Risks, risk management and opportunities
All business activities involve risks, therefore there is a need for a structured and proactive approach to manage the company’s risks, both locally and centrally within the organization. Well-managed risks can create opportunities and add value to the business while risks that are not well-managed can cause incidents and losses.
Atlas Copco’s global and diversified business towards many customer segments results in a variety of risks and opportunities, geographically and operationally. Thus, the ability to identify, analyze and manage risks is crucial for effective governance and control of the business. The aim is to achieve Group targets with a high-risk awareness and well-managed risk-taking, in line with the strategy and within the frame of the handbook of policies and guidelines The Way We Do Things. Atlas Copco sees the benefits of efficient risk management both from risk reduction and business opportunity perspectives, which can lead to good business growth.
Atlas Copco’s risk management approach follows the Group’s decentralized structure. Local companies are responsible for their own risk management, which is monitored and followed up regularly, e.g. at local board meetings. Group functions for legal, insurance, sustainability, treasury, tax, controlling and accounting, provide policies, guidelines, and instructions regarding risk management. This is regularly audited by internal and external audits. Examples of risks and how they are handled in Atlas Copco are shown in the table in this section.
In Atlas Copco, Enterprise Risk Management is not seen as a project but as a continuous process. The risk environment changes over time and it is therefore necessary to continuously revisit, update and identify new risks. The defined framework is described in the picture.
The Group Insurance Program is provided by the in-house insurance company Industria Insurance Company Ltd. which retains part of the risk exposure for the following insurance lines; property damage, business interruption, transport, and general and product liability. Financial lines insurance and business travel insurance are managed by the Group’s Insurance and Risk Management department. However, Industria is not the insurer for these two lines. Insurance capacity is purchased from leading insurers and reinsurers by way of using international insurance brokers. Claims management services are partly purchased on a global basis from leading providers. Insurance policies are issued on a local basis to ensure compliance with local insurance laws where required.
The main purpose of Atlas Copco’s loss prevention process is to prevent potential property losses and business interruptions. Atlas Copco’s Loss Prevention Standard stipulates Group requirements in regards of loss prevention for product companies and distribution centers, including areas like construction, safety systems, loss prevention procedures and plans that need to be prepared. To ensure alignment with the standard and to support sites’ understanding of how the standard applies to each site, around 25 risk surveys are performed annually. The results from the risk surveys are consolidated and reported to Group Management.
Enterprise risk management
Atlas Copco has developed an enterprise risk management process to map strategic risks. The methodology used is applied on divisions, which is the highest operational level in the Group. Annual workshops are held by each divisional management team where risks are identified, analyzed, evaluated/re-evaluated and managed to ensure a structured and proactive approach to risks exposing Atlas Copco. The ownership of managing the risks raised in this process lies within each division, while the Insurance and Risk Management department manages the overall process, moderates the sessions and consolidates the results on the business area and Group levels. This hands-on approach is also in line with Atlas Copco’s decentralized structure.
Examples of risks and how they are handled by Atlas Copco
- Reporting (including tax)
- Corruption and fraud
- Human rights
- Safety and health
- Climate and environment
Atlas Copco’s business operations are affected by numerous laws, regulations and trade sanctions as well as commercial and financial agreements with customers, suppliers and other counterparties, and also by licenses, patents and other intangible property rights.
- Inhouse lawyers on five continents support Group companies with advice on laws and regulations, including compliance, as well as support with contract reviews. Proactive training is also done.
- A yearly legal risk survey of all companies in the Group is performed in addition to continuous follow-up of the legal risk exposure. The result of the survey is compiled, analyzed and reported to the Board and the auditors.
- A separate central function, Group Compliance, is in place. It is responsible for aligning and coordinating the compliance organization which, in line with Atlas Copco’s decentralized structure, is hosted in the business areas and divisions.
- Complying with legal norms and laws minimizes costs and increases opportunities to strengthen Atlas Copco’s reputation. It also develops reliable partnerships and improves business stability.
- The ability to trade on all markets, in compliance with applicable trade sanctions, increases revenue and lowers risk.
Changes in exchange rates can adversely affect Group earnings when revenues from sales and costs for production and sourcing are denominated in different currencies (transaction risks). An adverse effect on Group earnings can also occur when earnings of foreign subsidiaries are translated into SEK and on the value of the Group equity when the net assets of foreign subsidiaries are translated into SEK (translation risks).
