# Strategic report

_Source: `DeepSeekOCR_Ardian_pruned_1k/basic-materials-specialty-chemicals/LSE_ELM.L_2021/LSE_ELM.L_2021.mmd` · pages 66-72_

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Strategic report
Risk management continued

## Risk culture

Every individual at Elementis has a responsibility to manage risk, irrespective of function, business or role. Risk awareness exists through decision making processes and is embedded in systems, policies, procedures, leadership and, behaviours and specific standards such as the Code of Conduct. All Company employees are responsible for complying with related Company policies and guidance, and share responsibility for ensuring that the Company conducts its business in a safe, lawful and ethical manner.

## Risk appetite and tolerance

Risk appetite at Elementis is understood as being the amount of risk that the Board is prepared to accept in return for reward or investment return. There is a degree of variability in determining risk appetite which may be based on strategic objectives as well as guidance from management or advisers based on appropriate understanding and analysis of the nature of the risk. The strategic appetite for risk is decided on a case-by-case basis at Board level, for example with respect to any corporate transaction or significant capital expenditure project, and delegated to the ELT to implement as appropriate. The maximum risk that can be taken before the Company experiences financial distress is also decided at Board level and mitigated, as far as possible, by internal controls, business continuity plans, insurance, financial instruments and contracts.

## Our risk review processes

Our risk management policy defines our approach to risk management. The Board maintains an annual forward planner to ensure that appropriate focus is given at scheduled meetings to discuss, review and monitor business and operational performance, strategic priorities, governance, compliance and risk matters. This approach enables the Board to engage directly with each of the business units and functional departmental leaders.

Each ELT member is responsible for identifying, assessing and monitoring their respective business and functional risks as well as measuring the impact and likelihood of the risk to the business. Each identified risk is categorised as strategic, commercial, operational, financial or compliance.

On an annual basis, the ELT collectively reviews the enterprise risk universe and the Board carries out a review of the principal risks and uncertainties.

During the year, the following risk management activities have been carried out:

Renewal of insurance programme

– BU and function risk registers reviewed, updated and development of effectiveness of controls with clear accountabilities

– New climate change risk landscape and assessment and climate scenario analysis undertaken

– Launch of risk champion role to support each business segment and function

– Property risk survey programme

– Board briefings on climate change reporting frameworks, risks and implementation

## Key areas of focus during the year

During 2021, the Board carried out a robust assessment of the key risks which we believe could threaten the Group's business model, future performance, solvency or liquidity, or the long term viability of the Company. These risks, if they materialise, could have a significant impact on the Group's ability to meet its strategic objectives over the medium term.

Our risk heat map (page 65) identifies these key risks pre-mitigation that we consider most impact our business model (pages 18-19) and the delivery of our strategic objectives (pages 20-27). Movements on the risk heat map reflect changes to the underlying long term risk environment.

IT networks, data security and privacy remain an increasingly significant risk to the business. The COVID-19 pandemic has expedited the use of new online platforms within the business and at home. Elementis continues to enhance its security and controls, and provides regular IT, cyber and GDPR updates to the Board.

Following a review of people, talent management and succession risk, the impact of the risk was assessed to have decreased in risk profile due to the progress made during the year. For example, the addition of several significant roles including General Counsel and Chief Compliance Officer and creation of the Global Director of Sustainability role demonstrates the strength of the management team. As noted on page 71, the Company has updated its succession planning processes to include retention risk and impact analysis.

The global pandemic was previously reported as a principal risk and, following assessment, COVID-19 is considered having a number of interdependencies with several principal risks. The impact of COVID-19 will now be captured within our other principal risks and is believed to be a shorter term impact, whilst our principal risks profile reflects medium to longer term risks. The global COVID-19 taskforce led by the CHRO will continue to monitor post COVID-19 risks and opportunities as global economies recover and vaccination programmes gain traction.

Health and safety is an important part of our risk management process. Previously risks associated with health and safety have been incorporated within other principal risks; however, following assessment it has been agreed that 'Health and safety' will be introduced as a new principal risk.

The risk rating of Business interruption as a result of supply chain failure of key materials and/or third party service provision has increased mainly due to the impact of COVID-19 on global supply chains. The Group continued with improving its planning process to ensure inventory and safety stock levels.

There have been no significant changes to the risk profiles for the remaining principal risks although we continue to monitor and review as appropriate.

