Risk management report

Illovo’s board regards risk management as a key process in the responsible pursuit of strategic objectives and the effective management of related material issues across the group. Illovo’s management culture is underpinned by effective risk identification and mitigation processes which are applied, on a day-to-day basis, through the group Enterprise Risk Management (ERM) system, including internal controls, monitoring mechanisms and relevant stakeholder engagement activities. In accordance with the group’s risk philosophy, business activities and plans are aligned to the group’s governance, economic, environmental and social aspirations, and form an integral component of the group’s materiality assessment processes.

Our ERM process is designed to facilitate the achievement of our business strategy and plans, through the identification and exploitation of opportunities that meet the risk appetite criteria set by the board, and to ensure that the risk profiles of our business activities and investments are maintained within the approved risk tolerance levels, thereby optimising the risk return parameters for the creation of sustainable growth and value for shareholders and stakeholders.

The Risk Management Committee is responsible for the oversight of the ERM process and embedding of the ERM framework across the group. Management is tasked with the process of developing and enhancing our comprehensive systems for risk identification and management. Risk assessments in line with the ERM framework are conducted regularly, with the resulting risk improvement plans being closely monitored. These procedures form an integral part of the risk management process, and ensure that any residual risk exposures are properly and timeously managed.

The ERM process considers strategic, operational, financial, compliance and reputational risks. Other risks inherent in the sugar industry generally are also identified, monitored, recorded and appropriately managed. Risk indicators and levels of risk appetite are reviewed and approved by the board on an annual basis or more frequently if required. Our risk appetite represents the amount and type of risk we are willing to accept in pursuit of our business objectives. Salient risks and their relevant mitigating strategies are subject to regular assessment by the Risk Management Committee and are given consideration in the annual strategic plan approved by the board.

Business continuity plans for all group operations are incorporated in the ERM framework, and training to ensure capability to deal with interruptions to the business is carried out at all operations.

The following risks were identified through our ERM process in the year under review as being the top strategic, financial and operational risks considered as potentially having the most material impact upon the group, if realised.

  • Sugar imports

    The risk of duty-free sugar being imported into countries at prices below which Illovo can compete at acceptable margins, caused by subsidies granted to major sugar producers around the world, together with the imminent de-regulation of the EU sugar regime, can lead to unfair competition leading to lower prices in our own markets and loss of revenue and profits. The mitigating controls are referred to in the Commercial Director’s Review.

  • Country and investment

    Broad political issues and government relations as a result of change of government, or civil unrest can cause political uncertainty and lead to lack of availability of foreign exchange, reduction in regulatory support (eg import tariffs, etc), shortage of basic commodities and a deteriorating infrastructure. The stakeholder engagement initiatives referred to here are an important mitigating factor. Additional controls include monitoring of political situations in operating countries through specialist service providers and ongoing country risk assessments.

  • Price and market

    Exposure to pricing variations, particularly due to world sugar price volatility, changes in market demand and supply (particularly where market supply exceeds market demand), and market protective measures implemented by governments create an inability to maintain acceptable margins. This risk and mitigating actions are fully discussed in the Commercial Director’s Review.

  • Weather

    The impact of abnormal weather conditions is a significant risk to the business. This might be caused by global warming and deforestation resulting in lower yields leading to inability of our factories to utilise capacity. Current controls in place to mitigate against adverse weather conditions include:

    • development of agriculture infrastructure including drainage systems, dykes and canals;
    • irrigation systems in place at most non-South African operations;
    • use of weather forecasting tools and an early warning system for flooding;
    • continually evaluating and selecting drought tolerant cane varieties; and
    • completion of a water footprint exercise so as to better understand and manage our water resource.
  • Direct and indirect tax exposure

    Exposure to complex tax legislation in the international environment remains a risk to the business. Various mitigating controls are in place including engagement with tax authorities on all new transactions and the review of tax returns by the group tax department. The company continues to make use of independent assessments in complex related transactions.

  • Advocacy and stakeholder relations

    Poor, inadequate or infrequent communication to the market, shareholders, analysts, employees and government may lead to reputational damage and impact on our share price. Lack of or inadequate communication of our social, environmental and other impacts, and the way in which we address these, could also have adverse reputational risks. In order to strengthen our ongoing communication with stakeholders, we have reviewed our stakeholder engagement approach, as discussed in the stakeholder engagement section.

