1. Philsophy: Turn Risk into a choice

      1. The assessment and prevention of the risks that could affect the Group’s values and objectives has always been an integral part of the innovative spirit and professional excellence on which Pirelli’s historical identity was founded.
        Risk is a fact of business life: a preventive analysis of risk factors and an assessment of their impact on a company performance are essential prerequisites for value creation. On these bases, decision-makers are allowed to make choices knowingly.

    1. Mission

      1. Considering that risks represent a key component of business, the new integrated risk governance model (Enterprise Risk Management) has the following mission:

        • "To manage" risks in terms of prevention and mitigation;
        • "To seize" proactively the opportunity factors;
        • To disseminate the “culture” of the value of risk within the Company, in particular, in the strategic planning and operating processes and in the most significant business choices;
        • To assure transparency in relation to the risk profile assumed and the management strategies implemented, based on periodic and structured reporting to the Board of Directors and to the Top Management and adequate information to the shareholders, and more in general, to the so-called stakeholders.

    1. Pillars

      1. In harmony with these aims, Pirelli’s Enterprise Risk Management is:

        • Enterprise-wide: extended to all types of potentially significant risks/opportunities;
        • Value-driven: focused on the more significant risks/opportunities in relation to their capacity to prejudice the achievement of Pirelli’s strategic objectives or to erode critical corporate assets (so-called Key Value Drivers);
        • Top-down: the Top Management identifies the priority risk areas and the events of greatest impact for the business;
        • Quantitative; where possible, based on an accurate measurement of the impacts caused by the risks on the expected economic/financial results in relation to their probable occurrence;
        • Integrated in the decision-making/business processes and, in particular, in the strategic planning and operational process.

Pirelli’s Enterprise Risk Management model forms part of three key phases in 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 the strategic, operative planning and analysis of investment projects through a continuous monitoring and management of operational risks.

    1. Risk analysis in strategic planning

      1. Risk analysis and risk measurement accompany the medium/long term planning process that is concluded with the presentation of the three-year plan to the investors.

        The methodology adopted is structured into three macro-phases:

        (i) identification of priority risk events;

        (ii) risk analysis;

        (iii) risk management.

        The Strategic Risks Committee defines the risk analysis methods and establishes the metrics to measure the risk events, in particular:

        • the economic and financial reference parameters to measure the risks and their impacts (PBIT, Cash Flow);
        • the probability scales;

        The identification of the priority risk areas and the respective assessment in terms of the potential impact and the probability of occurrence are guided by the Region based on the objectives and the business plan's strategic guidelines (key value driver). The central functions coordinate the analysis of the risks which are monitored centrally, for example: raw materials and exchange rates; statistical inference techniques are applied to some risk events which are especially significant for Pirelli to build possible development scenarios as an alternative to the scenarios considered when the industrial plan was defined in order to evaluate the "strength" of its assumptions and the possible impacts on the expected results.

        The use of quantitative metrics to measure the impact permits an aggregation of the risks and a representation of the Group's overall exposure to risk (so-called Profit@Risk).

        The Strategic Risks Committee assures that the following aspects are defined in relation to the so-called Profit@risk:

        • the target levels of exposure to priority risks;
        • the plans of action and the "management" policies to maintain the levels of exposure within the "target" limits.

        The Board of Directors takes into account the quantified risks and opportunities during the phase to approve the three-year plan and verifies that the volatility of the economic and financial results falls within the defined tolerance threshold.

        The three-year plan targets and the strategic choices which the plan reflects are also submitted to "stress tests" to verify the Group's economic, financial and equity "capacity" at the occurrence of uncertainty phenomena which cannot be readily "weighed" using probabilistic factors.

    1. Risk analysis in the annual and quarterly operational planning

      1. The high volatility of the principal economic and financial variables (price of raw materials, exchange rates, trend of reference markets, pricing trend) has entailed supplementing the "traditional" reporting tools with a quarterly measurement of the volatility of the expected profit in relation to the risk events or opportunities which may produce a change compared to the targets or the best renewed forecasts. The profit@risk review is subject to a quarterly report to the Top Management and supports the Top Management in the timely identification of the market trends and a possible "realignment" of the strategic actions.

    1. Risk analysis in new investment projects/business

      1. Pirelli's risk model was developed further, becoming a support tool in the decision-making process relating to investment initiatives.

        The set of characteristic information for the traditional analysis of investment projects was supplemented with the "risk dimension" based on:

        • a detailed analysis of the economic, political, safety and operational risk of the country where the investment is intended to be made;
        • the estimate of the "risk adjusted" cash profiles generated by the investment and the degree of volatility of the Net Present Value (NPV@risk) in relation to the events which are able to generate 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, will contribute to:

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

    1. Operative risks analysis

      1. The analysis of operating risks forms an integral part of the Group's internal control system; ad hoc methods are developed for each risk area with the aim of identifying the vulnerabilities of the control systems and the possible impacts for the Group.
        The areas of vulnerability which emerged are subject to a continuous follow-up activity performed by the Operating Risks Committee.

Last Revised: 15 June 2017