loans (SLLs) due to rising demand from bank clients. To inform the bank
management board, the director presents a report that explains the conditions of SLLs. What
condition should a loan fulfill to be considered an SLL?

A. The loan proceeds should have specific social and environmental performance targets.
B. The interest rate on the loan should be linked to predetermined SDG targets tied to an underlying
project.
C. The loan funds should be ring-fenced for use in a sustainable project by providing incentives to the
client.
D. The loan should improve the sustainability performance of the client using predetermined criteria.

Correct Answer: D

Explanation: D is correct. A sustainability-linked loan improves the borrower's sustainability profile

by aligning loan terms to the borrower’s performance against the relevant predetermined SPTs. (p.
102)

A is incorrect. Sustainability bonds need to combine environmental and social objectives to be

considered sustainability bonds. Sustainability-linked loans are not required to have social and
environmental performance targets. (p. 98)

B is incorrect. Interest rates on the loan may be linked to different predetermined targets tied to an
underlying project. Still, it is not a requirement for a loan to be connected to SDG targets to be
considered a sustainability-linked loan. (p. 100)

C is incorrect. Green loans should ring-fence proceeds, and borrowers are expected to report on the
use of their proceeds. In contrast, sustainability-linked loans should link financing to sustainability
targets as incentives. (p. 98)

Learning Objective: Define and describe sustainability-linked bonds and loans.

Reference: Chapter 5: Green and Sustainable Finance: Markets and Instruments

101
67. As part of a national strategy to achieve Paris Agreement goals, a country enacts a policy that
requires all buildings to conform to rigorous energy efficiency standards. Multi-unit residential
properties that do not meet the new standards will no longer be eligible to rent. In preparation for
the new regulations, a property management company hires a team of climate risk consultants. The
consultants assess how the new policies may affect company plans to purchase additional properties.
Which of the following risk impacts do the consultants identify?

A. Buildings located near rivers will have lower insurance premiums

B. Tenants may refuse to pay more for renewable power
C. Higher average temperatures will require air conditioner installation
D. Inefficient buildings decrease company creditworthiness

Correct Answer: D

Explanation: D is correct. Inefficient buildings will remain vacant, decrease rental income, and incur
additional costs for basic maintenance. These factors lower the capacity and capital needed for new
mortgages. (p. 66)

A is incorrect. As climate change progresses, flooding along rivers is expected to increase. This
increase in risk is expected to lead to higher insurance premiums. Flooding is an acute physical risk.
In the absence of the carbon-reducing regulations, buildings located along rivers would face higher
flooding risk. (p. 65-66)

B is incorrect. The cost of renewables has decreased in recent years and is expected to decrease
further in the future. Additionally, as energy efficiency standards go into effect nationwide, there will
be fewer opportunities to rely on conventional energy sources. (p. 62)

C is incorrect. Higher average temperature is a chronic physical risk. As temperature averages

increase, air conditioners will become necessary. However, in many jurisdictions, air conditioners are
not mandatory, and up to the discretion of the landlord. (p. 54)

Learning Objective: Understand current industry trends for each transition risk category and
strategies companies can take to reduce risk or manifest climate-related opportunities.

Reference: Chapter 3: Climate Change Risk

102
68. A construction company develops a new roof product that increases albedo and decreases thermal
radiation. The company board of directors decides to introduce an internal life cycle assessment
(LCA) for the new roof product to reaffirm the planned marketing campaign. The company CSO
reviews the four LCA phases and starts the assessment process with the phase, “goal and scope
definition.” What action should the CSO perform as part of this first phase of the LCA?

A. Identify processes that contribute to the product’s environmental impact

B. Gather data on the inputs, outputs, and energy use of the product
C. Categorize all environmental impacts of the product
D. Develop metrics on which to evaluate completeness of the product LCA

Correct Answer: A

Explanation: A is correct. The product system boundary is defined by identifying the processes that
contribute most to the roof’s environmental impact. (p. 40)

B is incorrect. This falls under the “inventory analysis” phase of the LCA. (p. 40)

C is incorrect. This represents the “impact assessment” phase of the LCA. (p. 40)

D is incorrect. The evaluation of the LCA completeness falls under “Interpretation” phase of the LCA.
(p. 40)

Learning Objective: Describe the Life-cycle Assessment process and how organizations use this
tool to advance sustainability.

