Risk management

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  • Key impacts, risks, and opportunities

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    Context:

    Suzano has an Integrated Risk Management Policy in place (a document that is available to the public on the Investor Relations website). The Company’s Integrated Risk Management is conducted by the Risk Management area in conjunction with the other business areas. Its purpose is to identify, analyze, prioritize, treat, monitor, and report the main risks associated with the company’s business, in line with the corporate strategy, thus enabling the perpetuity and continuity of our operations.

    The Risk Management area performs the Enterprise Risk Management (ERM) process, in which it identifies the company’s main risks through workshops and interviews with key executives. The risks are then consolidated in a matrix and presented to all Directors, CEO, and Board of Directors in order to define the priorities. At least one action plan is open for each of these. The action plans for priority risks are monitored and measured through critical analyses. The status of the action plan is reported to the Executive Board, the Statutory Audit Committee, and the Board of Directors. It is important to point out that the risk management process is continuous, and the matrix may be subject to changes in the level of risk assessment, whenever changes occur in the internal and external conditions related to the business. Throughout 2020, the Risk Management area updated the risk matrix with input from more than 170 company executives and redefined the priority risks together with the Executive Board, the Statutory Audit Committee, and the Board of Directors.

    The risk management process is extended to all units through the Regional Risk and Business Continuity Commissions. These Commissions are responsible for mapping, analyzing, treating, and monitoring the risks for each unit. These Commissions are composed of strategic members from each site to identify the risks applicable to their reality and define action plans and business continuity plans (intended to prepare the company if a priority risk materializes).

    In addition, a Corporate Commission was formed and is responsible for mapping, analyzing, assessing, treating and tracking corporate risks, as well as for monitoring the information on those risks identified by the Regional Commissions The Corporate Commission is formed by Suzano’s Executive Board. In 2020, more than 300 employees from the Units were trained in topics related to risk and crisis management.

    The Integrated Risk Management process is subjected to certification and customer audits, and the results obtained are taken into consideration for the awarding of bonuses to the employees involved.

    Some of the identified risks include:

    Market

    The pulp market is cyclical and follows the global price trend, which is dictated by the supply and demand for pulp, the global capacity to produce market pulp, and the conditions for economic growth. The price can also be affected by the exchange rate variation of the currencies of the main pulp producing and consuming countries, changes in stocks held by producers and buyers, given the expectation of future prices, and by strategies adopted by producers that may eventually place more competitive products on the market.

    On the other hand, paper prices are more stable than prices in the pulp market, and are determined by supply and demand conditions in the markets where they are sold. Also, the price of paper can vary due to a number of factors outside of our control, including fluctuating pulp prices and specific characteristics in the market where we operate. We cannot guarantee that pulp prices will remain at current levels, but the proper management of our mills allows us to have a competitive advantage in the cost of production, in addition to greater resilience in times of falling prices.

    In the market risk management process, in order to mitigate the aforementioned points, strategies are identified, evaluated, implemented, and financial instruments are contracted to protect against the risks. In order to manage the impacts on results during adverse scenarios, the company has processes in place for monitoring exposures and policies for the implementation of risk management. These policies establish the limits and instruments to be implemented in order to: (i) protect cash flow due to currency mismatches, (ii) mitigate interest rate exposures, (iii) reduce the impacts of commodity price fluctuations, and (iv) change debt indexes.

    Operations

    The Company is subject to operational risks and emerging risks that could lead to partial or temporary shutdown of its activities. These shutdowns can be caused by factors associated with equipment failure, accidents, fires, weather, exposure to natural disasters, cyber attacks, pandemics, and others. These events could result in serious damage to our property, significant decrease in production, increase in production costs, and even bodily or fatal injuries to our employees or contractors, as well as adverse effects on our financial and operating results. Furthermore, our business depends on the continuous availability of logistics and transportation networks, such as roads, railroads, terminals, and ports, which may be blocked by factors outside of our control, such as social movements, natural disasters, or shutdowns. Interruptions in supplying inputs to our industrial and forestry units or in delivering our finished products to customers. All of this can affect our financial and operating results.

    Climatic factors

    Climate change, as in cases of an increase in average temperature or water shortage, can lead to significant losses in forest productivity and impact the continuity of industrial operations. For this reason, Suzano is involved in different initiatives to reduce and mitigate climate-related risks, such as

    • Actions to reduce greenhouse gas emissions: projects to increase efficiency in the use of fossil fuels (when its use is required); reduction of the average radius (distance between forest operations and mills), procedures and specific action plans in case of fires, among other actions
    • Climate change adaptation initiatives: specific studies of the individual characteristics of each region where we operate and identification of trends in climatic, meteorological, and soil conditions, so we can make recommendations for operations and even guide analyses for possible expansions; studies aimed at the production of clones and seedlings that are more resistant to climate variations and extreme climate events; and development of contingency plans for more critical scenarios (such as possible water shortage in the river basins where we operate).

    Management of risks and social impacts

    Following the Procedure for Identification and Evaluation of Social Aspects and Impacts, Suzano’s social impact management model seeks to eliminate, reduce or offset the negative impacts it generates by adopting management practices, making social and environmental investments, and performing continuous control and mitigation actions, which must be included in the operating procedures of the company’s management system. The Social Development team is responsible for coordinating and identifying social aspects and impacts. The approval of the analyses is obtained from the managers of the processes involved, and the final validation comes from the Local RISC – the forum responsible for analyzing and monitoring the relationship processes with stakeholders in the region.

    In order to identify and analyze the social aspects and impacts, we consider relevant stakeholder demands coming from the SISPART software, whose data source is the Engagement and Operational Dialogue, among others. Annually, the Local RISC evaluates the need to revise the social impact matrix, considering the results of the monitoring and critical analysis of the processes related to the Annual Stakeholder Relations Plan and the stakeholder demands identified by SISPART.