Investment and Risk Management
investment level by participating with the investment team in the due diligence process and providing feedback to the SIF’s investment committee. The influence of the risk manager on the approval of an investment will vary by SIF. In many SIFs, risk managers do not have formal veto power over investment decisions but can challenge the investment thesis articulated by the investment team. SIFs share this feature with PCFs, for which the risk manager acts primarily as a second line of defense, making sure that all risks are assessed and measured to the highest standards (Invest Europe 2018). Some risk managers may also have the ability to escalate certain decisions to higher bodies (see the thematic review on CDP Equity in appendix B). Once the investment has entered the SIF’s portfolio, the risk team monitors and periodically reports on the risks posed by the portfolio, using benchmarks and mitigation criteria. A SIF’s risk manager may need support from external specialists when dealing with risks in areas such as legal and regulatory compliance, marketing and public relations, treasury, tax, financial crime, labor relations, or information technology (Invest Europe 2018). As discussed earlier, to eliminate conflicts of interest, best practice exemplified by the rules of the EU AIFMD calls for a functionally and hierarchically independent risk management role. For instance, in compliance with this directive, Marguerite Investment Management has a dedicated executive in charge of risk management, who is not a member of the investment committee, to ensure separation of functions. • Internal audit and compliance. The third line of defense in a SIF consists of the internal audit and compliance groups, which ensure respect for laws, regulations, and policies under which the SIF is expected to operate, including those related to risk exposure. Such groups also provide independent assessments to the SIF’s board and relevant subcommittees of the board overseeing audit and risk.56 For instance, NSIA-NIF’s compliance function regularly monitors the fund’s portfolio concentration limits and other constraints.57 Similarly, ISIF’s internal audit team provides independent, reasonable, and risk-based assurance to key stakeholders on the robustness of the NTMA’s governance, risk management, and the design and operating effectiveness of the internal control environment (NTMA 2020; see the case study in appendix A).
KEY TAKEAWAYS • The investment policy is constructed by the SIF owner or (by delegation) the board. The policy spells out the core parameters that the SIF needs to comply with in implementing its double bottom line mandate, such as eligible investments, investment horizon, return expectations, responsible investment policy, and performance monitoring framework. • Distinguishing features of the SIF investment policy include (1) a focus on both financial and economic returns; (2) alignment with the public sponsor’s overall vision for socioeconomic development; (3) a focus on privately traded investments; (4) the public sponsor’s ability to retain discretion over aspects of the investment policy, for national interest or to reflect changing economic conditions; and (5) a responsible investment approach. • The investment strategy is usually established through an iterative process between the sponsor or board and the manager. It translates the policy into detailed guidelines for the fund manager on permissible investments and
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