The Evolution of the Risk Management Profession
The global investment landscape has entered an era of unprecedented complexity. For institutional investors, particularly pension fund managers with a public mandate to steward the retirement futures of millions of people, the convergence of geopolitical realignments, accelerating climate disruptions, and rapid technological change has rendered traditional financial models increasingly incomplete. These forces are reshaping risk and return, demanding a fundamental rethinking of risk frameworks, skills, and governance.
As Chief Risk Officer at La Caisse (formerly CDPQ) and with more than 20 years of experience in investment navigating both tranquil and turbulent markets, I am convinced that the future of risk management is not merely an incremental improvement on the past. Rather, we are witnessing a paradigm shift, where the tools and mindset that once served us well may now leave us exposed. In this article, I share my thoughts on how risk managers can question their traditional approach to ensure that our organizations remain resilient and agile in a world where the future may bear little resemblance to the recent past.
Risk Frameworks: Beyond Historical Data
At the heart of traditional risk management lies a reliance on historical data. Value-at-Risk (VaR) models, credit migration matrices, and historical stress tests all depend on parameters calibrated from past market behaviour. While these tools have served us well during periods of relative stability, they are increasingly challenged by the current environment’s volatility and unpredictability.
Consider the shifting correlations between stocks and bonds. For decades, investors have relied on diversification between these two asset classes, but what happens if this fundamentally changes? The rise of private markets and the growing number of companies choosing to remain private further complicate the picture. How should we think about liquidity premiums in a world where a significant portion of the economy is no longer traded on public exchanges?
In recent years, we’ve witnessed a sea change in our assumptions around risk management, and modern frameworks require the capacity to consider unprecedented impacts from regime changes and black swan events as they becoming more frequent. The COVID-19 pandemic, geopolitical tensions, and climate-related disasters have all underscored the limitations of models that assume the future will resemble the past. In this context, modern risk frameworks must be resilient, dynamic, adaptable, and forward-looking.
Scenario analysis has emerged as a critical tool. While not new, its importance has grown exponentially. Scenario analysis allows risk managers to explore a range of possible futures, each with different likelihoods and impacts. By building robust and comprehensive scenarios, we can help investment teams and management assess and adjust the level of risk in their portfolios. More importantly, scenario analysis shifts the conversation from reactive to proactive, enabling organizations to prepare for adverse events before they occur.
Current events highlight the value of this approach. The Trump administration’s tariffs and ongoing tensions between China and Taiwan have prompted risk teams to model the potential impacts on global supply chains and investment portfolios. Another example is a severe climate event simulation carried out at La Caisse in 2024. Our team examined the impacts of a prolonged drought in India, , which modeled a 40% decline in crop yields. This simulation not only improved our understanding of portfolio resilience, or in this case confirmed its resilience, but also fostered meaningful discussion among the leadership team.
Most importantly, proactive scenario analysis creates an opportunity to have a crucial discussion about preparedness, opportunities for improvement, contingency plans and potential tactical responses at the right levels in the organization. This kind of exercise goes hand in hand with our role to ensure that risk is fully understood, well mitigated, and that our organization is optimally equipped to take it on.
Skillsets: The New Frontier
When I began my career in risk management, the profession was dominated by two core technical skillsets: quantitative modeling and financial acumen. Today, the demands on risk professionals are far more complex and multifaceted. As risk teams evolve from middle-office analysts to forward-looking strategists, the required skillsets have expanded significantly.
Modern risk management now requires interdisciplinary expertise:
- Climate: Understanding the physical and transition risks associated with climate change is no longer optional. Risk professionals must be able to assess how climate-related events, such as extreme weather or regulatory changes, could impact cash flows, asset values, and balance sheets.
- Energy: The global energy transition is reshaping industries, value chains and investment opportunities. Risk managers must evaluate the risks and opportunities associated with the shift to renewable and alternative sources of energy, including stranded assets and new market dynamics.
- Technology: The digital transformation of the economy has introduced new risks, particularly in the areas of cybersecurity, and technological maturity. Risk teams must be able to stress-test digital infrastructure, assess cyber-resilience, and understand the implications of artificial intelligence for business models and investment strategies.
- Geopolitical: Today’s global landscape is marked by shifting alliances, trade tensions, and regulatory changes. Risk managers must understand the complex web of international agreements and incentives, and how these factors could impact portfolio valuations and supply chains.
These expanded skillsets enable risk teams to better understand portfolio exposures, but also empower them to exert greater influence and ensure that independent risk oversight is integrated into strategic decision-making.
Governance: Managing Risk Across the Organization
In the landscape of modern institutional investing, robust risk governance is not merely a regulatory requirement, it is a cornerstone of sustainable performance. As the complexity and interconnectedness of risks continue to rise, the governance frameworks that once sufficed for traditional asset management are being stress-tested and, in many cases, found wanting. For Canadian pension fund managers and other large institutional investors, the imperative now is to build governance structures that are agile, inclusive, and deeply embedded throughout the organization.
Embedding a Risk-Aware Culture
Cultivating a risk-aware culture begins at the top, setting the tone for how risk is perceived and managed. In practice, this means moving beyond compliance checklists and towards a mindset where risk considerations are integrated in every investment decision. When risk awareness is embedded across all levels, from portfolio managers to operations teams, the organization is more resilient to withstand shocks and better positioned to seize emerging opportunities.
One of the most effective ways to embed risk awareness is to integrate risk professionals directly into investment teams. Rather than operating in silos, risk managers become active participants in the investment process, providing real-time insights and challenging assumptions. This approach not only improves the quality of risk assessments but also fosters a culture of accountability and continuous improvement.
For example, at La Caisse, our risk specialists are not gatekeepers but strategic business partners for investment teams, helping to identify emerging risks, assess the impact of new initiatives, and ensure that risk-return trade-offs are clearly understood. This level of integration has proven invaluable during periods of market changes and stress, enabling the organization to respond swiftly and decisively.
Active Involvement on Committees
Risk managers should have a seat at the table on investment and risk committees, as well as any other forums where strategic decisions are made. This ensures that risk considerations are part of the broader organizational dialogue, and that risk management is aligned with business objectives. In practice, this means that risk managers are not just providing reports but are actively engaging in discussions about strategy, execution, and performance.
The Importance of Diverse Perspectives
In a world where risks are increasingly complex and interconnected, no single perspective is sufficient. Organizations must actively seek out and incorporate insights from a wide range of experts, including climate scientists, technologists, geopolitical analysts, economists, and sectoral analysts.
Cross-functional working groups can be particularly effective in this regard. By bringing together individuals with different backgrounds and expertise, organizations can develop comprehensive scenarios and more effective responses to risk events.
Conclusion: The Path Forward
The role of risk teams has evolved significantly over the past few years, and this evolution will continue as the investment landscape becomes increasingly complex. In this environment, effective risk management requires more than just strong policies and procedures, it demands a cultural shift that embeds risk awareness at every level of the organization. By integrating scenario planning, interdisciplinary expertise, and robust governance, firms can transform volatility into opportunity. Risk managers actively participating with investment teams and on key committees, embracing diverse perspectives, help organizations build governance structures that are fit for the challenges of the 21st century.
For risk professionals, this evolution represents both a challenge and an unparalleled opportunity to shape the financial system’s next chapter. To have such a broad view of all the risks facing the organization is both unique and influential, and it makes risk management one of the most intellectually stimulating and rewarding roles in the investment industry.