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Risks and risk management

Our approach to risk management

Risk is an integral component of business, and it is characterised by both threat and opportunity. Stora Enso is committed to ensuring that systematic and holistic management of risks and opportunities is a core capability and an integral part of all group activities, and that a risk aware corporate culture is fostered in all decision making. Through consistent application of dynamic risk analysis, we manage risk in order to enhance opportunities and reduce threats to achieve competitive advantage.

Risk governance

Stora Enso defines risk as events or developments that may adversely affect the achievement of company values, objectives and goals. The Group Risk Policy, which is approved by the Board of Directors, sets out the overall approach to governance and management of risks in accordance with the COSO (Committee of Sponsoring Organizations) framework and in line with the ISO 31000 standard. 

The Board retains the ultimate responsibility for the overall risk management process and for determining what an appropriate and acceptable level of risk is. The Board has established the Financial and Audit Committee to provide support to the Board in relation to the monitoring of the adequacy of the risk management process within Stora Enso, and specifically regarding the management and reporting of financial risks. The Sustainability and Ethics Committee is responsible for overseeing the company’s sustainability and ethical business conduct, its’ strive to be a responsible corporate citizen, and its contribution to sustainable development.

The head of Enterprise Risk Management is responsible for the design, development and monitoring of the top-down implementation of the group risk management framework. Each division head, together with their respective management teams, are responsible for process execution and cascading the framework and guidelines further down in the organisation. Internal Audit evaluates the effectiveness and efficiency of the Stora Enso Risk Management Process.

Risk management process

In connection with the annual strategy process, business divisions and group service and support functions conduct a holistic baseline risk assessment, linked to their key objectives. Specific guidance regarding the Risk Management Process is outlined in the Enterprise Risk Management instructions, distributed with annual Strategy Guidelines.

Business entities and functions identify the sources of risk, events including changes in circumstances and their causes and potential consequences thereof. Stora Enso’s Risk Model outlines the overall risk universe which is used to support holistic risk identification and risk consolidation, while also providing taxonomy as well as consistency to risk terminology. Risk appetite is determined across main risk categories on the business division level.

Risk analysis involves developing an understanding of the risk to provide an input to risk evaluation. The purpose of risk evaluation is to determine risk priorities and to support decision making to determine which risks need treatment/actions. Risks are assessed in terms of impact and likelihood of occurrence. Pre-defined impact scales consider financial, people and reputational impacts, on both a quantitative and qualitative basis.

Risk treatment involves selecting one or more risk management option, such as avoidance, reduction, sharing and retention. Additional risk mitigation actions are determined for risks which exceed perceived risk tolerance incorporating assignment of responsibility, schedule and timetable of the risk treatment actions.

Following the annual baseline assessment, prioritised and emerging risks, the evaluation as well as the corresponding risk mitigation and business continuity plans related to those risks, are reviewed in divisional business review meetings on a quarterly basis.

Despite the measures taken to manage risks and mitigate the impact of risks, and while some of the risks remain beyond the direct control of management, there can be no absolute assurance that risks, if they occur, will not have a materially adverse effect on Stora Enso’s business, financial condition, operating profit or ability to meet financial obligations.

 

Main risk factors

Macroeconomic, geopolitical and foreign currency risks

The group operates in more than 35 countries and is affected by the global economy. Changes in broad economic conditions, sharp market corrections, increasing volatility in foreign exchange rates and chronic fiscal imbalances could have negative and material impact on our profit, cash flows and financial position. Prolonged global recession, may materially and adversely affect Stora Enso’s performance and financial condition. A recession may also materially affect our customers, suppliers and other parties with which we do business. Exchange rate fluctuations may have a material impact on the reported results through transaction and translation risk impact. 

A significant and sustained economic downturn, or any similar event, could have a material adverse effect on the group’s operational performance and financial condition. The group’s reported results may fluctuate as average exchange rates change, and reported net assets may fluctuate as the period-end exchange rate changes. 

The group has a diversified portfolio of businesses that mitigates exposure to any one country or product segment. We monitor the external environment continuously and our planning assumptions take account of important near- to medium-term and long-term drivers related to key macro-economic factors. We closely monitor the Board-approved risk appetite measures for specific financial metrics and actively manage cash flow and liquidity. We hedge 50% of the highly probable 12 months net foreign exchange flows in main currency pairs. Fx translation risk is reduced by funding assets, whenever economically possible, in the same currency as the asset. Financial risks are discussed in detail in Note 24. The divisions regularly monitor their order flows and other leading indicators, where available, so that they may respond quickly to deterioration in trading conditions. In the event of a significant economic downturn, the Group would identify and implement cost reduction measures to offset the impact on margins from deterioration in sales. 

