PIF risk management governance: more art than science
By: Oscar Bastanchury
Tags: Covid 19 Crisis, Digital Economy, Finance, Risk Management, Corporate Governance

Along the next years, the Saudi Arabia Public Investment Fund will have to face multiple challenges and threats, which directly affect to the viability of its strategy.

Considering Vision 2030 plan as goal, the questions about risk, as we have seen again with the global crisis caused by the COVID-19 pandemic, are more important than the answers. The PIF should be considered as the main vehicle to achieve the financial challenges of the Saudi government program. Current assets under management close to 300 billion, with the goal of increasing to 2,000 billion in 2030, will require very sound decision-making. The appropriate questions that the Board of Directors makes about the analysis and management of investment and divestment risks, will be key to achieving the goal for the future welfare of the country does not depend solely on the main source of income from oil.

Against this backdrop, large investment banks and portfolio management entities will want a big piece of the pie. This large international investors have realized the great investment and advisory business originated by the PIF. Debt issuances, IPOs or direct investments in Saudi companies, are just one example of operations where the PIF Board will have to analyze the different alternatives and decide on the optimal path under the cost versus benefit prism, facing any manipulation and conflict of interest on the part of investment banks and portfolio management entities. Direct investments in technological, as Vision Fund, and sociological megatrends by global geographic area, as renewable sources, digital & tech, longevity and wellbeing, will require a specific and exhaustive methodology and due diligences that brings out the true exposure and clarity of interests by part of the portfolio managers or advisors.

On the other hand, we all know that everything is uncertain in the financial world. An excellent Governance & ERM, considering financials and non-financial risks, based on skeptical view are key for a profitable sustainability. Finance, as a branch of the economy, is a social science, and modeling human behavior is very complex. Geopolitical events, macroeconomic cycles, changes in habits and social trends, behavioral finance, are just one example of variables that influence the fair value of investments and are difficult to predict. Knowing all the risks to which our investments are exposed, and acting quickly in the face of changes in the variables that influence them and, consequently, in their fair value, is the key to achieving sustainable profitability, and the skeptical vision of the non-executive directors contribute greatly to this.

Relevant to consider is as well that the world changed to 4.0, and the past experience and glamour does not guarantee to be a good non-executive director. The digital reality 4.0 has meant a disruption, a change of paradigm when applying methodologies and models in the decision making of large investment funds. The value that a Director contributed, based on his career and glamour within the financial sector in an analog world, takes a back seat in a digital world where the profitable sustainability of the fund, subject to the survival of companies under a constant change in consumer trends and crisis landscapes, it is not guaranteed without a strategy of possible stressed risk scenarios, with its derived consequences. Supervising the proper identification, valuation, management and control of a diversified asset mega-portfolio in an innovative environment requires Directors with risk innovative skills.

Additionally, the Directors with risk management expertise must take advantage of the strengths of the new digital tools for decision making, mixing quantitative and qualitative analysis. Risk metrics have evolved from statistical and econometric models, to methodologies that use big data, machine learning and artificial intelligence. A non-executive Director limits the value that can provide if he is not able to contrast the information provided officially with another obtained independently, processed and analyzed with the latest technology. It is as important to get correct numbers on the key risk indicators as to know how to interpret the meaning of them to help the best decision making.

Finally, within the new financial responsibility, the ODS agenda is priority, and the reputation and ESG investment are valued. Large investment vehicles have been influenced in recent years with the vision of activist funds. Although the power of influence in sovereign wealth funds is limited, the establishment of a global doctrine does affect to the reputation of these funds. In addition, the generalized tendency to relate the ESG approach as a form of qualitative investment entails the need to allocate a percentage of the global portfolio to this type of asset beyond its top financial profitability.