RISK
MANAGEMENT

Risks

Our risk management philosophy

The Sappi group has an established culture of managing key risks. We have a significant number of embedded processes, resources and structures in place to address risk management requirements. These include our safety programmes, internal audit systems, insurance, IT security, compliance and governance processes, quality management and a range of line management interventions.

In the broadest sense, effective risk management ensures continuity of operations, service delivery, achieving objectives (strategic and otherwise), and protecting the interests of the group.

To achieve our objectives, the risk management process is aligned and compatible with Sappi's strategy, taking into account recommendations set out in ISO 31000 standard (for guidance only) – 'Risk management – Principles and guidelines', as well as King IV.

Risk appetite and tolerance

Sappi has a board-approved framework for risk appetite and tolerance. Risk appetite is the total quantum that Sappi wishes to be exposed to on the basis of risk/return trade-offs for one or more desired and expected outcomes. This is the quantum of risk that the board believes will provide an adequate margin of safety within the group's risk capacity while enabling the achievement of strategic objectives.

Risk tolerance is the amount of uncertainty Sappi is prepared to accept. This is the maximum level of loss or reduced earnings that can be absorbed without compromising key objectives, eg return on investment.

 
Sappi Limited board of directors     Overall responsibility for the governance of risk
Sappi Limited Audit and Risk Committee     Tasked with assisting the board in carrying out its risk management responsibilities at the group level
Line management in each region, business unit and operation     Responsibility for implementing regional risk management processes
Group Internal Audit     Provides independent assurance on the risk management process
 

For an analysis of the principal financial risks to which Sappi is exposed, please see note 31 in the Group Annual Financial Statements on www.sappi.com/annual-reports

For a detailed discussion of the group's risk factors, please see Risk Management Report on www.sappi.com/annual-reports

Consequence type

Residual risk ratings

Residual risk ratings
Worsening Flat Improving

1 Safety

Root cause

  • We operate a number of manufacturing facilities and forestry operations. The environment at these facilities is inherently dangerous. The health and safety of our employees and contractors remain a top priority.
 

3Ps impact

Related material issue

  • Safety
 

How we mitigate this risk

  • Perform root cause analyses of all major incidents and fatalities, which are reviewed at all levels of the business including the board.
  • Group and industry-wide sharing of all incidents and associated mitigating steps, to ensure continuous improvement in safety performance.
  • Enforce compliance with behaviour-based safety (BBS) principles.
  • Provide continuous education.
  • Disciplined approach to all transgressions of our safety policies.
  • Encourage reporting of near-miss incidents.
  • External safety review commissioned, with detailed action plans implemented.

Strategic and 2020Vision objectives

  • Achieve cost advantages
  • Rationalise declining businesses
  • Accelerate growth in higher margin growth segments
  • Maintain a healthy balance sheet.

2 Cyclical macro-economic context

Root cause

  • We operate in a cyclical industry subject to global economic conditions (such as exchange rate fluctuations) that may cause substantial fluctuations in our results
  • Our products are affected by cyclical changes in supply (industry capacity and output levels) as well as demand changes
  • Due to supply and demand imbalances in the industry, markets have historically been cyclical with volatile prices
  • Turmoil in the world economy leads to sharp reductions in volume and pressure on prices in many of our markets.
 

3Ps impact

Related material issue

  • Cost containment and capital allocation
 

How we mitigate this risk

  • We continue to monitor the supply/demand balance, which might require us to impair operating assets and/or implement further capacity closures.
  • We are continuously taking action to improve efficiencies and reduce costs in all aspects of our business.

Strategic and 2020Vision objectives

  • Achieve cost advantages
  • Rationalise declining businesses
  • Accelerate growth in higher margin growth segments
  • Maintain a healthy balance sheet.

3 Evolving technologies and consumer preferences

Root cause

  • New technologies or changes in consumer preferences may have a material impact on our business
  • Trends in advertising, electronic data transmission and storage, the internet and mobile devices continue to have an adverse impact on traditional print media and other paper applications
  • Digital alternatives to many traditional paper applications are now readily available and have begun to adversely affect demand for certain paper products.
 

