Reducing non-financial risks is an important part of operating the business. Electrolux applies many tools, including the sustainability strategy, sustainability codes and policies, training and monitoring, to help manage these risks and if possible transform them into opportunities.
Electrolux divides risks into:
- Operational risks for business operations - usually managed by each unit
- Financial risks managed at Group level.
Electrolux applies an holistic approach to risk. A number of Group functions are accountable for risk identification within their area of responsibility and report to Group Management on a regular basis. Each Group function is responsible for mitigating actions and ensuring any significant remaining risks are reported to Group Management for further review and decision-making.
Group functions include risk management board, treasury board, audit board, IT board, tax board, brand leadership group, human resources and executive team.
Additionally, Electrolux evaluates and improves the effectiveness of governance, internal control and risk management processes in a systematic way.
Sustainability Affairs, alongside other key functions in Electrolux, has responsibility for identifying business-relevant non-financial risks in its area of influence and developing approaches to mitigate them.
Through a structured process of interviews and discussions with selected Group Functions and sector management, risks are identified and assessed, laying the foundation for prioritizing the auditing process and developing measures to manage the risks.
Approaches to managing and reducing sustainability-related non-financial risks are also described at Integrating sustainability.
Precautionary principle
As a signatory of the UN Global Compact, Electrolux endorses Principle seven: Business should support a precautionary approach to environmental challenges and risks.
The Precautionary Principle is applied to tackling climate change and chemicals use. Through the Group's risk-based procedures, Electrolux applies a similar approach in responsible sourcing, human rights and compliance with the Workplace Code of Conduct. Electrolux applies the definition of the Precautionary Principle as stated in the 1998 Wingspread Statement: "When an activity raises threats of harm to human health or the environment, precautionary measures should be taken even if some cause and effect relationships are not fully established scientifically.”
Early warning systems for risk identification
Social, economic and environmental issues have the potential to become risks and are therefore reviewed regularly. Two approaches used by Sustainability Affairs for identifying and assessing issues are:
1. Materiality processElectrolux uses an annual materiality process to identify priorities and align strategy and reporting with emerging stakeholder expectations. The process is based on analyzing a universe of sustainability issues from two perspectives: priority issues for key stakeholders and how these issues influence business priorities.
2. Value chain approachWith most of the Group’s impacts occurring outside its direct influence, the sustainability strategy focuses increasingly on addressing indirect impacts along the value chain. These are assessed, and where appropriate, managed as risks. Impacts are identified at all stages of the value chain - R & D, suppliers, Electrolux operations, transport, point of purchase, customer use and end-of-life. See the Value Chain for more about the challenges of addressing these impacts.
Group Financial risk management
Financial risks are managed at Group rather than functional level and are described in Managing risks.
Blue Risk Assessment
Group Risk Management applies a group-wide benchmarking tool for qualitative and quantitative information about the risk situation of operations. This benchmarking is done among operations and key suppliers annually, and according to 25 risk categories and six risk areas. The process is known as Blue Risk Assessment.
Blue Risk Assessment is used when a risk is identified as a material short to medium term risk to the business. It assesses the risks relating to safety, property damage and business interruption and is monitored by Group Risk Management. Every year, Group Risk Management performs a loss prevention survey of all Electrolux production sites, using the Electrolux Blue Risk benchmarking tool.
The approaches described above to risk and impact identification, assessment and management work largely in parallel and it is the responsibility of each function to ensure that appropriate risks are identified and managed. Formal links between the different risk identification and management processes are currently not in place. While the business impact of non-financial risks is identified, allocating bottom line financial implications for each is not a focus.
Key risks
Global megatrends impact long term business strategy, risks and opportunities for Electrolux, and these are discussed in the CEO statement.
Issues identified through the Electrolux materiality process are addressed in the materiality section. Many of the issues identified in the materiality process are managed as risks, and discussed below. Risks considered most material from a business perspective include:
- Climate change
- Regulatory risk (eg standards)
- Reputational risk (human rights, ethics)
- Shift to low cost regions (new operations)
- Raw materials
- Water
Climate change
Through active engagement in the climate agenda, Electrolux can contribute to positive change, reduce its negative impacts and at the same time generate business opportunities through the sale of energy-efficient products. The sustainability strategy and Environmental Policy give an overview of how the Group manages the risks and opportunities associated with climate change.
For Electrolux, risks relating to climate change concern reducing the climate impact of manufacturing and operations, managing potential disruptions in production, and decoupling growth from carbon emissions as well as meeting increased legislation and energy pricing.
Impact on operations: Electrolux estimates that Group operations are not exposed to higher risks due to storms, drought, rising waters or changes in temperature. In its 2012 CDP report, it presented a rough calculation of the risks of production disruptions.
Decoupling growth from carbon emissions: Climate change is a risk to society as a whole and over the medium to long term - the next seven to ten years - its biggest impacts on Electrolux will be indirect. For example, extreme weather events such as prolonged heavy rain, strong winds and high temperatures may disrupt the supply chain and affect purchasing patterns. However, they are unlikely to directly impact the Group's actual manufacture of products.
The challenge to 2020 is to meet the exponential expansion of the middle class, particularly in emerging economies where Electrolux is targeting the majority of its growth while generating dramatically fewer carbon emissions and reducing resource use. The Group’s biggest contribution to addressing the climate change challenge is to design products that reduce emissions in use, including in expanding markets such as Asia, Africa and Latin America. The Group is therefore rethinking both its production processes and product offering to lower energy consumption and from 2012, at least one third of the Group's R&D spend will be sustainability related, the majority invested in energy efficiency.
