Risk management Front pageRisk managementRisk management is an integral part of day-to-day management and decision-making at Enersense, as well as its control and reporting procedures. Risk management is carried out as part of all Enersense’s strategic, operational and financial processes. In addition, the impacts of any external threats are taken into account in risk management. Enersense has a risk management policy designed to determine its general risk management principles. The purpose of risk management is to ensure the implementation of Enersense’s strategy and the achievement of its goals, as well as enabling its steady growth. To achieve this goal, the risk management steering model provides a systematic and consistent way to identify, assess, report and prepare for risks related to business operations. General principlesEnersense applies the following general principles in its risk management: Business opportunities and the related risks must be taken into account in all decision-making and business planning. When making strategic decisions, such as decisions on increasing market presence, expanding business operations and creating new areas of operation, only informed and assessed risks must be taken. Risks must be assessed in accordance with the impacts and probability of their materialisation. In such assessments, the impacts of the risks on employees, stakeholders, the environment and reputation must be taken into account, in addition to financial aspects. Preparations must be made in case of risk materialisation by means of crisis, continuity and recovery plans, as well as through training related to the plans and sufficient insurance cover. The adequacy of risk management measures and processes is monitored and developed systematically. Risk categoriesEnersense divides risks into four (4) categories as follows: Strategic risks Operational risks Financial risks External threats Strategic risks are uncertainties related to changes in Enersense’s operating environment and its ability to prepare for and leverage such changes. Examples of strategic risks include changes in the business environment, competitive situation, market environment and legislation, as well as risks related to significant investments, mergers and acquisitions. Strategic risks and opportunities are assessed continuously. Enersense seeks to identify business opportunities that enable the company to achieve its goals by taking manageable risks, and to avoid business opportunities involving unreasonably high risks. A failure to identify or exploit an opportunity is also a risk. Operational risks arise from inadequate or ineffective processes and systems, as well as from people and other parties involved in implementing processes. An operational risk may materialise as a result of internal or external misconduct or mistakes, inadequate management, interruption in operations, system failure or ineffective processes, for example. Financial risks are related to the availability and price of financing, changes in foreign exchange rates, investment activities, stakeholders’ solvency and credit losses, for example. External threats are related to natural disasters, cyberattacks, fire, theft, information leakage or property damage, for example. It is not possible to comprehensively prepare for external threats, but they can be limited by maintaining sufficient insurance cover and an adequate level of capital. Roles and responsibilitiesThe Board of Directors determines Enersense’s strategic targets and confirms the risk appetite related to the achievement of strategic targets. The Board regularly assesses Enersense’s most significant risks and uncertainties. The Board also monitors the implementation of risk management and approves Enersense’s risk management policy. The President & CEO and the Group Executive Team are responsible for the implementation of risk management and report to the Board of Directors on matters related to risk management. The President & CEO and the Group Executive Team are also responsible for ensuring sufficient resources for the organisation of risk management. The Executive Vice President of each division and the directors of Group functions are responsible for ensuring that risk management is appropriately organised in their respective areas of responsibility. The Risk Management Steering Group coordinates the risk management process and is responsible for risk reporting and for identifying and assessing risks and determining management measures in cooperation with the business operations and Group functions. All employees are responsible for identifying, assessing and managing risks related to their duties as part of their day-to-day work, and for complying with Enersense’s risk management approach and reporting identified risks to their supervisor. Risk management processIn all Enersense’s operations, risk assessment is carried out as part of daily tasks and risk management procedures and in connection with individual decisions or events. Risks are assessed in accordance with their impacts and probability. Risk-taking in relation to Enersense’s risk tolerance is assessed regularly, and particularly when discussing its strategy and making decisions on business projects or investments that are significant for the Group. Persons in charge are designated for significant risks identified during risk assessments. They are responsible for planning, implementing and monitoring the management measures related to these risks. The business