3Ps impact

Related material issues

  • Product and process innovation
  • Circular economy and adjacent markets
  • Long-term demand growth for cellulosic-based fibres
 

How we mitigate this risk

  • We continue to implement strategic initiatives to improve profitability, including:
    • Restructuring and other cost-saving projects
    • Implementing measures to enhance productivity
    • Expanding our higher-margin packaging and speciality paper businesses, and
    • Accelerating growth in higher margin growth segments.
  • Our entrenched market share and low production cost position us well to take advantage of growth in the dissolving wood pulp market.
  • In 2019, we signed an agreement to acquire the Canadian Matane high-yield hardwood pulp mill. The acquisition will support our growth in higher margin segments, reduce cost of pulp, reduce earnings volatility and ensure supply.

Strategic and 2020Vision objectives

  • Achieve cost advantages
  • Rationalise declining businesses
  • Accelerate growth in higher margin growth segments
  • Reduce our environmental footprint
  • Provide greater opportunities for local communities.

4Highly competitive industry

Root cause

  • The markets for pulp and paper products remain highly competitive, with an increasing trend towards consolidation in the pulp and paper industry – creating larger, more focused companies.
 

3Ps impact

Related material issues

  • Cost containment and capital allocation
  • Circular economy and adjacent markets
 

How we mitigate this risk

  • We continue to drive customer service, innovation and efficient manufacturing and logistics as competitive differentiators.
  • We are focused on improving the performance and competitiveness of our businesses.
  • We continue to drive down costs across all our businesses.
  • Our recently announced acquisition of the Matane Mill will increase our pulp integration and reduce our cost of pulp.

Strategic and 2020Vision objectives

  • Achieve cost advantages
  • Rationalise declining businesses
  • Reduce our environmental footprint
  • Accelerate growth in higher margin growth segments.

5 Natural resource constraints

Root cause

  • We require substantial amounts of wood, chemicals, energy and water for our production activities
  • The inability to obtain energy, raw materials or water at reasonable prices, or at all, could adversely affect our operations
  • The prices for and availability of these items may be subject to change, curtailment or shortages.
 

3Ps impact

Related material issues

  • Supply chain transparency
  • Circular economy and adjacent markets
  • Climate change
  • Energy
  • Water
  • Biodiversity
 

How we mitigate this risk

  • We are focused on:
    • Improving procurement methods
    • Finding alternative lower-cost fuels and raw materials
    • Reducing water consumption
    • Minimising waste
    • Improving manufacturing and logistics efficiencies, and
    • Implementing energy-reduction initiatives.

Strategic and 2020Vision objectives

  • Achieve cost advantages.
  • Accelerate growth in higher margin growth segments.
  • Reduce our environmental footprint.

6 Project implementation and execution

Root cause

  • In executing our strategy, we carry out a number of capital expenditure projects
  • Should these projects not be completed on time, deliver the expected quality/ cost reduction or exceed the allocated capital spend, it would have significant adverse implications
  • This would impact the project's financial return metrics, impact normal operations, delay the time to market or result in a loss in market share
  • Reasons for this could be supplier and vendor performance, skill levels and ineffective project management and controls.
 

3Ps impact

Related material issue

  • Cost containment and capital allocation
 

How we mitigate this risk

  • A rigorous process selects potential contractors with the same Sappi commitment to quality and safety.
  • Evaluate shortcomings between contractor and supplier interfaces which, together with planning local skilled resource availability, are addressed well in advance.
  • Consider various contracting philosophies specific to the regions in which we operate.
  • The use of modern tools to improve efficacy in front-end engineering design, engineering standards, cost control and planning functions throughout the construction, erection and commissioning phases.
  • Continue to develop strong relationships with main suppliers.
  • Where applicable, cross-functional global teams, additional internal expert resources and detailed oversight and review, including risk metrics, will be brought into the various phases of projects to ensure project execution.
  • Operational and maintenance training remains a key focus area.

Strategic and 2020Vision objectives

  • Achieve cost advantages
  • Rationalise declining businesses
  • Accelerate growth in higher margin growth segments
  • Provide greater opportunities for local communities
  • Reduce our environmental footprint.

7 Uncertain and evolving regulatory landscape

Root cause

  • Regulatory requirements on business (including compliance with environmental, health and safety laws) as well as national and international political uncertainty could translate into cost increases that directly impact Sappi's competitiveness and profitability
  • Our global operations are subject to various economic, fiscal, monetary, regulatory, operational and political conditions
  • We are therefore exposed to risks such as material changes in laws and regulations, political, financial and social changes and instabilities, exchange controls, risks related to relationships with local partners and potential inconsistencies between commercial practices, regulations and business models in different countries.
 