## Priorities for 2022 include

Further enhancement of our mitigation programme including tracking and monitoring

– Fully integrate TCFD/ESG into our risk management system

– Improve risk programme capabilities to include net risk reporting

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## Emerging risks

Emerging risks and opportunities are identified and documented through the existing risk management framework through a variety of horizon-scanning methods and through activities, for example:

– Monthly performance calls with each business unit and functions including deeper dives on new business opportunities, supply chain resiliency and procurement matters

– Annual and 3 year financial plans and budgets and processes

– Board, ELT and other internal governance forums

– Customer/market insight and industry specific data

– Materiality assessment with regard to ESG

As well as assessing ongoing risks, we continue to consider how the business could be affected by emerging risks over the longer term and how strategic, market and customer initiatives might manage risks and seize any new opportunities. It is often possible to identify and respond to the potential impacts of emerging risks, but it is more challenging to predict their financial impact, likelihood and timeframe. For example, the climate scenario analysis which was carried out as part of our TCFD statement on pages 42-47.

## Climate change

Our response to the impacts of climate change is core to our long term success. Our products can contribute to lower energy and resource use, and we are working to minimise impacts of our own operations and supply chain.

In 2020, we set challenging targets to minimise our environmental and climate related impacts. For further information on our performance and activities in each of these areas, please refer to pages 34-37.

Our risk assessment has concluded that climate change is a contributing factor to many of our principal risks and longer term uncertainties. Specific climate risk factors are identified in our TCFD response. The TCFD framework has enabled us to analyse the physical and transition risks we face over a longer time horizon, and to better understand the implications of different future climate scenarios on our business. Further information on our approach to TCFD can be found on page 42.

## Internal control

The key elements of the Group's internal control framework are monitored throughout the year. The Audit Committee has conducted a review of the effectiveness of the Group's risk management and internal control systems on behalf of the Board.

To support the Board's annual assessment, a report is prepared by the Head of Internal Controls on the Group's principal risks and internal controls. This describes the risk management systems and key internal controls, as well as the work conducted in the year to improve the risk and control environment, including the level of assurance undertaken.

The internal control framework is intended to effectively manage rather than eliminate the risk of failure to achieve business objectives. It can only provide reasonable, but not absolute, assurance against the risk of material misstatement or financial loss.

For further information on internal controls, please refer to page 99.

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## Strategic report
Principal risks and uncertainties

## Global economic conditions and competitive market pressures

## Link to strategic objective

## Movement in year

## Description of risks

The performance of the specific end-user markets we serve is affected by general economic conditions. Adverse developments that may result in a downturn in general economic conditions or in the industries in which our customers operate may include political uncertainty, retaliatory tariffs or other disputes between trading partners. Sub-optimal global economic conditions can affect sales, raw material costs, fluctuations in foreign exchange rates, capacity, utilisation and cash generation, which can impact our position against banking covenants.

Increased competitive pressure in the marketplace can result in significant pricing pressure and loss of market share. The impact of non-delivery of operating plans can lead to market expectations of Group earnings not being met and slower delivery of reported strategic priorities.

## Impact of COVID-19

– Risk impact assessment carried out in respect of financial stress testing/response and strategy

## Controls and mitigating activities

– Financial performance (monthly sales, profit and cash flows and position against key banking covenants) is closely monitored with full year scenario planning of our key risks reforecasts updated twice a year and variances investigated and explained

– Contingency and cost reduction plans can be implemented in the event of an economic downturn to reduce operating costs, including non-essential capital expenditure items and discretionary spend

– Currency and commodity hedging action taken as appropriate
– Global key account management programme in place to deepen how we work and grow with our largest customers as well as monitoring customer performance and trends to pre-empt end market changes

– Balanced geographic footprint and supply chain and broad differentiated product offering across different sectors

## Developments in year

– Continued focus on cost reductions, capex effectiveness, working capital and discretionary spend (see page 27 for further information)

– New business opportunities delivered $50m and focus on future opportunity pipeline

– Balance sheet protections maintained including, bank covenant relaxations and continued suspension of dividends

– Prices rises implemented to mitigate impact of raw material, logistics and energy cost increases

– Refer to business summaries on pages 60-63

Link to KPIs Read more on pages 28-29

## Business interruption as a result of a major event or a natural catastrophe

## Link to strategic objective

## Movement in year

## Description of risks

The ability of the Group to manage its operations successfully and achieve performance in line with its strategy, business plans and budgets depends on the efficient and uninterrupted operation of planning processes, operational delivery capabilities and internal control environment.

Production facilities may be subject to planned and unplanned shutdowns, turnarounds and outages including natural catastrophe, weather, climate change, disruption associated with transportation, utilities and distributors, which could result in increased costs in securing alternate facilities, significant time to increase production or customer qualification.