Reference: Chapter 2: Sustainability

103
69. An analyst joins the climate risk team at a financial institution. The team translates environmental
issues into finance-related metrics that inform investment decisions for clients worldwide. For an
initial report, the analyst reviews international climate negotiations to understand cumulative versus
current annual GHG emissions by country. Which of the following should the analyst include in the
report?

A. It is more important to examine countries’ annual emissions that reflect the current flow of CO 2,
which have a larger effect on the climate, than countries’ cumulative emissions.
B. There is a global consensus that countries accountable for greatest annual emissions should be
most accountable for climate change mitigation efforts.
C. Countries in North America and Europe account for over half of current annual emissions, while
countries in Asia and Africa account for the least.
D. Countries that steeply increased their emissions share in the recent decades are not the same
countries responsible for the most historical emissions, contributing to tensions in climate
negotiations.

Correct Answer: D

Explanation: D is correct. Countries that have sharply increased their share of emissions in the past
two decades (e.g., China, India) are different from those responsible for accumulated historical
emissions (e.g., US, EU, Russia, Japan) and those expected to drive future emissions unless they
adopt green growth models (e.g., Saudi Arabia, Indonesia, Brazil). This has set up a tension in
international negotiations ever since, and it is complicated by the “fairness” questions around the
potential trade-off between emissions and economic development. (p. 74)

A is incorrect. It is cumulative emissions that matter more since cumulative emissions reflect the
stock of CO2 (not annual emissions) in the atmosphere. It is the total stock, not the annual flow, that
affects the changes in climate. (p. 74)

B is incorrect. There is no global consensus on whether it is the countries that are responsible for the
greatest share of new emissions or those responsible for the greatest share of cumulative emissions
(not annual; i.e., the total stock), are most responsible for climate change. (p. 74)

C is incorrect. Of current (as of 2017) emissions at regional levels, Asia accounts for over half (53%),
with North America at 18%, and Europe at 17%. (p. 74)

Learning Objective: Understand the relative scale of emissions by country.

Reference: Chapter 4: Sustainability and Climate Policy, Culture, and Governance

104
70. The ERM team for a mid-size bank plans to use the Paris Agreement Capital Transition Assessment
(PACTA) tool to assess the transition risk of their loan book. The team plans to use PACTA’s two main
alignment metrics of Production Volume Trajectory and Technology/Fuel Mix. Due to a lack of clear
sectoral decarbonization pathways, an ERM analyst notes that an emissions intensity metric would be
a better measure of climate transition risk for some sectors. For which sector would the emissions
intensity metric be more appropriate?

A. Power generation
B. Automotive
C. Cement
D. Fossil fuels

Correct Answer: C

Explanation: C is correct. The cement sector is considered a sector for which no mature alternative
low-carbon technology exists today and that is why there are no clear decarbonization pathways to
assess transition risk. (p. 159)

A is incorrect. There exist other mature alternative low-carbon technologies for the power sector. (p.
159)

B is incorrect. There exist other mature alternative low-carbon technologies for the automotive
sector. (p. 159)

D is incorrect. There exist other mature alternative low-carbon technologies for the fossil fuels sector.
(p. 159)

Learning Objective: Explain how scenario analysis is used for assessing transition risk.

Reference: Chapter 7: Climate Models and Scenario Analysis

105
71. The chief operating officer (COO) of a large manufacturing company observes the total quantity of
GHG emissions increased slightly over the previous year. The COO consults with the CSO, who
explains the company is making progress reducing its climate impact from emissions, despite the
quantity increase. What response could best justify the CSO’s claim?

A. Filters on industrial exhausts decreased aerosol emissions.

B. The company eliminated nitrous oxide emissions.
C. Methane emissions replaced CO2 emissions in terms of release percentage.
D. The company replaced use of nuclear energy with hydropower.

