CFA Institute Sustainable-Investing Exam - Topic 3 Question 10 Discussion

Actual exam question for CFA Institute's Sustainable-Investing exam

Question #: 10
Topic #: 3

[All Sustainable-Investing Questions]

Which of the following is most likely an example of a negative externality?

AImpairment costs incurred by a company due to regulatory changes

BDirect costs incurred by a company in reducing environmental damages

CIndirect costs incurred by third parties due to environmental damages caused by a company

Show Suggested Answer

Suggested Answer: C

Negative externalities refer to the adverse effects or costs that are incurred by third parties due to the actions or activities of a company, without these costs being reflected in the company's financial statements. These are costs borne by society or the environment rather than the company itself. Examples include pollution, health costs due to emissions, and environmental degradation.

MSCI ESG Ratings Methodology emphasizes understanding externalities, including environmental impacts, as significant ESG risks that can translate into financial risks over time.

by Jody at Jan 05, 2026, 05:16 AM

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Reiko

17 days ago

I see your points, but A is also a concern with regulations.

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Luis

23 days ago

Definitely C. It highlights the hidden costs of business.

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Casey

28 days ago

Agreed! C shows the real impact on communities.

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Micaela

1 month ago

I think C is the best choice. Third parties suffer from pollution.

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Elza

1 month ago

I thought B could be a negative externality too, interesting!

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Timothy

1 month ago

C is spot on, those third parties really suffer!

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Marylou

2 months ago

Wait, are we sure about that? What about A?

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Ligia

2 months ago

Totally agree, C is definitely a negative externality!

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Annmarie

2 months ago

C seems like the right choice.

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Joaquin

2 months ago

C is the one. Negative externalities are all about the ripple effects that companies don't have to pay for. Classic example right here.

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Thaddeus

2 months ago

I'm going with C. Anything that hurts others but benefits the company is a textbook negative externality. Gotta love those econ concepts!

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Scot

3 months ago

Haha, this is a classic econ question. Of course the answer is C - the company is passing the buck to innocent bystanders. Classic negative externality move!

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Lemuel

3 months ago

I agree, C is the way to go. Negative externalities are all about the costs that get passed on to others, not the company itself.

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Paulina

3 months ago

Option C seems like the correct answer. Indirect costs to third parties due to environmental damages are a classic example of a negative externality.

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Sherita

4 months ago

I feel like I might be mixing things up, but I thought direct costs were usually not considered externalities. So, I’m leaning towards C as well.

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Van

4 months ago

I practiced a similar question where we had to identify externalities, and I remember that indirect costs often indicate a negative impact on others. So, C seems right to me.

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Na

4 months ago

I'm not entirely sure, but I remember something about externalities being costs not reflected in the market price. So, maybe A could be relevant too?

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Howard

4 months ago

I think option C sounds like a negative externality because it mentions third parties being affected. That aligns with what we discussed in class.

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Karan

4 months ago

I'm not totally sure, but I'm leaning towards C since it talks about costs incurred by third parties, which seems like the definition of a negative externality.

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