A major event is categorised as an operational or HSE incident, transport related, or workplace incident caused by system failure and/or human error or by fire, storm, flood or pandemic.

## Impact of COVID-19

– Management continued to monitor pandemic status on a site by site basis

## Controls and mitigating activities

– Preventative maintenance, critical spares, process and other safety procedures to mitigate the effects of a major incident

– Property damage and business interruption insurance coverage

– Each site is required to develop a business continuity plan that includes emergency response and business recovery protocols; annual reviews, periodic updates, and training; and exercising the plan via periodic drills or table top exercises. We verify business continuity compliance through the HSE auditing process.

– Business continuity scenario planning overseen by ELT

– HSE management programme which includes corporate compliance audits and insurance property surveys

– HSE matters reviewed by ELT on a monthly basis

## Developments in year

– Internal audits completed for Anji, Songjiang and Castle Hayne

– Continued focus on operational reliability

– Adverse weather conditions impacted the entire state of Texas, including our Castle Hayne site, resulting in the unplanned shutdown of the site and energy utilities

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## Business interruption as a result of supply chain failure of key raw materials and/or third party service provision

## Link to strategic objective

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## Movement in year

## Description of risks

The Group is dependent on numerous raw materials from various sources. In the event of a long term supply disruption or market volatility, it may not be possible to secure sufficient supplies of raw materials from alternative sources on a timely basis or in sufficient quantities or qualities or on commercially reasonable terms. The lead time and effort needed to establish a relationship with a new supplier could be lengthy and could result in additional costs, diversion of resources and reduced production yields.

## Impact of COVID-19

– Port congestion

– Delays associated with shipping, availability of containers and shortages of truck drivers

## Controls and mitigating activities

– Review of single source supply chain and find and qualify alternatives
– Market research to understand and monitor the impact of short term events

– Recalibration of inventory stock levels and lead times on a regular basis at all sites

Business continuity scenario planning overseen by ELT

## Developments in year

– External reviewing of supplier business continuity planning

– Supply chain contingency planning to mitigate other trade related

– risks continually assessed and updated to address dynamic

planning environment

– Continually leverage strategic supplier relationships to secure required raw material volume

– Improved planning process ensured appropriate inventory and safety stock levels

– Accelerated production qualification programme to ensure ability to

– redistribute production volume across our global manufacturing network

– Continued focus on qualification of new sources of supply

## Link to KPIs Read more on pages 28-29

## Regulatory compliance and product stewardship challenges

## Link to strategic objective

## Movement in year

## Description of risks

Emerging regulations in global markets can lead to hurdles and additional costs to deliver on strategic objectives. Non-compliance and suspected non-compliance could lead to regulatory action. The Group is subject to extensive and evolving risk in multiple jurisdictions.

## Impact of COVID-19

– No impact

## Controls and mitigating activities

– Global Product Stewardship team oversees, manages and monitors regulatory developments in various jurisdictions

– Coordination with R&D team to enable a faster speed-to-market of new technologies and applications

– Safety Data Sheets, labels, and regulatory information is provided for global customers specific to the requirements in their jurisdiction

– Multiple languages are used to communicate these requirements

– Active compliance and risk management programmes in place (including policies, procedures and training)

– Horizon scanning for evolving regulatory landscape in new markets

## Developments in year

– UK REACH planning and assessment are underway throughout the supply chain

– Successful implementation of EURASIA REACH
– Supported the manufacturing optimisation change through

– regulatory activities
– Adding regulatory expertise to growth regions to support expanding market segments

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# Strategic report
Principal risks and uncertainties continued

## Major regulatory enforcement action, litigation and/or other claims arising from products and/or historical and ongoing operations

## Link to strategic objective

## Movement in year

## Description of risks

The scale and complexity of the Group's operations means that the Group is subject to a wide range of international regulation spanning all aspects of its business. This regulatory sphere includes multiple corporate taxation regimes, national and supra-national anti-corruption, fair competition and data privacy laws, as well as applicable environmental regulations and standards relating to the Group's past and present operations. Failure to comply can lead to complex cross border claims, litigation, damages, fines, penalties and remediation orders. The Group may be involved in legal proceedings and claims within the ordinary course of business including legacy claims from businesses that have been acquired or disposed of by the Group or ongoing operations.

Adverse results in legal proceedings could result in reputational and financial damages, loss of business, business opportunity and profit, and diversion of management time and resources.

