The year 2008 demonstrated the importance of effective risk measurement and management. After 25 years of enjoying far higher returns on risk than could be expected, 2008 took us to the other extreme. Equity risk had one of the poorest annual returns on record. And when market liquidity dried up, even the safest of corporate bonds suffered large losses. Fortunately, and as expected, positive returns on government bonds diversified some of that risk.

Good risk management will not shield our portfolios from the poor short-term return on risk. However, by properly accounting for sources of risk and carefully considering the merits of where risk should be deployed, we will be better positioned to earn a superior long-term return on risk.

The return on risk remains high because of investor aversion to extreme outcomes such as those occurring in 2008. It is important to focus on your long-term objectives, to “stay the course” and not be swayed by short-term market volatility. For these reasons, AIMCo intends to be at the forefront of risk management. We will strive to understand risk better than anyone else and our objective will be to generate the best possible return per unit of risk.

Our mandate to our balanced fund clients is to earn a long-term incremental return of about 2.0–2.5% per year over risk-free government bonds. To accomplish this, we use a diversified policy asset mix.

We have made comparing and contrasting risk across our portfolios part of our investment language and central to the debate of investment decisions. We monitor key operational risks through a “dashboard” report that shows, with quantitative and qualitative measures, how we are progressing in our efforts to control and remedy weaknesses across the organization.

Our risk group is fully integrated in the investment process, working closely with all asset classes. It operates as an independent unit, maintaining prudent separation between those who deploy risk and those who monitor it. We consider Risk Management a key component of our long term success, and are making considerable investments in people, processes and systems to improve its effectiveness.

AIMCo has a fiduciary duty to satisfy the investment objectives of our pension and endowment fund clients. We believe the time horizon, scale, and complexity of climate change present challenges which can impact asset values and influence systemic economic, environmental and social risk. We recognize the business imperative of addressing climate change in our investing strategies, and view both the physical and the regulatory risks of climate change as material to our clients’ objectives.

The physical effects of climate change have the potential to significantly impact asset value across all asset classes and markets. For example, changes in the frequency of extreme weather events alter probability scenarios, asset life assumptions and net present value calculations. Investors also seek certainty regarding potential regulatory impacts on asset value. The physical and regulatory impacts of climate change create stranded asset scenarios for companies, leading to possible solvency issues and shrinking the investible universe for investors.

Effectively addressing climate change requires concerted action from all actors – companies, investors and policymakers. Successive international agreements, culminating in the recent G7 pledge demonstrate growing concern that the average global temperature not increase beyond 2 degrees Celsius from pre-industrial levels. The Canadian government has committed to reduce our GHG emissions by 30% below 2005 levels. The UN conference of parties (COP 21) scheduled this December in Paris presents an ambitious, significant and timely opportunity to address global implementation strategies.

Many of the companies we invest in are pledging to support these political commitments. Over the coming decades, climate change will present strategic risks and opportunities’ to businesses. In alignment with our responsible investment pillars, AIMCo is committed to:

• Integrating consideration of an asset’s climate risk and resiliency into our investment decision making, including voting by proxy to support reasonable proposals to limit carbon emissions (ESG integration)
• Investing to support lower carbon infrastructure, such as alternative energy solutions and eco-efficiencies to facilitate the transition to a lower carbon economy (Positively-themed ESG investments)
• Actively engaging with companies to promote climate-resilient strategies and best environmental practices. AIMCo champions a voice over exit approach- we prefer to engage with select companies to promote best practices and effect positive changes, where possible, rather than divesting of applicable holdings. (Engagement)
• Reporting on climate change related Responsible Investment activities (Reporting and Disclosure)
• Participation in collaborative initiatives and support for credible climate change policies and regulations based on achievable emissions reduction targets, water efficiency targets, alternate energy implementation strategies and industry best practices (Advocacy)

AIMCo is committed to addressing climate risk across our portfolios in support of Canada’s vision and strategy to achieve a more sustainable, low carbon economy, while continuing to focus on our fiduciary duty to our clients.