All the powers of AIIB are vested in our Board of Governors—our ultimate authority. The Board of Directors, elected by the Governors, is responsible for the direction of our general operations, including setting our policies and strategies and overseeing their implementation. Under the direction of the Board of Directors, the President conducts the Bank’s business and is held responsible and accountable for our effective and efficient day-to-day operations.

To gather first-hand knowledge on how AIIB’s projects impact people and businesses, members of our Board of Directors visited three AIIB member-clients in 2018. Board members gained a deeper understanding of our clients’ infrastructure development challenges and relevant investment opportunities.

In March 2018, Board members visited Indonesia where they met with the President of Indonesia, the Minister of Finance, the Minister of Public Works and housing and other officials. Some of the feedback our Board members received were that AIIB should focus on delivering projects rather than reports and studies, and that our Bank should originate and lead projects more quickly. Government officials also stressed the importance of AIIB’s support for project preparation and capacity development. The delegation also visited several project sites, one of which was the AIIB-cofinanced National Slum Upgrading Project where about 9.7 million people living in 154 cities are experiencing better living conditions due to improved access to and quality of urban infrastructure.

In September 2018, Board members went to the northern part of Dhaka in Bangladesh in a visit program focused on energy. The delegation met with the State Minister of Energy and senior officials from the Ministry of Finance and were made aware of the government’s ambitious energy master plan. Board delegates also visited two AIIB project sites, including a power distribution project that aims to provide about 2.5 million service connections to rural consumers and is expected to benefit about 12.5 million Bangladeshis.

In November 2018, Board members held talks with Egypt’s top officials and investment banks about the ongoing economic and regulatory framework reforms being undertaken by the government. The Prime Minister wished to see broader AIIB engagement in development projects across Egypt, especially pertaining to energy, sanitation and transportation. The delegation also visited the Benban Solar Park—a project being cofinanced by our Bank—which will provide Egypt with a clean energy alternative.

We benefit from knowledge and experience gained from an International Advisory Panel (IAP) composed of former and current high-ranking government officials as well as experts from the private sector, multilaterals and academia. The IAP supports the President and Senior Management on the Bank’s strategies, policies and general operational issues. They keep us grounded by offering valuable advice and views from outside the organization.

Three former IAP members have completed their terms: Anders Borg, Tung-Chee Hwa and Dr. Oh-Seok Hyun. In 2018, we welcomed three new advisers:

• Jose Isidro N. Camacho—Managing Director in the Asia Pacific Division of Credit Suisse based in Singapore and Vice Chair of Credit Suisse Asia Pacific. A national of the Philippines, Camacho is former Secretary of Finance and former Secretary of Energy of the Philippines.

• Dr. Myung-Ja Kim—President of the Korean Federation of Science and Technology Societies. A national of Korea, Kim is a former Minister of Environment and a former member of the National Assembly of Korea.

• Dame Meg Taylor—Secretary General to the Pacific Islands Forum. Taylor is the former Vice President and Compliance Advisor Ombudsman for the International Finance Corporation and the Multilateral Investment Guarantee Agency of the World Bank Group. Taylor is a national of Papua New Guinea.

In 2018, several IAP members took part in two events held at our headquarters, alongside the regular advisory meetings: (1) an expert roundtable dialogue on the use of sustainable investment in Asia and opportunities for collaboration and (2) a panel discussion on building an inclusive culture, as part of AIIB’s internal work on building the Bank’s corporate culture.

After a nine-month process of in-depth engagement, in 2018 our Board approved a new model of governance in which an effective, strategic Board of Directors directs and oversees the work of an efficient, accountable management, together creating a Bank that is better able to serve clients’ needs effectively and efficiently. AIIB’s Accountability Framework strengthens (1) the Board’s role in establishing the Bank’s strategies and policies; (2) the President’s role in conducting the Bank’s business, such as delegating to the President the authority to approve projects except those reserved for Board consideration and (3) the Board’s role in holding the President accountable for management of our Bank.

