Current risk environment
The risks of new virus variants and varying success with vaccination programs in the world’s regions are continuing to jeopardize stable economic growth. In 2021, the global economy recovered from the previous year’s recession, despite the ongoing COVID-19 pandemic. The International Monetary Fund estimates that growth amounted to 5.9 percent in 2021 (-3.1 % in 2020). For 2022, the IMF forecasts growth of 4.4 percent.
Significant inflation, especially in relation to commodities and energy, is likely to continue to have a major bearing on the global risk environment in 2022. Risks such as supply chain problems, cyber attacks and the consequences of climate change are becoming increasingly significant.
In addition, it has become increasingly important to monitor geopolitical risks. In particular, the war in Ukraine will have a negative impact on the global economy. The Lenzing Group’s business is not directly affected by the military conflicts in Ukraine. Indirectly, however, as is the case for industry as a whole, the risk of further increases in energy and raw material costs in particular, as well as negative effects on the capital markets, is also increasing for Lenzing.
A detailed analysis of the trends in the global fiber market during the reporting year and the related risks for the Lenzing Group is provided in the section “General Market Environment”.
Lenzing risk outlook for 2022
Increasingly global risks will affect the Lenzing Group’s business to varying degrees in the future.
In 2021, the global textile and apparel industry recorded a broad-based recovery from the previous year’s pandemic-related demand shock, which also led to a recovery in demand and subsequently to rising prices on the world fiber market. Risks to operating results arise particularly from price fluctuations for key raw materials and energy, which lead to high volatility, especially also for standard viscose. Growing demand for sustainable solutions in the world is adding to the pressure on the standard viscose segment.
The stable trend and continued price premium for wood-based specialty fibers compared to standard fibers such as cotton and polyester continued to have a positive effect on the Lenzing Group’s business performance in 2021. As a consequence, the company continues to regard itself as very well positioned with its sCore TEN strategy and its focus on growth deriving from specialty fibers.
Lenzing aims for further organic growth in this area in order to be even more resilient to volatile markets in the future. The Group’s own fiber pulp supplies are secured long-term thanks to continuous capacity expansions and sufficient market supply. Investment activities will focus on the implementation in Brazil of the world’s largest pulp mill of its kind, including securing a plantation for the supply of biomass. The commissioning of the new plant with a nominal capacity of 500,000 tonnes per year is scheduled for the first half of 2022.
Significant increases in energy, raw material and logistics costs were recorded throughout the reporting year. Price momentum is not expected to diminish in the short term. As far as currencies are concerned, the US dollar fluctuated against the euro within a 10 percent range, while the Chinese yuan fluctuated against the euro in a 9 percent range. A depreciation of the two currencies would have a negative impact on Lenzing’s open currency volumes. Liquidity risk is expected to be low in 2022 thanks to the stable financial structure.
No significant loss events arising from operational, environmental or product liability risks occurred in the reporting year.
For the two key projects in Brazil and Thailand, possible cost overruns or long-term delays that could have a negative effect on the Lenzing Group’s financial results are not anticipated from today’s perspective. Despite the more challenging environment created by COVID-19, the implementation of these projects ran largely according to plan. In Thailand, the lyocell plant started production in the first quarter of 2022.
As at other companies, non-operational risks are playing an increasingly important role in the Lenzing Group. In recent years, especially cyber risks, compliance risks (as well as reputational damage that is often associated with compliance risks) and recruitment risks have been increasingly ranked higher. Lenzing continuously counters these risks with broadly rolled-out standards and a global organizational structure.
The main purpose of risk management within the Lenzing Group is to secure and strengthen the company by correctly and transparently assessing financial, operational and strategic risks, including those relating to the ESG area. The Lenzing Group’s Managing Board, together with the heads of the reporting departments, conducts extensive coordinating and controlling operations as part of a comprehensive integrated internal control system that covers all locations. The timely identification, evaluation and response to strategic and operational risks form essential components of these management activities and make a significant contribution to the company’s value. This approach is based on a standardized, Group-wide monthly reporting system and the ongoing monitoring of strategic and operational plans.
Lenzing has implemented a corporate risk management system for the central coordination and monitoring of risk management processes throughout the Group. This system identifies and analyzes the main risks, together with input from the operating units, and communicates the results to the Managing Board and senior managers. Risk management also includes the proactive analysis of potential events and near-misses. Further tasks include actively controlling risks and evaluating appropriate measures with the respective business areas. Since 2020, both long-term risks and opportunities related to climate change have been identified and assessed within the Lenzing Group. Mitigation measures corresponding to such risks are taken into consideration in the risk management process, including the requirements of the TCFD (Task Force on Climate-related Financial Disclosures) in relation to climate-related risks.
