Risk Management

Risk management refers to the identification, assessment, limitation and control of material risks arising out of VER’s own operations or external circumstances. Internal controls seek to minimise unforeseen risks and ensure efficient, reliable and financially sound operations.

VER’s investment activities are subject to oversight by the Financial Supervisory Authority (FSA). Additionally, VER is regularly audited by the National Audit Office of Finland (NAO).

Risk management in practice

With regard to risk management, VER monitors its operating environment from four perspectives: investment risks, operational risks, ESG risks and environmental risks. In the long term, the most significant risks associated with VER's own activities relate to the success of its investment activities and the return on its investments. A key risk that VER is exposed to is failure to reach its long-term return targets. These include the long-term target established by the Ministry of Finance requiring that VER’s rate of return exceeds the cost of government debt.
 
VER determines a baseline strategic allocation for the portfolio in its annual investment plan using forward-looking modelling based on return and risk assumptions, continuous analysis and monitoring of market conditions, The baseline allocation also largely determines the level of total risk VER is exposed to.

A risk analysis is carried out on an annual basis as part of the risk management plan and in consultation with Internal Audit to define the key operational risks, their effects and probabilities, including any needs to develop the risk management capabilities. Additionally, the plan explores the external operating environment with regard to investments, the probabilities and effects of the risks present in the operating environment and the potential of VER’s risk management function to regulate these risks. Risk management also seeks to identify ways of controlling and limiting risks. .

Risks associated with investment activities

TInvestment risk includes return risk, which means the risk of failure to achieve the expected rate of return. Other investment risks also include market risks that arise when assets are invested in different asset classes using different investment strategies and instruments. Market risks include equity, credit, interest rate, currency, liquidity, concentration or over/underweight risks.  Additionally, there is the model risk which is associated with all investment risks quantified using different rates of expected returns.

Operational risks

Operational risks refer to the risk of loss arising out of in-house processes or misguided actions due to unexpected external developments, any threat to the continuity of operations or loss of confidence in VER. As a rule, operational risks are associated with processes and procedures, IT systems and data security, reputation management, potential misconduct, outsourcing, contracts, damage to property or staff skills and capabilities.