- CFA Exams
- June 2019 Level II > Study Session 8. Corporate Finance: Financing and Control Issues > Reading 24. Corporate Governance
- 5. Environmental, social, and governance factors
Subject 5. Environmental, social, and governance factors
Investors should assess the following policies of corporate governance:
- Code of ethics.
- Directors' oversight, monitoring, and review responsibilities.
- Management's responsibility to the board.
- Reports of directors' oversight and review of management.
- Board self assessments.
- Management performance assessments.
- Director training.
A company's environmental, social, and governance (ESG) risk exposures are important factors to be considered for the company's long-term growth. Here are the risks:
- Legislative and regulatory risk: Risk that the government will pass new laws or regulations (e.g., emission standards.
- Legal risk: Potential for lawsuits to result from management's failure to adequately deal with one of the ESG factors.
- Reputational risk: Valuation impact of management's insufficient past attention to ESG factors.
- Operating risk: Possibility that a firm's operations will be negatively impacted by ESG factors.
- Financial risk: Risk of incurring a monetary cost due to ESG risk factors.
Study notes from a previous year's CFA exam:
f. describe elements of a company's statement of corporate governance policies that investment analysts should assess;
g. describe environmental, social, and governance risk exposures;