Our approach to risk management

The delivery of our strategic objectives and the sustainable growth and long-term shareholder value of our business is dependent on effective risk management. We regularly face business uncertainties and it is through a structured approach to risk management that we are able to mitigate and manage these risks and embrace opportunities when they arise. These disciplines remain effective as the global environment continues to be uncertain in the face of increasingly complex global economic, geopolitical and environmental challenges. As a result of these, together with ongoing inflationary pressures, cost-of-living remains a real issue for consumers across a number of the markets in which we operate.

The diversified nature of our operations, geographical reach, assets and currencies are important factors in mitigating the risk of a material threat to the Group’s sustainable growth and long-term shareholder value. However, as with any business, risks and uncertainties are inherent in our business activities. These risks may have a financial, operational and reputational impact.

The Board is accountable for effective risk management, for agreeing the principal, including emerging risks facing the Group and ensuring these are successfully managed. The Board undertakes a robust annual assessment of the principal risks that would threaten the business model, future performance, solvency or liquidity. The Board also monitors the Group’s exposure to risks as part of the business performance reviews at each Board meeting, providing the Board with an opportunity to discuss risk mitigation actions with divisional senior management.

Our decentralised business model empowers the management of our businesses to identify, evaluate and manage the risks they face, on a timely basis, to ensure each business’s compliance with relevant legislation, our business principles and Group policies.

Our businesses perform risk assessments which consider materiality, risk controls and specific local risks that are relevant to the markets in which they operate. The collated risks from each business are shared with the respective divisional chief executives who present their divisional risks to the Group Executive.

Emerging risks are identified and considered at both a Group and business unit level, with key management being close to their markets and geographies. These risks are identified as part of the overall risk management process through a variety of horizon-scanning methods including: geopolitical insights; ongoing assessments of competitor activity and market factors; workshops and management meetings focused on risk identification; analysis of existing risks using industry knowledge and experience to understand how these risks may affect us in the future; and representation and participation in key industry associations.

These discussions are wide-ranging and consider operational, environmental and other external risks. These risks and their impact on business performance are reported during the year and are considered as part of the monthly management review process.

Group functional heads including Legal, Treasury, Tax, IT, Pensions, HR, Procurement and Insurance also provide input to this process, sharing with the Director of Financial Control their view of key risks and what activities are in place or planned to mitigate them. A combination of these perspectives together with the business risk assessments creates a consolidated view of the Group’s risk profile. A summary of these risk assessments is then shared and discussed with the Finance Director and Chief Executive at least annually.

The Director of Financial Control holds meetings with each of the non-executive directors seeking their feedback on the reviews performed and discussing the key risks, which include emerging risks, and mitigating activities identified through the risk assessment exercise. Once all non-executive directors have been consulted, a Board report is prepared summarising the full process and providing an assessment of the status of risk management across the Group. The key risks, mitigating controls and relevant policies are summarised and the Board confirms the Group’s principal risks.

These are the risks which could prevent ABF from delivering our strategic objectives. This report also details when formal updates relating to the key risks will be provided to the Board throughout the year.

Key areas of focus this year

Effective risk management processes and internal controls

We continued to seek improvements in our risk management processes to ensure the quality and integrity of information and the ability to respond swiftly to direct risks. During the year, the Audit Committee on behalf of the Board conducted reviews on the effectiveness of the Group’s risk management processes and internal controls in accordance with the 2018 UK Corporate Governance Code. Our approach to risk management and systems of internal control is in line with the recommendations in the Financial Reporting Council’s (FRC) revised guidance ‘Risk management, internal control and related financial and business reporting’.

The Board is satisfied that internal controls were properly maintained and that principal and emerging risks are being appropriately identified and managed.

Geopolitical uncertainty, Russia’s ongoing war in Ukraine and the potential for escalation of the conflict in Gaza

The ongoing Russian war in Ukraine continues to drive economic uncertainty in almost all of the markets in which we operate.

Whilst during the year, we have seen a reduction in energy prices and sea freight costs, which are significant costs for ABF, the ongoing situation remains volatile and could result in supply chain disruption.

We remain cognisant of the significant impacts that would result from an escalation in the war in Ukraine, particularly if western governments’ support for Ukraine were to waver.

