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1 June 2018

Risk Management

SCG Enterprise Risk Management Framework

SCG has implemented Enterprise Risk Management Framework in alignment with international standards. The framework consists of:

 1. Strategy Establishment

SCG has established explicit objectives and risk appetite in managing risks to ensure consistent risk management practice across the organization.

 2. SCG Risk Management Structure and Responsibilities

The organization structure of SCG’s risk management is illustrated below:

The Board of Directors and the Audit Committee

The Audit Committee, on behalf of the Board of Directors, establishes risk management policies and oversees the risk management process and practice of SCG. The Audit Committee also evaluates the risk management system to ensure efficiency, effectiveness and compliance with established guidelines.

Internal Audit

SCG Internal Audit’s role is to conduct an audit of the first line (Operating Unit) and the second line (management level, risk management and compliance, and other supporting functions) to provide assurance on the efficiency and effectiveness of risk management. The internal audit also reports the audit outcomes to the Audit Committee.  Additionally, the Unit provides consultation and communicates Audit Committee’s opinions to the first line and functions that are being audited for improvements. 

The SCG Risk Management Committee

The SCG Risk Management Committee consists of the President and Vice President of each business unit. The SCG President and CEO serves as the Committee Chairman. The SCG Risk Management Committee has the following core responsibilities:

 1. Determine risk management structure and assign accountabilities for risk management.

 2. Consider and approve risk management policies, strategies, framework, and plans.

 3. Review and monitor the SCG risk profile.

3. Risk Management Process

The SCG risk management framework is applied in three primary areas: medium and long-term strategic risk management, investment project risk management and operational risk management. The risk management process, documented in the “SCG Risk Management Manual” for the above areas, comprises 1) Risk / Opportunity Identification, 2) Risk Assessment, 3) Risk Response (including defining the Key Risk Indicators and Key Performance Indicators which are the leading and lagging indicators in order to anticipate risk events and to manage risks to be in line with the targets), 4) Risk Reporting to the Business Unit Risk Management Committee and SCG Risk Management Committee, respectively. Then, the reports are presented to the Audit Committee on a quarterly basis.

 4. Building a Corporate Risk Culture

SCG recognizes that risk culture is a critical component of risk management. SCG has, therefore, assigned top executives to communicate the significance of risk management (tone at the top) and be role models in risk management. This includes establishing practical guidelines on the common risk language, risk appetite, common risk assessment system, and accountability of each risk owner. Moreover, SCG has encouraged employees to include risk management as part of the agenda in major meetings at each company. Apart from that, risk management was designated as a component of training and development programs for directors, top executives and SCG staff. SCG has also encouraged experience sharing across departments and companies to improve risk management practices through lessons learned. In addition, learning materials in digital format was recently developed to increase risk awareness and coverage for SCG staff from the commencement of employment. Over past years, SCG has defined integrated GRC definition and communicated the objectives and benefits of integrated GRC. In 2017, the Corporate Governance Unit, Risk Management Unit, and Compliance Management Unit have coordinated to increase communication coverage, understanding of GRC concepts and their importance to all SCG staff.

 

Key Risks, Opportunities and Management Strategies

In 2017, SCG assessed and mitigated the significant risks in alignment with material sustainability issues as illustrated below.

Safety, Health, and Environment Risk

 1. Safety and Health Risks

Overseas operations in countries where environment, safety and health are substandard can pose risks.

  • Implemented various safety & health standards such as Occupational Health and Safety standards (OHSAS 18001) and Safety Performance Assessment Program (SPAP) in overseas companies and disseminated the application of safety management principles to its trading partners to extend the practice to the wider society.
  • In 2017, SCG enforced “9 Life Saving Rules” to all employees and business partners to operate safely in the workplace and on the road. In addition, safety awareness is constantly promoted and punishment is applied for noncompliance in supporting behavioral change and safety culture.

SCG believes that safety and a healthy workplace environment allow operations to run efficiently and smoothly, reduce unnecessary production costs and create trust among customers, business partners and stakeholders. 

 2. Climate Change and Environmental Risk

Climate change, global warming, water crisis and exposure to environmental risk may affect the continuity of business operations, organization’s reputation, or cost.

