Risk management
We are committed to effective risk management in pursuit of our strategic and business objectives, with the ultimate aim of growing shareholder value sustainably. Risk management is an integral part of our value-based strategy, our governance and day-to-day operations. Not only do we aim to deal with the uncertainty in the business environment by minimising the downside, we also seek to capitalise on the upside potential to achieve our strategic objectives.
Our risk management process
In 2017 we introduced the Sasol Enterprise Risk Management (ERM) Framework which sets the foundation for our businesses to effectively manage their risks in a standardised and systematic manner. We also introduced our new risk management process, which is aligned with Sasol's operations excellence model (Plan, Do, Review, Improve) and aimed at efficiently managing and governing risk while enhancing the monitoring of risk. We employ this process in executing our strategy and business objectives as well as the day-to-day operational activities in order to meet stakeholder expectations.
In 2018, we continued with our efforts to ensure stronger integration between strategy and risk within a dynamic strategic context, and a changing business footprint. We continue to focus our efforts on enhancing our ability to effectively manage significant risk areas for the Group, including reputation risk, financial risk, improved investment decision making, environmental sustainability and day-to-day risks.
PLAN
Process:
Identify the risk. Understand the risk
Output:
Improvement of action plans
DO
Process:
Manage and monitor the risk
Output:
Effective management of the risk
REVIEW
Process:
Govern and assure
Output:
Assurance on effectiveness of risk management
IMPROVE
Process:
Analyse and determine improvement focus
Output:
Improvement of action plans
Risk tolerance and risk appetite
We understand and proactively manage risks within set risk appetite and risk tolerance levels, in order to optimise business returns. We define risk appetite as the amount and type of risk that we are willing to take in order to meet our strategic objectives. It is inextricably linked with expected returns. We define risk tolerance as the amount of uncertainty that we are prepared to accept and cope with. It identifies the maximum boundary, beyond which we are unwilling to operate.
Our financial risk appetite metrics:
- Return on invested capital
- Earnings growth
- Net debt-to-EBITDA
- Gearing
Review of risk appetite metrics considers the following:
- Changes in business conditions
- Changes to the economic environment
- Evolving group and strategic principles and portfolio changes
- Changing competitive conditions
Governance and oversight of risk management
Oversight and governance
- The Board is responsible for the strategic direction and control of the Company. Risk management is inextricably linked to our strategy and control is exercised by way of a governance framework, which includes principles of effective risk management. The Board retains overall accountability for the governance of risk and effective risk management.
- The Board reviews and assesses the integrity of the risk management processes, and in conjunction with the Audit Committee, ensures that these processes comply with the relevant governance requirements and standards.
Board and Board Committees
Business and strategic risk management
The Group Executive Committee (GEC) members are responsible and accountable for management of risks with delegated responsibility and ownership to their respective line managers, being the leaders of each Operating Model Entity (OME) and Group Functions.
Plants, assets and operations
Day-to-day risk management
Oversight of risk management at OME level is executed through the relevant executive committees. Risk management is integrated with combined assurance to enhance assurance over our significant risks
Risk management in action
Strategy and risk integration
The Board’s primary risk management focus is on risks that could materially impact the achievement of our value-based strategy which objective is to grow sustainable shareholder value.
The achievement of our goal is dependent on the effective delivery of certain key business imperatives, referred to as “aspects.” Within a dynamic strategic context, the identification and definition of these aspects provide the anchor for the risks that are reported to the Board.
In 2019, we will be finalising the implementation of an enhanced approach to manage risks at Board level. Furthermore, a combined assurance model (CAM) is being implemented to ensure pro-active monitoring and assurance of key responses/controls related to our top risks.
Reputation risk management
To build and sustain trust-based relationships with our stakeholders, an integrated reputation management and reporting framework has been developed to align reputational measures (reputation levers), reputation risk and stakeholder health reporting, as well as tracking and measuring reputation performance.
Financial risk management
In order to more effectively respond to changes in the macroeconomic environment, we are protecting our balance sheet and cash flows to limit potential downside impact on the business through execution of our hedging strategy and policy. Our hedging programme has been extended to include ethane, beyond crude oil price and exchange rates.
Improved investment decision-making
We are implementing a principle-based, milestone driven de-risking approach to investment development and implementation, ensuring risks, drivers and robustness of assumptions are better understood and more effectively managed.
Environmental sustainability including a focus on climate change
Sasol has identified environmental sustainability as one of our top risks of which climate change is a key driver. Associated risks are assessed and managed on an integrated basis, as many of the top risks have key touch points with the environmental sustainability risk.
Various scenarios linked directly to our Group strategy have been identified and unpacked to highlight the potential strategic and financial impacts. Furthermore, Sasol is taking proactive approach to improve our climate change disclosures including aligning to the recommendations by the Task Force for Climate-Related Financial Disclosure (TCFD) for its financial filings and other relevant disclosures.
