Risks, risk management and opportunities

Context

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). The Group’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.

Mitigating activities

• 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 may be 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.

Opportunities

Working proactively with financial risks protects and may improve the profit margin and creates possibilities for more stable cash flow. Overall, financial risk mitigation has the ability to improve business resilience for the Atlas Copco Group.

Context

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.

Mitigating activities

• Group 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.
• A Tax Committee meets regularly to manage tax risks.
• Group Tax monitors and ensures compliance with tax rules, regulations and guidelines. 
• 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 Group reports sustainability information according to GRI Standards and works with training to improve reporting practices.
• The Group is subject to the Corporate Sustainability Reporting Directive (CSRD) and is preparing to report according to the European Sustainability Reporting Standards (ESRS) for the 2024 financial year. One example of measures taken is the formation of a new Sustainability Reporting and Disclosure Council.

Opportunities

• 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.

Context

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 the Group negatively.

Mitigating activities

• 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, technology 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.

Opportunities

• 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.

Context

The Group’s reputation is a valuable asset which may be affected in part through the Group’s operations or actions andin 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 Group brand.

Mitigating activities

• All Atlas Copco Group 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.
• A robust crisis management process is in place and regularly tested.

Opportunities

• 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 Group’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.

Context

Atlas Copco Group 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 efficient supply chains, 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.

Mitigating activities

• 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 the Group’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 Code of Conduct, including the requirement for significant business partner to sign and follow the Code of Conduct. Action plans developed together with suppliers to deal with shortcomings and deviations.
• The Group 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.

Opportunities

• 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 the Group’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 in the entire value chain.

Context

The Group is present in most parts of the world and geographical crisis might lead to trade restrictions. The Group might inadvertently sell to sanctioned customers, directly or indirectly.

Mitigating activities

• The Group regularly performs geopolitical assessments and build scenarios to prepare for different outcomes.
• Production, supply chain and customer centers are located close to customers to reduce any disruption.
• Constant checks are performed in the divisions to comply with sanction lists.

Opportunities

With a decentralized organization and a strategy to remain close to the customers, the Group can identify and respond quickly to market shifts and changes in legislation.

Context

Atlas Copco Group 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 the Group’s operations.

The General Data Protection Regulation (GDPR), and other comparable legislation, impacts the handling of personal data. Failure to comply with GDPR or other IT-related regulations may result in substantial fines and reputational damage.

Mitigating activities

• The Group has a global IT Security policy, including quality-assurance procedures that govern IT operations. Information security is monitored through IT Security audits and cyber-risk assessments. 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. By performing cyber-risk assessments, awareness of cyber security risks increases the readiness to quickly detect and respond to any attacks.
• Compulsory trainings for all employees are regularly performed.
• A privacy- and data compliance council tracks the essential activities to ensure compliance with data privacy regulations.
• Increased focus on secure development process for our product software.

Opportunities

• 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, the Group is well prepared to face future data privacy initiatives in all regions or continents.

Context

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.

Mitigating activities

• 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 Group guidelines and policies are applied to assess and manage the environmental and social impact of operations, as well as business conduct, in the affected communities after an acquisition is completed.

Opportunities

• Acquisitions bring possibilities to enter new markets, segments, new technologies, new clients, increase revenues, etc.
• Identifying the obstacles to integration can allow the Group 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.
• Established process for a faster integration of newly acquired companies.

Context

One of the challenges to the Group ’s long-term growth and profitability is to continuously develop innovative, sustainable, and recyclable products that consume less resources over the entire life cycle. The Group’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.

Mitigating activities

•  Continuous investments in research and development to develop products in line with Group targets, including science-based targets, 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.

Opportunities

• Substantial opportunities to strengthen the competitive edge by innovating high-quality, sustainable products and creating an integrated value proposition for customers.
• Support internal and external stakeholders in reducing carbon emissions.

Context

Atlas Copco Group must have access to and attract skilled and motivated employees and safeguard the availability of competent managers to achieve established strategic and operational objectives.

Mitigating activities

• 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. The Group strives to maintain good relationships with unions.
• Continuous contacts with universities and schools help recruiting new skills and talents, and understanding the expectations of young generations.

Opportunities

Motivated and skilled employees and managers are crucial to achieve or exceed business goals and objectives.

Context

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 the Group’s productivity and brand.

Atlas Copco Group recognizes the risk that serious diseases and pandemics can interrupt business operations and harm employees.

Mitigating activities

• 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 Group’s business partners are trained in Group policies including the approach to health and safety.

Opportunities

• Improved safety and wellbeing 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.

Context

Atlas Copco Group operates in countries/areas with high risk of human rights violations, including child labor, forced or compulsory labor, modern slavery, poor working conditions, limitations of the freedom of association and discrimination.

The Group encounters customers who are exposed to human rights issues.

Risks to the Group’s reputation may arise from relationships with business partners who do not comply with internationally accepted ethical, social and environmental standards.

Mitigating activities

• 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 Group 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.

Opportunities

• 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.

Context

Corruption and bribery exist in many markets where Atlas Copco Group conducts business. Fraud or criminal deception intended to result in financial or personal gain, is always present in global operations.

Mitigating activities

• 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.
• SpeakUp: 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.

Opportunities

• By fighting against corruption and fraud, Atlas Copco Group 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 the Group’s credibility and transparency and creates more ways to improve stakeholder relations.