Correct Answer: B

Explanation: B is correct. Nitrous oxide has very high GWP. If the company had produced
significant amounts of this gas and eliminated it completely, the beneficial impacts of this action
would likely offset a small increase in other GHGs. (p. 8-9)

A is incorrect. Reducing aerosols might have environmental health benefits, but aerosols typically
have a cooling effect, so reducing these wouldn’t likely directly lead to climate benefits. (p. 9)

C is incorrect. Replacing carbon with methane would increase the GWP and climate impact. (p. 8-9)

D is incorrect. This would not have a significant impact either way, both sources do not release
GHGs. (p. 19)

Learning Objective: Know the primary greenhouse gases and aerosols, their sources, and relative
contribution to climate change.

Reference: Chapter 1: Foundations of Climate Change

106
72. A large integrated energy company prepares its annual GHG inventory. The company’s sustainability
director organizes data according to the GHG Protocol. Which emissions should the director
categorize as Scope 2 for the company?

A. Emissions resulting from the generation of purchased electricity that is consumed during
transmission and distribution
B. Emissions resulting from the generation of electricity that has been purchased for resale to end-
users
C. Emissions resulting from the combustion of fuels in stationary sources
D. Emissions resulting from the combustion of fuels in company owned/controlled mobile combustion
sources

Correct Answer: A

Explanation: A is correct. Emissions from the generation of purchased electricity consumed during
transmission and distribution are reported in scope 2 by the company that owns or controls the T&D
operation. (p. 79-81, and GHG Protocol, p. 27-28)

B is incorrect. Emissions from the generation of electricity purchased for resale to end-users are
reported in scope 3 under the category “generation of electricity that is purchased and then resold to
end users.” (GHG Protocol, p. 28)

C is incorrect. Emissions resulting from the combustion of fuels in stationary sources are reported in
scope 1. (p. 79-81)

D is incorrect. Emissions resulting from the combustion of fuels in company owned/controlled mobile
combustion sources are reported in scope 1. (p. 79-81)

Learning Objective: Describe and differentiate between Scope 1, 2, and 3 emissions.

Reference: Chapter 4: Sustainability and Climate Policy, Culture, and Governance

107
73. A global health institution seeks to understand the emerging variants of the COVID-19 disease as
updated strategies and activities increasingly tie into the SDGs of the 2030 Agenda. Due to increasing
stakeholder alignment pressure, the institution incorporates SDGs into an updated strategy. Which of
the following accurately identifies the key features of the 2030 Agenda that the health institution
recognizes?

A. The Agenda measures government alignment on environmental and social criteria.

B. The Agenda specifically targets economic development in developing regions and countries.
C. The Agenda focuses on habitat, health, hunger, and humanity to promote the Millennium
Development Goals.
D. The Agenda focuses on people, planet, prosperity, and peace, and is all-encompassing.

Correct Answer: D

Explanation: D is correct. The 2030 Agenda and sustainable development focuses on people,
planet, prosperity, peace and is a broad and all-encompassing set of goals. (p. 33-34)

A is incorrect. This is a partial definition of sustainable development, and does not accurately answer
the question. (p. 30)

B is incorrect. This is a partial definition of the Millennium Development Goals but is neither fully
correct nor does it correctly answer the question. (p. 33)

C is incorrect. This is a plausible-sounding, yet incorrect explanation of the 2030 Agenda and
sustainable development. (p. 33)

Learning Objective: Identify the key features of the Millennium Development Goals and 2030
Agenda.

Reference: Chapter 2: Sustainability

108
74. A large bank in Germany establishes a sustainability department after new research results show an
increasing stakeholder desire to implement sustainable practices in all parts of the bank. The bank's
CSO prepares a comprehensive sustainability framework for the management board consideration.
The CSO harmonizes definitions of sustainable finance subtypes and explains their application. What
sustainable finance subtype explanation should the CSO include in the proposal?

