All business activities involve risks which affect the ability to achieve the strategic goals. Risk management is therefore a continuous process in the daily business. Proactive risk management is crucial for successful governance and operations. The Board and Executive Leadership Team frequently follow up on limits and risk exposure.
Risk management
The Board is responsible for ensuring effective risk management to reach the ultimate target of generating an attractive total return. Risk management is an integral part of the Group’s processes and is kept close to business operations. The Board has adopted policies with risk levels, mandates and limits for the parent company and its business areas, while the boards of the subsidiaries decide and follow up on policies that have been adapted to manage the risks in their respective businesses.
Business risk
Being a long-term owner, the exposure to companies and sectors varies over time depending on the global economic development. Currently the geopolitical situation, wars and supply chain challenges affect all businesses. Market conditions and industry dynamics change. Transactions may not be feasible at a preferred time.
Risk mitigating actions: The Board has set investment principles and adopted an investment policy. The overall portfolio risk is mitigated by investments in several different industries and geographies. The business teams and the Executive Leadership Team follow up continuously and report regularly to the Board on the development of the portfolio companies.
Technology shift risk
The pace of technology change and the digital transformation is rapid. Being at the forefront of R&D and adapting to new technology is a prerequisite for all portfolio companies to become or remain best-in-class. Failure to adapt to technological developments and digital transformation could have a material negative impact on Investor and the portfolio companies.
Risk mitigating actions: Investor’s business teams constantly analyze the industries and the technology development and adapt the value creation plans. The risk is managed by continuous focus on agile and flexible business models, product development, customer needs, market analysis and cost efficiency.
The value creation plans are reported to the Board. Investor’s Executive Leadership Team and Board regularly discuss and follow up on the value creation plans.
Environmental and climate-related risk
Risks related to environmental factors of our portfolio companies continue to grow in importance at the same time as regulatory activity and reporting requirements are increasing. This includes for example resource scarcity, climate change and biodiversity. Environmentally related risks have bearing on most traditional risk types, such as reputational and market risk for our portfolio companies.
Risk mitigating actions: The Responsible investment and ownership policy is updated annually and adopted by the Board. Clear expectations are set on the portfolio companies. Measures and targets have been set to further future-proof Investor and the portfolio companies. Investor expects the portfolio companies to continue to mitigate negative environmental impact and transition to a low carbon economy, e.g. by developing and executing on climate strategies and committing to reduce emissions in line with the Paris Agreement. This work is driven through the board representatives in the individual companies including following up on companies’ targets and measures to reduce their environmental impact. Investor also monitors and follows up on the portfolio companies’ progress through dialog and reporting.
Political and geopolitical risk
Political and geopolitical uncertainty has implications on the portfolio companies’ businesses and strategies. Increased protectionism and international trade restrictions may lead to deglobalization and negatively impact the business environment in which Investor and the portfolio companies operate.
Risk mitigating actions: The Board and Executive Leadership Team monitor and work proactively to assess political and geopolitical risks and how they affect the portfolio companies’ businesses. When possible, Investor representatives participate in various relevant forums to promote transparency, a level playing field and free trade.
Financial risk
The risks of losses due to changes in market variables such as fluctuations of share prices, interest rates and currency rates, are significant for Investor. Share price risk is the largest financial risk. The risks that liquidity is unavailable to meet payment commitments or that financing cannot be obtained or only at increased cost due to changed market conditions, are other material financial risks.
Risk mitigating actions: Limits for financial risks are set in the Finance policy adopted by the Board.
A measure to manage fluctuations in exchange rates and interest rates is the option to hedge by using derivative instruments. The share price risk is not hedged. Daily procedures are established to monitor, evaluate and report to the Executive Leadership Team on current exposure. Also, ensuring financial preparedness by managing the liquidity ratio, allocating loan maturities over time and diversifying sources of capital are continuous risk mitigating activities. Regular reports on exposure versus set limits are provided to the Audit and Risk Committee by Treasury and Risk Control.
Business ethics risk
High ethical standards, respect for human rights and labor laws are the foundation for a strong and sustainable business. The risk of bribery and corruption or the risk of investing in companies with insufficient ethical business conduct, poor working conditions or non-compliance with labor rights, all carry a reputational risk and can have a significant negative effect on both Investor, the portfolio companies and other stakeholders.
Risk Mitigating Actions: The Board has adopted a Policy framework with principles on how Investor should act as a responsible owner and company. Investor has set clear expectations on all portfolio companies to act responsibly and ethically. It is the responsibility of each portfolio company and its board and management to analyze and take systematic action to reduce these risks. The Audit- and risk committee regularly follow-ups on the internal control as well as actions taken on internal audit observations. New portfolio companies are evaluated in the investment process’ due diligence. Investor follows up the subsidiaries on a range of areas within governance, ethics, risk and compliance, all selected based on risk assessment. Preventive measures include regular risk assessments, procedure development to mitigate risk, regular training to strengthen awareness and having whistleblowing channels implemented
Regulatory risk
All businesses and operations are affected by laws, regulations, agreements, sanctions and other regulatory requirements. Non-compliance with any of the above will significantly affect the business and reputation negatively, for both Investor and the portfolio companies.
Risk mitigating actions: Compliance with laws and regulations is a basic principle in the Policy framework adopted by the Board. Preventive measures taken are among other internal controls implemented in procedures as well as control functions following-up on compliance. The regulatory environment is continuously monitored in order to prepare for changes that may impact the business.
Cyber and information security risk
Cyber and information security risk is an increasingly material risk that continuously evolves. Security incidents, cyber attacks, hacking or data leakage may have a direct negative impact on the operations of Investor and the portfolio companies.
Risk mitigating actions: The Board has adopted an Information security policy. The Executive Leadership
Team has implemented procedures and continuity plans to identify, protect, detect, recover and respond to incidents. Investor assesses regularly its risk profile and invests continuously to protect its systems and improve recovery plans. Investor follows up on the subsidiaries’ cyber security maturity and resilience. To increase awareness in the organization, employees are trained. Status and actions are regularly reported to and discussed within the Audit and Risk Committee.
Key personnel/succession risk
The ability to attract and retain the right competence is a prerequisite for Investor’s long-term success. The risk of not being able to attract the right people could have a negative impact on both Investor and the portfolio companies.
Risk mitigating actions: Our network is key to finding the best board and management candidates for our companies as well as for recruitment to Investor. Investor’s Board and the boards in the portfolio companies continuously identify required key skills, to support the companies’ long-term ambitions and needs, and reach out to individuals with relevant industrial, functional and geographical knowledge to broaden the network. The ability to attract, retain and develop individuals is supported by several measures including a well-defined recruitment process, succession planning, a competitive and long-term approach to compensation, and a focus on development opportunities.
Uncertainty factors
Commercial and financial risks are the most significant risks and uncertainty factors affecting the Group. The global economic landscape remains uneven and subject to elevated uncertainty. Ongoing wars and armed conflicts in certain regions continue to contribute to geopolitical instability, with potential adverse effects on economic activity, energy markets, and supply chains. Trade policy remains a source of uncertainty, with tariffs and other trade measures remaining elevated and subject to change, contributing to volatility in global trade flows.
In addition, the uncertainty regarding policy direction in major economies continues, with potential implications for global trade, inflation and other financial conditions. The described uncertainties may have a material adverse impact on Investor’s and the portfolio companies’ business operations, financial situations and ability to deliver on the strategies.
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