3Ps impact

Related material issue

  • Ethical behaviour and corruption
 

How we mitigate this risk

  • A legal compliance programme designed to increase awareness of, and compliance with, applicable legislation is in place. The Group Compliance Officer reports twice per annum to the Group Audit and Risk Committee.
  • Our aim is to minimise our impact on the environment. The principles of ISO 14000, FSC™, SFI®, PEFC™ and other recognised programmes are well entrenched across the group. We have also made significant investments in operational and maintenance activities to reduce air emissions, waste water discharges and waste generation.
  • We closely monitor the potential for changes in pollution control laws, including GHG emission requirements, and take action in our operations accordingly. We invest to maintain compliance with applicable laws and cooperate across regions to apply best practices in sustainability.

Strategic and 2020Vision objectives

  • Achieve cost advantages
  • Reduce our environmental footprint.

8 Market share and customer concentration

Root cause

  • Sappi is a business-to-business supplier, so a limited number of customers account for a significant amount of our sales
  • Should adverse changes in economic market conditions have a negative impact on our customers, it could materially affect the results of our operations and financial position.
 

3Ps impact

 

How we mitigate this risk

  • We are continuously working to expand and diversify our customer base.
  • No single customer, although some are significant, individually represented more than 10% of our total sales.
  • We monitor any adverse development affecting our customers to respond proactively.

Strategic and 2020Vision objective

  • Accelerate growth in higher margin growth segments.

9 Employee relations

Root cause

  • A large percentage of our employees are unionised, and wage increases or work stoppages by our unionised employees may have a material adverse effect on our business
  • A large percentage of our employees are represented by labour unions under collective bargaining agreements, which need to be renewed from time to time
  • In addition, we have in the past and may in future seek, or be obliged to seek, agreements with our employees on workforce reductions, closures and other restructurings
  • We may become subject to material cost increases or additional work rules imposed by agreements with labour unions, which could increase expenses in absolute terms and/or as a percentage of net sales.
 

3Ps impact

Related material issues

  • Labour relations
  • Employee engagement
  • Skills
 

How we mitigate this risk

  • Across all our regions, we continue to interact and engage with our union representatives and organised labour on a frequent basis and to build constructive work relationships.

Strategic and 2020Vision objective

  • Achieve cost advantages.

10 Failure to attract and retain key skills

Root cause

  • We require specialised and scarce skills to execute our strategy
  • Should we fail to attract, develop and retain key skills, this might have a material effect on our business.
 

3Ps impact

Related material issues

  • Skills
 

How we mitigate this risk

  • Succession planning and regular talent reviews.
  • Leadership training and development as well as dedicated skills centres.
  • Workforce planning.

Strategic and 2020Vision objectives

  • Achieve cost advantages
  • Rationalise declining businesses
  • Accelerate growth in higher margin growth segments.

EMERGING RISKS AND OPPORTUNITIES

The effects of climate change may have an impact on our business

In all three regions where Sappi operates, climate change could alter the frequency and intensity of forest disturbances such as insect outbreaks, invasive species, wildfires and storms. These disturbances could reduce forest productivity, change the distribution of tree species and increase the risk that the wood supply necessary for our operations may be negatively affected.

However, given Sappi Europe's general risk mitigation strategy of sourcing pulp and woodfibre from a variety of sources and regions, we do not anticipate any material impact on our raw material supply from climate change in the short to medium term (five to ten years). In Sappi North America, our operations do not currently face material risks associated with climate change. With the exception of fibre from Brazil for Westbrook Mill, we source from northern hard and softwood baskets that have not suffered under any drought conditions or from fire.

In Sappi Southern Africa, where our operations have already been impacted by climate change, we invest significantly in preventing fire, pests and diseases, as well as site species matching to tolerate drought, frost and other weather events. Climate change has led to an increased emphasis on water footprint in South Africa. This, in turn, is causing greater focus on the location of forestry plantations, which could affect the quality and quantity of groundwater, the use of water by our operational units, quality of water released back into natural water systems and control of effluent discharge. The cost, availability and use of our water supply also have a direct impact on our input costs and operating profit.