Day-to-day management of risk
In order to ensure reliable and safe operations, we continue to focus on day-to-day management of operational risks, including risks related to Safety, Health and Environment. Our goal of achieving zero harm and sustainability remains a strategic imperative. We have identified four focus areas to address high severity incidents and fatalities: identification and field verification of critical controls and pre-task risk assessments; life-saving safety rules, understanding and influencing human behaviour and institutionalising learnings.
Sasol’s top risk profile – with mitigations
Our top risks include risks and opportunities that have a direct potential impact on financial risks which relate to revenue, earnings and capital. These financial risks are the main drivers of the approved risk appetite and tolerance metrics. Furthermore, we consider risks that can impact our achievement of longer-term strategic objectives, our near- to-medium-term business plans and reputation. We use a risk breakdown structure (RBS) which comprises six risk categories, financial, operational, market, people , legal and regulatory and geopolitical and safety affairs to categorise our risks.
| SASOL’S TOP RISKS | RBS CATEGORY | |
| 1 | Macroeconomic factors | Financial |
| 2 | Competitiveness | Market |
| 3 | Capital project performance | Operational |
| 4 | Non-compliance and governance | Legal and regulatory |
| 5 | Human capital | People |
| 6 | Safety, Health and Environmental | Operational |
| 7 | Environmental sustainability | Legal and regulatory |
| 8 | Unplanned production interruption | Operational |
| 9 | Delivery on strategy | Market |
| 10 | Stakeholder | Geopolitical and Public Affairs |
| 11 | Geopolitical and instability | Geopolitical and Public Affairs |
| 12 | Information security | Operational |
The Sasol top risk profile includes a “watch list” which contains risk areas not specifically covered in the Group top risks and is constantly evolving. Jointly the top risks and “watch list” represent a comprehensive coverage of risk themes that could potentially impact Sasol.
The watch list themes include:
- Asset inflation
- Major public health crisis and global pandemics
- Global security incidents
- Disruptive/new technologies
- Energy mix
- Use of social media as it relates to Sasol’s stakeholder management and reputation
- New and changing laws and regulations with significant potential impact on Sasol
- Country risks
Macroeconomic factors risk
Sasol’s ability to sustainably grow and deliver shareholder value depends on key macroeconomic factors that drive the near- to-medium- term business plans and long-term strategy. Changes in year-on-year profitability and earnings growth impacts Sasol’s cash flow, solvency and liquidity.
Mitigation
Financial market risks, whether passively borne or actively managed with hedges, are evaluated, monitored and managed continuously in order to ensure that the exposures which we maintain are most appropriate in the context of our cash flow protection and risk management assessments.
Our hedging strategy prudently manages our financial market risks in order to reduce the financial impact due to adverse movements in market rates or prices, contributing to us meeting our strategic financial objectives, and remaining within our approved risk appetite and risk tolerance levels.
In addition to the hedging programme, our South African operations can respond (to some degree) by optimising the allocation of chemical molecules in order to maximise the integrated margins across the value chains. Furthermore, we actively engage with rating agencies on our processes to mitigate financial market risks.
Competitiveness risks
Sasol’s competitiveness is based on its ability to continue producing and selling products that meet the quality standards of its target markets, at margins and service levels that provide adequate returns. Increasing competition in relation to products originating from countries with low production costs may adversely affect Sasol’s business, operating results, cash flows and financial condition.
Mitigation
We are implementing a Continuous Improvement initiative focusing on customers, digitalisation and asset performance to sustainably ensure a more effective, efficient and competitive response to changing global marketplace dynamics. We have a diversified asset base to reduce risk exposure and to secure access to distribution channels globally. We continuously assess the efficiency and effectiveness of our operations against best in class global benchmarks. We are optimizing our sales and marketing strategies, including the development of new outlets and plans to grow new differentiated applications and to enhance logistics. We are driving customer service excellence to improve customers’ experience and focusing our attention to grow a differentiated product offering.
Delivery on strategy
Sasol is exposed to unfavourable macroeconomic conditions influencing the availability of capital, as well as, the capability to access required feedstock or markets that may impact the company’s ability to timeously execute its growth initiatives in line with its strategy, and maintain an optimal portfolio.
Mitigation
We apply capital allocation principles to enhance business value and ensure optimal shareholder growth, while taking balance sheet and funding risks into consideration. We continuously review our asset base to ensure that we can increase our return on invested capital. We pro-actively allow for development funds to be available and focus on active portfolio management. We direct our attention on driving portfolio optimisation through securing feedstock positions and access to markets, aligned to our strategic objectives.
Capital project performance risk
Sasol’s success in growing and sustaining the business depends on successful deployment of capital, with a focus on capital spend on larger and more complex projects. Unexpected or unanticipated changes in the external environment or project delivery may result in escalating project cost and schedule delays.
Mitigation
Robust integrated project management teams manage our capital projects. Appropriate contracting strategies are developed for capital projects to assist in mitigating potential cost and schedule risks. Furthermore, we are strengthening our approach to investment development and implementation to ensure that risks, drivers and robustness of assumptions are better understood and more effectively managed.