Regulatory risk
Electrolux requires that its products meet or exceed all regulatory stipulations.
As of 2012, more stringent European Eco-Design energy-efficiency requirements mean refrigerators in energy class ‘A’ can no longer be placed on the market. Class ‘A’ dishwashers and washing machines will no longer be sold as of December 1, 2013. Electrolux supports developments to phase out inefficient appliances, along with better enforcement of efficiency standards. Electrolux is also preparing for upcoming revisions in ENERGY STAR labeling and federal minimum efficiency standards in the United States.
These changes in legislation and the need to modify products could have a material impact on Electrolux and offer both risks and opportunities. The financial impacts of these risks are reported on at length in the Group's yearly reporting to the Carbon Disclosure Project.
In the long term, Electrolux is preparing worldwide for more stringent rules for energy labeling and producer responsibility for the recycling of appliances (including a revised EU WEEE Directive to come into force in 2016). Future regulation may also include restrictions in the use of fluorinated gases such as foam-blowing agents and refrigerants presently used in some products, due to their global warming potential.
Legislation regarding the management of chemicals use and registration of the types of chemicals employed in manufacturing is also increasing, led by EU legislation RoHS Directive (Restriction of Hazardous Substances) and REACH.
Electrolux annually revises its RML (Restricted Materials List) in order to stay ahead and better harmonize the response to chemicals legislation worldwide. REACH is EU legislation on the registration, evaluation, authorization and restriction of chemicals. Electrolux sees REACH as a tool for ensuring safe products, safe production and environmental protection.
In 2007, Electrolux in Europe established a central chemical office to effectively manage chemicals regulation such as REACH and RoHS.
Reputational risk
The actions of any supplier, employee or operation have the potential to positively or negatively impact stakeholders’ perception of Electrolux. The Group’s own management of the workplace, particularly the health and safety of employees and the way it demonstrates accountability can enhance the employee brand.
A strong values-based corporate culture, a commitment to openness and transparency in reporting on key challenges and risks, the Ethics at Electrolux program and forward-thinking supply chain management all address reputational risk.
Electrolux has a Code of Ethics and other policies related to ethical conduct on topics such as bribery and corruption, anti-trust, workplace conduct, environment and conflicts of interest.
The Electrolux Ethics Program rolled out across seven European operations in 2012 and includes training and a helpline. By year-end 2012, 75% of the workforce throughout Europe, North and Latin America had access to these confidential reporting helplines.
In 2012, Electrolux stepped up its human rights efforts. The Group began alignment with the UN Principles on Business and Human Rights and conducted a corporate human rights risk assessment taking into account geographical and activity related risks. In 2013 Code of Conduct will be updated to reflect the findings. See more at Management approach: Society.
During 2013 Electrolux will introduce a global provider for ISO and OSHAS certification. In addition to certification, performance against specific environmental provisions set out in the Workplace Standard will also be monitored. The new approach is expected to deliver improved governance and reporting, as well as greater harmonization across the Group.
Electrolux has four ways to ensure the Code of Conduct is fulfilled. Each one is described in detail in the Labor Practices section of this report. They are:
- ALFA assessments of the Code of Conduct
- Ethics at Electrolux program
- Internal Code of Conduct audits
- Core values awareness raising, integrated into Human Resource processes and training.
These initiatives are designed to manage risk in our operations, help reinforce a strong values-based culture and provide transparency to our customers.
In an era of retailer consolidation, Electrolux has fewer and more powerful customers. Their expectations for transparency and sustainable product offerings are on the rise and have growing impact on the Group’s position as a preferred supplier.
Strong relationships with customers can be in part contributed to the Group’s proactive environmental performance, social engagement and energy-smart products. There are an increasing number of retailers who request Code of Conduct audits of Electrolux facilities and the Group readily shares audit findings with customers.
Shift to low-cost regions
As the Group expands to new regions and developing markets, different challenges and risk factors arise in the supply chain. The financial implications of these risks are set out in Managing Risks.
Due diligence of potential acquisitions and supply chain monitoring that highlight non-compliances for environmental, human rights, labor practice and corruption, help the Group better understand the risks of operating and sourcing in low-cost regions.
The Responsible Sourcing program helps ensure that all suppliers adhere to the same high environmental and labor standards as Electrolux. Compliance to the Workplace Standard is mandatory and is used in evaluating both existing and potential suppliers.
Following an acquisition, every effort is made to integrate the new member of the Electrolux Group both operationally and culturally. The integration of CTI in Chile and Argentina and Olympic in Egypt to ensure alignment with the Code of Conduct is continuing, see also Olympic results.
The restructuring strategy also has the potential to impact both individuals and local communities during closures. Managing closures by being transparent and inclusive is therefore key to strengthening the Group’s reputation for corporate citizenship. See more under Community.
Raw materials
From minerals to oil, raw materials will become an increasingly costly commodity. The first impact of increased demand is likely to be price increases, along with pressure for greater efficiency, materials substitution, greater recycling and reuse impacting product affordability. The Group’s exposure to raw materials comprises mainly steel, plastics, copper and aluminum.
Water
Water risk is rising up the agenda globally, and Electrolux is undertaking a fine-grained water risk assessment for operations.