Strategic risks
102-15
Robust risk management is a sine qua non for PhosAgro to achieve its strategic goals and sustainable development. We continuously develop and improve our risk management framework, which enables us to identify external and internal risks in a timely manner and develop effective mitigants.
Key risks associated with PhosAgro’s activities
| Risk | Description | Risk mitigants | Key |
|---|---|---|---|
| Strategic planning | Risk associated with the adoption of an incorrect strategic decision and ensuing management decisions, resulting from an erroneous assessment of internal and external factors that have an impact on the Company’s prospects for development and its ability to achieve strategic objectives. | The Company actively monitors both internal and external factors that could impact the strategy. PhosAgro also takes a systematic approach to assessing the potential costs and benefits of new strategic projects to facilitate and improve the decision-making process. | Deviations from strategic targets. No material risk events occurred. |
| Failure to deliver on sustainable development goals | Risk factors for the Company’s sustainable development include failure to set the Sustainable Development Goals (SDGs) or update them in a timely manner, as well as the lack of resources and processes necessary to achieve the SDGs. | In 2020, the Company made great progress in mitigating sustainability risks. The Sustainable Development Committee helped set and prioritise the SDGs and strategic ESG targets covering environmental, social, and corporate governance matters. To achieve the same, PhosAgro developed action plans, including the low-carbon transition plan, the Climate Strategy, the Water Strategy, and the Energy Efficiency Programme. For more information on the Company’s activities and indicators in this area, see Case study navigator on UN SDGs section | Deviations from SDG targets. No material risk events occurred. |
| Social | Risk of an adverse social environment in the regions of operation. | With its commitment to the principles of partnership and cooperation between private business and the government, the Company runs a number of social programmes on a voluntary basis. Social projects are designed, among other things, to support local authorities in promoting sports and culture, and enhancing the public utilities and opportunities for growth in the cities where the Company operates. Sustainable development in the regions of operation is one of the key goals the Company pursues in its community activities. In particular, PhosAgro provided substantial support to public health authorities in the cities of its operation with a view to combating the spread of a novel coronavirus (COVID-19) in 2020. For more information on the Company’s activities in this area see the Contributing to Local Communities section | Deviations from ESG targets (social dimension). No material risk events occurred. |
| HR | Developments and decisions related to the hiring, development and retention of employees. | PhosAgro runs independent and joint programmes seeking to train and attract young talents, including those from other regions, develop employee skills and enhance motivation as a way to improve retention and productivity. Given the rising number of employees working from home in 2020, the Company is introducing an online personnel appraisal system together with qualification criteria. For more information on the Company’s activities in this area, see the People Development section | Personnel turnover and skill mismatch. No material risk events occurred. |
| Production | Technical/industrial disruptors of production processes, unscheduled equipment downtime. | PhosAgro seeks to ensure uninterrupted operation of machinery and reduce unscheduled equipment downtime. To that end, the Company invests in the construction and upgrade of equipment and carries out preventative maintenance and major overhauls by relying on backup equipment and a reserve pool of components, accessories and spare parts. The Company’s insurance programme covers the risk of production disruptions. | Unscheduled equipment downtime. No material risk events occurred. |
| Health and safety | Risk associated with injuries, occupational illnesses, accidents and incidents at hazardous production facilities, and non-compliance with statutory requirements in the realm of health and safety. | PhosAgro enforces health and safety in workplaces in line with applicable laws and best global practices. To that end, the Company trains staff in health and safety and regularly checks their knowledge, promotes safety culture, and makes sure that all contractors adhere to the health and safety standards. In addition, safety audits and inspections ensure compliance with applicable regulations and OHSAS 18001 requirements. Tasks and measures to reduce the corresponding risks in various Company’s activities are defined in its Health and Safety Strategy. Given the rising number of employees working from home in 2020, the Company arranged for online training in internal regulations on health and fire safety. For more information on the Company’s indicators in this area, see the Health and Safety Review section | Deviations in terms of workplace injuries and incidents 2020 saw some risks materialise in terms of workplace injuries. The Company carefully investigated each accident, with remedial action plans developed to prevent their recurrence. |
