A fund that invests in the best ESG performers across industries uses both positive screening to select companies with strong ESG performance and norms-based screening to ensure they meet international norms and standards. (ESGTextBook[PallasCatFin], Chapter 7, Page 325)

An Emissions Trading System (ETS), also known as a cap-and-trade system, is designed to control and reduce greenhouse gas (GHG) emissions by setting a total emissions cap and allowing participants to trade allowances.
How it works:
A government or regulator sets a cap on total emissions.
Companies receive or buy carbon allowances (permits to emit a certain amount of CO#).
Companies can trade allowances-if they emit less, they can sell excess permits; if they emit more, they must buy additional permits.
Key examples:
EU Emissions Trading System (EU ETS) (largest globally)
California Cap-and-Trade Program
China's National Carbon Market (launched in 2021)
Why not A or B?
A is incorrect because an ETS does not directly set a price on carbon-it allows the market to determine the price based on supply and demand.
B is incorrect because an ETS does not involve direct investment in renewable energy (that would be carbon offset programs).
References:
European Commission: EU Emissions Trading System (ETS)
World Bank: State and Trends of Carbon Pricing 2023

Integrating ESG factors into private equity investments can be challenging due to various factors, including the capabilities and resources of the investee companies.
1. Capacity for ESG Reporting: Private equity investee companies often lack the capacity to fulfill ESG reporting requirements. These companies may not have the necessary resources, expertise, or infrastructure to collect, analyze, and report on ESG metrics, making it difficult for private equity investors to obtain reliable ESG data.
2. Long-Term Orientation and Transparency:
Strategy and Long-Term Orientation (Option A): Private equity managers typically focus on long-term value creation, which aligns with the objectives of ESG integration. Therefore, the lack of long-term orientation is less likely to be a significant challenge.
Reporting Frameworks (Option C): While reporting frameworks may pose challenges, the primary issue is often the lack of capacity within investee companies to meet these requirements.
Reference from CFA ESG Investing:
ESG Reporting Capacity: The CFA Institute discusses the challenges related to the capacity of private equity investee companies to fulfill ESG reporting requirements. This includes the lack of dedicated resources and expertise necessary to implement robust ESG reporting systems.
Private Equity ESG Integration: Understanding the specific challenges faced in private equity ESG integration helps investors develop strategies to address these issues, such as providing support and resources to investee companies.
In conclusion, the lack of capacity within the investee company to fulfill ESG reporting requirements is most likely a challenge an investor may face in ESG integration in private equity, making option B the verified answer.

ESG factors can create new sub-asset classes(e.g.,green bonds, impact investing funds) that affectrisk-return trade-offs in mean-variance optimization (MVO) models.
* MVO assumes that ESG factors can impact risk-adjusted returns, meaning ESG data can influenceasset weightings and expected volatility.
* Regional asset mixes (B) are still relevant for ESG investing, and ESG factorsdo impact expected returns and volatility (C).
References:
* CFA Institute ESG Portfolio Optimization Framework
* MSCI ESG Risk-Adjusted Return Analysis
* Principles for Responsible Investment (PRI) Guide to ESG Factor Integration
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ESG ratings can be noisy due to variations in methodology, data sources, and subjective judgments by rating agencies, leading to inconsistencies across ratings for the same company. (ESGTextBook[PallasCatFin], Chapter 7, Page 364)