CFA Climate Risk Sample Questions & Practice Test

CFA Institute Climate Risk, Valuation, and Investing is a route for candidates who need to connect climate risk, scenario analysis, valuation, portfolio construction, stewardship, disclosure, and greenwashing risk.

These original sample questions preview the reasoning style a Finance Prep route should use. They are not official CFA Institute exam questions.

What this route should test

• distinguishing physical and transition climate risks
• translating climate assumptions into valuation, credit, and portfolio implications
• evaluating disclosures, targets, stewardship, and greenwashing risk
• applying scenario analysis without treating it as a point forecast

Sample Exam Questions

Question 1

Topic: transition risk

A cement producer faces rising carbon prices and must invest in lower-emission production. Which risk is most direct?

• A. Custody risk only
• B. Transition risk
• C. Check-clearing risk
• D. Simple settlement error

Best answer: B

Explanation: Transition risk comes from policy, technology, market, and legal changes associated with moving toward a lower-carbon economy.

Question 2

Topic: physical risk

A coastal property portfolio has increasing exposure to storm surge and flooding. What type of climate risk is highlighted?

• A. Pure currency translation
• B. Short-sale recall risk
• C. Mutual fund expense risk
• D. Physical risk

Best answer: D

Explanation: Physical risk arises from acute events and chronic changes such as flooding, wildfire, heat, drought, and sea-level rise.

Question 3

Topic: valuation

How can carbon-pricing assumptions affect equity valuation?

• A. By changing expected costs, margins, capital expenditure, and cash flows
• B. By eliminating the need for discount rates
• C. By guaranteeing higher multiples
• D. By making revenues irrelevant

Best answer: A

Explanation: Climate assumptions can affect projected cash flows, reinvestment needs, risk, and terminal value. They should be incorporated where material.

Question 4

Topic: scenario analysis

What is the best use of climate scenario analysis?

• A. Replace all financial statements
• B. Guarantee portfolio performance
• C. Explore plausible pathways and sensitivities, not predict one exact future
• D. Avoid documenting assumptions

Best answer: C

Explanation: Scenario analysis tests resilience under different assumptions. It is not a single forecast or guarantee.

Question 5

Topic: disclosure

A company reports emissions targets but omits scope, baseline year, and progress metrics. What is the main concern?

• A. The target is automatically invalid
• B. The target is difficult to assess without clear methodology and evidence
• C. Disclosures are never useful
• D. Investors should ignore all climate data

Best answer: B

Explanation: Climate targets need scope, baseline, methodology, governance, and progress reporting to be investment-useful.

Question 6

Topic: portfolio construction

An investor lowers portfolio carbon intensity by selling high-emitting companies but does not evaluate sector concentration. What risk remains?

• A. Guaranteed lower volatility
• B. Elimination of climate risk
• C. No need for benchmark comparison
• D. Unintended factor or sector exposures

Best answer: D

Explanation: Portfolio climate metrics can change exposures. Investors should evaluate tracking error, sector weights, factor tilts, and mandate fit.

Question 7

Topic: stewardship

An investor holds a company with weak transition disclosure but believes engagement can improve governance. Which action fits stewardship?

• A. Engage with defined expectations, vote thoughtfully, and monitor progress
• B. Ignore voting rights
• C. Publish unsupported accusations only
• D. Buy more shares without analysis

Best answer: A

Explanation: Stewardship can include engagement, voting, escalation, and monitoring aligned with investment objectives.

Question 8

Topic: greenwashing

A fund markets itself as climate-aligned but cannot explain portfolio criteria, data sources, or transition methodology. What is the concern?

• A. Excessive transparency
• B. Guaranteed impact
• C. Potential greenwashing
• D. No disclosure risk

Best answer: C

Explanation: Greenwashing risk rises when claims are not supported by methodology, holdings, data, and reporting.

Question 9

Topic: credit analysis

How can climate risk affect credit analysis?

• A. It only affects equity investors
• B. It can affect asset values, operating costs, regulation, refinancing, and default risk
• C. It eliminates covenant analysis
• D. It guarantees lower spreads

Best answer: B

Explanation: Climate-related risks can affect leverage, collateral value, cash flows, transition cost, and refinancing risk.

Question 10

Topic: data quality

An analyst estimates missing emissions data using industry averages. What should be disclosed?

• A. That estimates are exact facts
• B. That no uncertainty exists
• C. That methodology does not matter
• D. Data limitations and sensitivity to assumptions

Best answer: D

Explanation: Climate datasets often include estimates. Analysts should explain limits and test whether conclusions depend heavily on assumptions.

Question 11

Topic: stranded assets

What does stranded-asset risk mean?

• A. Assets may lose economic value because market, policy, or technology conditions change
• B. Assets are stored in a warehouse
• C. Assets cannot be audited
• D. Assets always appreciate

Best answer: A

Explanation: Fossil reserves, infrastructure, or equipment can be impaired if transition pathways reduce expected economic use or value.

Question 12

Topic: materiality

Which climate factor is most likely material for an insurer?

• A. The color of the company website
• B. The number of office chairs
• C. Changing claims exposure from severe weather and catastrophe risk
• D. The length of the annual report title

Best answer: C

Explanation: Insurers may face material climate risk through underwriting, claims, reserves, reinsurance, investment portfolios, and capital planning.