Risk management strategy
Lenzing pursues a multi-step approach to risk management:
Risk analysis (based on the COSO®1 Framework)
The Central Risk Management Department carries out semiannual risk assessments with a five-year time horizon at all production locations and functional units. Long-term risks and opportunities are also analyzed in connection with ESG issues. The main risks, as well as an increasing number of opportunities, are recorded and quantitatively assessed in accordance with international COSO® standards. Those risks are presented outside the consolidated statement of financial position and the consolidated income statement. The financial impact of a potential loss on Group EBITDA or on cash and cash equivalents is taken into consideration. The risks are simulated against EBITDA planning, and the range of potential deviations from the respective budget is determined. Lenzing uses a simulation software which also calculates other KPIs such as value at risk, risk-adjusted ROCE and a sensitivity analysis. Risks that cannot be measured in monetary terms are recorded qualitatively.
The objective is to minimize, avoid or, in certain cases, intentionally accept risks based on appropriate measures. The actions taken depend on the expected impact of the specific risk on the Group.
Individual risks are assigned on the basis of the existing organization matrix. Each risk is assigned to a member of the Managing Board as “risk owner” and to a risk officer.
The effectiveness of the risk management system used by the Lenzing Group was evaluated by KPMG Austria GmbH pursuant to Rule 83 of the Austrian Corporate Governance Code (ACGC) as part of a special, limited assurance audit in the reporting year.
The main risks are presented in detail in a report and discussed with the Managing Board and the Audit Committee. The risk report is also submitted to the Supervisory Board.
Market environment risks
As an international corporation, the Lenzing Group is exposed to a variety of risks. The trend in prices and volumes for textile fibers and, to a lesser extent, also for nonwoven fibers, is cyclical as it is dependent on global and regional economic conditions. Lenzing fibers compete with cotton and synthetic fibers in many submarkets. Consequently, price trends for these products also have an influence on Lenzing fibers’ revenue and sales volumes trends.
The Lenzing Group counteracts this risk by steadily increasing the share of specialty fibers in its global product portfolio and a consistent sustainability and innovation strategy. In addition to increasing the share of specialty fibers, which now accounts for around 72 percent of fiber revenue, the aim is to further expand the company’s role as a leader in terms of sustainability in the fiber sector. Lenzing fibers also offer a differentiating feature in the standard fiber sector with their high sustainability and quality standards combined with customer-oriented and solutions-oriented technical support.
The Lenzing Group relies on a strong international market presence, especially in Asia, combined with a first-class regional support network for customers, as well as a high level of customer-oriented product diversification.
A comparatively small number of major customers are responsible for approximately one half of the Lenzing Group’s fiber revenue. A decrease in sales to these major customers, or the loss of one or more major customers without an immediate replacement, poses a certain risk. The company counteracts such risk with its global presence and the continuous broadening of its client base and sales segments. Possible default on trade receivables is covered by clear receivables management and global credit insurance.
Competitive and innovation risks
The Lenzing Group is exposed to the risk of losing its position on the fiber market due to greater competition or new technologies developed by competitors. In particular, the Lenzing Group could relinquish its market position if it were no longer able to offer its products at competitive prices, if its products were to fail to comply with customer specifications and quality standards, or if its customer service were to fail to meet customer expectations. Lenzing counteracts this risk with research and development activities that exceed the average for the sector, and by a high level of product innovation and steady cost optimization. The Lenzing Group – similar to other producers – is exposed to the risk that acceptable or superior alternative products may become available and at more favorable prices than wood-based cellulosic fibers.
Laws and regulations
The Lenzing Group is confronted with different legal systems and regulations in its global markets. A change in laws or other regulations (e.g. import duties, product classifications, environmental requirements etc.), as well as a more stringent interpretation of existing regulations and laws, could lead to significant additional costs or competitive disadvantages. The Lenzing Group maintains certified management systems for quality management according to ISO 9001, for environmental management according to ISO 14001, and for safety management according to ISO 45001. Legal compliance in connection with these management systems is regularly audited both internally and externally.
With its own legal and compliance department, the Lenzing Group has a corporate division that performs corresponding consulting services and risk assessments.
In response to the far-reaching implications of global warming for society and ecosystems, governments and further stakeholders are likely to introduce more stringent laws and regulations. For example, in addition to reducing carbon credits issued in the EU, new taxes on carbon dioxide emissions could be introduced. Other regions and countries are currently also planning to implement similar steps. The implementation of regionally differing measures could have a negative impact on the Lenzing Group’s civic performance and success. The Lenzing Group is implementing a number of measures to reduce climate-related transition risks, and to further enhance resilience in this area.
Intellectual property risks
A risk exists that Lenzing’s intellectual property may be infringed or incompletely protected. The Lenzing Group counters such risks by means of a dedicated intellectual property protection department.
