Our risk profile
The risk management activities as performed by the first line as well as the reviews/audits conducted by the second and third line in 2020 did not indicate any material failings in the design and effectiveness of our risk management and internal control system. This is the basis for the Statements of the Managing Board and for the risk disclosures below.
Top risks and related mitigating actions
Below the four most important risks are given that might prevent us from achieving the targets defined in our strategy, along with the mitigating actions that we are taking to further reduce our exposure. These risks are labeled as top risks as the exposure on DSM’s EBITDA is an indicative €30 million or more, or because they have a major non-financial impact such as on reputation.
People, organization and culture
There is a risk that we might not be able to attract, retain and develop the workforce required to deliver on our strategy, to deliver above-market growth and retain strong operational efficiency. To address this risk, different initiatives were deployed to support our employees working remotely in an effective way, to maintain high levels of engagement, and to continue people development using digital tools. Our new Inclusion & Diversity strategy was launched with a scope beyond gender and internationalization, to build a more inclusive environment for people to contribute to their full potential. Our new Culture Compass was introduced as a navigational tool to support our purpose-led, performance-driven strategy. Further advancement of our organization, people and culture remains a key focus area, to ensure that we are able to deliver on our strategy in a rapidly changing world.
Further mitigations: Our new People & Organization strategy defines our key priorities for the next period, including creating a flotilla-style organization, creating a contemporary workplace, driving people empowerment, rolling out the ‘Leading through Culture’ program to people managers, and implementing a framework for modern, flexible rewards.
There is a risk that we might not be able to deliver on our organic growth targets, as key drivers behind our projected growth are our innovation projects as well as commercial synergies from recent acquisitions. To address this risk, immediate focus was placed on the integration of our three biggest, recent acquisitions (Royal CSK, Glycom and Erber Group). These are each at a different stage of progress. The integration approaches were tuned to fit the specific needs of each business. Several Important innovation projects progressed well in 2020, such as Veramaris® algal-based omega-3, Bovaer® methane inhibitor solution, fermentative Stevia, CanolaPRO™ plant-based proteins, and the introduction of bio-based material grades for Bio-based Dyneema® and the circular economy, Stanyl® PA46, and Arnitel® TPC. Despite the progress made so far and having processes in place to manage and monitor further progress of innovation projects on a timely basis, time-to-market and delivering peak sales remain a risk.
Further mitigations: We are adapting our innovation approach from project-based to platform-based. Growth platforms are linked to major global societal, technological and environmental trends and are closely connected with our current businesses. Each platform will have a clear pipeline of projects in different stages of maturity, and sales growth will be less dependent on the success of individual large projects.
Market environment and competitive position
There is a risk that we might not meet our strategic targets due to increasing competition, especially from low-cost/margin players. To address this risk and increase our ability to understand changing end-market needs and to serve our customers better, programs were launched in 2020 in different parts of the company, such as ‘Fit for Growth’ in the Nutrition cluster and ‘Agility to Grow’ in the Materials cluster. These programs also simplified our organizations, improving our cost base. In 2020, our teams adapted their way of connecting to customers, driven by the travel restrictions. The extra efforts to engage in new, digitally enabled ways were well received by our customers, resulting in an all-time high Net Promotor Score. Nonetheless, the risk remains of facing increased competition for some product-market combinations.
Further mitigations: To distinguish ourselves from our competitors, we continue to invest in our product and service portfolio to address customer needs such as the demand for bio-based and recyclable materials, and we enable customers to develop solutions with a more sustainable footprint.
Operating in a digital world
In an increasingly digital world, DSM is subject to cybersecurity attacks which, if successful, could lead to a loss of Intellectual Property, discontinuity of operations, or otherwise have a negative impact on the company. To address this risk, we continued throughout 2020 to implement our multi-year cybersecurity program that covers the domains of information technology, operations technology, and R&D laboratory systems. A global Cybersecurity Governance Board was established to ensure a global, cross-functional approach to cyber risks and related risk responses. Phishing tests, both global and targeted, were frequently executed. To increase awareness on cybersecurity risks and controls, a DSM Global Cybersecurity Week was held with a series of webinars for all employees as well as a number of focus sessions for specific target groups.
Driven by our strategy, both the number and the importance of digital initiatives is increasing. In combination with the unusual circumstances created by the COVID-19 pandemic and cyber threats becoming more sophisticated, the cyber risk remains, despite the progress made in this area.
Further mitigations: The implementation of our multi-year cybersecurity program will continue in 2021. In parallel, we will be updating our maturity assessment such that we can adjust our priority setting in line with changes in our cyber risk profile.
The following emerging risks have been identified by the Executive Committee.
- Our Nutrition and Materials markets may be disrupted by non-climate related longer-term changes in the value chain or end-markets, such as new business models, industry consolidations or changes in end-consumer behavior
- We may not be able to respond fast enough to the physical impacts of climate change on our operations, value chains and end-markets (climate physical risks)
- We may not be able to respond fast enough to the changes related to the transition to a net-zero world and the impact these will have on our operations, value chain and end-markets (climate transition risks)
- Risk of increasing polarization in the world. This could lead to new legislation and new regulations that have a negative impact for our company (such as increasing taxation, trade barriers, sanctions and embargoes, and labor costs)
Where relevant, actions have been defined to anticipate on emerging risks in a timely manner, like in the Climate Action Agenda. On the other hand, some of the emerging risks also offer new opportunities for our Brighter Living Solutions.
COVID-19 related risks
In 2020 we responded swiftly to the impacts of the pandemic. We ensured that people were safe, we kept our supply chains and operations running, and continued to serve our customers. Some of our end-markets were impacted positively by the pandemic, whereas others were facing a significantly decreased demand. Our financial performance was solid in 2020 and COVID-19 has demonstrated the relevance of our strategic focus on Nutrition, Health and Sustainable Living. Hence, COVID‑19 was not considered a top risk, but the effects of the pandemic have been factored in to the assessment of all other risks. This was consistent with the outcome of the Materiality Matrix assessment.
In 2021 we will focus on keeping our employees engaged, as working remotely will be the standard for most of our office workers, at least in the first part of the year. Special attention will be paid to mental wellness and increasing resilience against pandemic fatigue.
Other important risks
There are also more generic business risks, such as business continuity, sourcing, product liability, intellectual property, tax, and business process risks. Our risk management system is set up to adequately monitor and respond to these risks.
We did not identify any significant company-specific risks associated with Brexit and the ongoing trade war between the US and China, other than the general uncertainties around, for example, currency and other economic developments.
Brighter Living Solutions (BLS) is DSM’s program for the development of sustainable, innovative solutions with environmental and/or social benefits, creating shared value for our stakeholders. Brighter Living Solutions are products, services and technologies that, considered over their life cycle, offer a superior environmental impact (ECO+) and/or a superior social impact (People+) when compared to the mainstream alternative for the same application. The impact of Brighter Living Solutions can be realized at any stage of the product life cycle, from raw materials through the manufacturing process to potential re-use and end-of-life disposal.
Within the program, DSM conducts an annual ‘Product Category Sustainability Review’ for all product categories. This review identifies environmental and social impact differentiators and risks for each of our product categories and confirms the mainstream reference solution. To substantiate the identified differentiators DSM uses comparative Life Cycle Assessments (LCAs) and/or expert opinions to determine whether a product has a superior performance and can be identified as a Brighter Living Solution.