Principal risks, post Brexit and COVID – 19 separately considered, emerging risk, climate change

Electrocomponents plc – Annual report – 31 March 2021

Industry: distribution

Risks, viability and going concern (extract)

Principal risks in focus

Two of the Group’s principal risks require further explanation: the more prolonged effects of the ongoing COVID-19 pandemic and the UK’s exit from the EU.

1. COVID-19 pandemic

The Group is maintaining its operations and at present all our distribution centres (DCs) around the world are open and operating effectively. Our online business model continues to differentiate us and is helping us to continue to serve our customers.

The pandemic continues to affect some of our other, already identified, principal risks; these are explained in the relevant principal risk narratives.

Uncertainties related to this risk

Since the pandemic has its own specific uncertainties we continue to disclose it as a separate principal risk. These include:

  • Changes in demand across our diverse customer base and possible changed behaviours following the pandemic.
  • Potential impacts on cash flow, specifically the recoverability of trade receivables which is a key liquidity sensitivity.
  • Changes to sourcing inventory as suppliers’ production capabilities are affected by the pandemic and demand levels change in any recovery phase.
  • Significant transport constraints and increased costs and how quickly these will recover following the pandemic.
  • Uncertainty about the duration and later frequency of future disease control activities.
  • The difficulties managing the business’s return to partial office-based working as respective governments’ restrictions on people movement are eased.
  • When the pandemic passes, the speed and extent to which industries can recover from the effects is unclear.
  • The longer-term effects of the pandemic on business activity, government finances and related levels of public expenditure.

Mitigating actions

The business has several structural factors, including the diverse nature of its customer base and strong online capabilities, that have helped protect it from some effects of the pandemic. These have enabled the business to continue to support customers during the pandemic.

During the year the business took several mitigating actions, many of which are still in place, including:

  • The majority of our office-based staff working from home and enhanced personal protective equipment for our DC employees.
  • Appropriate cost actions taken to protect profit and focus on maintaining cash flow.
  • Improving the Group’s balance sheet flexibility including securing additional funding facilities (see page 42).
  • Supporting employees’ physical safety in our DCs and mental wellbeing for those during extended periods of home working.
  • Maintained cyber monitoring and training reflecting the changing business working environment and increased external threats.

The effectiveness of the business’s operational controls during the COVID-19 pandemic have been reviewed by the Group’s internal audit team on a risk-based approach. These were initially focused on COVID-19 effects whereas now these have been embedded within the team’s ongoing market and functional audits.

2. The UK’s exit from the EU

The UK formally left the EU and the agreed transition period ended on 31 December 2020 and the principal risk that the Group was working to mitigate has now crystallised. Our planning activities leading up to this date meant that the business was largely able, where possible, to mitigate the associated risks. Nonetheless, the business is monitoring the risk of further unforeseen consequences following the UK’s exit from the EU (Brexit). There is now a hard border between the UK and the EU and this has led to more transactional friction when moving goods across this border. As expected, the business is experiencing more customs administration, tax, duty and brokerage fees when moving products across this border. Further, customs clearance processes continue to evolve in some areas, for example between Northern Ireland and Great Britain. For this reason, we continue to track and monitor the effects of Brexit on the operational activities of the business as a principal risk, albeit that this risk is lower than the prior year.

Emerging risks

As part of the Board’s Group risk reviews of developing risk themes, climate change is identified as an important emerging risk.

Climate change

An important emerging risk for the Group is climate change, with ongoing work to investigate the potential implications of an increase in global temperatures upon the Group. This includes the impact on the Group’s operations, customers and supply chain, and span physical, regulatory, market, technology and reputation risks.

The countries that signed the 2015 Paris Agreement committed to aim to keep increases in global average temperature to ‘well below 2ºC above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5ºC’.

Accordingly, governments in several countries where the Group has operations have committed to net-zero carbon emissions, including the UK, France and Japan. Other countries and regions are considering adopting net zero targets, including the EU.

In this context, there are several specific risks, and opportunities, that the Group, as a global distributor, faces due to climate change. These include physical risks with increased likelihood of more extreme events such as storms, significant rainfall episodes, droughts and heatwaves which could affect the business’s physical sites or its distribution process. Other risks are more transition oriented, including regulatory change, often by governments, designed to reduce greenhouse gas (GHG) emissions. These may render certain products obsolete while increasing demand for others. Other potential impacts include increases, for example, in the costs of air transport of inventory to meet customer demands. There is also reputation risk if the business is not seen to be taking deliberate and tangible actions to reduce its GHG emissions.