A. Climate finance refers to financial flows for mitigation and adaptation projects related to climate
change.
B. Climate finance identifies climate-related financial flows that historically put weight predominantly
on private sector activities.
C. Green finance encompasses all sustainable finance activities, but mostly emphasizes environmental
protection.
D. Green finance focuses on environment-related risks and opportunities specifically relating to
climate change.

Correct Answer: A

Explanation: A is correct. Climate finance refers exclusively to financial flows relating to climate
change, whether mitigation or adaptation. (p. 95)

B is incorrect. Climate finance refers to financial flows relating to climate change, and it historically is
associated with the public sector more than with private-sector funding. (p. 95)

C is incorrect. Green finance encompasses environment-related risks and opportunities, not all
sustainable finance activities. (p. 95)

D is incorrect. Green finance refers to sustainable finance that focuses on environment-related risks
and opportunities that often include climate change but not necessarily. (p. 95)

Learning Objective: Define and describe sustainable, green, and climate finance and understand
their application.

Reference: Chapter 5: Green and Sustainable Finance: Markets and Instruments

109
75. An agricultural company in southern Europe evaluates crop yield. The evaluation reveals high
temperatures and water shortages will likely harm crop production. The company engages a team of
climate risk technology consultants to provide guidance on smart irrigation technologies to diagnose
when and how much a crop needs irrigating. To prepare for the new technology implementation, the
company’s senior risk director updates the company ERM strategy to include climate risk
considerations in the risk governance process. What recommendation should the director provide
about the implementation of a risk governance process?

A. Require accountability at all levels of the company, and the company should allocate
responsibilities on climate-related issues to specified senior executives.
B. Involve goal setting that revolves around climate change mitigation, driven by various risk
objectives such as CSR.
C. Risk department articulates any potential climate risk effects on business operations and strategy.
D. Senior management communicates climate risk exposure both internally and to external
stakeholders, and provides public disclosure of practices.

Correct Answer: A

Explanation: A is correct. Effective risk governance enables understanding and diffusion of

knowledge as well as accountability at all levels of an institution. TCFD recommendations on
governance have helped prompt many companies to institute climate risk governance structures and
to allocate responsibility to specified senior executives. (p. 136)

B is incorrect. This describes the strategy and setting objectives, goals, and targets component of the
ERM process. (p. 136)

C is incorrect. This describes the performance component of the ERM process; specifically, the risk
identification sub-component. (p. 138)

D is incorrect. This describes the communication, reporting, and disclosure component of the ERM
process. (p. 140)

Learning Objective: Examine how climate risk drivers can be incorporated into existing ERM
frameworks.

Reference: Chapter 6: Climate Risk Measurement and Management

110
76. A newly established impact investing firm formulates its corporate strategy to generate investment
returns with social and environmental impacts for investors. A team of risk consultants is hired to
advise on investment structure and the potential risks the firm may face. The team prepares a report
to recommend data types and analytical tools to evaluate transition and physical risk impact at the
company level. How should the company evaluate company-level transition risk?

A. Use data from the Coupled Model Intercomparison Project, versions 5 or 6, to gauge climate
hazards.
B. Calculate CVaR to provide quantitative estimates of expected financial losses or gains from climate
risks and opportunities.
C. Categorize emissions as Scope 1, Scope 2, or Scope 3 as part of the GHG Protocol.
D. Develop company-level scores that combine proprietary methodologies to downscale and
normalize climate model data.

Correct Answer: C

Explanation: C is correct. The GHG Protocol provides a way of categorizing emissions, and is an
example of company-level transition risk data. (p. 130)

B is incorrect. Climate Value at Risk (CVaR) is an approach to use at the macro level, relating to
systemic risk and financial stability. CVaR gives a quantitative estimate of the expected financial
losses or gains from climate risks and opportunities. (p. 128)

A is incorrect. This is an example of company-level physical risk data. Data for gauging physical
hazards is provided by global climate models developed by climate scientists for the periodic reports
of the IPCC; an example is the Coupled Model Intercomparison Project, versions 5 or 6. (p. 132)

D is incorrect. This is an example of company-level physical risk data. Company-level scores, as sold
by Four Twenty Seven, Carbone 4, and Trucost, provide offerings that combine the proprietary
methodologies of downscaling and normalizing climate model data with detailed facility-level location
information of firms, mainly those that are publicly listed. (p. 133)

Learning Objective: Describe the data types and analytical tools to measure transition and physical
risks at the company-level and their sources.

