DSM 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 2021 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 five most important risks are listed that might prevent us from achieving the targets defined in our strategy, along with the mitigating actions 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.
There is a risk that we may not meet our strategic targets in the event of not being able to respond fast enough to the volatile economic environment or to increasing competition, especially from low-cost/margin players.
To address this risk, several improvement projects were implemented in 2020 to create a more agile organization. In 2021, macro-economic conditions continued to be challenging, with high logistic costs, as well as increasing energy prices in Europe. Despite these headwinds, we continued to show resilience, serving our customers and delivering solid financial results.
Nevertheless, with increasing inflation and uncertain market developments there is a risk that sales volumes and margins could be negatively impacted.
Further mitigations: To distinguish ourselves from our competitors, we continue to create value for our customers through innovative products and services. In addition, in 2021 we revised the organizational structure of DSM, creating three Business Groups more closely aligned with the end markets we serve. We also adjusted the operating model for science and innovation to bring innovation closer to the Business Groups, and the set-up of all enabling functions has been revisited to better support business priorities.
There is a risk that we might not be able to attract, retain and develop the talents required to transform our company and deliver on our strategy. To enable continued strong performance, our P&O strategy has been fully aligned with our business priorities, and it is centered around our Culture Compass. It has four focus areas, addressing organization, people, workplace, and leadership and it is supported by modern, flexible rewards.
We want to provide an environment where everyone can feel safe, valued and included and where everyone can contribute. Our Inclusion & Diversity strategy therefore consists of initiatives to diversify our current and future talent pools. And, as an engaged workforce is essential, we increased our efforts to connect with our employees in different ways throughout the pandemic. We monitor employee engagement and well-being through different surveys.
Further mitigations: A new data platform will provide new people and organization insights that will serve as a base for future decision-making.
As we move further into new business areas — such as gut health, precision & personalization – there is increased uncertainty around time-to-market and peak sales of our innovation projects, impacting our organic growth.
Several strategic projects progressed well in 2021, such as the launch of the decision-making tools Verax™ and Sustell™, the regulatory approval for Bovaer®, our methane inhibitor solution, the launch of Hologram Sciences Inc., the introduction of a fast-acting vitamin D form ampli-D®, the expansion of the portfolio of Market-Ready Solutions, the capacity expansion and growing market reach for Veramaris®, our algal-based omega-3, the construction of a production facility for CanolaPRO®, a rapeseed protein isolate, and the development of the market for EVERSWEET™, our fermentative Stevia sweetener. Despite the progress that has been made so far and having processes in place to manage and monitor further progress of innovation projects, the contribution to organic sales growth remains a risk.
Further mitigations: We are aligning our science and innovation organization with our new end-market organization. We will also continue to increase our investments in the digital transformation of our science and innovation capabilities such as artificial intelligence (AI), big data, deep learning and modelling as well as extending lab automation.
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 2021 to implement our multi-year cybersecurity programs that cover the domains of information technology, operations technology, and R&D laboratory systems. We have updated our maturity assessment to provide us with insights for further improvements.
Since the ‘human firewall’ remains critically important, we continued to raise employee awareness via e-learnings, awareness campaigns and regular phishing tests, either on a global scale or for specific target groups.
Despite our progress in this area, the risk remains due to a growing number of digital initiatives driven by our strategy, and increasing external cyber threats.
Further mitigations: Using as input the results from the maturity assessment, the Cyber Security Governance Board has defined the One DSM Cyber Security Program. Through this program we are implementing an overarching framework to manage cybersecurity risks on a global level, covering the domains of information technology, operations technology, and R&D laboratory systems.
A food safety incident may arise due to (alleged) acts or omissions of DSM, our suppliers or other value chain partners and may have severe consequences for the health of consumers and negative financial and reputational impact for DSM. To reduce this risk, four initiatives were deployed over the last couple of years to complement our quality management systems: 1) growing as a learning organization, 2) high quality risk assessments, 3) improving standards, and 4) mindset and behavior. While the quality of our products is a constant focus, the risk of a quality incident remains.
With the shift to new markets and new product offerings, the importance of product quality increases further, whereas the risk of quality defects cannot be fully excluded.
Further mitigations: In addition to already high standards and corporate requirements with regards to quality, we are launching a program across our operations to further strengthen our quality procedures, building on our experiences from putting safety as first priority.
The following emerging risks have been identified by the Executive Committee.
Climate physical risks
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 transition 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
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).
Environmental, Social and Governance (ESG) reporting risk
With ESG performance becoming more important and with increasing disclosure requirements, we might not be able to address all of these developments timely.
In 2020, we performed a desk study on physical risks for our sites that could lead to material financial impact in case of a prolonged shutdown. We mapped five emerging hazards (flooding, cyclones, wildfire, extreme heat, and water scarcity) against three IPCC climate temperature scenarios (RCP 2.6, RCP 4.5, and RCP 8.5), using three different time horizons (present, 2030, and 2040/2050). These scenarios were supplemented with additional data.
In 2021, the results from that study were validated with these sites in order to understand our risk exposure and resilience taking into account local circumstances and existing mitigations. The validations demonstrated that we already have mitigations in place for several of the risks identified through the desk study. We have concluded that water scarcity is the most material risk and needs to be actively monitored and managed. All sites with an increased water risk profile were already in scope of our water stewardship program.
In parallel, we piloted a transition risk assessment approach in two different businesses, one from the Materials cluster and one from the Nutrition cluster, covering more than a third of total sales. Using external data sources, such as International Energy Agency – World Energy Outlook, World Bank, and sector-specific sources such as the FAIRR initiative, we built forward-looking scenarios aligned with the IPCC temperature models and time horizons used for the physical risk assessments. Scenarios are evolving depending on external data availability and by adding parameters relevant for the businesses under review. Through the assessments both risks and opportunities are captured. The scope is not limited to our own operations but includes the full value chain impact on our business.
At this moment, no material short-term climate risks have been identified through specific climate risk assessments or regular risk assessments. Physical and transition risks are seen as emerging, with transition risks still expected to materialize this decade. Various climate-related opportunities are foreseen to have a meaningful contribution as well, such as methane reducing ruminant solution Bovaer®. The material risks identified through the climate risk assessments were integrated and are managed as part of our regular risk management processes.
We will continue to expand and update our physical risk assessments for our own operations as well as the rest of our value chains.
With the help of external parties, we are also exploring different approaches to assess vulnerabilities caused by climate change and increase our resilience. This will address both our own sites and our end-markets. Furthermore, we will roll out the transition risk assessments in the remaining businesses and continue to update our scenarios to reflect latest external insights.
COVID-19 related risks
In 2021, we continued to respond swiftly to the impacts of the pandemic. We ensured that people were safe and continued to serve our customers. Our financial performance was solid in 2021 and COVID-19 has demonstrated the relevance of our strategic focus on Health, Nutrition & Bioscience. Hence, COVID‑19 was not considered a top risk, but the effects of the pandemic have been factored into the assessment of all other risks. This was consistent with the outcome of the Materiality matrix assessment.
In 2021, we focused on keeping our employees engaged, as working remotely was the standard for most of our office workers during a significant part of the year. For those workers whose activities had to be carried out within an operational setting, measures were put in place to ensure that these working environments were COVID-19-secure. Special attention was paid to mental wellness and increasing resilience, see People.
Other important risks
There are also more generic business risks, such as business continuity, sourcing, intellectual property, tax, and business process risks. Our risk management system is set up to adequately monitor and respond to these risks.