Climate change and marine pollution
Increasing awareness of problems caused by climate change, such as rising sea levels, the frequency and severity of natural disasters, and a growing risk from pollution of the world’s oceans by plastic waste and microplastics, are creating major risks for the entire fiber industry. By producing biodegradable fibers, Lenzing regards this development as an opportunity for its business model.
The Lenzing Group has recognized the far-reaching effects of climate change on society and ecosystems and offers a sustainable alternative with its innovative and biodegradable products. Lenzing is constantly working to set clear sustainability targets and is continuously seeking ways to enhance its energy efficiency as well as opportunities to utilize renewable energy sources or those with lower carbon dioxide emissions. As early as 2020, Lenzing became the first fiber manufacturer to commit to carbon neutrality by 2050.
ESG (Environment, Social and Governance)
As part of a materiality analysis conducted in 2021, Lenzing conducted a multi-stage, holistic survey of the main issues relating to its sustainably oriented business model. From this analysis, the most important risks and opportunities were determined for each ESG topic area. The topics are integrated into the Enterprise Risk Management System and are successively reflected in Lenzing’s long-term strategic business planning.
In the environmental responsibility area (Environment), the main focus topics in the risk matrix comprise climate-related issues in connection with global warming (carbon dioxide reduction) as well as sustainable raw material procurement (wood, chemicals) and the growing water shortage in certain regions. Increasing regulation, particularly in relation to the taxation of greenhouse gases and the pricing of carbon, represents a significant risk for Lenzing. Regulations concerning greenhouse gas emissions have already been introduced in countries where Lenzing operates carbon-intensive processes. Lenzing is consistently working on the implementation of energy efficiency measures, as well as the reduction of carbon dioxide emissions in order to reduce the potential burden of eco-taxes.
For Lenzing, wood is the most important natural resource for the production of its biodegradable cellulosic fibers. Despite sustainable sourcing policies and backward-integrated production, a risk exists that wood prices will rise due to climate change, increasing global demand for biomass, and alternative land use. In this context, Lenzing is expanding its pulp capacities in Brazil (see Lenzing Risk Outlook).
The global textile industry, especially the fashion industry in which Lenzing’s products are frequently deployed, is regarded in a critical light due to its sometimes resource-intensive consumption of raw materials and its production processes. Lenzing identifies significant business opportunities through access to new and emerging markets with innovative new products and technologies. Innovation and sustainability lie at the heart of Lenzing’s sCore TEN corporate strategy.
The production of pulp and fibers is associated with high levels of water consumption and emissions. Lenzing operates a careful global water management system that ensures compliance with both local laws and global standards. Lenzing is counteracting the increasing scarcity of water by continuously improving resource utilization and by optimizing the selection of sites for the expansion of production capacities.
In the area of social responsibility (Social), the main risks were identified in the area of cyber attacks (see IT risks). With regard to the corporate governance area (Governance), the risk of inadequate compliance with corporate governance and resultant risks is considered material. Lenzing is continuously tightening its internal rules and expanding its compliance organization accordingly.
Procurement risk (including pulp supplies)
The Lenzing Group purchases large volumes of raw materials (wood, pulp, chemicals) and energy for the manufacture of its cellulosic fibers. Fiber production and related margins are exposed to risks arising from the availability and prices of these raw materials, which can fluctuate to the Lenzing Group’s disadvantage and may increase as a consequence of climate change. Such risks are countered through the careful selection of suppliers based on price, reliability and quality criteria, EcoVadis-based sustainability assessments, as well as the establishment of long-standing, stable supplier-customer partnerships, in some cases with multi-year or long-term supply agreements. In addition, all suppliers must comply with Lenzing’s Global Supplier Code of Conduct. Nevertheless, a risk exists of violations of this code, which may have a negative impact on the Lenzing Group and its stakeholders along the value chain. Supply chain risks may also result from disruptions caused by natural disasters.
Lenzing has also entered into long-term contractual relationships with several raw material suppliers and service partners. These agreements require Lenzing to purchase specified quantities of raw materials on standardized terms and conditions, which may also include price adjustment clauses. Lenzing may consequently not be able to adjust prices, purchase volumes or other contract conditions over the short term in order to respond to market changes.
The sCore TEN strategy includes an increased focus on backwards integration through the expansion of the Group’s own cellulose production.
Operating risks, environmental risks and risks relating to climate change
The production of wood-based cellulosic fibers involves complex chemical and physical processes that cause certain environmental risks. These risks are very well controlled thanks to proactive and sustainable environmental management, closed production cycles, ongoing emissions monitoring and state-of-the-art production techniques. Lenzing continuously works on increasing safety and environmental standards through voluntary references such as the EU Ecolabel. As the Lenzing Group has operated production facilities at several locations for several decades, risks arising from environmental damage in earlier periods cannot be completely excluded.