Under the framework, the President may approve certain projects based on predetermined criteria and a transparent process. The President shall submit to the Board of Directors the summaries of projects that (1) have passed Concept Review at the Investment Committee and (2) have been determined for approval within the President’s authority. Changes in any project shall be submitted to the Board at the latest after the project has passed Appraisal/Final Review at the Investment Committee. We expect this governance model to make AIIB more efficient and increase our President’s accountability. The framework sets clearly demarcated roles and responsibilities for the Board and Management and helps us spread a strong culture of accountability across all levels of AIIB. It lays out clear reporting and performance guidelines to reinforce the Board’s oversight role. This follows best modern governance practice, appropriate for a new MDB with a nonresident Board like AIIB.

In 2018, we began establishing a strong risk culture, coupled with an Oversight Mechanism, as part of the transition to this new governance framework (which eventually came into effect Jan. 1, 2019).

Under the Accountability Framework, projects are delegated to the President for approval under specific circumstances. The framework ensures that the Board continues to have a strong voice in the project approval process by requiring projects that (1) are precedent setting, (2) have significant strategic or policy impacts or (3) meet certain dollar thresholds to go to the Board of Directors for approval. Any Board member can also request that a project which would otherwise be delegated to the President for approval be brought to the Board for its approval. The President may also undertake the decision to elevate a project to the Board for its consideration if the project presents significant reputational or integrity risks.

We believe this creates the right balance between oversight by the Board and the efficient approval of projects.

As AIIB expands its product offerings, we are also exploring environmental and social aspects of nontraditional projects. Managed credit portfolios and innovative efforts to attract private capital require us to explore new ways to ensure that the projects we fund improve economic outcomes and are environmentally and socially sound. To bridge this gap, we are working toward the use of an ESG approach consistent with our ESF’s objectives.

A recent example is the AIIB Asia ESG Enhanced Credit Managed Portfolio, a USD500-million managed credit portfolio that aims to develop infrastructure as an asset class, develop debt capital markets for infrastructure and promote the integration of ESG principles in fixed-income investments in Emerging Asia. This project is an example of how we are promoting innovative financing mechanisms to catalyze private investments in sustainable infrastructure projects.

In November 2018, ESG rating agencies evaluated our Bank for the first time based on industry-specific ESG criteria.

“The Asian Infrastructure Investment Bank has established an Environmental and Social Framework (ESF), which serves to manage and minimize risks associated with the activities it finances. It includes comprehensive standards on resource efficiency, climate change and labor rights and the protection of vulnerable populations, as well as reasonable standards on pollution prevention, ecosystems and biodiversity, resettlements, community health and safety, and security personnel. AIIB forms part of the more progressive development banks, publicly disclosing individual projects financed on its website (including project overviews, financing information and project documents).”

Sustainalytics also rated AIIB for the first time, awarding a score of 66 out of 100 points. In their November 2018 ESG Rating report, the agency said that AIIB “is considered an average performer on ESG issues compared to its industry peers. AIIB’s success relies on its ability to recruit and motivate a highly skilled workforce able to identify, invest in and monitor commercially sound projects with positive economic impacts. The company’s ESG‐related issues are overseen by the board or the executive team, suggesting that these are integrated in core business strategy.”

AIIB adheres to sound banking principles. Our risk management governance applies sound governance principles to identify, measure, monitor and control risks. It ensures that risk-taking activities are in line with our strategy and risk appetite and covers all material risk categories applicable to AIIB. To manage risk effectively, we’re (1) articulating and monitoring adherence to the risk appetite, (2) leveraging a model with three lines of defense to strengthen our risk management architecture and (3) building and reinforcing the Bank’s risk culture. A strong risk culture requires all staff to understand their roles and responsibilities to manage risk. To achieve this, a training and awareness campaign was launched in 2018 to help staff identify and respond to operational risks. This risk culture is being embedded throughout our organization—from the Board of Directors to the President and to Senior Management—to prepare for and manage financial, operational and other nonfinancial risks that impact our business lines. We’re working on fully developing our risk management capability to support our growing business.

Our Bank holds a strong liquidity position while conservative financial management gives us favorable financial ratios. Our financial and risk management policy design, implementation and oversight are managed by AIIB’s Risk Committee, the Chief Risk Officer, the Chief Financial Officer and the Treasurer. Our risk management activities are guided by the Bank’s Risk Management Framework, the Financial and Risk Management Policy and the Asset Liability Management Policy along with the directives which further define how these policies are implemented.