  • Increase the use of alternative energy, for example, the use of solar power and the experiment of planting and using energy crops to produce electricity to lower greenhouse gas emissions. In addition, various projects are conducted to reduce greenhouse gas emissions, for example, power generation from waste heat and combustion production efficiency improvement in ceramic plants.
  • Developed environmentally-friendly products and services, for example, Stay Cool, an insulation that keeps out heat 7 times better than normal insulation and preserves an air conditioner’s power usage. Another example is Emisspro®, a coating substance for energy-saving burners, which was developed out of attempts to reduce energy use and greenhouse gas emissions.
  • For the manufacturing process, SCG strictly adheres to the application of the 3R concept (Reduce, Reuse/Recycle, and Replenish) and collaborates with related government organizations in order to support water shortage prevention projects.
  • SCG has continued various corporate social responsibility (CSR) projects, for example, building 70,000 check dams according to the Royal initiatives and promoting “Satanee Rak Nam”, a community learning center for water conservation. In addition, activities and projects’ assessment regarding social, environmental and economic aspects are conducted to ensure SCG’s operations and the surrounding communities live together sustainably.

Compliance Risk

 3. Compliance Risks from Changes in Laws & Regulations

Risks from noncompliance or partial compliance caused by constant changes in laws & regulations could negatively affect the organization’s reputation and result in significant penalties and fines or loss of business opportunities.

  • Sets out SCG compliance policy and communicate to all SCG employees.
  • Closely monitors changes from government policies as well as laws and regulations in the countries where SCG operates. Build networking with government and the private sector in domestic and overseas operations to increase the efficiency in monitoring law and regulation changes.
  • Monitor Base Erosion and Profit Shifting (BEPS) measures introduced by the Organization for Economic Co-operation and Development (OECD) to prevent future tax risks that could incur reputational risk and the loss of license to operate.
  • Constantly updates the SCG Code of Conduct according to changes in laws and regulations. This includes conducting “Ethics e-testing” focusing on SCG Philosophy, anti-corruption and human rights policies. Communicates good risk management and control practices in accordance with the “Three Lines of Defense” concept to SCG staff at all levels to prevent non-compliance.

Reputation and Intellectual Property Risk

 4. Reputation Risk from Social Media

Social media has been widely used as a channel to communicate and exchange opinions on products, services, and organizations. In the event that SCG becomes the topic of negative news coverage on social media, its outstretch nature may cause serious impact on the brand and reputation of the organization.

  • Established a Brand Committee which oversees the monitoring of online risk events, and the preparation of countermeasures and a communication system, which includes a crisis management drill.
  • Applied digital technology to analyze the voices of customers and stakeholders regarding SCG’s products, services and businesses using information from social media to proactively assess market movements, stakeholders’ satisfaction and expectations.

 5. Intellectual Property Risks

SCG has continuously supported the development of High Value Added products and services (HVA) to increase competitive advantage and elevate industry performance. Therefore, Intellectual Property (IP) management plays a crucial role in risk mitigation to prevent SCG’s trademarks and innovations from being infringed.

  • Established IP division and IP management system at corporate and business unit levels to prevent SCG from infringing others or being infringed. This includes organizing IP training for SCG employees to raise awareness and promote practice.

After years of IP strategy and IP management implementation, SCG received the “Asia IP Elite 2017” award for the fourth consecutive year at the IP Business Congress Asia 2017 Conference hosted by Intellectual Asset Management (IAM). This award truly represents SCG’s achievement in IP management and IP system which covers IP creation, IP protection and IP commercialization. This system is implemented at the beginning of research and development until new products and services are launched into the markets.

Hazard Risk

 6. Geopolitical Risk

A more severe geopolitical conflicts, resulting in economic instability and higher risk exposure from doing business internationally, could impact SCG operations and its business continuity.

  • Closely monitor the situations and build a network of geopolitical experts locally and overseas to obtain up-to-date information for risk mitigations and business continuity plans.
  • Conduct scenario analysis of the most likely situation that could impact SCG’s operations and prepare business continuity plans to handle crisis events accordingly. 
  • Business Continuity Management (BCM) Unit at corporate and business unit levels leads the efforts to manage the situation to minimize impact.

Input Risk

 7. Labor Shortage and Rising Wages Risk

As the world including Thailand is entering the era of aging society, problems from labor market imbalance in ASEAN countries have caused competition for labor and rapid wage hikes in some countries.