Atlas Copco’s net interest cost is affected by changes in market interest rates.
Funding risk refers to the risk that the Group and its subsidiaries do not have access to financing on acceptable terms.
As in any business, there can be a credit risk linked to our customers’ abilities to pay.
- A Financial Risk Management Committee meets regularly to manage financial risks.
- Atlas Copco Financial Solutions is responsible for these risks and supports Group companies to implement financial policies and guidelines.
- The Group’s operations continuously monitor relevant exchange rates and try to offset negative changes by adjusting sales prices and costs
- Translation risks are partially hedged by borrowings in foreign currency and financial derivatives
- The Group’s Financial Risk Policy stipulates that a minimum amount of standby credit facilities should exist and that a minimum average time to maturity for the external debt is set.
- Stringent credit policies are applied and there is no major concentration of credit risk. The provision for bad debt is based on historical loss levels and up-to-date information and is deemed sufficient.
Working proactively with financial risks improves the profit margin and creates possibilities for more stable cash flow. Overall, financial risk mitigation has the ability to improve business resilience for Atlas Copco.
The risk related to the communication of financial information to the capital market is that the reports do not give a fair view of the Group’s true financial position and results of operations.
Reporting errors could result in management drawing the wrong conclusions. However, with many small entities, the material impact is low.
Taxes is an area with increased focus, especially transfer pricing risks but also new tax rules and regulations.
Estimations sometimes form a portion of the sustainability data which is reported, and thus by its nature the numbers presented may not be representative of the Group’s impact.
- Atlas Copco subsidiaries report their financial statements regularly in accordance with International Financial Reporting Standards (IFRS). The Group’s consolidated financial statements, based on those reports, are prepared in accordance with IFRS and applicable parts of the Annual Accounts Act as stated in RFR 1 “Supplementary Rules for Groups”.
- The Group’s operational and legal consolidated results are based on the same numbers and system. These are analyzed by divisional, business area, Group Management and corporate functions before being published externally.
- The Group has procedures in place to ensure compliance with Group instructions, standards, laws and regulations, for example internal and external audits.
- Group Tax monitors and ensures compliance with local tax rules. Transfer pricing policies and agreements are implemented in operations and regularly updated. Quarterly updates on tax are presented to the Board and Group Management.
- Atlas Copco reports sustainability information according to GRI Standards and works with training to improve reporting practices.
- Integrated reporting provides a better understanding of business risks and opportunities which in turn allows for improved decision making. It also allows the company to identify opportunities for business synergies.
- Addressing reporting risks increases transparency and improves the potential to represent the business fairly and accurately.
- Improved reporting results in improved business insights and risk management, especially when the data has been integrated to highlight interdependencies.
- Efficient and consistent reporting based on clear standards and principles creates transparency, supports decision making and drawing the right conclusions.
- Increased reporting requirements on taxes improves transparency.
Corruption and bribery exist in many markets where Atlas Copco conducts business.
Fraud or criminal deception intended to result in financial or personal gain, is always present in global operations.
- Zero-tolerance policy on bribery and corruption, including facilitation payments.
- Internal control routines aimed at preventing and detecting deviations. The Internal Audit function is established to ensure compliance with the Group’s corporate governance, internal control and risk management policies.
- Control self-assessment tool to analyze internal control processes.
- Training in the Code of Conduct and signing compliance to the Code for all employees and significant business partners.
- The global Group misconduct reporting system to report violations anonymously.
- The Group supports fair competition and forbids discussions or agreements with competitors concerning pricing or market sharing.
- By fighting against corruption and fraud, Atlas Copco has the opportunity to work with industry peers to influence international market practices. Refusing to pay bribes may cause temporary delays and setbacks; however it reduces costs in both the long and short run, builds opportunities to improve operational efficiencies and creates more stability in society and in markets where the Group operates.
- Working against corruption and fraud improves Atlas Copco’s credibility and transparency and creates more ways to improve stakeholder relations.
Atlas Copco operates in countries/areas with high risk of human rights violations, including child labor, forced or compulsory labor, poor working conditions, limitations of the freedom of association and discrimination.
Atlas Copco encounters customers who are exposed to human rights issues.