As the organization matures, so does its approach to risk management. In 2018, AIIB developed a more sophisticated approach to ensure the Bank can calculate its capital requirements more precisely, remain adequately capitalized in the face of adverse economic conditions and accommodate planned growth.

The Board of Directors approved the Capital Adequacy and Stress Testing (CAST) policy which (1) establishes that Economic Capital will determine the Bank’s capital requirements and (2) further supports the risk culture of the Bank in line with the principles of the Risk Management Framework. This policy ensures AIIB’s capital adequacy is assessed not only against the existing macroeconomic outlook, but also within the context of a severe and protracted crisis scenario.

We stress tested our business plans to determine their adherence to risk appetite based on our CAST policy approved mid-2018. The CAST policy requires stress testing of AIIB’s profitability and liquidity to ensure that the Bank has robust and sound net income-generating capacity. The desired outcome of the capital adequacy test is that AIIB should have (1) sufficiently available capital to ensure it can maintain its triple-A rating even after being subjected to a severe and protracted crisis, (2) extra lending capacity to provide countercyclical lending during the same crisis period and (3) robust net income generating capacity to absorb the shock of nonperforming loans and to return to positive net income the year after reporting negative net income. To communicate all these activities and outcomes, we also strengthened our risk-related reporting.

In 2018, the Board of Directors supported our latest Risk Appetite Statement and approved the top-down allocation of risk specified therein. We define our risk capacity as the maximum level of risk the Bank can assume given its current level of resources before breaching constraints determined by available capital and liquidity needs, operational environment and obligations. The Risk Appetite Statement distinguishes between the Bank’s buildup phase and its longer-term mature state, with a greater allocation made to noncore supporting activities in the buildup period. By end-2018, the Bank remained in its buildup phase.

We use sound principles of financial management to ensure sustainable financial viability and enable us to implement our mandate effectively. We’re building up our reserves and profitability to increase the Bank’s operational capacity. Such a practice protects us from having to make a call on the Bank’s capital that is not yet paid in and from having to resort to future shareholder capital increases. It also assures our resilience during crises while maintaining our ability to provide countercyclical financing. These ensure our financial resilience to withstand events of market stress while safeguarding our triple-A ratings as we move toward self-sufficiency in providing financing.

In September 2018, we began establishing the roles and responsibilities of the Bank’s compliance function. We laid out guidelines for the assessment, monitoring and control of the risk of legal or regulatory sanctions, material financial loss or reputational loss the Bank may suffer due to failure to comply with laws, regulations, rules, related self-regulatory organization standards and codes of conduct applicable to AIIB’s activities.

AIIB began initiatives to establish a fit-for-purpose Bankwide compliance function with focus on financial crime risk, particularly the anti-money laundering and combating the financing of terrorism (AML/CFT) framework. Accordingly, our AML/CFT Directive was approved and became effective by end-2018. The directive establishes the Bank’s AML/CFT framework and ensures its effective implementation by laying down principles and guidance to safeguard the Bank and its personnel from being misused for money laundering, the financing of terrorism or other illicit activities. The directive serves as the cornerstone of the Bank’s AML/CFT framework and reinforces AIIB’s principle of zero tolerance for money laundering and financing of terrorism. To further implement the AML/CFT Directive, the Counterparty Due Diligence and Know Your Counterparty Administrative Guidance (CDD/KYC AG) was drafted and underwent consultations with internal stakeholders.

Our Bank receives professional and objective assurance and advisory services designed to add value and improve AIIB’s operations. The Internal Audit Office (IAO) enhances and protects organizational value by providing risk-based and objective assurance, advice and insight. IAO helps AIIB accomplish its objectives by bringing a systematic, disciplined approach to evaluating and improving the effectiveness of governance, risk management and control processes.

In 2018, IAO led a cross-department effort under an advisory assignment on a Committee of Sponsoring Organizations of the Treadway Commission (COSO) 2013 Framework on internal control gap analysis. The analysis was completed in April 2018. By year-end, the Office of the Controller took over to close the gaps. Three mandatory training workshops were conducted to reinforce knowledge on the COSO Framework and share best practice on how to close the gaps efficiently, effectively and economically.