| Environmental | Risk of potential environmental damage resulting from the Company’s operations. | The Company has put in place the Environmental Policy, the Water Strategy for 2020–2025, and the Code of Conduct for Counterparties setting out key environmental requirements for suppliers and contractors. PhosAgro conducts regular analysis and assessment of its impact on the environment. The environmental impact is mitigated through the upgrade of treatment and warehousing facilities and the implementation of energy efficiency programmes. The Company partners with the UNESCO and the International Union of Pure and Applied Chemistry (IUPAC) to provide research grants as part of the Green Chemistry for Life project seeking to protect the environment and human health through energy efficient processes and eco-efficient technologies based on innovative solutions. PhosAgro’s investment projects harness the best available techniques to reduce unit feedstock and energy costs while also cutting unit emissions of regulated substances. The Company discloses its environmental impact mitigation goals and performance in line with applicable laws and as part of the Carbon Disclosure Project. In 2020, the Company’s CDP rating was raised from C to B-, which is one of the best scores in Russia. For more information on the Company’s activities in this area, see the Sustainability Report: Environmental Review section | Deviations from environmental impact targets. No material risk events occurred. |
| Project | Risk associated with delays and budget overruns in construction and upgrade projects, along with failure to deliver project efficiency targets. | PhosAgro strives to adhere to approved project budgets and schedules and to take a unified implementation approach leveraging a variety of project management tools. All projects go through a multi-step review and approval process. For large-scale and strategically important projects, dedicated project management offices are set up. The Company regularly monitors progress against project budgets and deadlines. | Deviations from project efficiency targets. No material risk events occurred. |
| Business processes and systems | Inefficiency or disruption of the Company’s business processes, including risks related to counterparties and supply chain. | PhosAgro seeks to maximise efficiency of all its business processes and systems. Business process efficiency reviews are conducted on a regular basis to identify potential bottlenecks and develop and implement efficiency improvement initiatives. The Company strives to minimise the risk of disruptions in supplies of key raw materials to its production facilities. To that end, PhosAgro uses multi-stage tender procedures and enters into long-term contracts with its most reliable suppliers. The Company also monitors its IT infrastructure on an ongoing basis and carries out a number of initiatives to mitigate risks associated with business process disruptions caused by technological factors or cyberattacks. | Deviations from business process targets (by focus area). No material risk events occurred. |
| Tax | Potential claims lodged by tax authorities in response to the Company’s failure to correctly file tax returns or pay taxes in due time. | PhosAgro complies with tax laws of the countries where it operates. The Company tracks all changes (including the planned ones) in tax laws, analyses the law enforcement practices, and seeks clarifications from the government on taxes. In addition, law and accountancy firms are engaged to advise on the administration of applicable tax laws. | Tax claims. No material risk events occurred. |
| Information security | Losses incurred on the Company’s property and assets as a result of unauthorised access to its information systems or disclosure of confidential data. | PhosAgro implements a number of initiatives to prevent unauthorised access to its information systems and disclosure of confidential data. A wide variety of technical and software solutions, including those based on encryption, are used to control access to information resources and systems. Access rights are granted to specific user groups. There is a clear definition of what constitutes confidential information and how it should be handled. The Company undertakes regular audits to ensure strict compliance with its confidentiality policy. | Unauthorised disclosure of confidential data, unauthorised access to IT systems. No material risk events occurred. |
| Economic security | Losses incurred on the Company’s property and assets as a result of economic crimes committed by employees or third parties, including fraud and theft. | The Company takes steps to prevent potential damage to its property and assets as a result of economic law infringements, including by introducing access authorisations to the Company’s administrative and production facilities, clearly differentiating between responsibilities as part of contract or transaction execution, vetting counterparties before signing a contract, and putting in place a dedicated hotline. Moreover, additional checks are undertaken by a variety of the Company’s functions. | Theft and fraud incidents. No material risk events occurred. |
