Open Access

Lukas Benz

• An institutional investor is an organization that invests money on behalf of others or for itself in a variety of financial instruments and asset classes, controlling a significant proportion of all financial assets worldwide and having significant influence in all markets. Due to the large number of investments, the portfolios of these investors are exposed to a variety of different types of risk which must be assessed and considered by the portfolio managers. Krueger et al. (2020) highlight the fact that institutional investors have to consider at least six different sources of risk, namely financial, operational, governance, social, climate and other environmental risks. Their study shows that institutional investors consider financial risks, i.e. risks related to earnings or leverage of their investments, as most threatening, followed by operational and governance risks. These financial risks are determined, inter alia, by the composition of the portfolio and the characteristics ofAn institutional investor is an organization that invests money on behalf of others or for itself in a variety of financial instruments and asset classes, controlling a significant proportion of all financial assets worldwide and having significant influence in all markets. Due to the large number of investments, the portfolios of these investors are exposed to a variety of different types of risk which must be assessed and considered by the portfolio managers. Krueger et al. (2020) highlight the fact that institutional investors have to consider at least six different sources of risk, namely financial, operational, governance, social, climate and other environmental risks. Their study shows that institutional investors consider financial risks, i.e. risks related to earnings or leverage of their investments, as most threatening, followed by operational and governance risks. These financial risks are determined, inter alia, by the composition of the portfolio and the characteristics of the assets under management. As shown by Benz et al. (2019) for mutual funds and Aragon and Martin (2012) for hedge funds, institutional investors not only invest in trivial assets such as equities and bonds, which expose the investor mainly to linear risks, but also in more complex securities such as options, swaps, and futures, exposing a portfolio to more complex sources of non-linear risk. After all, about 10% of all investors consider climate risk to be the most threatening one, which underlines the importance of this risk factor. The general climate risk includes, among others, the so-called carbon risk, which arises from the growing awareness of the impact of climate change on companies and includes all uncertainties arising from the transition process from a brown to a green economy (Görgen et al., 2020). In recent years, there have been a vast number of articles, both theoretical (e.g., Busch and Hoffmann (2011)) and empirical (e.g., Cunha et al. (2019)), which have shown that investors should consider this risk factor in their investment process. In summary, the portfolios of institutional investors are constantly exposed to a variety of different types of risk. Therefore, one of the key tasks of portfolio managers is to be able to correctly assess and measure the risks taken and to act and react accordingly to portfolio changes or to external influences. This dissertation discusses several types of risk arising in the investment and portfolio allocation processes of institutional investors.…