Risks and Risk Management
SRV engages in systematic risk management in order to protect itself against factors that might adversely affect its business operations and to promote recognition of new opportunities. The company improves the profitability and stability of its operations by identifying strategic and operational risks and reacting to them in a timely manner. Risk management is part of SRV’s management system. It supports the company’s values, vision, strategy and the achievement of its earnings objectives.
The objective of risk management is to ensure that SRV’s controllable risks do not jeopardise operations. To this end, SRV has a systematic and comprehensive approach to identifying and assessing risks as well as to carrying out the necessary risk management measures and reporting on operations.
Overall responsibility for risk management rests with the company’s Board of Directors and the President & CEO. The Audit Committee goes quarterly through a report on the operational risks and how to prepare for them. The Board of Directors approves the risk management strategy and policy, and assesses the framework for risk management covering the entire company. Line management is in charge of carrying out day-to-day risk management as well as for its steering and supervision. The Group’s risk management function supports the application of risk management principles and develops Group-wide operating practices.
Risks, risk management and and corporate governance (Interim Report 1-3/2021)
SRV has published a separate Corporate Governance Statement in its Annual Review and on the company’s website. More detailed information about the company’s business risks and risk management has been provided in the 2020 Notes to the Financial Statements and Annual Review, which have been published on the company’s website.
The most significant risks concern negative changes in SRV’s and its customers’ operating environment and currently the coronavirus pandemic in particular, capital employed in major projects, SRV’s earnings trend, availability of financing for SRV and its projects, the development of the situation in Russia, the rouble exchange rate and key project implementation risks.
A significant risk is still posed by the coronavirus pandemic and its impact not only on the operating conditions and business of SRV, its customers and other partners, but also its broader effects on general economic development. Although the pandemic situation worsened in early 2021, infection rates started to decline again in mid-March. Measures to lift restrictions are currently being planned and economic growth is forecast to pick up towards the end of the year. However, how the situation develops is largely dependent on whether or not the pandemic is prolonged further. The scheduling and effectiveness of Covid-19 vaccinations will be decisive.
In its Russian business, fluctuations in the rouble exchange rate expose SRV to translation and transaction risks. A ten per cent weakening of the rouble against the euro on the reporting date would have had an impact of about EUR -6.7 million on the Group’s equity translation differences. A ten per cent weakening in the exchange rate would correspondingly have an impact of about EUR -5.0 million on SRV’s earnings if the effect of currency hedging were not taken into account. The exact rouble hedging rate varies over time. SRV’s transaction risk largely comprises the euro-denominated loans of associated companies that are partly owned by SRV. The remaining exchange rate risk is hedged in accordance with the hedging policy approved by the Board of Directors.
SRV Group Plc’s Russian subsidiary, of which SRV Group Plc indirectly owns 51 per cent, is involved in legal proceedings in Russia. This lawsuit is still ongoing, as the counterparty appealed to the Supreme Court after the end of the review period. The lawsuit concerns an agreement for an electrical connection that was never implemented.
There is a risk that the land lease on a particular plot owned by SRV Group Plc’s subsidiary in Russia will not be extended. The development of this plot has been delayed due to the market situation and it is possible that the City will not extend the land lease agreement beyond autumn 2021. If this happens, the EUR 1.7 million acquisition cost of SRV’s lease would become worthless.
In order to develop its business, the company has launched a strategic spearhead programme to integrate a lifecycle-wise approach into all construction and cooperation. Other strategic development programmes include “streamlining operations throughout the construction chain”, “housing construction at the forefront of profitability”, and “a leading market position in the business premises market”.