Risks to the Group’s reputation may arise from relationships with business suppliers who do not comply with internationally accepted ethical, social and environmental standards.
- Guidance by interaction with well-established non-governmental organizations to identify and mitigate risks.
- Policies and procedures corresponding to the UN Guiding Principles on Business and Human Rights, which Atlas Copco has committed to since 2011.
- Due diligence process and integration of internal controls for human rights violations in relevant processes.
- The Group customer sustainability assessment tool.
- Regular supplier evaluations in accordance with the UN Global Compact.
- Following the UN Guiding Principles on Business and Human Rights to respect human rights reduces risks and costs.
- Strong business ethics help promote societal prosperity and a more stable market place.
- Working with human rights positively impacts both the Atlas Copco brand and stakeholder relations.
Poor physical and mental health and too much stress among employees affect the individual and can cause sick leave and disturbances in the production.
Accidents or incidents in the workplace, due to the lack of proper safety measures, harm employees and can negatively affect Atlas Copco’s productivity and brand.
Atlas Copco recognizes the risk that serious diseases and pandemics can interrupt business operations and harm employees.
- The Group regularly assesses and manages safety and health risks in operations.
- Training is held regularly.
- The ambition is to certify all major units in accordance with the ISO 45001 standard.
- Workplace wellness programs.
- Atlas Copco’s business partners are trained in Group policies including the approach to health and safety
- Improved safety and well-being among employees increases employee satisfaction and engagement, productivity and strengthens the brand.
- Improving working conditions for customers and business partners benefits their employees and local societies and can enhance long-lasting relationships that result in repeat orders.
The primary drivers for external environmental risk are physical changes in climate and natural resources, changes in regulations, taxes and resource prices.
Natural disasters as a consequence of climate change can disrupt own operations or impact the supply chain.
Increased fuel/energy taxes increase operational costs.
Regulations and requirements related to carbon-dioxide emissions from products and industrial processes are gradually increasing.
Climate-related and environmental events can affect all of Atlas Copco’s operations and negatively affect operations either directly or by disrupting the supply chain.
Market shifts toward a low-carbon economy may impact the viability of certain sectors.
Biodiversity-related requirements on companies are increasing.
- Atlas Copco continuously develops products with improved energy efficiency, reduced emissions and lower environmental footprint.
- Atlas Copco has several key performance indicators (KPIs) that address resource and energy usage in order to reduce carbon-dioxide emissions.
- Strict handling processes for hazardous waste and chemicals are implemented in all operational units. Compliance is audited regularly and awareness is reinforced by training.
- All cooling agents in Atlas Copco products have a zero-ozone depleting impact during the product’s lifecycle, and the aim is to continue to introduce cooling agents with lower Global Warming Potential (GWP).
- The Group’s SHEQ Policy is updated to cover biodiversity-related aspects. ISO 14001 certifications in major subsidiaries will support addressing relevant environmental focus areas
- Working proactively with environmental risks can provide significant opportunities to drive innovation at Atlas Copco.
- Given that many customers are operating in areas of extreme water stress/scarcity, water-efficient or water-recycling products can have a strong customer appeal. This presents a strong business opportunity to extend Atlas Copco’s innovations to the focused area of water consumption.
- Climate change impacts and predictions can induce changes in consumers’ habits and behavior. As a result of climate events, Atlas Copco’s customers can become more risk averse and demand sustainable products from the Group. New businesses and business models that are being served by Atlas Copco arise. For instance, increased renewable energy generation and the surge in production of electrical vehicles present opportunities to provide products to the industries.
- Raised awareness of the subsidiaries’ impact on biodiversity in their near surroundings can support activities to restore flora and fauna.
A widespread financial crisis and economic downturn would not only affect the Group negatively but could also impact customers’ ability to finance their investments. Changes in customers’ production levels also have an effect on the Group’s sales of spare parts, service and consumables.
In developing markets, new smaller competitors continuously appear which may affect Atlas Copco negatively.
- Well-diversified sales to customers in multiple countries and industries. Sales of spare parts and service are relatively stable in comparison to sales of equipment.
- Monthly follow-up of market and sales development enables quick actions.
- Agile manufacturing set-up makes it possible to quickly adapt to changes in the demand for equipment.
- Leading position in most market segments provides economies of scale.
