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 (Half-Year Financial Report 1-6/2021)
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 capital employed in major projects, SRV’s earnings trend, the availability of financing for SRV and its projects, the coronavirus pandemic, the development of the situation in Russia and the rouble exchange rate, a rise in construction costs, and key project implementation risks.
A 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. The lifting of restrictions began in the spring as the pandemic eased, and economic growth is forecast to pick up towards the end of the year. However, future developments will be heavily influenced by the schedule and effectiveness of the vaccination programme.
In its Russian business, fluctuations in the rouble exchange rate expose SRV to translation and transaction risks. SRV’s transaction risk largely comprises the euro-denominated loans of associated companies that are partly owned by SRV. During the review period, the loan taken out by the company that owns the Pearl Plaza shopping centre, which was originally partially euro-based, was fully refinanced using a completely rouble-based loan, thereby reducing SRV’s transaction risk position by about EUR 10 million. Excluding the effect of currency hedging, a ten per cent weakening of the rouble against the euro on the reporting date would have had an impact of about EUR -7.0 million on the Group’s equity translation differences. Correspondingly, a ten per cent weakening in the exchange rate would have had an impact of about EUR -4.2 million on SRV’s earnings excluding the effect of currency hedging. The exact rouble hedging rate varies over time. 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, was involved in legal proceedings in Russia. This lawsuit was still ongoing, as the counterparty had appealed to the Supreme Court. The lawsuit concerned an agreement for an electrical connection that was never implemented. The Supreme Court dismissed the appeal during the second quarter.
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 capitalised acquisition cost of SRV’s lease would become worthless.
Construction costs have started to rise. Materials have become more expensive, and in particular sawn timber and steel. According to Statistics Finland, construction costs rose by about 3.2 per cent in May compared to the previous year. Some construction products have also started to face availability risks that may pose challenges for supply chain management.
In order to develop its business, the company is implementing 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 commercial premises market”.