Each year, AP6 reviews and documents the risks associated with its operations. Each risk area has its own risk factors, which are analyzed. Each risk is then discussed, along with establishing the likelihood of it occurring and what impact it would have on operations. An assessment is also made of the mitigating factors that exist, and whether the level of net risk is acceptable. This work is carried out by the AP6 senior executives and their results are reported to the Audit Committee, or, if it pertains to sustainability, to the Sustainability Committee. As with all organizations and business activities, there are many risks that must be managed. Below is a description of the six risks that have been assessed as most significant to AP6 and its activities.
Market risk is the risk that a fair value or future cash flow from an investment will vary due to changes in the market. The market risks that predominantly affect AP6 are share price, currency and interest rate risks. Both fund and company investments are exposed to these risks and they are monitored continuously. A maximum of 10 percent of AP6’s assets, valued at market value, may be exposed to currency risk. For this reason, AP6 uses derivative instruments to hedge the currency risk.
Credit and counterparty risk
This arises as an effect of the inability or unwillingness of a fund or company to carry out its contractual obligations or other commitments, a factor which could lead to losses. In these cases, AP6 is working to diversify the portfolio so that its exposure to individual holdings will not be too high.
This risk is best described as the risk of a financing crisis. One of the ways in which liquidity risk arises is when assets, liabilities and commitments have different maturities. As AP6 does not have any inflows or outflows to the pension scheme, AP6 only needs to consider its own investing activities. Unlike other buffer funds, there is no legal requirement on the proportion of assets that must be placed in investments with a low liquidity risk. AP6’s target is for the liquidity reserve to normally account for approximately 10 percent of AP6’s total managed assets. There is also a credit facility that can be utilized if a need for financing arises.
Refers to the risk that a holding fails to perform in accordance with the objectives set in, for example, the ownership plan or business plan. This category of risk is monitored by the Direct Investment and Fund Investment organizations. AP6 monitors its investments by being an active owner with the objective of having a representative on the board of the unlisted companies when the ownership interest makes this feasible. The financial performance of both companies and funds is continually monitored.
The risk of financial loss as a result of human error, inadequate processes, external events or faulty systems. The ways in which AP6 manages these risks include documenting and mapping different process flows. In addition, there are also ongoing, individual skill development activities.
These risks exist in all types of organizations and with all types of business activity. For AP6, exposure is primarily via the investments it makes in companies and funds. Sustainability risks vary, depending on the company or fund’s business activities and geographic location. Examples include violation of human rights or labor rights, corruption risks, risk of environmental damage or climate risks. AP6 manages its sustainability risks by systematically reviewing and assessing them prior to making an investment. Afterwards, it works with them continually during the ownership phase. The risks are also managed by, each year, having the Board of Directors establish goals for AP6’s systematic sustainability efforts.