  • Cane supply

    This key risk is described by our ability to maintain area under cane, and the maintenance of cane yield and quality. Challenges to the former include land tenure and expropriation, competitive crops, as well as competition for cane supply. The direct consequence of the above is lower yields leading to the inability of factories to utilise capacity. Various controls are in place to mitigate the risk including:

    • sustainable cane variety selection;
    • increased cane replant programmes; and
    • proactive engagement with government and financial institutions/donors to provide cost effective funding for grower development and ratoon management.
  • Bulk water supply

    This is the inability to secure water required for agriculture and factory processes as well as potable consumption by employees and communities. Potential causes of this key risk is Illovo having drought or abstraction permits revoked, as well as poor maintenance of our canal systems and irrigation infrastructure. This will lead to lower yields which will impact the ability of factories to utilise capacity. Amongst the current controls for this risk are planned maintenance and replacement of infrastructure, irrigation scheduling and drought mitigation strategies, having our estates in close proximity to perennial water supply, appropriate investment in irrigation systems (centre pivots), and a group-wide water footprint assessment leading us to a better understanding of our water use.

  • Currency exposure

    Exposure to fluctuations in exchange rates are caused by country risk and the inherent macro-economic factors within countries. This could cause significant financial impact in the translation and transaction of foreign earnings. The following controls are in place:

    • strict hedging policies and procedures;
    • foreign cash flow forecasting of proceeds; and
    • a centralised treasury function.
  • Skills and capabilities

    The inability to attract and retain a workforce with the required technical skills and capabilities remains a key risk facing the business. There are additional pressures in terms of the retention of critical skills. Some of the challenges are caused by the increased competition for scarce human resources, including competitors establishing a footprint in African markets where we are operating. In addition to those identified in the Human Capital Report, mitigating measures include:

    • talent management processes for all disciplines;
    • bursary and training programmes; and
    • our establishment of a world class training centre for the agriculture and sugar processing disciplines.

Combined assurance

Our combined assurance model aims to optimise the assurance coverage obtained from management as well as internal and external assurance providers relative to the risk areas affecting the group. Collectively, they provide the board with assurances on the effectiveness of controls that mitigate the risks identified during risk assessments, as part of the governance practice recommended by King III.

Our combined assurance framework, which covers all the business operations of the group, is monitored by the Audit Committee and the Risk Management Committee, ensuring the integration, co-ordination, and alignment of risk management and assurance processes, and thereby optimising and maximising the level of risk, governance and control oversight across the group.

A combined assurance forum, which meets on a quarterly basis, assesses feedback on the effectiveness of the internal controls received from the assurance providers in a co-ordinated manner so as to identify gaps or improvement areas in the internal control framework. The forum also provides assurance that current control measures in place are adequate. The combined assurance plan is reviewed and updated on a quarterly basis and is used to provide an overall opinion and assurance to the Risk Management Committee on an annual basis.

Materiality assessment

The Risk Management Committee drives an ongoing risk assessment process to identify and rank our key risks and opportunities according to their probability and potential to materially impact our operations. This process informs the prioritisation of various material issues affecting all operations within the group, ensuring a dynamic and responsive business strategy.

We acknowledge the importance of a robust, continuous materiality assessment process to ensure that matters impacting upon the organisation’s ability to create value over the short, medium and long term are identified. Through materiality assessments we identify, quantify, prioritise and respond to important stakeholder issues, both negative and positive. A wide range of factors, both external and internal and encompassing regulatory, economic, social, political and global influences on the group, together with legitimate stakeholder expectations, impact our daily business operations. These are deliberated upon at both the operational and board levels across the group, feeding into our strategic framework and the identification of risk impacts on the organisation.

The issues identified are quantitative and qualitative in nature and cover internal and external perspectives. Internal issues are identified by considering our policies and procedures, codes of conduct and business ethics, strategies, targets, risk management processes and employee engagement. Identification of external risks takes into account stakeholders’ interests and expectations, and matters identified in reporting initiative frameworks such as CDP’s climate change and water responses, the JSE SRI Index requirements, the GRI requirements, the UN Global Compact, the UN Guiding Principles on Business and Human Rights, as well as legal and regulatory requirements. These are compared and prioritised, based on internal and external assessments.

The materiality assessment process also guides the prioritisation of topics identified during the stakeholder engagement process. Engagement with employees, shareholders, customers, service providers, non-governmental organisations and other interested persons leads to the identification of the primary issues governing these relationships and the topics of importance to our stakeholders generally. This ongoing engagement throughout the year is used as the basis for defining report content and prioritising business initiatives.