Risk management report
The acceptance of risk is an integral part of Illovo’s businesses. Management of that risk is therefore critical to Illovo’s continuing profitability. The Illovo 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. Where risk is assumed it is undertaken within a calculated and controlled framework that assigns clear roles and responsibilities.
Illovo’s risk management culture is underpinned by a three-tiered approach. The first is that the primary responsibility for risk management lies at the business level, and risk owners throughout the group at corporate and country level are responsible for their identified risks and the appropriate management thereof. The following tier is the risk management function which guides effective risk identification and mitigation processes applied on a daily basis, through the group Enterprise Risk Management (ERM) system, including internal controls, monitoring mechanisms and relevant stakeholder engagement activities. The final tier is the group’s internal audit function responsible for independent review of the group ERM process, systems and controls. 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 Illovo’s materiality assessment processes.
Our ERM process is designed to facilitate the achievement of our business strategy and plans, through the identification and maximisation 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 at both group and country level, with the resulting risk improvement plans being monitored closely. 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, commercial, 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 annually, 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 underpin the annual strategic plan approved by the board.
Business continuity plans for all group operations are incorporated within the ERM framework, and training and testing to ensure capability and capacity 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 most important strategic, commercial, financial and operational risks which are considered as potentially having the most material impact upon the group, should they occur:
- 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 the lack of market protective measures implemented by governments, create an inability to maintain acceptable margins. Mitigating controls include improvement to logistics and a refocus on markets that offer trade advantages. This risk and mitigating actions are also dealt with in the Commercial Director’s Review. - Weather
The impact of abnormal weather conditions is a significant risk to the business. Causes may be related to global warming and resultant deforestation which impact on cane yields, resulting in the inability of our factories to utilise installed 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 early warning systems for flooding; and
- continually evaluating and selecting drought tolerant cane varieties.
- Sugar imports
The importation of duty-free sugar into the countries in which we operate presents a risk to our being able to compete at acceptable margins. Such market conditions are caused primarily on the world market by way of a range of production subsidies which are granted to global sugar producers. Together with the imminent de-regulation of the EU sugar regime, these conditions can lead to unfair competition and lower prices in our own markets, resulting in the loss of revenue and profits. The mitigating controls are referred to in the Commercial Director’s Review and include the focus on improving the existing regulatory frameworks in the countries in which we operate. - Interest rate exposure
Exposure to fluctuations in interest rates due to both country risk and macroeconomic factors, for example the inflationary effect of a strengthening US Dollar forcing emerging markets to increase interest rates so as to protect their local currencies, has a significant effect on financing costs as well as putting the affordability of capital projects at risk. The mitigating controls are referred to in the Financial Director’s Review on page XXX. - Quality
Poor product quality (sugar and downstream) and non-compliance with quality control standards impact upon the company’s reputation and may result in reduced sales. This risk has assumed increasing importance as our direct exports into the EU of high-value speciality sugars have grown in volume. The mitigating controls are referred to in the Operations Director’s Review on page xxxxx and include a project to obtain FSSC 2000 certification at all our operations. - 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. - Exceptional input cost increases
This key risk is best described by cost pressures on fuel, electricity, fertiliser, salaries and wages, impacting margins and long-term competitiveness. Any one of these risks, or a combination, could potentially result in a margin squeeze on the business. Among the controls in place to mitigate the risk include:
- centralised supply-chain contracts;
- natural hedges to purchase US Dollar goods and services, in particular, in Malawi and Zambia; and
- operation’s executives CI targets.
- Cane supply
Cane supply, cane yields and cane quality are vital for the business. Challenges to the former include land tenure and expropriation, competitive crops, competition for cane supply, as well as the viability of our supplying outgrowers. In terms of cane yield and quality, abnormal weather conditions, power supply interruptions, pests and diseases, can also pose their own risks, all of which could potentially lead to lower cane yields and impact the ability of our factories to utilise their installed capacity. Various controls are in place to mitigate the risk including:
- sustainable cane variety selection;
- increased cane replant programmes;
- proactive engagement with government and financial institutions/donors to provide cost effective funding for grower development and ratoon management; and
- strategies for managing flooding, drought conditions, and frosted cane.
- Country and investment
Broad political/government relations issues as a result for example, of changes in government or civil unrest can cause political uncertainty and lead to lack of availability of foreign exchange, reduction in regulatory support (eg, import tariffs), shortage of basic commodities and a deteriorating infrastructure. The stakeholder engagement initiatives referred to are an important mitigating factor. Additional controls include monitoring of political situations in operating countries through specialist service providers and ongoing country risk assessments.
- Factory utilisation and performance
Sub-optimal factory utilisation and performance continues to be risks to the business. These risks are caused primarily as a result of no cane stops, poor quality of the cane received (which impact recoveries of sugar from cane) and unplanned breakdown of equipment. Risk control measures include:
- consideration of detailed weekly reports covering factory statistics;
- de-bottlenecking programmes;
- securing cane supply; and
- continuous improvement via capability development and improved logistic management.
Illovo recognises that an effective risk management framework depends on robust processes and controls, together with an embedded and mature risk culture across the business which results in clear goal and expectation setting and leads to the efficient monitoring, measuring and management of key performance indicators at an executive level.
Combined assurance
Our custom-designed combined assurance framework, implemented throughout the group, is aimed at providing the assurance that all identified risks are adequately managed and coordinating the assurance efforts of management, internal assurance providers and external assurance providers. Collectively, they provide the board with assurances that effective controls are in place to mitigate against the identified risks during risk assessments, and 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, coordination, 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 risk management forum, which meets twice yearly, assesses feedback relating to the effectiveness of the internal controls received from the assurance providers in a coordinated 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. One of the most important outcomes of the combined assurance process is to ensure that each operation is continually benchmarked in terms of the assurance that is provided to uphold best practice and limit duplication of effort.
Our materiality assessment is covered in full here.