Ethics and compliance

Stora Enso operates in highly regulated business and is thereby exposed to risks related to breach of applicable laws and regulations (e.g capital markets regulation, company and tax laws, customs regulation and safety regulation) and breach of group policies such as Code of Conduct, Supplier Code of Conduct and Business Practice Policy regarding fraud, anti-trust, corruption, conflict of interests and other misconduct. Stora Enso may face high compliance and remediation costs under environmental laws and regulations. See also Information systems and information security.

Potential impacts include prosecution, fines, penalties, and contractual, financial and reputational damage.

Stora Enso’s Ethics and Compliance Programme, including policy setting, value promotion, training and knowledge sharing and grievance mechanisms is kept continuously up to date and developed. Other compliance mechanisms include Stora Enso group’s internal control system and Internal Audit assurance, Supplier Code of Conduct in supplier contracts, supplier risk assessments, supplier trainings, supplier audits and black-listing procedures.

In response to capital markets regulations, Stora Enso’s Disclosure Policy emphasises the importance of transparency, credibility, responsibility, proactivity and interaction.

Environmental risks are minimised through environmental management systems and environmental due diligence for acquisitions and divestments, and indemnification agreements where effective and appropriate remediation projects are required. Special remediation projects related to discontinued activities and mill closures are executed based on risk assessments.

Strategic investments

Stora Enso’s business strategy is to transform from a traditional paper and board producer to a customer-focused renewable materials growth company. The success of this transformation depends on our ability to understand the needs of the customer and find the best way to serve them with the right offering and with the right production asset portfolio. Failure to complete strategic projects in accordance with the agreed schedule, budget or specifications can have serious impacts on our financial performance. Significant, unforeseen changes in costs or an inability to sell the envisaged volumes or achieve planned price levels may prevent us from reaching our business goals.

Risks are mitigated through profound and detailed pre-feasibility and feasibility studies which are prepared for each large investment. Group investment guidelines stipulate the process, governance, risk management and monitoring procedures for strategic projects. Environmental and Social Impact Assessments (ESIAs) are conducted for all new projects that could cause significant adverse effects in local communities. Post completion audits are carried out for all significant investments.

Global warming

Changes in precipitation patterns, typhoons and severe frost periods in the subtropics could cause damage to tree plantations. Increases in the temperature could lead to changes in the tree species composition of forests, accelerated by insect outbreaks. Milder winters and shorter periods of frozen soils could impact harvesting and transport of wood and thus affect the stability of raw material supply and increase costs. Additional demand for bioenergy and agricultural land may limit the availability of land for fibre production, affecting the price of biomass. The increasing global demand for water may in the long-term impact our operations through our supply chains.

Stora Enso is committed to contribute and mitigate the effects of climate change by actively seeking opportunities to reduce the group’s carbon footprint. Risks related to climate change are managed via activities related to finding clean, affordable and safe energy sources for production and transportation, and reducing energy consumption. Additional measures include energy efficiency initiatives, use of carbon-neutral biomass fuels, maximising utilisation of combined heat and power, and sequestration of carbon dioxide in forests and products. Diligent plantation planning is ensured to avoid frost sensitive areas and non-controversial tree breeding and R&D programmes are applied to increase tolerance of extreme temperatures. Stora Enso maintains a diversity of forest types and structures and enforces diversification in wood sourcing. Wood harvesting in soft soils involves implementation of best practices guidelines. Agroforestry concepts are introduced to integrate the different land use forms and to mitigate the competition on land and the effects of raising food prices.

Regulatory changes and political risks

The group’s businesses may be affected by political or regulatory developments in any of the countries and jurisdictions in which the group operates, including changes to fiscal, tax, environmental or other regulatory regimes. Potential impacts include higher costs and capex to meet new environmental requirements, expropriation of assets, imposition of royalties or other taxes targeted at our industry, and requirements for local ownership or beneficiation. In particular, the EU energy and carbon policies may impact upon the availability and price of wood fibre. Also political instability can result in civil unrest, nullification of existing agreements, harvesting permits or land leases. Unpredicted changes in forest certification schemes could limit the availability of certified raw material.

Stora Enso follows and actively participates in the development of environmental and other legislation to minimise any adverse effects on its business. Forest management certification and chain-of-custody certification are tools for managing risks related to the acceptability of wood.

