Risk management

Code of Conduct and Ethics

The CEFC Code of Conduct and Ethics shapes the CEFC risk culture, setting the required standards of behaviour for the Executive and staff consistent with the highest professional and ethical standards. This includes requiring CEFC personnel to consistently consider “should we” act as distinct from “can we” act.

Risk Management Framework

Consistent with section 68 of the CEFC Act, the Board has established an integrated approach to risk management, founded on a Risk Management Framework (RMF), to monitor and manage strategic, investment and financial, reputational, operational and regulatory risks. This framework uses a “three lines of defence” model, with responsibility across all staff, the independent CEFC credit risk function and internal audit process.

The RMF recognises the fundamental linkage between strategic objectives and the impact that uncertainty (or risk) may have on the achievement of those objectives and more importantly, the performance of the CEFC. The RMF promotes a holistic approach to managing risk, starting with strong governance structures that promote transparent decision-making, guided by a well-developed and well-executed strategy that remains cognisant and informed about the risks embedded in that strategy.

Refer to the discussion on market trends and risk.

Risk Appetite Statement

The Risk Appetite Statement (RAS) is the key operational document that facilitates the RMF. The RAS goes to the heart of how the CEFC pursues its strategic objectives and the types of investments it considers. The RAS also sets out the risk limits (or tolerances) that are applied to both financial and non-financial consequences of accepting the risks outlined in the RAS.

The CEFC, as with any prudent investor or financier, must take risks to achieve returns. For the CEFC, a heightened level of risk, beyond what is deemed acceptable by a commercial financier, may be appropriate in specific circumstances in pursuit of broader public policy objectives. In contrast to some other investors, the CEFC has limited opportunities to diversify its portfolio by sector, particularly given the requirement to have at least 50 per cent of the portfolio invested in renewable energy technologies from 1 July 2018, thereby concentrating exposure in the clean energy sector.

Role of Investment Committees

Due diligence is a key feature of CEFC risk assessment with respect to investment decisions:

• Transaction teams are required to review, screen and develop structures to mitigate potential financial and reputational risks that may be associated with proposed investments
• The Chief Risk Officer/Credit team independently review and challenge this risk assessment and ensure that the proposed investment is consistent with the RAS, Investment Policies and risk limits and guidelines
• Investment Committees then make a case-by-case assessment of the merits of proposed investments, their assessed risk and their returns.