Regulatory and political risks
- REACH: cost-intensive testing and registration procedure
- Emissions trading: risk of undersupply from 2013
- E.U. directive on industrial emissions might require conversion of plants
Regulatory and political risks: Due to the European chemicals directive REACH, which came into force on June 1, 2007, BASF and our European customers face the risk of being placed at a disadvantage to our non-European competitors due to the cost-intensive test and registration procedures.
Within the framework of E.U. emissions trading, the BASF Group was allocated emission certificates for the second trading period from 2008 to 2012. We do not currently expect any shortage of certificates for our activities in Europe in this second trading period. However, the concrete design of the European emissions trading from 2013 is still unclear. Depending on the final design of the implementing regulation, BASF may be required to purchase several million additional certificates annually. Depending on the quoted prices for CO2 certificates, this will affect our cost position and therefore our global competitive situation.
Due to the amendment of the E.U. directive on industrial emissions (IED), scheduled for 2010/11, additional costs could arise for reporting and for the conversion of existing plants.
Additional risks are associated with an intensification of geopolitical tensions, the destabilization of political systems and the erection of trade barriers (customs duties, embargo measures). Overall, we regard the probability that regulatory and political risks will occur as low; the financial impact can be classified as low in the short term and elevated in the medium term.
Research and development risks
- Know-how Verbund and close collaboration with customers minimize risks that projects will be stopped prematurely, budgets exceeded or products not approved for sale
- Dialogue with customers and consumers about new technologies at an early stage
Research and development: Due to the high degree of complexity and uncertainty involved in chemical and biological research, there is a risk that projects might be discontinued, budgets may be exceeded or developed products will not receive regulatory approval for sale. Our global Know-how Verbund, our collaboration with partners and customers as well as our innovation process reduce this risk. Within our project management framework, we continuously review the efficiency, chances of success and the operating environment of research projects; this review includes all phases from idea generation to product launch. The trust of customers and consumers is essential for the introduction of new technologies. That is why we enter into dialogue with stakeholders at an early stage of development. A significant contribution to long-term risk management is made by the alignment of strategic goals and the research portfolio as part of both strategic planning and strategic controlling.
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Exploration: There are also opportunities and risks in oil and gas exploration. Geological uncertainties can result in varying degrees of success in the search for and development of oil and natural gas reserves. We lessen such risks by means of a balanced exploration portfolio.
- Addressing demographic change with the Generations@Work program
- Developing the employer brand to compete internationally for highly-qualified specialist and management candidates
- Diversity + Inclusion initiative to encourage internationality and diversity
Personnel: Dedicated and competent employees are essential for BASF’s sustainable success. Our goal is to form the best team in industry. Due to global competition for highly-qualified specialist and management candidates, which is intensified by demographic change, there is a risk that job vacancies cannot be filled with suitable applicants, or only with a significant delay. The loss of expertise due to the high number of retirements in North America and Europe and the comparatively high level of undesired turnover in Asia may have negative effects on business. Following the difficult economic situation in 2009, the intensification of competition for specialists and managers will quickly resume. In Europe, this affects the engineering and scientific professions in particular; a noticeable talent shortage can already be observed.
We address these risks with our global programs Generations@Work and Diversity + Inclusion, the further development of our employer brand and an emphasis on personnel development as well as additional regional initiatives. These measures are aimed at both effective personnel recruitment and retention.
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Overall, we rate the risk of a negative impact on our business due to the loss of managers and employees as significant. In addition, we expect this risk to increase in the medium to long term, and are already working to counter these developments using the above-mentioned methods as well as increased investment in human resources marketing and personnel development.
Risks from acquisition and investment decisions: Implementing acquisition and investment decisions involves complex risks. The evaluation of risks and opportunities already plays a significant role during the assessment of potential acquisition targets. A detailed analysis and quantification are conducted as part of due diligence. Examples of risks are: increased staff turnover, delayed realization of synergies or the assumption of obligations that could not be quantified exactly in advance. Therefore implementation and follow-up assessments take place along defined processes. By nature, the acquired businesses are subject to general market risks and business-specific risks. For this reason, acquired businesses are promptly integrated into BASF’s risk management process. This has already been carried out for most of the business activities of the recent Ciba acquisition.
Legal risks: In order to assess the risks from current legal disputes and proceedings and any requirement to recognize provisions, we consider the results of comparable proceedings and independent legal opinions as well as assumptions regarding the probability of occurrence and the range of potential claims in individual cases. In addition, we use our own analyses and assessments of the circumstances and claims asserted. The actual costs can deviate from these estimates.
In addition, the Global Intellectual Property unit at BASF SE, together with the appropriate units of the U.S.-based BASF Corporation and BASF Coatings in Münster, Germany, monitors all the intellectual property rights of BASF. We aim to avoid patent and licensing disputes whenever possible with the help of extensive clearance research.
Based on the measures taken, we classify the risk of damages as low and the potential of an impact on earnings as medium.
- Voluntary commitment to environmental protection and socially responsible conduct
- Adherence to standards assured by monitoring systems
- Global management system for early identification of important topics
- Ongoing dialogue with stakeholders
Sustainability: BASF is committed to integrating environmental protection and socially responsible conduct into its business activities. Contraventions to our voluntary commitment to sustainability or to laws represent a reputational risk and could lead to operational or strategic risks. We have set up a global issue management system for sustainability to enable us to promptly recognize risks and opportunities related to sustainability. The results are then used to initiate change processes in the company in order to be prepared for any risks and to exploit opportunities accordingly. We have established global monitoring systems to enable us to ensure the adherence to laws and our voluntary commitments in the areas of environment, health and safety as well as to labor and social standards. These systems include our entire supply chain.
In order to assure society’s acceptance of our business activities, we remain in continuous dialogue with relevant stakeholders.
Information technology: Risks are caused primarily by the non-availability of IT systems and applications, delayed provision of important data, loss or manipulation of data and the disclosure of confidential information. This can have negative consequences for the respective business processes.
To minimize such risks, BASF has a stable and redundantly designed IT system, back-up processes, virus and access protection and encoding systems as well as integrated, Group-wide-standardized IT infrastructures and applications. The systems used for information security are tested and updated on an ongoing basis. In addition, all our employees receive regular training on information and data protection. Risk management is conducted by using Group-wide regulations for organization and application, as well as an internal control system based on this.
Due to the measures taken, we regard the probability of a risk to our IT system as low. However, the potential impact would be high.