operations and Group functions regularly report to the Risk Management Steering Group on risks and changes therein. The Risk Management Steering Group prepares and maintains a risk register and creates a risk map of the Group’s key risks based on the risk register. The Group’s risk map is reported to the Group Executive Team. Enersense’s Board of Directors processes the most significant risks and their management measures and assesses the effectiveness and efficiency of the risk management. The Board reports on the most significant risks and uncertainties to the markets through the company’s financial statements and business reviews. Strategic risks The company continues to implement its growth strategy based on the development of strategic competencies, services and/or customer accounts. Even if the strategy is competitive, it is possible that it may not be implemented according to plan. Enersense may not be able to successfully execute its strategy in the rapidly changing business environment as part of the energy transition, and it may be unable to recoup investment costs or may incur opportunity losses, fail in change management, or in its reskilling ability and speed, or lack the agility to respond to new entrants in the market. Due to possible insufficient resources, management, information management, monitoring and planning, Enersense may fail in executing its key strategic development projects. Enersense’s strategy may prove to be misaligned in relation to the prevailing trends or fast changes occurring in the market or too modest with regard to its targets as compared to the services required by the energy transition. A failure in strategy implementation may also lead to weaker cash flow and insufficient funding. The company seeks to digitalise its business operations as applicable and to adopt operational efficiency tools and practices. As digitalisation accelerates, failure or wrong choices in the introduction of new tools and operating methods may slow down business operations and their development or reduce the relative efficiency and competitiveness of operations. The company strives to accelerate the development of strategic competencies, services and/or customer accounts with acquisitions. This involves a risk that the company may not identify suitable companies to acquire at favourable terms and conditions. Enersense may also incur significant acquisition, reorganisation and other expenses in connection with the acquisitions. Mergers and acquisitions also carry risks related to the integration of new businesses, and there can be no assurance that the estimated synergies can be achieved in full or within the contemplated schedule in relation to its already executed or future acquisitions. Furthermore, Enersense’s ability to complete mergers and acquisitions as planned and realize related synergies and other benefits may be dependent on the fulfillment of the conditions set for the transaction, such as receipt of authority approvals particularly from competition authorities. When the company completes acquisitions or expands its operations into new countries, it is possible that the revenue and profits of the target companies or Enersense’s foreign subsidiaries and/or branches will not meet its expectations, or the company would have to write down the value of its acquisitions. In addition, changes in customer relationships, local labour markets, political conditions and legislation, as well as changes in the company’s locations, may have an adverse impact on Enersense’s business operations, performance and financial position. Operational risks Enersense’s customers are typically owners of construction or industrial projects, developers, main contractors or suppliers, with whom Enersense usually executes the project, service or framework agreement for the project. The company often enters into project-specific contracts, which involve uncertainty in terms of successful competitive bidding. This makes it more difficult to estimate the company’s business performance and financial position over a period of time longer than the order backlog. Correspondingly, framework agreements do not guarantee that the company is successful in the tendering for individual deliveries falling within the scope of the framework agreement. Increased competition may also have a negative impact on the development of Enersense’s order backlog, and thereby also on its revenue and profitability. Changes in official regulations and restrictions and the related uncertainty may also have a material impact, especially among customers in the energy business. Although Enersense’s business areas also generate continuous revenue from, among other things, the servicing and maintenance services provided by it, a significant part of Enersense’s revenue is directly or indirectly related to significant long-lasting construction projects or other investments. Large fixed-price projects are typical of Enersense’s business operations, and the profitability of such projects requires Enersense to estimate the related contract risks and production costs with sufficient accuracy, in addition to successful project management, technical implementation and schedule management. General economic uncertainty may reduce customers’ willingness to invest and affect projects in Enersense’s order backlog by causing delays or interruptions. General macroeconomic uncertainty may lead to a deterioration in the financial position of Enersense’s customers or suppliers through