Although the Lenzing Group has set very high technological and safety standards for the construction, operation and maintenance of its production sites, the risk of breakdowns, disruptions and accidents cannot be completely excluded. These types of disruptions can also be caused by external factors over which Lenzing has no control. It is impossible to provide direct protection against certain natural hazards, such as cyclones, earthquakes and floods. Moreover, a risk exists that personal injury, material and environmental damage, both within and outside the production facilities, could result in substantial claims for damages and even criminal liability.
The Lenzing Group’s production activities are concentrated at a small number of locations. Any disruption at one of these facilities has a negative impact on the company’s business operations.
Product liability risk
The Lenzing Group markets and sells its products and services to customers worldwide. These business activities can lead to damage to customers, or along the value chain, through the delivery of a defective product by Lenzing or one of its subsidiaries. Moreover, product safety can be jeopardized by pollution, which may cause problems in the value chain, such as potential health implications for employees and customers. Lenzing is also subject to local laws in the countries where its products are delivered. Especially in the USA, the potential implications are considered to be severe. Such risk is countered by a special department that focuses exclusively on customers’ problems in processing Lenzing products and on handling complaints. Appropriate precautions in the production process and regular quality inspections have been implemented. Third party damages caused by Lenzing are covered by a global liability insurance program.
For a detailed description of financial risks refer to notes 36 to 39 in the Notes to the Consolidated Financial Statements.
The Lenzing Group’s production sites are subject to local tax regulations in their respective countries and are required to pay corporation tax as well as other taxes. Changes in tax legislation or different interpretations of prevailing regulations could lead to subsequent tax liabilities.
Increasingly stringent international codes of conduct and legal regulations are creating additional demands on Lenzing in relation to compliance and monitoring. Inadequate controls in business processes or a lack of documentation can lead to the violation of applicable laws or regulations, and significantly jeopardize reputation and commercial success. Lenzing addresses this risk by, among other measures, continuously developing its Group-wide compliance organization, the corporate code of conduct that is valid throughout the Group, as well as directives addressing the areas of bribery and corruption, money laundering and antitrust practices. Further information on compliance is provided in the Corporate Governance Report.
Lenzing depends on highly developed information technology (IT) systems for its daily operations. IT systems are vulnerable to a range of problems, including software and hardware malfunctions, malicious hacking and cyberattacks, physical damage to key IT centers, and computer virus infections. Consequently, any major damage, disruption and/or circumvention of its existing IT systems may disrupt Lenzing’s business operations.
Personnel risks may arise through the turnover of key staff as well as the recruiting of new staff at all global sites. The Lenzing Group has established a Human Resources Department which operates internationally and coordinates personnel planning with the respective sites. It is responsible for the central management and monitoring of all personnel-related issues, including the organization of global management and training programs for potential executives.
At the production facilities, Lenzing Group employees as well as external contractors’ workers and employees are exposed to a risk of injury. Lenzing’s “Heartbeat for Health & Safety” program takes such risk into consideration and includes a strategic approach to risk reduction, precautionary measures and extensive training. For more information, please refer to the Lenzing Group Sustainability Report. In addition, risks related to compliance with legal requirements arise when engaging contractors, particularly in connection with the two major projects in Thailand and Brazil.
Risks relating to major projects
The Lenzing Group is continuously expanding its capacities in numerous projects. Examples include the new pulp mill in Brazil and the lyocell mill in Thailand, which is being ramped up at present. These types of major projects entail an inherent risk of cost and schedule overruns. Lenzing counters such risks with a standardized planning process, consistent project management, ongoing cost controls, as well as insurance solutions and risk transfer. In addition to ongoing risk management, Monte Carlo simulations are used for projects of this and similar size to model the sensitivity of the key financial indicators. Despite the currently difficult environment due to the COVD-19 pandemic, progress with these two projects is largely running to schedule to date.
Risks from an external perspective and for other stakeholders
As a globally operating company, the Lenzing Group is aware of its social responsibility. The risks described in the risk report refer primarily to the effect on the Lenzing Group’s assets and earnings. As one of the sustainability leaders in its sector, the Lenzing Group seeks a balance between the needs of society, the environment and the economy. The company assumes such responsibility, particularly with respect to potential effects of its operations on neighbors of the production sites and in relation to society as a whole. Active stakeholder work to mitigate risks (partnership for systemic change) and to create additional benefits for people and the environment is a clear goal of the Lenzing Group’s innovation and operating activities. The Lenzing Group was awarded platinum status in EcoVadis’s CSR rating in the reporting year. This evaluation covers the most important practices in the Corporate Social Responsibility (CSR) area. In cooperation with its partners, the Lenzing Group is working on understanding the risks for stakeholders and on finding solutions to mitigate such risks. This work is based on open communication and transparency as well as continuous improvement of technologies and sustainable practices.
1 Committee of Sponsoring Organizations of the Treadway Commission