## Impact of COVID-19

Although normal travel between the Group's sites by the Group's functional teams continued to be limited due to pandemic travel restrictions, e-learning functionality was used to deliver a broad range of compliance training modules to employees

– The Group's governance forums were able to continue to meet by virtual connection

## Controls and mitigating activities

– Cross functional expertise including Legal, Compliance, Finance, HSE and Product Stewardship, supported appropriately by external consultants and advisors, actively monitoring emerging risks and ensuring controls in relation to known risks are effective

– The Group's products are routinely and rigorously tested to the highest standards. The Group continuously evolves its global compliance programme to ensure high risk employees receive targeted training and to establish adequate surveillance for, and responses to, newly identified risks and issues – as monitored by the internal audit programme.

– Insurance programme and risk transfer strategy in place to mitigate potential financial losses

– The Audit Committee and Board of Directors exercise oversight through regular reports on all threatened and actual litigation within the Group from the General Counsel

– Employees are subject to a range of policies and procedures setting out required behaviours and standards, and consequences for non-compliance

– The Ethics and Compliance Council, chaired by the General Counsel and Chief Compliance Officer, meets regularly to monitor the Group's compliance culture and ensure ethics and compliance considerations are appropriately weighted in business decisions

– The Data Protection Steering Committee meets regularly to oversee compliance with applicable data privacy laws

## Developments in year

– See page 40 for KPIs on ethics and compliance

– Internal audit programme and activities continued in 2021, see page 99 for further information

## Link to KPIs Read more on pages 28-29

## Intellectual property and know-how

## Link to strategic objective

## Movement in year

## Description of risks

Failure to adequately protect and preserve intellectual property and proprietary know-how in both existing and new markets could harm our competitive position.

## Impact of COVID-19

– No impact

## Controls and mitigating activities

– The Group actively manages its trademark portfolio via an internal Trademark Committee (TMC) comprised of the business segment Marketing Directors and Legal. The TMC meets regularly to take decisions in relation to the registration of new trademarks and defensive activity in relation to existing marks. The TMC is supported by a global network of trademark agents who represent the Group's interests in all relevant jurisdictions.

– General Counsel supported by in-house and external legal teams
– The Group's Science Director works closely with the Legal team and external patent attorneys to ensure emerging inventions are appropriately protected. Employees are trained on the importance of appropriate handling and disclosures of proprietary and confidential information.

– The Legal team reviews every Confidentiality Agreement entered into by the Group to assess the suitability of the proposed purpose and the duration of the confidentiality obligations. A central record of all Confidentiality Agreements entered into globally is maintained by the Legal team. Contentious IP matters are reported through to the Audit Committee and Board of Directors.

## Developments in year

– New stage gate system incorporates intellectual property and freedom to operate as requirement to launch new product

– Patent and intellectual property disclosures to keep distinction in our new launches

In house legal expertise for partnership

– Evaluation of new tool (chemtracker) to monitor competitive intellectual property landscape for each business segment

– Enforcement of proprietary advantage

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## Portfolio innovation and technology

## Link to strategic objective

## Movement in year

## Description of risks

The ability of the Group to compete is highly dependent on its ability to meet the changing needs of customers and keep pace with technological innovations and sustainability trends.

New or substitute products and technologies developed by competitors could erode the Group's ability to compete and lead to declines in sales and market share.

## Impact of COVID-19

– Qualification of alternate raw materials for existing portfolio have impacted number launches

## Movement in year

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No change

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image<|/ref|>
[[485, 78, 515, 96]]weeks

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Increasing

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Decreasing

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## Controls and mitigating activities

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– Global R&D team aims to develop new products and technologies used in an evolving market to meet the changing needs of our sophisticated customers

– Collaborative relationships with customers and industry formulators ensures our efforts are aligned with latest market trends

– Innovation stage gate process with systematic prioritisation enables the Group to deliver high value solutions for the market

– Hectorite and high quality talc minerals are natural resources enabling the Group to consistently deliver high performance innovation

## Developments in year

– 21 new products launched in 2021 (targeted 20 planned for 2022)

– Innovation from new products was in line with 2020 at 14% in 2021
– New innovation management (smart sheet based) tool has been implemented to increase speed to market
– Sustainability remains a key driver for Innovation: all new launches will have sustainability drivers as part of the launch package

– Open innovation with strategic partners remains a priority

## Link to KPIs Read more on pages 28-29

## People, talent management and succession

## Link to strategic objective

## Movement in year

## Description of risks

The Group operates in highly competitive labour markets and relies upon the expertise and services of talented individuals and teams to succeed.

Loss of key people or disruption to teams without timely action could result in a disruption to business operations.

