CESGA common mistakes
CESGA · Understand the traps and how to avoid them.
Treating ESG integration as a values-based screening process, so when asked to distinguish it from negative screening or best-in-class selection, the candidate describes excluding sin stocks or picking leaders rather than adjusting valuation inputs or forecasts for material ESG factors.
Candidates conflate the broad term 'ESG investing' with its sub-strategies and rely on everyday usage where ESG is synonymous with ethical exclusion; they have not internalised that integration is an analytical technique that changes expected cash flows, discount rates, or risk assessments.
What to do instead
Build a one-page comparison table of the main strategies (negative screening, positive/best-in-class, norms-based screening, ESG integration, thematic, impact, active ownership) with columns for decision mechanism, portfolio effect, and typical evidence used. For integration specifically, practise writing two sentences that name the financial variable affected (e.g., higher cost of capital for a carbon-intensive utility) rather than an ethical judgement.
When a question asks how a specific ESG factor affects a valuation, the candidate answers with a generic statement that ESG 'reduces risk' or 'enhances long-term returns' instead of identifying the channel-revenue, operating costs, capex, cost of capital, or asset life-and the direction of the effect.
Study material often presents ESG as a risk-management narrative, so candidates memorise conclusions without practising the mechanical link from a factor to a financial line item; exam questions that ask for the transmission mechanism expose this gap.
What to do instead
For each of ten common factors (carbon pricing, water scarcity, product safety, labour relations, board independence, data privacy, etc.), write a line showing the factor → affected financial statement line → valuation input → directional impact. Practise with a simple discounted cash flow: state which of the five value drivers changes and why. Use past-exam-style scenarios to rehearse this mapping under time pressure.
Describing climate risk as a single category-usually physical risk-and failing to separate transition risk into policy, technology, market, and reputational sub-drivers, or misclassifying a stranded-asset write-down as a physical risk.
Physical risk is more intuitive and widely covered in introductory material; transition risk requires knowing the TCFD/ISSB taxonomy and the difference between chronic and acute physical hazards. Candidates skim the taxonomy and then apply labels loosely.
What to do instead
Create a two-by-two grid (physical vs transition, acute vs chronic) and place at least fifteen concrete examples in the correct cell, including policy (carbon tax), technology (battery cost decline), market (shifting demand), reputational (litigation), acute physical (flood), chronic physical (rising mean temperature). Then practise classifying short scenarios and justifying the label with the mechanism, not the sector.
Confusing scenario analysis with sensitivity analysis or stress testing, and treating a 2°C scenario as a forecast; the candidate describes scenarios as predictions and fails to explain that they are exploratory, internally consistent pathways used to test strategic resilience.
The terms are used interchangeably in general finance, and candidates have not encountered the climate-specific convention that scenarios are not probabilistic forecasts. They also miss the requirement to disclose assumptions and the choice of reference scenarios (e.g., NGFS phases).
What to do instead
Write a short definition for each of the three techniques with one example of when each is appropriate. Memorise the key features of climate scenarios: plausible, challenging, internally consistent, not forecasts, with clearly stated assumptions and time horizons. Practise answering a question that asks why a company might use a 1.5°C and a 3°C scenario together rather than a single central case.
Treating the 'S' as a single bucket and answering social questions with governance examples, or reducing social factors to employee diversity while ignoring supply-chain labour, product safety, community relations, and access/affordability issues.
Social factors are less standardised than environmental or governance factors, and candidates default to the topics they know from news coverage (diversity) or borrow governance language (board oversight). The lack of a single reporting framework encourages vague answers.
What to do instead
List the recognised social topic areas-workforce (health and safety, labour relations, diversity and inclusion, training), value-chain workers (forced labour, child labour, supplier audits), affected communities, customers and end-users (product safety, data privacy, access and affordability)-and for each write one metric or disclosure and one financial channel. Distinguish social from governance by asking whether the issue concerns people and relationships with stakeholders versus decision-making structures and controls.
