Sovereign Wealth Funds
Risk and Creative Thinking
OTPP on how to include long-term risks into decision-making.
October 18, 2011
How does a long-term investor include long-term risks into current investment decision-making? Funny you should ask, because I just read all about how Ontario Teachers’ Pension Plan is trying to do just that in their 2010 annual report. Here’s a blurb.
“Take for example, our approach to climate change. We believe that an integrated approach to climate change risk will help investment managers in all asset classes to identify potential risks and opportunities and thus improve long-term performance. Investments are not to be selected or rejected solely on the basis of climate change risk factors. Rather, climate change risk factors are taken into consideration to the extent that they have a material impact on the financial return of an investment. For example, in conducting due diligence on a potential acquisition, we would consider the fact that well- managed companies may have a process in place to identify and analyze future challenges and opportunities associated with climate change if it is deemed to be a material investment risk. A clear and straightforward statement regarding the implications for competitiveness that addresses issues such as access to resources, the timeframe that applies to the risk, and the company’s plan for meeting any strategic challenges posed by climate risk is encouraged.”
In other words, it’s all about developing a risk-based culture that thinks creatively about these issues — assessing present and future risks to a certain investment strategy or acquisition. Anyway, interesting stuff. Kudos to OTPP.
This post originally appeared on the Oxford SWF Project