- Risks and opportunities systematically explored on all levels
- Supply chain risks managed actively
- Products and market risks included in the development and marketing process
Flawed risk assessments may seriously impair a company’s reputation, limit its freedom of action or, at worst, lead to insolvency. Mindful of this, Sika reacted years ago by introducing a comprehensive risk management system at Group level and for all its subsidiaries. The aim is to identify risks at an early stage and integrate them in strategic decision-making processes. Risk management may sometimes assist in the identification of new opportunities and thereby help to generate added value.
GROUP MANAGEMENT AND BOARD OF DIRECTORS
Whereas Sika’s Group Management regularly reviews the processes underlying risk management, the Board of Directors bears ultimate responsibility for risk assessment. Its duties include the annual reassessment of the risk situation at Group level. All risks are assessed in terms of a few basic questions:
– Is the risk global or regional in scope?
– What implications does the risk have for the Group?
– How high is the probability of losses occurring?
– What measures need to be implemented to prevent the risk or mitigate its consequences?
If a risk is rated critical in the overall assessment, effective measures are then taken to reduce the probability, prevent its occurrence, or limit its implications. Sika pursues a risk-based management approach along the entire value chain, from procurement and production, to marketing.
SUPPLIER MANAGEMENT AND RAW MATERIAL PROCUREMENT
The raw materials that Sika processes into superior-grade products are the Group’s biggest cost factor. Approximately two-thirds of the materials used by Sika in production, such as polyols, epoxy resins, acrylic dispersions, and polycarboxylates, are based on fossil fuels or their derivatives. Purchase prices consequently vary according to the supply and demand situation for each raw material and fluctuations in the price of oil. To reduce its dependency on crude oil, Sika is increasingly relying on renewable raw materials, such as sugar derivatives, bioethanol derivatives, and natural oils. Moreover, recycled raw materials are used wherever possible, and many production plants implement their own, or externally operated, recycling loop systems. Mineral substances, such as calcium carbonate, sand, and cement, make up the remaining raw materials.
Sika purchases its base chemicals in accordance with strict quality requirements from certified suppliers offering the best value for money. In the case of key raw materials with limited availability or large purchase volumes, Sika mandates at least two suppliers whenever possible. For unique, highly innovative technologies, the Group seeks to manufacture raw materials itself, or source them in close collaborative partnerships with innovative suppliers. In respect of all the materials used, compliance with the relevant statutory registration requirements (e.g. REACH or TSCA ) is monitored and ensured by a network of global and local specialists, as well as external consultants. Sika’s procurement specialists and technical experts work closely with suppliers’ technical units to fully understand the raw material flows, and continually optimize costs, quality, availability, and sustainability.
Since February 2020, Sika is an active member of the Together for Sustainability (TfS) initiative. The organization, founded in 2011, aims to improve sustainability practice within the supply chain of the chemicals industry. The TfS program is based on the UN Global Compact and Responsible Care® principles and allows Sika to assess and evaluate the performance of its suppliers in various aspects. This includes environmental, labor & human rights, ethical and sustainable procurement performance in order to achieve measurable improvements and its own sustainability performance.
Additionally, potential suppliers are closely screened by Sika and must demonstrate compliance with all laws, regulations and international standards set out through Sika’s qualifying and selection process. All suppliers are required to sign the Supplier Code of Conduct, which includes the Sustainability, Ethics, and Fair Competition principles. TfS evaluations will be an additional requirement introduced in 2021, in which all potential suppliers must also participate in a TfS Assessment.
Suppliers are also regularly evaluated by a comprehensive supply risk management process to achieve continuous uninterrupted material availability, quality, cost competitiveness, and compliance, essential for business success. The corresponding findings are incorporated into the risk assessment, along with the suppliers’ self-assessments and data available in the public domain. If a relevant risk is identified, Sika will conduct an audit of the supply company in question to ensure expected functionality of the latter’s internal risk management system.