- A significant competitive advantage as a result of a strong global presence, including growth markets.
- Opportunities to positively impact both society and environment, through the Group’s high-quality sustainable products and high ethical standards.
- Continue to develop close, long-term and strategic relationships with customers and suppliers.
Examples of risks and how they are handled by Atlas Copco, continued
- Supply chain
- Information technology (IT)
- Acquisitions and divestments
- Product development
The Group’s reputation is a valuable asset which may be affected in part through the Group’s operations or actions and in part through the actions of external stakeholders. Products must deliver on the brand promise and be of high quality, safe and have a low negative impact on the environment when used by the customer. There is potential for reputational risk from non-compliance to product labeling standards or if there are cases of false advertising.
Unsatisfied employees may potentially detract the Atlas Copco brand.
- All Atlas Copco products are tested and quality assured. Product labeling is monitored and there are regular communications trainings.
- The Group actively engages in stakeholder dialogue.
- Compulsory training in the Code of Conduct includes the yearly signing of a compliance statement.
- A clear and well known corporate identity and brand management.
- An employee survey is carried out every two years and followed up actively.
- Brand positioning.
- Stakeholder engagement not only mitigates reputational risks in certain cases but it also presents opportunities to increase awareness and credibility of Atlas Copco’s brand through improvements and innovations.
- Delivering tested and quality-assured products improves customer satisfaction and promotes repeat business.
- Attract and develop employees who adhere to the Code of Conduct.
Core component manufacturing is concentrated to a few locations and if there are interruptions or lack of capacity in these locations, this may have an effect on deliveries or on the quality of products.
Production facilities could also have a risk of damaging the environment through their operations, e.g. through hazardous waste and emissions.
Atlas Copco is directly and indirectly exposed to raw material prices.
Atlas Copco primarily distributes products and services directly to the end customer. If the distribution is not efficient, it may impact customer satisfaction, sales and profits. Damages and losses during the course of distribution can be costly.
Some sales are made indirectly through distributors and rental companies and their performance may have a negative effect on sales.
The distribution of products results in CO2 emissions from transport.
- Manufacturing units continuously monitor the production process, test the safety and quality of products, make risk assessments, and train employees.
- Atlas Copco has an internal Loss Prevention Standard to ensure high level of protection.
- Production units have developed business continuity plans.
- Ambition to certify all manufacturing units in accordance with the ISO 14001 standard.
- Physical distribution of products is concentrated to a number of distribution centers and their delivery efficiency is continuously monitored.
- Resources are allocated to training and development of the service organization.
- As indirect sales are local/regional, the negative impact of poor performance is limited.
- Increased focus on safer and more effective transports to reduce losses, costs and total emissions per transport.
- Continued opportunities to extensively promote operational excellence to streamline production, minimize inefficiencies and maintain a high flexibility in the production process.
- Continue to strengthen the relationship with customers through timely deliveries of products and services.
- Transport efficiencies and safe transports can save the customers time and cost while reducing the environmental impact of their own operations.
- Reduce fuel costs and resource requirements which improves business agility for the Group.
Atlas Copco and its business partners, such as suppliers, subcontractors and joint venture partners, must share the same values as expressed in the Group’s Code of Conduct regarding issues such as human rights standards and principles of ethical conduct.
The availability of many components is dependent on suppliers and if they have interruptions or lack capacity, this may affect deliveries.
Using a large number of suppliers gives rise to the risk that products contain components which are not sustainably produced, e.g. hazardous substances or electronic components containing conflict minerals, or components with a large carbon footprint.
- Business partners are selected and evaluated based on objective factors including quality, delivery, price, and reliability, as well as on social/environmental responsibility.
- Significant direct suppliers are required to have an approved environmental management system.
- The presence of conflict minerals in Atlas Copco’s value chain is investigated and eradicated.
- Establishment of a global network of sub-suppliers, to prevent supplier dependency.
- E-learning for business partners (suppliers and distributors) to raise awareness of the Business Code of Practice, including the requirement for significant business partner to sign and follow the Business Code of Practice. Action plans developed together with suppliers to deal with shortcomings and deviations.
- Atlas Copco maintains lists of substances that are prohibited or restricted due to their potential negative impact on health or the environment. Compliance with these lists is part of the business partner criteria.