Mergers, acquisitions, divestures and restructuring

Failure to achieve the expected benefits from any acquisition or value from assets or businesses sold can have serious financial impacts. The group could find itself liable for past acts or omissions of the acquired business, without any adequate right of redress. Failure to achieve expected values from the sales of assets or deliveries beyond expected receipt of funds may also impact the group's financial position.

In connection with an acquisition, past practices by the target such as in relation to pollution, competition law compliance or corruption could result in additional costs for Stora Enso and cause reputational damage. Divestments may involve additional costs due to historical and unaccounted liabilities. Business restructuring may involve reputational impacts.

Rigorous M&A guidelines, including due diligence procedures are applied to the evaluation and execution of all acquisitions that require the approval of the Board. Structured governance and policies such as policy for responsible right- sizing, are followed when taking restructuring decisions.

Information technology and information security

The group is dependent on information technology systems for both internal and external communications and for the day-to-day management of its operations. The group’s information systems, personnel and facilities are subject to cyber security risk. Failure to capitalise on digitalisation and cognitive technologies could impair Stora Enso’s competitiveness. Other IT related risks relate to potential unavailability of IT services due to human error in operations, damaged hardware in data rooms and data centres, network connection issues and suppliers’ failure to follow service level agreements.

Accidental disclosure of confidential information due to failure to follow information handling guidelines or accident or criminal act resulting in financial damage, penalties, disrupted or delayed launch of new lines of business or ventures, loss of customer and market confidence, loss of research secrets and other business critical information. Loss of backup media and violation of data privacy regulations.

Management of risks is actively pursued within the Information Risk Management System and best practice change management and project methodologies are applied. A number of security controls have been implemented to strengthen the protection of confidential information and to facilitate compliance with international regulations. Specific measures include thorough request for proposal (RfP) process in supplier selection for business-critical services, supplier audits, annual controls and audit, data centres located in low-risk areas, backup connections for critical services, disaster recovery plans, targeted scanning and investigation activities, encryption of communication, information and devices, remote management of security on devices and information security awareness training.

Health and safety

Failure to maintain high levels of safety management can result in harm to the group’s employees or contractors, and also to communities near our operations and the environment.

Impacts in addition to physical injury, health effects and environmental damage could include liability to employees or third parties, impairment of the group’s reputation, or inability to attract and retain skilled employees. Government authorities could additionally enforce the closure of our operations on temporary basis.

Stora Enso measures its performance in health and safety through lag indicators on accidents and near-misses, and lead indicators on safety observations. The target in safety is zero accidents, but demanding milestones have also been set for accident and incident rates. Stora Enso has adopted a common model for safety management, establishing a set of safety tools that all units must implement in their operations. Implementation of the tools is followed up and reported monthly, and support is offered to units through training, coaching and best-practice sharing. The main responsibility for identifying and managing safety risks remains with the units. At mill level, safety and health risks are assessed jointly, in co-operation with the occupational health service providers. Global health and safety risks are monitored and assessed by group Occupational Health and Safety function.

Product safety

Some of our products are used to package liquids and food consumer products, so any defects could affect health risks or packaging functions, and result in costly product recalls. Our wood products are incorporated into buildings, and this may involve product liability resulting from failures in structural design, product selection or installation. 

Failure to ensure product safety could result in product recalls involving significant costs including compensation for indirect costs of customers, and reputational damage.

The mills producing food and drink contact products have established certified hygiene management systems based on risk and hazard analysis. To ensure the safety of its products, Stora Enso actively participates in CEPI (Confederation of European Paper Industry) working groups on chemical and product safety. In addition, all Stora Enso mills have certified ISO quality management systems. Also, contractual liability limitation and insurance protection are used to limit the risk exposure to Stora Enso.

Competition and market demand

Continued competition and supply and demand imbalances in the paper, packaging, pulp and wood products markets may have an impact on profitability. The paper, pulp, packaging and wood products industries are mature, capital intensive and highly competitive. Stora Enso’s principal competitors include a number of large international forest products companies and numerous regional and more specialised competitors. Customer demand for products is influenced by general economic conditions and inventory levels, and affects product price levels. Product prices, which tend to be cyclical in this industry, are affected by capacity utilisation, which decreases in times of economic slowdowns. Changes in prices differ between products and geographic regions.

The table below shows the operating profit sensitivity to a +/- 10% change in either price or volume for different segments based on figures for 2016.

