A new approach to RI mainstreaming – making use of the “new risk” agenda

A new approach to RI mainstreaming – making use of the “new risk” agenda

Asset owners have repeatedly said they would like to see better risk management in their investment supply chain but the new study described below indicates that this change is happening very slowly. There are three points which NSFMers may be interested to explore:

First, how many of these “new risks” have a strong link to extra-financials (eg the systemic or macro-prudential consequences of climate change)?

Second, why is better risk management – something clients say they want – not happening? What are the real barriers to this change happening and how do these relate to the barriers to mainstreaming ESG analysis in investment and governance decisions? For example, few would say better risk management is stalled because there is no evidence that it “adds value”. So is it worth continuing with the efforts to show that ESG analysis adds alpha? Or might it be better to focus on the shared cultural/systemic reasons which stop both better risk management and ESG integration from happening?

Third, and generalising somewhat, risk professionals are gaining influence whilst internal research staff are, at best, holding their own. Today ESG professionals are located in front office teams, often focusing on equity and sometimes fixed income. But their ability to add alpha, on the time frame that clients are - in practice - interested in, is limited. Might they have more impact and add more real value if they were to join the newly beefed up risk teams?

Perhaps interested NSFMers, ESG professionals and risk specialists working at PRI members could form a new working group to explore these matters further? With the benefit of hindsight, pension funds now know they can serve their customers best by working together on some forms of macro-prudential risk. By actively engaging this new constituency in the RI debate before the next “predictable surprise” and doing it in a new way would be proof that learning from experience is really happening.

Managers fail to control hazards

By Sophia Grene

Published: April 5 2009 09:22 | Last updated: April 5 2009 09:22

Asset managers are failing to monitor and control risk at the highest level, according to a global survey from a Danish research institute. This is despite increased focus on risk management from both customers and regulators.

The survey “indicated a relatively low positioning of risk management in the organisational hierarchy and no apparent intention to raise it” among the 90 companies surveyed.

“The risk management function has been seen as an obstacle to be overcome in doing business,” said Steen Thomsen, a professor in the department of international economics and management at Copenhagen Business School. He is also closely involved with SimCorp StrategyLab, which conducted the survey.

Risk management is generally understood to mean having a process for alerting senior executives to unexpected problems, as well as clear procedures for identifying and managing foreseeable risk of all sorts.

“There is much more focus on [risk management] now than two or three years ago,” said Peter de Proft, director general of the European Fund and Asset Management Association. “But this crisis has shown us there are new types of risk.” He cites liquidity risk as a major problem to hit asset managers that had not been built into risk models.

Increasing use of complex financial instruments requires more sophisticated financial risk management, while upheavals in the global banking system have highlighted the danger of complacency with respect to operational or systemic risk.

Mr de Proft was not surprised by the survey’s suggestion the industry had outstripped its own ability to manage risk: “People in this industry have a natural tendency to invest first in the front office, and only then in the middle and back office.”

Investors, on the other hand, do focus on risk management, he said. “Of 60 pages of questions in an RFP [request for proposal], 10 would be about risk of all sorts,” said Mr de Proft, who chaired the risk committee at Fortis Investments Belgium when he was chief executive there.

Although the survey found many blamed poor strategic understanding of risk for large financial losses in the past two years, it uncovered no evidence risk management was being treated as more important within the organisations. On the contrary, its status as indicated by the line of reporting has declined in some cases, with no plans for future changes.

“Right now we’re in a decision vacuum,” said Mr Thomsen. He pointed to the finding that the main source of risk advice for asset managers is regulatory authority. Since regulators are moving slowly towards a new framework in the light of recent events, this means asset managers have a tendency to sit and wait.

“Waiting for the regulators is a negative,” he commented. “They could take a long time and they don’t really know what to do.”

Although the Committee of European Securities Regulators recently released a feedback statement on its consultation on the risk management principles for Ucits, the European retail fund structure, this is only one step in a long, drawn-out process of regulatory reform.

In the UK, the Financial Services Authority has been asking individual asset managers to demonstrate the robustness of their risk management. Mr Thomsen called for the industry to take the initiative in developing the role of the risk management function.

Copyright The Financial Times Limited 2009