- Further increase business agility and reduce costs by improving supplier inventory management in response to changes in demand.
- Continue to be a preferred business partner and promote efficiency, sustainability and safety. Good supplier relations help to improve Atlas Copco’s competitive position.
- Strengthen customer relationships by supporting customers impacted by the Dodd Frank legislation on conflict minerals.
- Promote human rights and work towards improving labor conditions, reducing corruption and conflicts.
Atlas Copco must have access to and attract skilled and motivated employees and safeguard the availability of competent managers to achieve established strategic and operational objectives.
- The competence mapping and plan secure access to people with the right expertise at the right time. Recruitment can be both external and internal. Internal recruitment and job rotation are facilitated by the Internal job market.
- Salaries and other conditions are adapted to the market and linked to business priorities. Atlas Copco strives to maintain good relationships with unions.
Motivated and skilled employees and managers are crucial to achieve or exceed business goals and objectives.
Atlas Copco relies on IT systems in its day-to-day operations. Disruptions or faults in critical systems have a direct impact on production.
Errors in the handling of financial systems can affect the company’s reporting of results.
Theft or modification of intellectual property constitutes a risk to our products and future business success.
Cyber security risks are increasing in importance and can have a major impact on Atlas Copco operations.
The General Data Protection Regulation (GDPR) impacts the handling of personal data. Failure to comply may result in substantial fines and reputational damage.
- Atlas Copco has a global IT Security policy, including quality-assurance procedures that govern IT operations. Information security is monitored through IT Security audits. Standardized processes are in place for the implementation of new systems, changes to existing systems and daily operations. The system landscape is based on well-proven technologies.
- IT Security tracks globally major downloads of files. Screening of business partners/ consultants working in our systems.
- Cyber security is regularly discussed, addressed and invested in by the IT Security function. Awareness of cyber security risks increases the readiness to quickly detect and respond to any attacks.
- A privacy- and data compliance council tracks the essential activities to ensure compliance with the regulation.
- Increased focus on secure development process for our product software.
- Stable IT systems, secure IT environment and standardized processes increase efficiencies and reduce costs.
- Quick action on major download of product development files minimizes the potential damage.
- Quick action to address a cyber-attack gives opportunity to stable work environment and business continuity.
- As the approach has been global, Atlas Copco is well prepared to face future data privacy initiatives in all regions or continents.
When making acquisitions, there are risks related to the selection and valuation of the potential targets as well as the process of acquiring them. Integrating acquired businesses may also be a complex and demanding process. There is no guarantee for an acquisition to be successful even if all steps are done properly.
Annual impairment tests are made on acquired goodwill. If the carrying values are not deemed justified in such tests, it can result in a write-down, affecting the Group’s result.
Acquisitions and divestments can impact local communities and/ or the environment, directly or indirectly
- The Group’s Acquisitions Process Council has established a process for acquisitions. The process is continually updated and improved to address and mitigate risks. The Council also provides training and supports business units prior to, during and after an acquisition. Before any acquisition is completed, a detailed due diligence will be performed in order to evaluate the risks involved.
- Atlas Copco guidelines and policies are applied to assess and manage the environmental and social impact of operations in the affected communities after an acquisition is completed.
- Acquisitions bring possibilities to enter new markets, segments, new technologies, new clients, increase revenues, etc.
- Identifying the obstacles to integration can allow Atlas Copco to improve the process through methods such as job rotation, training or teambuilding exercises. This would not only result in a smoother process but also lower operational costs by decreasing downtime and allowing newly acquired companies to become even more productive and efficient.
One of the challenges for Atlas Copco’s long-term growth and profitability is to continuously develop innovative, sustainable products that consume less resources over the entire life cycle. Atlas Copco’s product offering is also affected by national and regional legislation on issues such as emissions, noise, vibrations, recycling, etc. However, there may be increased risk of competition in emerging markets where low-cost products are not affected to the same extent by such rules.
- Continuous investments in research and development to develop products in line with customer demand and expectations, even during economic downturns.
- Designing products with a life-cycle perspective and measurable efficiency targets for the main product categories in each division.
- Designing products with reduced emissions, vibrations or noise, and increased recycling potential to meet legal requirements.
Substantial opportunities to strengthen the competitive edge by innovating high-quality, sustainable products and creating an integrated value proposition for customers.