Operating Profit: Impact of Changes +/- 10%, EUR million
Segments Price Volume
Consumer Board 220 84
Packaging Solutions 97 37
Biomaterials 131 59
Wood Products 156 37
Paper 301 83

The ability to respond to changes in product demand and consumer preferences and to develop new products on a competitive and economic basis calls for innovation capabilities, continuous capacity management and structural development. The risks related to factors such as demand, price, competition and customers are regularly monitored by each division and unit as a routine part of business management. These risks are also continuously monitored and evaluated on group level to get a perspective of the group’s total asset portfolio and overall long-term profitability potential.

Community relations and social responsibility

Social risks may harm existing operations and the execution of investments, especially in growth markets. Failure to successfully manage relationships with local communities and non-governmental organisations (NGOs) could disrupt our operations and adversely affect the group’s reputation. The group operates in certain countries where land and resource ownership rights remain unclear, and where related disputes may arise.

Potential impacts include reputational impacts and negative media coverage, harm to communities and rights holders, disruption of operations, losing the licence to operate.

Stora Enso strives to identify and minimise risks related to social issues in good time, in order to guide decision-making in its investment processes as well as in ongoing operations. Tools such as sustainability risk assessment, human rights due diligence and Environmental and Social Impact Assessments (ESIA) help ensure that no unsustainable projects Fare initiated and all related risks and opportunities are fully understood in all operations. They also enable project plans and operating practices to be adapted to suit local circumstances. More information on community engagement is presented in Stora Enso’s Sustainability report.

Sourcing

Increasing input costs of energy, fibre, chemicals, other raw materials, transportation and labour may adversely affect Stora Enso’s profitability. Securing access to reliable low-cost supplies and proactively managing costs and productivity are of key importance. Reliance on outside suppliers for natural gas, oil and coal, and for peat and nearly half of the electricity consumed, leaves the group susceptible to changes in energy market prices and disturbances in the supply chain.

The next table shows Stora Enso’s major cost items.

Composition of Costs in 2016
Operative Costs % of Costs % of Sales
Logistics and commissions 11 10
Manufacturing Costs
Fibre 34 31
Chemicals and fillers 9 9
Energy 7 6
Material 6 6
Personnel 15 14
Other 12 11
Depreciation 6 5
Total Costs and Sales 100 92
Total operative Costs and Sales in EUR million 8 998 9 802
Equity accounted investments (EAI), operational 80
Operational EBIT 884

In many areas Stora Enso is dependent on suppliers and their ability to deliver a product or a service at the right time and of the right quality. The most important products are fibre, chemicals and energy, and machinery and equipment in capital investment projects. The most important services are transport and various outsourced business support services. For some of these inputs, the limited number of suppliers is a risk.

Input cost volatility is closely monitored at business unit, divisional and group level. The group applies consistent long-term energy risk management. The price and supply risks are mitigated through increased own generation, shareholding in competitive power assets such as PVO/TVO, physical long-term contracts and financial derivatives. The group hedges price risks in raw material and end-product markets, and supports development of financial hedging markets. The group uses a wide range of suppliers and monitors them to avoid situations that might jeopardise continued production, business transactions or development projects.

Suppliers and subcontractors must also comply with Stora Enso’s sustainability requirements as they are part of Stora Enso’s value chain, and their weak sustainability performance could harm Stora Enso and its reputation. Stora Enso’s sustainability requirements for suppliers and audit schemes cover its raw materials, and other goods and services procured. Suppliers are assessed for risks related to their environmental, social and business practices through self-assessment questionnaires and supplier audits. Findings from such assessments are continuously followed up and progressive blacklisting procedures are applied as necessary.

Environmental and social responsibility in wood procurement and forest management is a prime requirement of stakeholders. Failing to ensure that the origin of wood used by the group is acceptable could have serious consequences in markets. Stora Enso manages this risk through its policies for sustainable sourcing of wood and fibre, and for land management, which set the basic requirements for all Stora Enso wood procurement operations. Traceability systems are used to document that all wood and fibre come from legal and acceptable sources.

People and empowerment

Recruiting, retaining and developing a competent workforce and managing key talent throughout Stora Enso’s global organisation are crucial to the success of the group. Competition for personnel is intense and the group may not be successful in attracting or retaining qualified personnel. A significant portion of Stora Enso employees are members of labour unions and there is a risk that the group may face labour market disruptions especially at a time of restructuring and redundancies due to divestments and mill closures.