Reference: Chapter 6: Climate Risk Measurement and Management

111
After reviewing the following case study, answer questions 77-80.

The Lowlands Pension Fund (LPF) in the United Kingdom manages approximately GBP 40 billion in
investments and provides two dozen portfolio options to clients. LPF manages investments for 13 local
government pension funds. LPF published its first TCFD disclosure last year with the following highlights:

An early adopter of sustainable investing among peers, LPF is a signatory of the PRI and member
of Climate Action 100+, among other initiatives. To understand exposure in high-carbon sectors,
LPF contracts with a data provider to understand the Scope 1 and Scope 2 emissions and several
categories of Scope 3 emissions of its portfolios. The sustainability team has identified carbon-
intensive holdings as a significant risk and developed several renewable and infrastructure
portfolios to take advantage of climate-related opportunities.

In 2022, LPF updated its climate policy to include the following objectives:

1. Commit to Net Zero by 2050;

2. After an annual portfolio review identifying holdings with high climate risk exposure, actively
engage investee companies on climate risks and opportunities;
3. Establish strategies to achieve science-based climate targets according to SBTi recommendations
for a sectoral decarbonization approach.

To achieve objective 2, LPF examines the weighted average carbon intensity (WACI) of four selected
holdings in a high-growth portfolio, using the information in the table below:

Company
Alpha Beta Gamma Delta
tCO2e 550,000 500,000 2,000,000 300,000
Revenue (GBP mm) 10,000 8,000 200,000 12,000
Portfolio weight 10% 8% 15% 12%

LPF will designate any company in the portfolio with a contribution to WACI of 5 or higher as a high-
WACI-contribution company. For these companies, LPF will review any available company climate-
transition plans to recommend potential improvements, and if no transition plans are available LPF will
engage senior management by recommending they clarify or enhance the company’s climate transition
plan. One high-WACI-contribution company provides a transition plan, highlighted below:

Investee transition plan:

• Overall corporate pledge of Net Zero by 2050 covering Scope 1 and 2 emissions
o Reduce emissions steadily over the next 30 years, with the majority of emissions
reduction between 2040 and 2050;
o Continue pursuit of carbon offsets via investments in renewable energy;
o Provide additional training and resources on low-carbon transitions for operations in
developing countries;
o Consider ecological and social repercussions of any mitigation or adaptation projects.

112
77. What strategy could LPF take with existing portfolio companies to implement Objective 3?

A. Encourage portfolio companies in high-emission sectors to follow through on science-based

targets.
B. Align all companies within the portfolio with global temperature targets.
C. Divest from companies with unambitious carbon reduction targets.
D. Set emissions intensity targets and engage investment managers to influence companies in high-
emission sectors.

Correct Answer: D

Explanation: D is correct. The SBTi sectoral decarbonization approach asks financial organizations
to set emission intensity targets for investments and loans for emission intensive sectors. (p. 182)

A is incorrect. This aligns with the SBTi “portfolio coverage” approach in which financial institutions
work toward ensuring investee companies commit to their own respective science-based targets. (p.
182)

B is incorrect. This aligns with the “temperature rating” approach in which financial institutions try to
align a portfolio with a temperature target. (p. 182)

C is incorrect. This does not directly address the “sectoral approach” recommended by SBTi and
active engagement is encouraged before divestment or portfolio realignment. Divestment is a
complimentary approach. (p. 182)

Learning Objective: Describe the factors that affect different sectors’ abilities to achieve net-zero.

Reference: Chapter 8: Net Zero

113
78. What companies, with a WACI-contribution higher than 5, will LPF engage?

