Overview of the risk management systems
Principles of risk management
Risk management is an essential part of the internal control system of the Group and an active means to analyze and manage opportunities and threats related to the business strategy and operations. The Company has defined the principles applied in the organization of the risk management. The purpose of risk management is to identify potential events that may affect the achievement of the Group’s objectives in changing business environment and to manage such risks to a level that the Group is capable and prepared to accept so that there is reasonable assurance and predictability on the achievement of the Group’s objectives. The risk management process of the Group is based on Enterprise Risk Management (ERM) framework of Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Risk management process and responsibilities
The Group’s risk management process involves assessing risks systematically by business unit, segment and Global function, improving risk management awareness and quality, sharing best practices and supporting cross-functional risk management initiatives. In order to systematize and facilitate the identification of risks they are categorized as strategic, operational, financial, and information risks. These categories are closely aligned with the strategic, operational, financial and compliance objectives of the Group.
Huhtamaki Group Enterprise Risk Management (ERM) Policy defines the objectives, scope and responsibilities of risk management. Compliance with the risk management policy assures timely identification and recording of risks and the application of relevant risk management measures to address these risks. More detailed risk management procedures are set forth in the Group’s ERM framework and process guideline.
The Audit Committee monitors the implementation of risk management activities, and evaluates the adequacy and appropriateness of ERM. The Audit Committee reports regularly to the Board, which is responsible for reviewing the Group’s strategic, operational, financial and information risks. The Board approves the risk level that the Group is capable and prepared to accept and the extent to which risks have been identified, addressed and followed up.
The GET is responsible for the adoption and deployment of the Group’s internal control principles and procedures relating to risk management. The risk management process includes systematic identification and assessment of risks in each business segment and their business units as well as at Group level. Risks are consolidated from the business unit to the segment level and from the business segment to the Group level. At each level risk treatment actions are defined in order to reach acceptable risk levels. Execution and supervision of these risk treatment actions is a task of line management. Upper level line management always approves lower level risk mitigation actions and the risk level reached after implementation of such actions. The Global Risk Management function monitors and reports the achievement of these actions. The purpose is to verify that risk treatment actions support the achievement of the Group’s strategic, operational, financial and compliance objectives.
The Global risk management function organizes, instructs, supports, supervises and monitors risk management activities on an ongoing basis. The function also analyzes changes in the impact, likelihood and level of control for each identified business risk. It reports results of the risk management process to the Audit Committee annually. The Global risk management function also prepares reports to the business segment and Group management as well as the internal audit and the Auditor.
Business unit, segment and Group level risk management process and activities are integrated into the Group’s strategic planning and budgeting processes. Risk management process may be commenced any time in the course of the financial year should a certain business area encounter essential strategic changes requiring initiation of the risk management process.
The most significant risks
The most significant strategic risks
Huhtamaki’s 2030 strategic priorities are to grow its business, drive competitiveness, develop talent and embed sustainability in everything it does. Huhtamaki views that the most significant risks and opportunities for growth arise from the macroeconomic environment. Continued uncertainty due to the impact of COVID-19 on the economy may impact consumer buying behavior, and thus demand for the Group’s products. Uncertainty on trade agreements, particularly post Brexit, as well as trade wars and political unpredictability may slow down investment and economic growth in impacted geographies. Another key risk to growth arises from the Group’s ability to hold and increase its market position while during and post pandemic the competitive environment is volatile and market dynamics are changing. Yet, these changes, together with certain changes in demand also present opportunities to build agile business models and grow in product categories that serve food delivery, casual at home entertaining and everyday convenience. Huhtamaki manages the risks by developing its range of product offering, allocating capital and resources carefully and diversifying investments geographically.