The loss of key employees, the group’s inability to attract new or adequately trained employees, or a delay in hiring key personnel could seriously harm the Group’s business and impede the group and its’ business divisions from reaching their strategic objectives. Labour market disruptions and strikes could have material adverse effects on the business, financial conditions and profitability.

Stora Enso manages the risks and loss of key talents through a combination of different actions. Some of the activities aim at providing a better overview of the whole workforce of the group, making the Stora Enso employer brand better known both internally and externally, globalising some of the remuneration practices and intensifying the efforts to identify and develop talents. Finally, the group actively focuses on talent and management assessments, including succession planning for key positions. The majority of employees are represented by labour unions under several collective agreements in different countries where Stora Enso operates, thus relations with unions are of high importance to manage labour disruption risks.

Litigation

The international nature of the group’s operations exposes it to the potential for litigation from third parties. Material levels of litigation may arise from many of the group’s activities. Significant levels of litigation in our industry sector have in the past related mainly to major contracts and shareholder agreements. Acquisitions and disposals and the restructuring of under-performing businesses may also give rise to litigation. For more information on specific litigation and legal cases affecting the group, see Note 29, Commitments and contingencies. Secure best expertise in contract formulation, the assessment of litigation risk when entering into agreements.

Property and business disruption

Protecting production assets and business results is a high priority for Stora Enso to achieve the target of avoiding any unplanned production stoppages. This is done by structured methods of identifying, measuring and controlling different types of risk and exposure. Divisional risk specialists manage this process together with insurance companies and other loss prevention specialists. Each year a number of technical risk inspections are carried out at production units. Risk mitigation programmes and cost-benefit analysis of proposed investments are managed by internal reporting and risk assessment tools. Internal and external property loss prevention guidelines, fire loss control assessments, key machinery risk assessments and specific loss prevention programmes are also utilised.

Planned stoppages for maintenance and other work are important in keeping machinery in good condition. Formal computerised preventive maintenance programmes and spare part criticality analysis are utilised to secure a high availability and efficiency of key machinery. Striking a balance between accepting risks and avoiding, treating or sharing risks is a high priority. Risk managers are responsible for ensuring that divisions have adequate insurance cover and support units in their loss prevention and loss control work.

Personnel security risks

Personnel security can never be compromised and thus Stora Enso must be aware of potential security risks and give adequate guidelines to people for managing risks related to, for example, travel, work and living in countries with security or crime concerns. Focusing on the security of key personnel is also important from a business continuity perspective. Stora Enso constantly monitors risks related to personnel security, including health issues, and information is available on the Intranet and delivered directly to travelling employees. An external service provider takes care of action in medical or security crises, under guidance from Stora Enso’s crisis management team. The crisis management team is chaired by the Head of Human Resources, who is a Group Leadership Team member.

Natural catastrophe risks

Stora Enso has to acknowledge that natural catastrophes such as storms, flooding, earthquakes or volcanic activity may affect the group’s premises and operations. However, most of the group’s assets are located in areas where the probability of flooding, earthquakes and volcanic activity is low. The outcome of such catastrophes can be diminished by emergency and business continuity plans that have been proactively designed together with the relevant authorities.

Financial market

Stora Enso is exposed to several financial market risks that the group is responsible for managing under policies approved by the Board of Directors. The objective is to have cost-effective funding in group companies and manage financial risks using financial instruments to decrease earnings volatility. The main exposures for the group are interest rate risk, currency risk, funding risk, commodity price risk and credit risk.

Financial risks are discussed in detail in Note 24, Financial risk management.

Financial reporting and critical accounting judgements

Critical accounting judgements are described in Note 2 Critical accounting estimates and judgements. Internal control over financial reporting is discussed in the Corporate Governance Report.

Corporate governance in Stora Enso

Stora Enso’ complies with the Finnish Corporate Governance Code 2015 issued by the Securities Market Association (the “Code”). The Code is available at www.cgfinland.fi. Stora Enso’s Corporate Governance also complies with the Swedish Corporate Governance Code (“Swedish Code”), which has been applicable to Stora Enso as a foreign company from 1 January 2011, with the exception of the deviations that are listed in Appendix 1 of the Corporate Governance Report. The deviations are due to differences between the Swedish and Finnish legislation, governance code rules and practices, and in these cases Stora Enso follows the practice in its domicile. The Swedish Code is issued by the Swedish Corporate Governance Board and is available at www.corporategovernanceboard.se.

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