Russia’s suspension of the Ukraine grain export agreement in July 2023 could result in tensions and further inflation in the medium-term. Our management teams continue to work closely with suppliers to secure raw materials, maintain production and provide a reliable supply to our customers.

Escalation of recent events in Gaza could have further inflationary pressures, particularly on energy. In addition, there could potentially be wider implications for global logistics and supply chains. 

Cost of living

Recent global financial data shows that several European economies in which we operate tipped into recession in recent months and a prolonged period of stagnation is a real possibility. This would increase consumer debt problems, resulting in increasing costs of living and putting additional strain on household budgets. 

Whilst consumer spending has proven to be more resilient than anticipated at the start of the financial year, household budgets continue to face real pressures as a result of high inflation and interest rates and general economic uncertainty. This means that some consumers are having to make challenging and difficult choices in respect of what they spend and where they spend it.

We continue to offer safe, nutritious and affordable food and affordable, quality clothes to our customers. Primark’s cost leadership position continues to be attractive to the customer. In the food businesses, there is an increasing demand for private label products.

All of our businesses have developed strategies considering the potential changes in both end consumer and our customer behaviours and demands, the implications for the business and where investment or changes to business models may be appropriate.

The medium-term impact on our businesses will depend on the extent of government intervention and the duration of any economic downturns.

Regulatory changes

Our businesses continue to face a large number of regulatory changes with ever increasing complexity and variations in requirements across the markets in which we operate. For example, the EU’s Corporate Sustainability Reporting Directive (CSRD) requiring EU-incorporated companies and certain other companies with operations in the EU to publicly disclose and report on environmental, social affairs and governance issues, the new German Supply Chain Due Diligence Act (LkSG), and changes to data privacy laws.

The extent of change will have an impact on the capacity of management at a time when they are dealing with the ongoing challenges resulting from economic uncertainty, alongside the day-to-day growth of our businesses.

Environmental, Social and Governance

ABF has an ambition to continue to make food and clothes available and affordable and to achieve net zero by 2050 or sooner.

Environmental factors, including the potential implications of climate change within our businesses and their supply chains, are considered as part of the risk management framework and they also frame opportunities for our businesses. Our culture and values, and particularly our devolved decision-making model, empowers our teams to make the right judgements in assessing and mitigating risks related to climate change.

Where relevant, third-party experts have been engaged to perform scenario analyses and in-depth risk assessments which form the basis of strategies to mitigate the material risks.

Our local management teams have demonstrated their ability to respond quickly and make decisions that make sense to their businesses when extreme climate-related events occur. For example, in response to adverse weather conditions which resulted in significantly lower beet yields from the 2022/23 crop, British Sugar moved swiftly to secure alternative sources of supply. Similarly, our Africa sugar business, Illovo, has been significantly impacted by floods in Mozambique and Malawi, and is investing in a variety of irrigation and drainage projects to reduce the impact climate has on sugar yields.

Leaders across ABF are also empowered to implement responsible business practices to further reduce our negative impact on the environment, such as the sustainable use of natural resources, sourcing responsible packaging and our use of plastic, as well as reducing carbon emissions. Each of our businesses has prioritised resources to those environmental factors which are of greatest relevance and will make the greatest long-term difference.

The Board has overall responsibility for overseeing ESG factors across ABF. On a regular basis, the Board conducts a review of each of our business segments, including a review of significant ESG issues.

Divisional chief executives have responsibility and are accountable for their ESG programmes, as well as for risks, opportunities and impacts in their divisions. They can draw on support from the Corporate Responsibility Hub and the Director of Legal Services and Company Secretary, the CPPO as well as specialist legal advice from the team led by the Associate General Counsel for ESG. The leaders of our businesses are also challenged by the centre through detailed reviews of the Group’s environmental performance, health and safety performance, and its diversity, equity and inclusion and workforce engagement programmes.

Our principal risks and uncertainties

The directors have carried out an assessment of the principal risks facing ABF, including emerging risks, that would threaten our business model, future performance, solvency or liquidity.

The Group’s principal risks and uncertainties and the key mitigating activities in place to address them are outlined on pages 68 to 75 of the Annual Report 2023. These are the principal risks of the Group as a whole and are not in any order of priority.

ABF is exposed to a variety of other risks related to a range of issues such as human resources and the attraction, development and retention of people, community relations, the regulatory environment and competition. These are managed as part of the risk process and a number of these are referred to in our 2023 Responsibility Report

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