Should our strategy to mitigate the related risks of raw materials shortages fail, our business may be adversely impacted.

The threat of cyber-risk is expanding

Continued cyber-attacks on both public and private institutions as well as businesses are intensifying as the Internet of Things and use of connected devices expands. Cyber-criminals are becoming more sophisticated, changing what they target and using complex methods of attack for different security systems.

In addition to confidential customer and employee information, as well as financial, commercial, transactional and production systems, Sappi owns significant trade secrets and intellectual property.

We protect these through an information technology security programme which mitigates against cyber-attacks and information security breaches. Should this fail, we could face serious disruption to our business and confidential information on our employees and customers could be compromised.

We adhere stringently to the data protection laws in the jurisdictions where we operate and provide relevant training to all our employees. Nevertheless, in the event of data breaches, we could be negatively impacted by regulatory fines or sanctions which could change our reputation and shareholder value.

Industry 4.0 is changing the business landscape

Industry 4.0 is about smart and autonomous systems fuelled by data and machine learning. At Sappi, we recognise the opportunities presented by automation, digitisation and data analytics in optimising our production and maintenance processes, as well as our logistics and supply chains, together with enhanced innovation and speed to market.

We are using our strong foundation of continuous technology improvement and intentional evolution to leverage these key developments by maximising the use of data analytics; making our processes more efficient and productive; tracking information on quality, raw materials and environmental information; and enhancing workforce training and development. We are already making extensive use of intelligent solutions through satellite imaging and drones in our forestry operations.

Falling behind in investment for Industry 4.0 opportunities and failing to keep pace with developments could have negative implications for our strategic direction and growth path.

Increasing need to integrate of sustainability into everyday business practices

Environmental issues, structural demographic changes and resource scarcity are affecting us globally. Economic and social progress remains uneven, various financial crises and trade tensions have revealed the fragility of progress, and accelerating environmental degradation inflicts increasing costs on societies. There are a number of economic, social, technological, demographic and environmental megatrends underlying these challenges including accelerating urbanisation and globalisation; the rise of social media; climate change, energy, water and food insecurity; pressure on natural resources and an increasingly vocal and connected population.

Sappi's sustainable development agenda prioritises Prosperity, while balancing the needs of People and Planet in an approach known internally as the 3Ps. We believe this approach brings demonstrable benefits in terms of risk management, cost savings, access to capital, as well as human resource management and innovation capacity. It also enhances our trust levels with stakeholders, including shareholders, customers, employee and communities.

Should we fail in our drive for sustainability to underpin our strategic direction, this could have a significant impact on our licence to trade, reputation and levels of established trust.

Social unrest

Incidents of social unrest in South Africa have been escalating, the result of a disaffected population protesting about lack of service delivery and job opportunities. Officially, the country's unemployment is at 29% but in certain regions of the country, particularly the rural areas, it is much higher.

This risk is partially mitigated by the integrated community forums we have established. However, should the country's broader issues not be resolved, the impact on our business could be disruptive.

Land restitution

Sappi is currently engaged in a number of land claims in South Africa. In the past 10 years, we have settled 37 claims involving 33,992 hectares of which claimants took ownership of 8,151 hectares and claims for 11,629 hectares in which claimants preferred to seek compensation. The balance of the land has been withdrawn from the claim by the Restitution on Land Rights Commission or the claim rejected by the Land Claims Court.

For many of the land claims in which we have been involved, and where there has been a change in ownership, we continue to buy the timber and help manage those plantations.

We are involved in some 60 land reform projects, helping beneficiaries to manage ±19,000 hectares of land. To ensure sustainable production from these properties, we have entered into supply agreements with the new beneficiaries and provide them with assistance. The level of assistance depends on the requirements of the project, but ranges from a pure supply agreement to a comprehensive forestry enterprise development agreement. The latter is a supply agreement which incorporates development objectives whereby Sappi provides technical and business training as well as administrative support to help entrench these new timber suppliers.

While we support the land claim initiatives generally, we have been frustrated by the implementation of policies and levels of bureaucracy. The forestry industry is a key driver of rural growth. If government could unlock some of the bureaucratic lagging, the attendant benefit would flow directly to rural communities.

Should the issue of bureaucratic lagging not be resolved, it could heighten social tensions and social unrest which, in turn, could negatively impact our operations.