## Developments in year

– Orderly transition to new General Counsel and Chief Compliance Officer; Global Marketing Directors for Personal Care and Coatings;

Manufacturing Directors for Chromium and Specialities plus the addition of a Global Sustainability Director completed through external hiring

– Internal development moves for Senior Leaders in Coatings, HR and Finance to further build experience and capability

– LinkedIn Learning adopted globally with a local solution sourced for China to enhance learning opportunities

– Talent and succession process further embedded into the organisation with cross functional reviews for commercial roles

– Flexible working principles adopted globally to support talent acquisition and retention

## Controls and mitigating activities

– Formal talent, succession management and retention risk programmes in place with individual development goals reviewed

– Succession to senior management positions formally reviewed by the ELT twice a year

– Succession to the ELT reviewed with the Board
– Regional HR Directors, Global Talent Manager and Country HR Managers support the CHRO and ELT to provide focus on talent
– HR systems functionality in place for performance management, goal setting, career profile and compensation planning with succession management to be integrated in 2022
– Formal system for job grading and compensation benchmarking in place supported by external expertise
– Employee engagement survey reviewed on 6 monthly basis with the quality of managers measured through their impact on Engagement. Action plans developed by each people manager.

## Impact of COVID-19

– Accelerated the roll-out and adoption of e-learning

– Prompted a global approach to flexible working through new principles with local application

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## Strategic report

## Principal risks and uncertainties continued

Key

1 Innovation

2

Growth

3 Efficiency

Movement in year

No change

Increasing

Decreasing

## IT networks, data security and privacy

## Link to strategic objective

Movement in year

## Description of risks

The Group is expected to increasingly rely on IT systems for its internal communications, controls, reporting and relationships with customers and suppliers.

A significant disruption could cause delays to key operations and inability to meet customers' requirements and result in increased operating costs, legal liability and reputational damage. In addition, continuing developments in data protection legislation globally have created a range of compliance obligations with increased financial penalties for non-compliance.

## Impact of COVID-19

– Targeted guidance issued on records management when working remotely

Link to KPIs Read more on pages 28-29

## Health and Safety

## Link to strategic objective

Movement in year

## Description of risks

The nature of business manufacturing activities, which includes the production, storage and transport of hazardous materials, has a wide-ranging exposure to health and safety risks, including both occupational safety and process safety risks. Failure to recognise, evaluate and mitigate health and safety risks would leave the Group vulnerable to negative impacts such as employee and contractor injuries, lost production time, equipment damage, impact to the community, potential regulatory compliance challenges, and reputational damage.

## Impact of COVID-19

– Operational impacts with short term interruptions due to staff shortage; covered staff gaps with overtime and reprioritising production schedules

– Keeping informed with local requirements and implementing safety protocols as necessary
– No work related COVID-19 cases documented

## Controls and mitigating activities

– Security controls including policies and procedures, staff awareness and training, risk management and compliance, systems and information management and protection process

– Regular IT, cyber and data protection updates to the Board
– Business continuity and emergency response plans are in place for manufacturing sites
– Internal audits are scheduled on a regular basis

## Developments in year

– Schedule of phishing simulations introduced to increase awareness and continually assess training needs
– Information governance group established
– Implementation of a privacy and data protection management platform
– Digital data review pilot programme launched

1

## Controls and mitigating activities

– Safety leadership – setting clear expectations for site leaders and supervisors on their role and responsibility for ensuring employee safety and providing them with leadership training/tools (Alive & Well at the End of the Day); HSE site leader certification process required for all site leaders; establishing safety lagging and leading key performance indicators; communication and demonstration of top management's strong commitment to our Safety value
– Management systems – programmes such as compliance and insurance audits, root cause analyses, management of change, routine inspections, risk assessments, training, contractor management and work permits

– Safety culture development – stop work authority focus and training; increasing employee participation in safety through near miss reporting, hazard recognition and safety committees; TogetherSAFE awareness sessions with all employees and development of safety improvement plans focused on employee concerns
– Process safety management – performing process hazard analyses; ensuring equipment is well maintained and functioning properly (mechanical integrity) through capital investment; developing corporate guidelines and performing equipment criticality assessments to determine preventative maintenance approach

## Developments in year

– Development of new management of change web based tool
– Participation in World Day for Safety & Health at Work and establishing a Safety week
– Dedicated HSE Sharepoint page
– Development of process safety management guidelines for process hazard analyses and equipment criticality assessments
– Embedding TogetherSAFE, our value for safety, into our work planning and business processes; launching the first CEO TogetherSAFE award promoting team safety initiatives