access to financing, for example, which may result in insolvency or even bankruptcies that, if materialised, may result in losses and other negative consequences for the company. As the company advances in digitalisation and the adoption of new tools, the quality of reliable data and the ability to collect, process and analyse data for the needs of data-driven management are very important. Failure in the selection and adoption of tools or in ensuring data quality may lead to failure in achieving planned benefits and higher efficiency. Enersense has a number of major key customers whose purchasing behaviour has a significant impact on its business performance. If a major customer transferred its purchases from Enersense to its competitors or significantly changed its operating model, or if a significant project ended, discontinued or decreased unexpectedly, the company would have limited opportunities to replace the customer volume over a short period of time. If Enersense is not able to recruit, train, motivate and retain highly competent employees, it may not necessarily be able to compete effectively or fully implement its strategy. Other risk categories Guarantees Enersense’s customers typically require, for example, work and delivery guarantees as well as warranty period guarantees. Granting such guarantees to a customer is often the prerequisite for Enersense’s ability to submit a tender for a new project. However, the guarantee facilities do not oblige, for all parts, the issuer of the facility to provide a guarantee, but instead each guarantee requires specific approval by the issuer, and for example any previous negligence and failures by Enersense or, in particular, a deterioration of Enersense’s solvency or financial position could lead to Enersense not being granted the guarantees it needs for executing new projects. This could lead to Enersense’s inability to participate in new projects. Financing Enersense Group’s financing agreement includes financial covenants concerning the Group’s equity ratio, its ratio of interest-bearing net debt to EBITDA, and minimum liquidity. Breaching the covenants may give a financier the right to demand accelerated or immediate repayment of the loans and simultaneous cancellation of any committed but undrawn amounts as well as any amounts under guarantee facilities. The risks related to the company’s financing are explained in more detail in Note 20 Financial risk and capital management to the Financial Statements that will be published during the week starting on 4 March 2024. Partners Enersense collaborates with subcontractors and other partners during the various phases of its projects and services. Typically, the outsourcing or subcontracting includes material deliveries, subcontracting (e.g. civil engineering), provision of resources and deliveries of equipment that Enersense does not offer or have the capacity to offer. However, Enersense may fail in evaluating and choosing its subcontractors or have to accept partly unfavourable terms and conditions to ensure the acquisition of such services. Subcontractors may fail to deliver on time or in accordance with the level, cost structure or quality that Enersense expects, or their activities may be otherwise defective or breach legislation or regulations. Enersense’s subcontractors may also cease to deliver services to Enersense due to an inability or unwillingness to deliver, or may increase prices significantly. Disruptions that affect Enersense, including delays or terminations of agreements or the inability of subcontractors to deliver services within a prescribed time or at an acceptable cost, can also lead to disputes regarding customer claims for compensation for any damages caused by Enersense. Sustainability risks The acquisition of services and materials is an integral part of Enersense’s business operations. Enersense only deals with reputable and reliable partners. The backgrounds and business operations of subcontractors and other partners are reviewed before starting cooperation. Failure in executing and monitoring the legality and sustainability requirements for subcontractors and suppliers of materials, as well as in addressing shortcomings, could result in additional contractual liabilities or even fines for the company. Hazard risks Enersense’s hazard and continuity risks are mainly related to people, property and IT systems. Although the company has protected its operations and property by means of insurance, the materialisation of hazard risks may result in damage to people and property or business interruption. In addition, the reliability and functioning of IT systems are essential for the continuity of Enersense’s operations. Prolonged interruptions in key systems could limit Enersense’s opportunities to operate profitably and efficiently. Cyberthreats can also pose threats to Enersense’s data resources. Disputes The Group companies have ongoing legal disputes, some of which are in progress in general or administrative courts or in arbitration in Finland and abroad. The disputes are typically related to claims against Enersense concerning alleged defective performance, delays or damage incurred by customers in project operations in particular, or to claims made by Enersense against its suppliers or customers. The end results of claims, disputes and legal processes are difficult to predict. The company has assessed the potential impacts of the disputes, and has recorded provisions based on these assessments.