| Regulatory | Untimely receipt/extension of licences; legislative changes that might bring about higher cost of doing business, restrictive policies by regulators, weaker equity story of the Company and/or transformation of the competitive landscape. | PhosAgro is in full compliance with applicable laws. To make sure it gets timely updates on potential legislative changes, the Company closely tracks initiatives of legislators, the government and regulators, and takes part in discussing such initiatives and drafting relevant recommendations in partnership with professional associations. The Company prepares and submits documents in due time to receive or extend licences required for its business. | Deviations related to regulatory compliance. No material risk events occurred. |
| Corruption | Losses resulting from non-compliance or inadequate compliance with applicable anti-corruption laws by the Company or its employees (penalties levied against the Company by government authorities and other damages). | PhosAgro makes sure its facilities and partners fully comply with applicable anti-corruption laws. To that end, it provides training in combating corruption and administrating the anti-corruption law, and promotes zero tolerance towards corruption among the Company’s employees and partners. Among other things, the Company has approved the Anti-Fraud and Anti-Corruption Policy, the Code of Ethics, and the Regulations on Conflict of Interest. The Company’s counterparties are obliged to declare their compliance with anti-corruption laws. The Company is a member of the Anti-Corruption Charter of Russian Business. | Corrupt practices, conflicts of interest. No material risk events occurred. |
| Reputational risk | Damage caused to the Company’s business reputation as a result of unauthorised disclosure of information about the Company’s operations, financial results, senior management, etc. in the mass media or employees’ neglect of business ethics. | In its operations, PhosAgro demonstrates commitment to transparency by disclosing all relevant material facts and circumstances. The Company has adopted an information policy and a media engagement policy. Information about the Company is available on its website and in the mass media. PhosAgro provides comments in response to media enquiries and regularly monitors coverage in both Russian and international media. To protect its business reputation, the Company has approved the Code of Ethics setting out unified rules for PhosAgro’s employees based on the principles of integrity, good judgement, fair play and partnership and designed to support the Company’s success. | Stakeholder confidence. No material risk events occurred. |
| Credit risk | Financial losses caused by the failure of buyers, commercial contractors and other financial counterparties to fulfil their financial obligations to the Company in full and on time. | PhosAgro has approved policies on managing credit risks to institutionalise a number of credit risk mitigation techniques, including deliveries against full or partial prepayments with full or partial insurance of credit risks, use of letters of credit, and factoring (securitisation) of accounts receivable. Providing advance payments to suppliers and contractors is only considered after the counterparties have proved their reliability or after they have offered adequate bank guarantees for advance payments that exceed approved internal limits. The Company partners with banks, financial organisations and insurance companies that boast a high level of financial stability and meet the criteria set out in the Company’s treasury policy. PhosAgro monitors all covenants under the existing loan agreements on an ongoing basis. For more information on the Company’s activities and indicators in this area, see the Financial Risk Management. Credit Risk section of the Notes to the consolidated financial statements. For more information on the Company’s activities and indicators in this area, see the Financial Risk Management. Credit Risk section of the Notes to the consolidated financial statements | Overdue accounts receivable, provision for bad debt. No material risk events occurred. |
| Currency risk | Financial losses arising from unfavourable changes in FX rates against the Company’s base currency. | In the context of oil price volatility and fluctuations of the rouble exchange rate against major international currencies, the Company seeks to align the currency breakdown of its debt financing with the FX structure of its sales. As of now, most of PhosAgro’s debt is denominated in US dollars as a natural hedge against predominantly USD-denominated sales. The Company carefully tracks analyst forecasts and factors that may influence the rouble exchange rate against major currencies. If need be, PhosAgro can hedge its FX positions either fully or partially. For more information on the Company’s activities and indicators in this area, see the Financial Risk Management. Currency Risk section of the Notes to the consolidated financial statements. For more information on the Company’s activities and indicators in this area, see the Financial Risk Management. Currency Risk section of the Notes to the consolidated financial statements | Changes in FX rates. No material risk events occurred. |