Raw materials are systematically evaluated within Sika to identify potential risks and to determine relevant measures, such as maintaining safety stocks, and/or securing long-term supply contracts. Despite the unusual circumstances as a result of Covid-19, 2020 again saw a successful execution of Sika’s risk management process, allowing the company to better identify potential risks and secure well-structured mitigation practices. Sika continues to use this risk management process stringently to ensure any potential impacts on the company and its customers are mitigated.
RISK MANAGEMENT EARLY IDENTIFICATION OF POSSIBLE RISKS
Risk Management Suppliers are regularly evaluated by a comprehensive supply risk management process to achieve continuous uninterrupted material availability, quality, cost competitiveness, and compliance, essential for business success. The corresponding findings are incorporated into the risk assessment, along with the suppliers’ self-assessments and data available in the public domain. If a relevant risk is identified, Sika will conduct an audit of the supply company in question to ensure expected functionality of the latter’s internal risk management system. Raw materials are systematically evaluated within Sika to identify potential risks and to determine relevant measures, such as maintaining safety stocks, and/or securing long-term supply contracts. Despite the unusual circumstances as a result of COVID-19, 2020 again saw a successful execution of Sika’s risk management process, allowing the company to better identify potential risks and secure well-structured mitigation practices. Sika continues to use this risk management process stringently to ensure any potential impacts on the company and its customers are mitigated.
PRODUCTION AND LOGISTICS
Sika sets defined standards for risk provisions that are binding for its production and logistics operations. These standards form part of the Group-wide “Sika Corporate Management System” and determine minimal requirements and best practices; for example, processes and guidelines in the areas of safety, health, environment, quality, sourcing, manufacturing, and logistics. The “Sika Corporate Management System” is accessible to all employees of the Sika Group. Together with the local regulatory requirements, these standards are subsequently documented in individually maintained Sika management systems of the local Sika companies. Additionally, Sika production companies are certified to ISO 9001:2015 (quality management), ISO 14001:2015 (environmental protection), ISO 45001:2018 (occupational health and safety management) and IATF 16949:2016 (automotive quality management). A growing number of larger facilities are also certified to ISO 50001:2018 (energy management).
The current certification status of individual Group companies is shown in the Annual Report on page 150 et seq.
Audits and inspections are core elements of Sika’s comprehensive management system. They provide management at Group, regional, and local company levels with a regular, independent assessment of compliance with official requirements, as well as with Sika’s internal risk management guidelines and principles. These audits and inspections ensure the effectiveness of processes and related controls. Quality, environment, health, safety, sustainability, property loss prevention and business interruption, product development and technology, legal matters, application risks, IT security, suppliers, and product performance are all subject to audit.
In 2020, Sika conducted 135 centrally documented audits throughout the organization. Supplier audits are carried out by the purchasing and quality assurance departments based on the risk assessment. The number of reviews is steadily increasing. Membership in the “Together for Sustainability” (TfS) initiative enables Sika to ensure that global standards for environmental, social and governance are met by suppliers. In 2020, 44 supplier audits were executed, and supplier audit trainings for more than 80 purchasing and quality assurance employees were conducted. Sika regularly audits production and logistics operations at local companies. This includes recording any risks that may result in personal injury, incidents, production downtime, property damage, or liability claims. The probability and significance of these risks are assessed, and measures are subsequently defined and implemented to minimize the risk potential at the site and to enhance operational safety. Sika is insured against production losses.
PRODUCT DEVELOPMENT AND MARKETING
For products and services, Sika implements a structured product development process that factors in potential risks. The Group monitors ecological and safety aspects during the development, production, and product-handling stages. For this purpose, it has introduced the specific checking of new developments against a sustainability profile. Sika also focuses on market opportunities and risks, product sustainability performance, and the protection of intellectual property. Sika has a global program in place to minimize the risks in advisory and sales activities that could provide grounds for product complaints. Thanks to a host of measures, including the regular training of employees, clearly formulated standards, detailed causal analyses, and stricter controls, expenditure for product-related claims is steadily being reduced. To avoid the risk of customers using Sika’s products incorrectly, Sika provides systematic instructions, application training, and support to customers, as well as extensive documentation and quality control.