A. Alpha, Beta
B. Alpha, Gamma
C. Gamma, Delta
D. Beta, Delta

Correct Answer: A

Explanation: A is correct. LPF will engage companies with a WACI-contribution at or above 5. The
formula for WACI-contribution is: portfolio weight * tCO2e/mm revenues (p. 52 of TCFD). For Alpha
and Beta, respectively, this is:

10% x 550,000 ÷ 10,000 = 10% x 55 = 5.50

8% x 500,000 ÷ 8,000 = 8% x 62.50 = 5.00

Company
Alpha Beta Gamma Delta
tCO2e 550,000 500,000 2,000,000 300,000
Revenue (GBP mm) 10,000 8,000 200,000 12,000
Carbon Intensity 55 62.50 10 25
Portfolio weight 10% 8% 15% 12%
WACI contribution 5.50 5.00 1.50 3.00

B is incorrect. This selection contains Gamma, which has a WACI-contribution below 5, thus, LPF will
not engage. (p. 52 of TCFD)

C is incorrect. This selection contains Gamma and Delta, companies with a WACI-contribution below
5, thus, LPF will not engage. (p. 52 of TCFD)

D is incorrect. This selection contains Delta, which has a WACI-contribution below 5, thus, LPG will
not engage. (p. 52 of TCFD)

Learning Objective: Fully calculate the weighted average carbon intensity of investments, total
carbon emissions, and carbon footprint given a set of inputs.

Reference: Chapter 6: Climate Risk Measurement and Management; Implementing the

Recommendations of the Task Force on Climate-related Financial Disclosures,” Task Force on
Climate-related Financial Disclosures, October 2021. (p 52-54).

114
79. How should LPF recommend the high-WACI-contribution company improve its transition plan?

A. Prioritize reductions in Scope 2 emissions over Scope 1.

B. Backload emission reductions closer to 2050.
C. Shift to carbon removal offsetting.
D. Consider factors beyond GHG emissions.

Correct Answer: C

Explanation: C is correct. Section 8.4/Box 8.3 discusses concerns about carbon offsets. The Oxford
Principles for Net Zero Aligned Carbon Offsetting recommend shifting to carbon removal offsetting
and the SBTi only acknowledges carbon removal projects, not avoidance offsets, which is what
investing in renewable projects are. (p. 182-185)

A is incorrect. This chapter does not recommend this. (p. 183)

B is incorrect. This is the opposite of the recommendations, this section recommends “front-loading”
emission reductions and reducing as soon as possible to meet Paris commitments. (p. 183)

D is incorrect. The company transition plan already considers ecological and social impacts. This
aligns with point 6 of the seven attributes listed on p. 183-184.

Learning Objective: Describe how organizations use transition plans to pursue net-zero carbon
emissions and the tools private-sector actors can use to verify the credibility of net-zero
commitments.

Reference: Chapter 8: Net Zero

115
80. How can LPF improve disclosure to cover all four core elements of TCFD recommendations?

A. Describe how management reviews and incorporates climate risks into decision making.
B. Identify climate-related risks and opportunities.
C. Specify a process for identifying climate risks.
D. Highlight organizational climate targets and the metrics to achieve targets.

Correct Answer: A

Explanation: A is correct. The scenario does not discuss how LPF management (or board) reviews
climate risks. This is part of the TCFD’s Governance “core element.” (p. 14-15 of TCFD)

B is incorrect. In the scenario, LPF has already identified carbon-intensive holdings as a significant
risk and developed several renewable and infrastructure portfolios to take advantage of climate-
related opportunities.” This is part of the “Strategy” core element. (p. 14-15 of TCFD)

C is incorrect. An annual portfolio review of holdings with high climate risks is a “process” for
identifying and assessing climate risks. This is part of the “Risk Management” core element. (p. 14-15
of TCFD)

D is incorrect. LPF lists a net zero goal and that it uses Scope 1, 2 and 3 metrics. This is part of the
“Metrics and Targets” core element. (p. 14-15 of TCFD)

Learning Objective: Describe recommendations for TCFD disclosure parameters designed for all
sectors.

Reference: Chapter 3: Climate Change Risk; Implementing the Recommendations of the Task Force
on Climate-related Financial Disclosures,” Task Force on Climate-related Financial Disclosures,
October 2021. (p 14-22).

116
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