The key risks and opportunities to Huhtamaki’s competitiveness arise from its ability to manage prices effectively in the presence of aggressive competition, a rise in raw material pricing, it’s capability to meet customer demand for technology and digital solutions and its ability to benefit from its global position in terms of sales and sourcing. Activities to manage the threats and seize the opportunities involve cross-functional and cross-segment collaboration and active dialogue with the customers to develop ways to increase value and understand Huhtamaki´s competitive position. Furthermore, Huhtamaki’s competitiveness relies on the successful completion of its key projects as part of its World Class Management system. This is supported with good project governance and explicit accountability and responsibility structures.
To successfully reach its goals in talent development, the Group focuses on managing the risks and opportunities relating to leadership and human capital. These include developing the skills of leaders and managers, global and local talent pools and succession planning, and performance management activities that support a high-performing and diverse culture.
In terms of the Group’s sustainability ambition, the biggest strategic risks and opportunities arise from changes in consumer behavior and potential new environmental legal requirements on single-use products. The company’s future growth and success depend on its continued ability to predict and respond to changes and its ability to innovate and develop new sustainable products and solutions in a timely manner. Understanding consumers enables Huhtamaki to realize business opportunities in building long-term sustainable growth in partnership with its customers. On the other hand, negative media attention on plastics and single-use products which does not take into consideration the value of packaging within the broader sustainability context, may depress demand for Huhtamaki’s products. Negative media attention may also drive governmental attitudes and legislation. To manage the threats, Huhtamaki is focused on driving an evidence-based discussion to deliver data on the value of packaging in terms of hygiene, food safety, food availability and food waste prevention. Furthermore, Huhtamaki actively tracks early stages of regulatory initiatives and potential regulatory changes so as to reflect these in the development and commercialization of its products and solutions.
Operational and financial risks
Huhtamaki’s ability to pass increases in the cost of raw materials and energy to the price of its products is considered one of the biggest operational risks and opportunities to the Group. The risk is managed by increased centralized purchasing by the business segments. Raw material and energy prices are monitored on an ongoing basis, and energy and material escalation clauses are included in contracts when possible.
Risks related to destruction of facilities and dis-continuity of operations, disruption in raw materials or energy supply as well as IT infrastructure, systems and applications, are important operational risks potentially impacting the business continuity of Huhtamaki. The company performs a continuous improvement program in property risk control, mitigating the impact and likelihood of hazards, such as fire, explosion, flood or windstorm, that may lead to property damage and business interruption. To minimize the impact of a potential business interruption, the company maintains and further develops its disaster recovery and business continuity plans and allocates manufacturing capacity to several locations. Huhtamaki is also renewing its ERP systems, modernizing business software and updating hardware.
Product safety and quality is a number one priority to Huhtamaki. While consistent high quality and safety in Huhtamaki’s products build a competitive advantage, a critical shortcoming in product safety or quality could negatively impact the company’s reputation resulting in a decrease in sales. The Group applies rigorous quality control processes in all its manufacturing operations and has formal trial processes for new products and materials. Quality and hygiene management systems, such as ISO9001 and BRC, provide a solid base for securing manufacturing consistency.
Huhtamaki has made substantial investments into the production machinery serving its technology platforms. To mitigate the risk of its technology and machinery becoming outdated, inefficient or unfit for serving customer demand, the Group continuously monitors and anticipates long term needs for replacement investments. Huhtamaki is also actively working on strategic partnerships and M&A to secure a competitive advantage on new technology innovations.
Foreign exchange transaction risk remains among Huhtamaki’s twenty most important risks and is slightly increased in 2020 versus 2019. More information on financial risks and risk management can be found in Note 5.8. of the Financial statements 2020.
None of the risks identified in connection with the 2020 risk assessment are considered of a magnitude that could not be managed or would endanger the implementation of Huhtamaki’s 2030 Strategy.
When considered necessary, appropriate risk treatment actions may also involve a risk transfer by means of insurance. The Group maintains a number of global insurance programs. The need for insurance, including the adequacy of its scope and limits, is continuously evaluated by the Global Risk Management function.