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 2022 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.
As the world around us is very volatile, there is a risk that we may not meet our strategic targets in the event that we are not able to respond fast enough or in full. The inflationary environment and the high volatility of energy prices, especially in Europe, are putting pressure on our margins. Supply chain disruptions have the potential to impact our operations if not handled well.
To address this risk, we aim to counter cost increases with pricing actions and strict spend management. Our global footprint helps us optimize our supply and demand balance, which increases our resilience. Where necessary and practicable, we make use of alternative pre-qualified suppliers in order to maintain continuity of supply. We offer solutions for our customers that help them to navigate difficult market circumstances.
Nevertheless, with increasing inflation and uncertain market developments there is a risk that sales volumes and margins could be negatively impacted.
We continue to innovate and offer products and services that meet the continually evolving needs of our customers while addressing significant societal and environmental challenges.
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. Various initiatives that are implemented as part of our P&O strategy are addressing this risk. We deploy global and local health and well-being programs to support our people. We have introduced hybrid working. By aiming for a 50:50 balance between office and remote work, we hope to provide our office-based employees with the flexibility to focus on individual work where needed, while also facilitating the right opportunities for personal development, strong collaborations, and closer relationships. In 2022, we continued to work on making sure that all our people feel included and cared for through the execution of our Diversity, Equity & Inclusion (DE&I) strategy.
We create a working environment that encourages all colleagues to take ownership of their performance and development. As part of this, we launched MyCareer Marketplace as well as the Learn Together, Grow Together initiative. We expanded our offering of flexible benefits to address the different needs of people. 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 by means of various surveys.
The implementation of the P&O strategy will be continued. Based on the insights from our Employee Engagement Survey, extra focus will be given to support the well-being of all our employees and their ability to regularly re-energize.
As we move further into new business areas – such as gut health and ‘precision & personalization’ – there is increased uncertainty around time-to-market and peak sales of our innovation projects, impacting our organic growth.
In 2022, we implemented our new organizational model in which we have a central, shared science organization in combination with dedicated innovation teams that are embedded in our Business Groups. This allows us to be closer to our customers and develop solutions that address market needs with greater speed.
Our innovation roadmap is focused around four overarching growth themes that address major global societal, environmental and technological trends: Pathways, Proteins, Prevention and Precision. Each theme is connected to a technology platform that develops disruptive technologies which allow us to expand our customer offerings. We use advanced digital technologies in order to accelerate innovation and provide evidence of its efficacy.
During 2022 we progressed well with several of our strategic innovations, such as our methane inhibitor solution Bovaer®, the decision-making tools Sustell™ and Verax™, our‘Health of the Gut’ platform, and Vertis™ CanolaPRO®, our high-quality canola protein isolate.
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.
We will 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. We will also extend 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 2022 to implement our multi-year cybersecurity programs that cover the domains of information technology, operations technology, and R&D laboratory systems. Further progress was made to integrate the three domains under an overarching framework.
Since the ‘human firewall’ remains critically important, we continued to raise employee awareness via e-learnings, knowledge assessments 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.
We will continue the various multi-year programs to increase our resilience. Further improvements are being implemented based on the learnings from a cybersecurity incident response exercise. Following the announcement of our merger of equals with Firmenich, we updated and expanded the actions taken to increase cyber awareness.
A food safety incident might arise due to (alleged) acts or omissions of DSM, our suppliers or other value chain partners, with potentially severe consequences for the health of consumers and negative financial and reputational impact for DSM. To reduce this risk, product quality has been accorded the same scrutiny as safety. We perform special risk assessments to identify quality risks. Based on the outcomes, we define and implement quality standards. Technical solutions are deployed when needed and procedures are adapted to make processes more robust. We are working to sustainably embed the right quality mindset and behaviors in our organization and to grow as learning organization.
With the shift to new markets and new product offerings, the importance of product quality increases further. Despite quality being a core value, the risk of quality defects cannot be fully excluded.
We will continue to develop and adapt our capabilities in the three focus areas: risk assessments, standards, and learning organization, mindset & behavior. We use incidents and near misses to improve by performing root cause analyses and taking corrective actions. As learning organization, we share and discuss quality incidents and near misses with a broader audience.
In 2020, we started our climate risk assessments by means of a desk study for our most material sites on physical risks 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 (2020, 2030, and 2040/2050). These scenarios were supplemented with additional data.
In 2021, the results from that study were validated with the most relevant 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. Water scarcity was the most material physical climate risk identified, which needs to be actively monitored and managed. Our sites with an increased water risk profile were already in scope of our water stewardship program. For more information on our water stewardship program, see Water stewardship.
In 2022, we made progress on our assessments as follows:
- We started on-site deep dives to understand the climate risks in more detail. These have been completed for four of our material sites. For this, the RCP 4.5 scenario was used in combination with a 2040–2060 time horizon. In addition to the five hazards mentioned above, several other hazards are also considered such as storm, hail and subsidence
- We started to expand the risk assessments to our value chains. We completed a pilot to obtain first insights into potential climate risks for our key suppliers by means of a desk study
- We also completed a study to increase our understanding of physical climate risks for one of our end-markets, being the Brazilian dairy market.
In 2022, we performed transition risk assessments for our three Business Groups. Both risks and opportunities are captured through the assessments. The scope is not limited to our own operations but includes the full value chain impact on our business. 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.
The following risks were identified as having the highest impact:
Policy and legal
- As carbon pricing schemes expand, this could have a negative impact on our operating costs
- Regulations to constrain emissions-intensive activities could require us to reduce or stop manufacturing activities in certain locations
- Changes in animal farming practices following regulations to reduce emissions could impact demand for our products in the event that we are unable to adapt our product and service offerings in a timely manner
- As demand for certified, renewable energy and sustainable raw materials will increase, this might have a negative impact on their availability and price levels
- In the event that we are not able to bring innovations to the market that address the need for solutions with a verifiable, lower carbon footprint, this could impact the demand for our products
- Changing customer preferences related to climate change, e.g. dietary shifts could impact demand for some of our solutions
With our innovation portfolio and through the implementation of our GHG roadmap, we aim to mitigate those risks and by doing so capture the opportunities offered by the transition to a net-zero world.
The material risks identified through the climate risk assessments are 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 explore different approaches to assess vulnerabilities caused by climate change and to increase our resilience. Furthermore, we will update the transition risk assessments on an ongoing basis and continue to update our scenarios to reflect the latest external insights.
Other important risks
There are also more generic business risks, such as business continuity, sourcing, intellectual property, tax, changing legislation and regulations, increasing non-financial reporting requirements, and business process risks. Our risk management framework is set up to adequately monitor and respond to these risks.
For risks related to the announced merger between DSM and Firmenich, reference is made to the offering circular dated November 22, 2022.
All relevant risks are taken into account in the preparation of our financial statements.
Primary energy is energy that has not yet been subjected to a human engineered conversion process. It is the energy contained in unprocessed fuels.
Final (consumed) energy is the energy that is consumed by end-users. The difference between primary energy and final consumed energy is caused by the conversion process between the two as well as any transmission losses.