Strategic Risk Management
Risk is exposure to uncertain events that have the potential to impact the achievement of objectives, whether negatively (threats) or positively (opportunities). Our approach to risk management is aimed at helping AIMCo effectively reduce the likelihood and severity of adverse events, quickly respond when challenges arise and enhance management’s ability to capitalize on investment opportunities in the best interests of our clients.
AIMCo is in the business of prudent risk taking and risk management is at the heart of everything we do. It is the responsibility of everyone to identify, assess, manage, monitor and report on risks.
We do this by:
- Aligning to our Enterprise Risk Management (ERM) Framework, which specifies how AIMCo manages all key risks across the organization, including investment and non-investment risks. Top risks are assessed on an on-going basis, and assessments are reviewed with the Executive Committee and the Board of Directors.
- Explicitly incorporating management of top risks into our Corporate Strategy and five-year plan.
- Integrating the strategic planning process with risk management and seeking to ensure that risks taken in pursuit of our Corporate Strategy and objectives are understood and appropriately managed within approved risk appetite and tolerance.
- Ensuring appropriate board and executive oversight. Our Board of Directors provides ultimate risk oversight, in conjunction with management committees (see diagram below). In 2023, the Operating Committee was established as a management committee responsible for oversight of corporate planning, budgeting and corporate initiative prioritization and execution.
- Setting the “tone from the top” regarding the importance of risk management in all our activities by the Executive Committee members, led by the CEO.
- Understanding client investment objectives, risk appetites and strategic plans. This is reflected in the risk limits and monitoring that governs our products and strategies and is an integral part of our ongoing client relationships.
- Promoting a risk-conscious culture by implementing risk policies, guidelines and control processes with clear roles and responsibilities within the three lines model. Employees attend regular training on expected behaviors for core risk management and compliance as well as training on updated aspects of our programs that impact their daily work.
Governance Structure
2023 Key Initiatives
- Refreshed the Liquidity Risk Management Policy and refined liquidity and leverage measurements
- Enhanced scenario analysis by incorporating new scenarios and executing a variety of sensitivity and stress tests, which play a crucial role in guiding investment and risk management decisions
- Performed deep dive reviews on credit risk and concentration risk
- Improved risk reporting to clients including integration of risk reports into the new client service portal
- Provided compliance assurance for clients and continued to engage clients on their investment risk appetite and tolerance
- Established an operational risk event collection and analysis program and further matured the Model Risk and Third Party Risk Management programs
- Enhanced Risk Appetite Statements for various risk types and expanded the Key Risk Indicator Program for key non-investment risks
Key risks we monitor and manage
Investment Risk
Risk that an investment fails to achieve its risk-adjusted objective
- independently assess and measure the risk being taken and challenge accordingly
- seek to ensure investment strategies have a risk/return profile consistent with product descriptions
Liquidity Risk
Risk resulting from having to settle payment obligations as they come due
- seek to ensure a supply of high-quality liquid assets and diverse funding sources to meet potential liquidity demands in a stressed environment and over multiple time horizons
- stress test various scenarios to assess resiliency to a liquidity crisis; independently measure and monitor liquidity risk at the client level
Information Security Risk
Risk arising from unauthorized access, misuse, disclosure, disruption, modification, or destruction of information and/or information systems
- maintain a dedicated team of cyber security professionals
- continue to invest in cyber resilience posture that is commensurate with the increased sophistication of threats
Corporate Execution Risk
Risk resulting from the failure to effectively implement strategic organizational and transformational initiatives or absorb change
- effective planning, resource allocation, implementation and monitoring of strategic initiatives and transformational programs
- establish robust governance structure to oversee strategic initiatives and transformational programs
- maintain effective change communication that is clear and provides consistent messaging
- continuously evaluate progress to ensure the change process stays on track and enable timely intervention, remediation and/or recalibration, as needed
People & Culture Risk
Risk due to the failure to effectively and appropriately attract, develop, manage and retain a highly engaged, skilled and diverse workforce; maintain and demonstrate AIMCo’s core values and expected behaviours
- Modernize our people and culture experience
- Prioritize workloads
- Offer services that support mental health needs
- Develop our people through training and leadership programs
Emerging risks
As risk managers, we focus not only on current risks, but also on understanding opportunities we need to capture and threats we need to manage. Emerging risks include:
Geopolitical Risk
About 49% of the world's population will participate in elections in 2024, which could lead to different governments and policy changes that may influence global investors like AIMCo. The U.S. Presidential election affects fiscal policy and the long-term solvency of U.S. government debt, economic policy, foreign policy, immigration, trade policy and the increasing fragmentation of global trade.
Fragmentation extends beyond global trade. Countries are increasingly aligning regionally and ideologically in an emerging multipolar world. These factors make it harder to reach agreement on how to deal with ongoing and expanding global conflicts and geopolitical issues that affect global financial markets, as well as trade and business. Some examples of these include the Russia-Ukraine war, Hamas-Israel conflict, Houthi militant attacks on shipping in the Red Sea, territorial disputes that could escalate into wars if not resolved (e.g. Guyana/Venezuela, Sino-Indian border), geopolitics in the Indo-Pacific region, and U.S.-China relations.
Geopolitical events, unlike macroeconomic events, do not have a well-established playbook for the delivery of desired outcomes, making the management of risks associated with such events challenging. To navigate these complexities and make appropriate and well-informed risk and investment management decisions, our teams regularly receive briefings on geopolitics from experts, monitor geopolitical developments, incorporate potential geopolitical events into our scenario analysis, and stress test clients’ portfolios.
Technology Revolution
The world is undergoing a technological transformation. A key driver of this technological revolution is artificial intelligence (AI), an innovation that many compare to the importance of the invention of electricity.
AI is a hot topic that has a huge influence on the U.S. stock markets through seven companies that are focused on AI, known as the Magnificent 7 (an informal term which refers to these seven companies: Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta Platforms, and Tesla). Despite economic challenges and pressures from various global conflicts, these mega-cap companies with high valuations drove the S&P 500 index and Nasdaq 100 index to perform well in 2023. However, most of the mega-cap AI-themed companies seem to have very high expectations; any disappointment in earnings leads to more stock price fluctuations, which affects the performance of the S&P 500 index.
Valuation of these AI mega-caps is not the sole significant risk here. Other risks include concentration risk due to dependence on a few large players, increased energy demand for computational power and cooling requirements, biases, AI-enabled cyberattacks and disinformation, intellectual property/data privacy concerns, AI regulation, and competition over advanced AI chips and export restrictions.
The next stage of this technology revolution offers both challenges and possibilities, as leading companies move from building infrastructure and training models to applying AI inference work (the process of using a trained AI model to make predictions, decisions or complete a task based on new, unseen data) and using AI in real-world situations. This next stage also involves developments like quantum computing, bio-pharma innovation, more research on carbon capture and storage technology, fusion energy at scale, better battery storage technology, and the growing production of cheap electric vehicles, especially from China.
This technology revolution will bring changes to how businesses operate. Some will succeed while others may struggle, opening up possibilities for thematic investments. Our Investment Risk team is committed to researching and tracking these changes and ensuring we understand and manage the risks to help our clients achieve their long-term goals.