  • Continuously build relationship with universities and other institutions in ASEAN.
  • Continue the Pracha Rat (people’s state) project called “Role Model Institute” to advance the status of vocational students with the aim to supply skilled laborers to the market.  Under this project, vocational students benefit from real life working experience, English skills improvement and safety culture knowledge in the workplace.
  • Implementation of automatic machines and robots to enhance production efficiency and to prepare for the labor shortage situation, for example, PVC manufacturing robots to increase production capacity and reduce defective products, and an inspection robot to deliver inspection and repair services in hazardous areas both in-house and to large industrial customers outside SCG.

 8. Fluctuation in Energy and Major Raw Material Prices Risk

The rising trend of global crude oil price due to the possibility of oil production cut by the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC countries has resulted in the upward trend of energy and commodity prices such as naphtha and fuel oil. In addition, the price of coal, one of the main energy sources for SCG Cement-Building Materials and SCG Packaging, has shown signs of soaring due to the Chinese coal mining restriction policy and its effect on decreased coal supply.

  • Commodity Price Risk Management Committee has adjusted the risk management strategy to respond to the changing circumstances. For example, a hedging instrument is applied to reduce the risks from commodity price fluctuation and maintain competitive cost in the global market.
  • Increases the proportion of alternative energy usage, for example, solar energy, industrial waste, and biomass to reduce the risk from energy price increases.
  • Develops HVA products such as plastic for medical equipment and plastic parts for the automotive industry, with the aim to increase revenues and profits and to reduce the risk from raw materials price volatility.

Process Risk

 9. Supply Chain Risks

SCG considers all risk factors throughout the supply chain, starting from raw material procurement, materials and equipment used in the production and transportation, to the sales and delivery of products and services, to prevent any misalignment that may affect the confidence of consumers and other stakeholders as well as the impact on SCG’s operations.

  • Developed the SCG Supplier Code of Conduct for all suppliers to adhere to in order to help enhance operating standards for the mutual benefits of SCG and the suppliers.
  • Conducts “Spend Analysis” to assess risks and impact on SCG’s operations in various dimensions covering economic, environmental and social. Results from the analyses are applied to classify suppliers, and develop strategies and plans to develop these suppliers, for example, the “Greening the Supply Chain” project to ensure the sustainability of suppliers’ businesses.
  • Conducts suppliers’ assessment using onsite and offsite audit considering products and services quality, economic, social, environment and governance performance,

10. Human Resources Management and Capability Risks

In preparation for human resources readiness and capability to accommodate future business expansion in Thailand and ASEAN countries, SCG has consistently improved its human resources management to be better aligned with its business strategies.

  • Communicated human rights policies and practices to SCG employees, business partners and related parties to create understanding, fair and equitable business practices.    
  • In 2017, SCG assessed human rights risk and completed a mitigation plan for all Business units.
  • Established a learning and coaching culture using the 70-20-10 approach. This method emphasizes on on-the-job training and learning from mistakes with support from supervisors. Furthermore, an employee at each level will be given the opportunity to develop their business knowledge, as well as leadership and teamwork skills.
  • Applied competency development program to all SCG staff to improve job-related, business and management knowledge. SCG employee development programs are properly and continually conducted to ensure long term business competitive advantage.

Having constantly placed importance on equal treatment of all employees, staff competency development and employee engagement, in 2017, results from JobsDB Thailand survey showed that SCG is one of the most attractive employers in Thailand. This has resulted in SCG’s ability to better recruit talent to work with the company.

Business Environment Risk

11. Foreign Exchange Rates Fluctuation Risk

In 2017, the Thai Baht appreciated against the US dollar compared to past years. Still, in 2018, it is expected that the Thai Baht could be volatile due to various uncertainties such as the impact from powerful countries’ international policies, the US Fed’s interest rate trends and US economic stimulus measures. 

  • SCG’s Financial Committee considers using financial instruments to hedge foreign exchange rate exposure when appropriate. This includes matching revenue and expense in foreign currency (Natural Hedge), making agreements with trading partners  using local currencies, and considering foreign exchange hedging for investment projects at an appropriate level.
  • SCG has leveraged cross-currency competitiveness and focused on export to countries within and outside ASEAN where appropriate.