| Commodity risk | Losses associated with unfavourable changes in the market prices for mineral fertilizers and other products or a hike in prices for key feedstock and equipment sourced by the Company. | In the context of heightened price volatility in the core product markets, PhosAgro takes consistent steps to optimise its sales structure in terms of the fertilizer grade offering and regional sales focus as a way to maximise the Company’s margins. PhosAgro also continues to increase the share of sales to end consumers, improve production efficiency and offer its customers add-on services such as packaging, blending and storage. PhosAgro has offices in Buenos Aires (Argentina), Belgrade (Serbia), Hamburg (Germany), Bayonne (France), Zug (Switzerland), Limassol (Cyprus), Vilnius (Lithuania), Warsaw (Poland), São Paulo (Brazil) and Singapore. With a foothold firmly established in the priority export markets, the Company can respond more quickly to changes in the market demand and customer needs. To reduce its feedstock and equipment expenses, PhosAgro invites multiple suppliers to take part in tenders, enters into long-term supply contracts and develops lasting relationships with its suppliers. | Changes in product and feedstock prices. No material risk events occurred. |
| Climate risk | Risks associated with changes in natural processes or phenomena amid climate change (physical factors) or with political, economic, financial or other decisions made by governments, multilateral organisations, financial institutions, or producer or consumer associations or other NGOs to curb climate change by reducing GHG emissions through carbon border adjustment or restrictions on the use of fossil fuels or non-renewable energy (transitional factors). | Processes to identify and assess climate change risks are being integrated throughout the value chain – from design, procurement and apatite-nepheline ore mining to finished product delivery. The climate risk management framework is also an integral part of the Company’s risk management and internal control framework. In December 2020, the Board of Directors approved PhosAgro’s Climate Strategy, the key elements of which are an analysis of climate risks and opportunities, a scenario analysis, the setting of science-based targets and a low-carbon transition plan. In accordance with the Climate Strategy, priority actions are being taken to develop and implement the following measures: direct (Scope 1) emission reduction programmes; an internal energy efficiency programme, and communication with energy suppliers to improve the climate profile of energy supplies (Scope 2); a supplier and customer engagement plan and supplier ESG ratings (Scope 3); and integration of climate risks into the risk management framework, climate KPIs, science-based climate targets (SBTi) and global projects. Thanks to these actions, the Company has improved its ratings for climate disclosure (CDP) and sustainable development (Systainalytics). | Deviations resulting from climate impacts (by focus area). In 2020, there were severe weather events, with effects including squalls and excessive precipitation. However, at this stage it is difficult to assess the extent to which this weather was caused by climate change. In any case, the Company did not incur any significant losses associated with these natural phenomena. |
| Infectious disease risk | Risks associated with the outbreak and spread of infectious diseases that pose a threat to business continuity. | In early 2020, an infectious disease caused by a newly discovered coronavirus | Confirmed cases, Progress in epidemiological response. Several countries declared a state of emergency and almost all have imposed lockdowns, restricting business activity. Russia is experiencing a mild COVID-19 scenario thanks to its prompt response, including restricted international travel, self-isolation requirements, adequate medical care, vaccination, etc. |
| Sanctions risk | Any foreign sanctions imposed on the Group’s companies. | Economic globalisation has increased the exposure of the Russian economy and the Company’s foreign operations to potential sanctions by individual countries or their groups. The Company’s flexible production and sales model would help minimise any negative impact should such a risk event occur. | Losses associated with sanctions. No material risk events occurred. |
| Interest rate risk | The Company borrows money to finance its investment programme and working capital requirements, including via floating interest rate loans. Rising floating rates might lead to higher debt service costs and adversely impact the bottom line. | Should the Company accumulate significant floating interest rate borrowings, it would hedge this risk using interest rate derivatives. PhosAgro closely monitors and manages its fixed-to-floating debt ratio to mitigate interest rate risk. For more information on the Company’s activities and indicators in this area, see the Financial Risk Management. Interest rate risk section of the Notes to the consolidated financial statements. For more information on the Company’s activities and indicators in this area, see the Financial Risk Management. Credit Risk section of the Notes to the consolidated financial statements | Losses associated with changes in interest rates. No material risk events occurred. |