Information security risks
Sasol is exposed to information security breaches or attempts to disrupt critical information technology (IT) and digital systems and services. IT and digital systems with related services include our financial, commercial, transacting and production systems. Cyber threats are becoming more pervasive, persistent and sophisticated and may adversely impact Sasol’s operations.
Mitigation
Our Information Security strategy and programme has been developed to address and manage information security risks, including cyber security risks. We run global information security awareness campaigns, training and continuously stay abreast of global Information Security technology developments and requirements. In addition, applicable privacy laws require us to store, manage and safeguard personal data. We have adopted a global privacy policy to set a group-wide standard regarding the protection and appropriate use of personal data.
Unplanned production interruption risk
Sasol’s value chains may be impacted by unplanned operational and reliability interruptions, including non-availability of essential utilities and services, feedstock and supply chain disruptions, security breaches, natural disasters and extreme weather.
Mitigation
We continue implementing and embedding our Operations’ Standard Framework, Asset Management Strategies and Standard Operating Procedures. We monitor infrastructure reliability of non-Sasol electricity and water infrastructure and have focused engagements with key stakeholders responsible for utility supply. We continue to focus on achieving energy efficiency targets and the implementation of site water use efficiency measures. We purchase insurance as a cost effective means of transferring risk, to mitigate the impact of catastrophic risks. We have established a Group Crisis Management Centre and have Emergency Response Plans in place at entity level to respond to emergency situations.
Safety, Health and Environmental risks
Safety performance and improvement is a strategic imperative for sustainable and competitive operations. We remain committed to achieving zero harm to people and minimising our impact on the environment, being a responsible and accountable corporate citizen.
Mitigation
We have a zero harm philosophy at Sasol. The One Sasol SHE Excellence approach, SHE Risk Management Procedure and Incident Management Procedure standardises initiatives to improve safety performance. We continue to focus on process safety management, interaction with various global networks, regular internal and external audits and the implementation of process safety roadmaps. We have identified and are implementing focus areas to address high severity incidents and fatalities.
Human capital risk
Sasol’s ability to ensure an attractive employee value proposition, maintain a stable labour environment, and high performance culture are key to sustainable delivery on existing operations and achieving growth aspirations.
Mitigation
We have talent management strategies and plans in place to better define and understand our talent supply and demand requirements. We have succession plans in place to increase employee readiness for future positions. We implement targeted programs to increase diversity and gender representation, accelerate development of high potential employees, and enable leaders to leverage diversity and inclusion as a lever for embedding a high-performance culture. Our annual negotiations strive for multi-year agreements, with a clear and well defined collective bargaining framework. Business Continuity and contingency plans are in place, in the event of any labour unrest event.
Non-compliance and governance risk
Sasol is governed in accordance with good corporate governance practices, including legal compliance management, compliance or adherence to appropriate and relevant industry rules, codes and standards, and internal control systems.
Mitigation
We have multi-disciplinary compliance programmes and identify changes in the regulatory landscape, coupled with systems and processes to ensure compliance with applicable laws, other legal requirements and good governance practices. We set the tone at the top through appropriate ethical codes of conduct, policies and procedures and annual compliance training and certification.
Environmental sustainability risk
Sasol is impacted by climate change and environmental challenges and considers developments in the external environment. The carbon intensive operations in South Africa, coupled with increased regulatory, Environmental, Social and Governance (ESG) and investor pressure have heightened the risk exposure relating to climate change.
Mitigation
We regard our response to environmental challenges not simply as a compliance obligation but rather as a business and social imperative. We endeavour to operate in compliance with all current licences and continuously engage with government departments on policy issues and challenges. We implemented and are committed to environmental roadmaps and offsets programs. There is pro-active and appropriate disclosure of challenges faced and we continue to undertake initiatives to address ESG and investor concerns.
Stakeholder risk
Sasol is reliant on being viewed as a credible stakeholder partner. Not delivering on stakeholder commitments, transformation and localisation objectives together with increasing ESG awareness and concerns, may impact Sasol’s reputation.
Mitigation
We engage regularly with key stakeholders including Joint CEO engagements, and engagements with government and regulators, media, NGOs and communities as captured in the systematic positioning plan. We participate in industry associations engagements with regulators. Through the implementation of our B-BBEE strategy, we strive to become a level 4 contributor by 2020. We understand the local content requirements in the regions in which we operate, and have plans in place to achieve local content requirements.
Geopolitical and instability risk
Sasol is a multi-national company operating in countries and regions that are experiencing significant geopolitical and socioeconomic conditions and developments that may potentially impact Sasol’s operations.
Mitigation
We continuously monitor socio-economic developments and geopolitical events in countries where we operate and response strategies have been implemented where required. We have identified a set of top priority, trust builder, strategic and watch-list issues to effectively deal with social instabilities and policy uncertainties in the countries where we operate. Business continuity plans and a Group crisis management capability are developed and implemented.