APPROACH

    1. Philosophy & Mission

      1. The assessment and prevention of the risks that could affect the Group’s values and objectives have always been an integral part of the innovative spirit and professional excellence upon which Pirelli’s historical identity was founded.

    1. Pillars

      1. In line with its mission, Pirelli Enterprise Risk Management is based on 6 macro pillars:


    1. Risk model

      1. Pirelli Enterprise Risk Management model is embedded in three key phases of the decision making process:

        • strategic planning (medium/long term);
        • operational planning (annual and quarterly);
        • new investment projects/businesses.

        It is worthwhile noting that the Enterprise Risk Management model goes beyond these three phases by assessing operational as well as reputational and sustainability risks that-if not correctly managed- may negatively affect strategic tangible and intangible assets.


    1. Risk analysis in strategic planning

      1. Risk and opportunity assessment embraces in the medium/long term planning process, which sees the Group shedding light on the three-year plan to investors.

        The methodology adopted is structured into three macro-phases:

        (i) identification of key risk and opportunity events;

        (ii) risk assessment;

        (iii) risk management.

        Not only does the Strategic Risk Management Committee approve the risk assessment methodology, but also the key metrics to measure risks, in particular:

        • the economic impact to measure risks and opportunities (EBIT; Net Sales);
        • the probability scales;

        The process of assessing key risk areas and their potential impact on strategic objectives (key value drivers) is guided by the Business Units, supported by the Regions. Central functions, such as Finance or Purchasing- coordinate the risk assessment on areas that are centrally monitored (raw materials and exchange rates).

        Statistical inference methods are applied to evaluate risk events that are significant for Pirelli and to build potential alternative scenarios to the one considered when the industrial plan was defined. This is performed in order to evaluate the "strength" of the strategic plan assumptions. Quantitative metrics to measure impact and probability allow the aggregation of each risk and opportunity into an overall Group risk exposure (EBIT@ Risk through Montecarlo Simulation).The Strategic Risk Management Committee assures that the following aspects are defined in relation to the so-called EBIT@risk:

        • Risk exposure target level on priority risks;
        • Mitigation plans and "management" policies to maintain the levels of exposure within the "target" limits.

        When approving the three year strategic plan, The Board of Directors takes into account the overall Group risk exposure and verifies that the resulting economic and financial volatility falls within the defined tolerance threshold.

    1. Risk analysis in the annual and quarterly operational planning

      1. The high volatility in the key economic and financial variables (raw materials price, exchange rates, market trends, pricing/mix evolution) has entailed supplementing the "traditional" reporting tools with a quarterly measurement of expected EBIT volatility taking into account risks and opportunities that may produce a significant change in the Group targets. The EBIT@risk review is subject to a quarterly report to the Top Management and supports it in proactively identifying market trends and a possible "realignment" of strategic actions.

    1. Risk analysis in new investment projects/business

      1. Pirelli risk model supports the decision-making process relating to investment initiatives. The “risk dimension” has been fully embedded in the traditional set of data related to investment projects, in particular, the ERM department provides the following information:

        • a detailed analysis of the economic, political, safety and operational risk of the country where the investment is intended to be made;
        • the estimated of the "risk adjusted" cash profiles generated by the investment and the degree of volatility of the Net Present Value (NPV@risk) taking into account events that are able to lead to significant changes to the business plan results.

        The inclusion of the risk variable in the analysis of investment projects and the possibility of comparing them with the expected returns, contribute to:

        • enhance further the Top Management's awareness and guide the risk management strategies;
        • lead a comparative evaluation of the investment initiatives.

    1. Operational risks assessment

      1. The assessment of operational risks forms an integral part of the Enterprise Risk Management activity as a proactive identification and management of such risks minimize negative impacts on strategic assets (both tangible and intangible) as well as unfavourable ramifications on the Group strategy. Thus, at least on an annual basis, the following activities are performed:

        • Risk assessment on the operational risk cluster (with an ad hoc focus on cross- risks, which may affect more than one risk area);
        • Risk register creation, which is then approved by the Operational Risk Management Committee;
        • Follow-up activity by the Operational Risk Management Committee on mitigation strategies related to key risk events.

    1. External risks assessment

      1. The analysis of external risks-especially stemming from macroeconomic volatility -is carried out on an ongoing basis with the support scenario analysis- both internal and external-as well as econometric models. These techniques are used by the Enterprise Risk Management to assess potential negative impacts on strategic and operational planning goals.

    1. Reputational risks assessment

      1. The assessment of reputational risks leads to the identification of potential events that may jeopardise the stakeholders’ feelings toward the Company. The key risk assessment outcome are reported to the Strategic Risk Management Committee for approval and potential identification of mitigation strategies.

Last Revised: 4 Oct 2017 7:00 am