The Sandvik risk management process aims to support our business in managing and mitigating critical risks which may impact our ability to achieve our financial targets and strategic objectives.
ERM – a part of our strategic work
To effectively identify and manage risk is an important element of business success for all parts of the Sandvik business. Sandvik has implemented an Enterprise Risk Management (ERM) program that covers all business areas, divisions and functions within the Group. The Sandvik Board of Directors is ultimately responsible for the governance of risk management and Sandvik’s Group Executive Management ensures there is a common and efficient process in place. All management teams are responsible for their own risk management. The teams must follow the minimum requirements outlined in The Sandvik Way, which requires reviewing the strategic and operational risks at least annually. The ERM methodology is also used as a tool for decision-making, operationally and within projects, as well as in the strategy process in various levels of the Group.
New strategic analysis
In 2022, we decided to complement the bottom-up process with a strategic analysis at the Group Executive Management level to more specifically identify key risk areas that are tied to our ability to execute on our Make the Shift Strategy on Group level. The purpose was to get a more focused and concrete risk landscape for the Group to enable good follow-up of the different risk mitigating activities in relation to the strategic goals. This exercise resulted in the Sandvik Key Risks map.
An ERM report, summarizing key risks and mitigating activities across our business, was provided to Sandvik’s Audit Committee and Board of Directors in December 2022. The Board of Directors’ and the Audit Committee’s involvement in the ERM process is further described on the page about Board of Directors.
Insurance as a risk management tool
Sandvik has tailored insurance programs that transfer the risks associated with, amongst others, the Group’s property, cargo and liability exposures. Insurable risks are continuously evaluated and actions are taken to reduce these insurable risks, as part of Sandvik’s loss-prevention strategy. Supported by our loss-prevention procedure and guidelines, risk evaluations highlight opportunities to reduce the potential for business interruption and to ensure the Group’s ability to deliver to its customers. In order to ensure cost efficient and tailored insurance solutions, selected risks are reinsured through the Group’s captive insurance company.
Business continuity and crisis management
The Global Risk Management Policy and related procedures for business continuity and crisis management set the requirements for local management teams to ensure their ability to successfully respond to disruptive events and continue their business operations on an acceptable level when faced with challenges. Once a risk materializes, our crisis management priorities are to minimize harm to people, to the environment, and to minimize damage to Sandvik’s business, as well as ensuring a swift return to normal activities and safeguarding the company brands.
Internal audit and internal control in Sandvik’s risk work
The internal audit function regularly follows up the implementation of different risk management programs such as ERM, business continuity, crisis management and the insurance programs. Sandvik applies group-wide internal controls to monitor risk mitigations. Read more about the internal controls program at Sandvik on the page Internal control over financial reporting.
Sandvik Group risk profile
The Sandvik Group risk profile is based on the bottom-up ERM process where the divisions, business areas and functions first make their assessment and the Group Risk Management Council makes recommendations for a new Group risk profile based on the outcome of these assessments. As earlier mentioned the bottom-up ERM process was this year complemented with a strategic analysis at the Group Executive Management level. This exercise resulted in the Sandvik Key Risks map. The Sandvik Key Risks map is also coupled with a follow-up model for tracking the different initiatives that lead to better risk mitigation, which the Group Executive Management team will review and discuss every quarter, thus creating a more dynamic and strategically relevant risk management discussion at the highest levels of the company. The outcome of these two processes is presented in the table Sandvik Group Key Risks 2022 together with examples of what the identified risks mean for Sandvik in different parts of the organization and the mitigating activities taken to manage them.
Sustainability and climate change
Assessment and management of sustainability risks, including climate change, are integrated parts of the ERM program and are set out in the Sandvik Key Risks map and Risk Profiles in different parts of the organization. During 2022 we conducted an assessment of current and future natural and climate change related hazards for Sandvik locations covering 285 individual sites and 94 percent of the overall Total Insured Value (TIV). The assessment reflects the current situation and models the evolution of Natural Hazards under different climate change scenarios and at different future time horizons.
The goals with the assessment were to provide an overview of the physical climate risks facing the portfolio of sites at different time horizons and under different climate change scenarios and to establish a ranking of locations from high to low climate risk based on climate data and insured values. This will support the identification and prioritization of management actions, which may include in-depth assessments of sites and investment in resilience measures, as next steps of Sandvik’s climate resilience journey.
Current natural hazard exposure
The Sandvik portfolio is currently mainly exposed to Hail (with Very High or High hazard levels for 26 percent of the total portfolio, followed by wind (19 percent), flood (13 percent), lightning (13 percent) and storm surge (8 percent).
Future climate change risks
The study was performed using the SSP2–4.5 (middle-road) and SSP5–8.5 (fossil fuel development) scenarios for the 2030 (near term) and 2050 (long term) horizons. Material exposure with increasing trend in both scenarios is identified for precipitation, drought and heat. Thunderstorm is also relevant and an increasing trend.