12. Risks to  ASEAN Economic Growth and Competition

In 2017, the global economy recovered due to fundamental factors such as the stronger labor market and continued global trade expansion. However, the world’s economy will continue to face uncertainties pending powerful countries’ economic and political policies, for example, political uncertainties in Europe, monetary policy tightening in the US and Europe, non-performing loans and slowdown in the Chinese economy, directions on foreign trade from the US president and growing geopolitical risk in North Korea and the Middle East which could trigger a war. All these factors will likely affect the ASEAN economy directly or indirectly. Moreover, the market entries of new players, both large and small, in countries where SCG has presence will intensify the competition for SCG.

  • Established Country Business Support Office (CBSO) to evaluate and monitor risks in the countries where SCG has invested. Besides, reports on significant risk events in each strategic country are presented quarterly to the audit committee and top management for country risk management and portfolio management. In addition, Scenario Planning and Sensitivity Analysis are conducted to assess potential consequences from such risks.
  • Continue to develop HVA products and services to serve niche markets, increase sales from export, and accelerate sales from export to ASEAN and non-ASEAN countries to compensate for domestic slowdown and intense competition as well as explore future investment opportunities.

Emerging Risks

1. Risk from digital technology transformation

Digital technology has and will play a crucial role in daily lives and businesses, for example, the adoption of digital technology in delivery service, marketing and sales through online channels. In the long term, such development may impact the SCG business model and traditional distribution channels, which threatens SCG’s competitive advantage. On the other hand, such a trend could create new business opportunities. For this reason, SCG has dedicated efforts to monitoring and analyzing trends and changes in digital technology and adopting them to prevent disruption risks and capture new opportunities. Examples include the adoption of Big Data to investigate customers’ needs and behavior in introducing products and services, the development of marketing strategy focusing on the Omni channel that allows customers to access products and services through physical stores and websites, and the adoption of new technologies, automatic machineries and robotics in the production process. In 2017, SCG found AddVentures, a venture capital aiming to invest in domestic, regional and global start-ups, to explore solutions that respond to market requirements and improve SCG’s operation efficiency from utilizing digital technology. AddVentures focuses on collaborating with start-ups in various key areas, including industrial, robotics, energy-saving, e-commerce, and logistics.

2. Risk from cyber threat

Changes of business operating models and working processes that are becoming more dependent on digital technology, automation in productions and factories and the connection of plant equipment with the internet make businesses exposed to cyber risks. For example, stolen research and development data, trade secrets and employee data could result in large amounts of monetary impact and adverse effects on the company’s brand and reputation. SCG has therefore, set out e-Policy 2017 and the cyber security roadmap implemented in domestic and overseas operations. The policy and roadmap include data classification and management, social network usage guidelines and the procedures for human resource staff involved with the personal data of SCG employees. SCG has also raised awareness among staff through training and various activities to create the right understanding when using digital technology and to ensure that cyber threats are being prevented.

3. Risk from higher costs of energy in Thailand

Various sources have forecasted that the major sources of energy supply in Thailand are diminishing while demand for energy is on a rising trend, which will likely lead to an increase in energy and electricity prices impacting SCG’s energy costs. Therefore, emphasis has been placed on reducing energy risk. SCG established the Energy Committee which is responsible for setting out and monitoring the organization’s energy policy to increase energy utilization efficiency. Additionally, the organization appointed a taskforce responsible for the exploration of both the main and alternative sources of energy that are also environmentally-friendly. Moreover, the organization has encouraged the use of technology that allows for the utilization of low-cost, but not commonly used energy, the production of electricity from process waste, along with the development of products that require lower production cost per unit or reduce energy consumption when in use.

4. Risk from climate change, natural disaster and greenhouse gas emission control

Climate change from greenhouse gas accumulation, more severe and frequent natural disasters and regulatory development for emission control have become vital risks that have caught the world’s attention and could pose risks to corporate reputation. In 2015, Thailand signed the Paris Agreement, according to the UN Framework Convention on Climate Change, to keep the global temperature rise below 2 degrees Celsius. SCG has therefore established measures to reduce greenhouse gas emissions, for example, increasing the proportion of alternative energy, conducting experiments on planting and using energy crops, generating power from waste heat, developing products and improving production processes to reduce greenhouse gas emissions such as a rooftop solar power generation system and power generation from solar panels for SCG’s operations in Thailand and overseas countries. In addition, SCG has considered setting up a working committee to study the financial impact resulting from climate change and continued raising awareness among staff on the importance of energy conservation and the use of a clean and environmental friendly energy.