Answering governance questions by listing board committees or describing 'good governance' in general terms, without linking specific mechanisms-board independence, separation of chair and CEO, audit committee expertise, say-on-pay, dual-class shares, related-party transactions-to the agency problem or to a financial consequence.
Governance content overlaps with corporate finance and law, so candidates rely on broad familiarity and produce descriptive rather than analytical answers. They also miss that governance is the most established ESG pillar in valuation and assume it needs less precision.
What to do instead
For each governance mechanism, write the agency conflict it addresses and the observable indicator (e.g., percentage independent directors, CEO/chair separation, auditor tenure, related-party transaction disclosure). Then practise a question that asks how a controlling-shareholder structure affects minority shareholders and the cost of equity, and answer with the mechanism, the evidence, and the valuation channel.
Mixing up the SFDR article classifications-treating Article 8 as 'sustainable investment' and Article 9 as 'ESG promotion', or assuming Article 8 products must have a sustainability objective-and applying the labels without reference to the underlying EU definitions.
The article numbers are easy to memorise in the wrong order, and the distinction between 'promotes environmental or social characteristics' (Article 8) and 'has sustainable investment as its objective' (Article 9) is subtle. Candidates also conflate SFDR with the Taxonomy Regulation.
What to do instead
Write the exact SFDR definitions for Article 6, 8, and 9 products and one distinguishing test for each. Separately, list what the EU Taxonomy does (defines environmentally sustainable economic activities via technical screening criteria, do-no-significant-harm, and minimum social safeguards) and how it interacts with SFDR disclosures. Practise classifying three short fund descriptions and stating which article applies and why.
Confusing the roles of the ISSB, EFRAG, and the EU institutions in standard-setting-for example, stating that the ISSB issues ESRS or that EFRAG is the EU regulator-and failing to distinguish IFRS S1 (general sustainability disclosures) from IFRS S2 (climate).
The reporting landscape changed rapidly with the creation of the ISSB and the adoption of ESRS, and older study material may still refer to predecessor bodies. Candidates learn the acronyms without mapping each to its output and legal status.
What to do instead
Build a table with columns: body, legal status, output, scope, and effective date. Include ISSB (IFRS S1 and S2, global baseline, issued by the ISSB under the IFRS Foundation), EFRAG (technical advice to the European Commission), ESRS (mandatory under CSRD, adopted via delegated act), and GRI (widely used, impact-focused). Then answer a question that asks which framework a large EU company must use and which a non-EU company might voluntarily adopt, citing the correct instruments.
Treating double materiality as two separate materiality assessments rather than one process with two dimensions-financial materiality (how sustainability matters affect the undertaking) and impact materiality (how the undertaking affects people and the environment)-and failing to apply the ESRS materiality assessment logic.
The term 'double' suggests duplication, and candidates with a financial-reporting background default to the investor perspective only. The ESRS requirement to consider impacts, including through the value chain, is often overlooked.
What to do instead
Write a precise definition of each dimension and a worked example where a matter is impact-material but not financially material (and vice versa). Memorise the ESRS process steps: understand the context, identify actual and potential impacts, assess severity and likelihood, and determine material information to report. Practise a short case where a company must decide whether to disclose a value-chain labour issue, and justify the conclusion using both dimensions.
Describing stewardship as voting at the annual general meeting only, omitting engagement, escalation, and the 'comply or explain' monitoring cycle, and failing to reference the relevant codes (e.g., the UK Stewardship Code, the ICGN Global Stewardship Principles, or the Shareholder Rights Directive II requirements for EU institutional investors).
Voting is the most visible stewardship activity, so candidates equate the two. The purpose of stewardship-promoting long-term value through monitoring and engagement-and the escalation tools (letters, meetings, voting against, requesting board changes) are learned superficially.
What to do instead
Write the stewardship cycle: setting policy, monitoring investees, engaging, escalating, voting, and reporting. For each stage, list two concrete actions and one disclosure requirement. Distinguish engagement from activism and from exclusion. Then practise a question that asks what an asset manager should do when engagement on climate lobbying fails, and structure the answer around escalation options and disclosure obligations.