CUSTOMERS AND MARKETS
Sika has a policy of strategic diversification to limit market and customer-related risks. Geographical diversification is tremendously important in the locally based construction industry, given the sometimes contrary business trends witnessed in this sector in different regions of the world. Customer diversification – with no single customer accounting for more than 2.5% of Sika’s turnover – is another stabilizing factor. As a further safeguard against economic fluctuations, Sika operates both in the newbuild sector, and in the less cyclical renovation and maintenance market.
The purpose of financial risk management is to optimize funding and achieve a liquidity position geared to financial obligations. Liquidity is ensured by means of long-term bonds and a long-term revolving credit facility. Liquidity is optimized by means of a cash-pooling arrangement. Sika also manages its net working capital with the utmost prudence. For example, the local companies have precisely defined processes for handling accounts receivable. A cost structure dovetailed to the prevailing market conditions ensures adequate cash generation. Sika attaches high priority to open and cost-efficient access to capital markets. In this context, the A-/stable rating of Standard & Poor’s must be taken into account.
Financial risk management is described in greater detail in the Annual Report on page 143 et seq.
Global climate change and government measures to mitigate this change can impact our day-to-day business in many different ways and/or influence demand for our products. Within Sika, climate risks are essentially divided into two categories: (a) transitional risks, which are temporary risks connected with the transition to a low-carbon economy and (b) physical risks, or actual risks created by the occurrence of an event. The respective risks are mapped out in greater detail in the “Sustainability Report” section , alongside related measures to reduce risk and the corresponding parameters. The analysis of climate risks confirms how fundamental it is that critical dependencies and the external effects of climate change on Group strategy are well understood. Climate-change time horizons are challenging, as these horizons are much longer than political terms of office and investor outlooks, and stretch far beyond typical planning cycles. Sika is accelerating its efforts to drive the transition to a low carbon economy. The Group continues to increase its use of renewable energy sources in its own operations and enables customers to improve their environmental footprint through its products and solutions. Sika will continuously launch products that offer environmental benefits combined with enhanced performance. This includes product (re)formulations with less emitting materials and at the same time contribute to a circular economy.
The ever-increasing use of information technology, cloud computing, automated processes, and new communication standards (5G) combined with increasing interconnectedness is giving rise to new business models. The flip side of this coin is that new technologies also entail inherent and at times covert risks, such as espionage, data theft, and sabotage. Companies are increasingly exposed to such risks, which can take shape through cyberattacks carried out by national governments, individuals, groups, or organizations. Sika follows such unwelcome developments very closely, provides its staff with the requisite training, and has reinforced its IT organization within the Group accordingly. The measures to combat and defend against such attacks are continually reviewed with the help of external specialists and adapted in line with any new situations that may arise.
Sika’s internationally highly regarded reputation contributes significantly to the company’s value. The Sika Code of Conduct and Sika’s Values and Principles are the guiding principles for integrity and ethical behavior. All employees and all those who join Sika through acquisitions are trained in the Code of Conduct and in dealing with the Sika Trust Line (Whistleblower Line). External tools support the monitoring and management of potential reputational issues. With the goal of identifying crisis topics, so-called issues, at an early stage, a global issue monitoring system was established last year. In this context, the company focuses on potential negative issues and, in particular, adverse reporting on online and offline platforms or media. The aim is to identify these at an early stage and respond accordingly. An external database is used to search for potential negative ESG topics with which Sika is associated. For this purpose, a comprehensive set of search terms from various categories was defined, which comprise the following topic complexes:
- Community Relations
- Employee Relations
- Group Management
- Board of Directors
- Main Legal Entities
- Main Brands/Products
Monthly reporting was established in January 2021. The system is to be rolled out to other areas and departments in the current fiscal year.
Internal Audit carries out audits as set out in the annual audit plan, approved by the Audit Committee. The internal audits are primarily for Group companies in the areas of sales, accounts receivable and accounts payable management, product development, purchasing, production, quality control, inventory management, financial and operational reporting, payroll processes, and IT management. In addition to the global audit of sales and production companies, regular in-depth audits are carried out in the area of headquarter functions and Group-wide support processes. Internal Audit is an instrument of the Board of Directors and reports to the Audit Committee.