Risk management
Tornator’s risk management is aimed at securing profitable business in the long term and to create opportunities for well-managed risk taking using the selected strategy. It is based on the systematic identification and analysis of all significant risks to the company.
Tornator’s risks are divided into three main categories: strategic risks, operational risks and financial risks. Examples of each category are described below.
Strategic risks
Fluctuation in timber demand is naturally a risk for a forestry company. Demand risk has decreased as the use of wood has increased and diversified, and many new innovations are still to be discovered. With new investments by the forest industry and as the importation of timber from Russia came to a halt, wood demand has increased in all countries in which Tornator operates. The company has also secured high demand for wood by certifying all of its forests.
The volatility of wood prices is a significant risk factor in terms of Tornator’s results. If prices fall, Tornator can temporarily increase the volume of cutting right sales or plot and forestland sales, or both. However, the goal is to follow a sustainable felling plan in order to optimise annual cash flows in the long run.
Risks concerning the quantity and quality of wood raw material are controlled through long-term forest resource management planning and focusing operations according to the structure and age-class distribution of the forests. In 2021, for the verification of growing stock growth, the company adopted the MOTTI Finnish forest growth model, developed by the Natural Resources Institute Finland (Luke), based on the latest research results. These models are used in the preparation of the long-term felling plan (longer than 30 years).
The change in the forest valuation method in Finland may result in greater volatility in the recognised fair value of forests entered in the income statement. In the transaction-based method, fluctuations in the forestland market may be larger than in the previous model based on future cash flows. Changes in current certification criteria may affect opportunities for forest use and cause a loss of income for Tornator, unless there is an agreement on full compensation. The Finnish Forest Stewardship Council (FSC) has now redefined its national criteria. Tornator was closely involved in this process, and does
not foresee that the changes will cause any significant loss of revenue.
Forestland purchasing entails risks, and the success of investment often becomes apparent only later. The forest resources and structure of the estate to be purchased are determined using highly advanced technology, but some decisions must still be based on estimates. The pricing of estates is based on clear criteria, but pricing and the underlying appraisals may have an effect on the success of purchases in terms of returns.
Tornator monitors the current economic trend when planning plot sales. A downturn may decrease demand for plots for holiday homes and temporarily reduce profits. The risk involved in investments made in wind power project development is managed by preparing accurate feasibility studies before launching such projects, by selecting partners among well-known operators in the sector, by dispersing the projects throughout Finland, and by planning them carefully. Tornator does not participate in wind power construction or ownership of production, but sells its shares in projects before construction and remains the lessor of land.
When utilising forest resources Tornator manages risks to the environment by complying with environmental legislation and certification criteria. Risks are discussed in employee training and introduction, and minimised through the careful planning of operations and a high standard of implementation.
Significant new statutes or other factors impeding operations can be regarded as political risks. An example of this is the debate in Finland on the acceptability of forest use, or discussions on regulation at EU level that would restrict forestry. The role of forests in halting biodiversity loss, among other things, has been in the headlines. Acquiring forest assets as a foreign company may also subject the company to political risks in the target countries in question. In managing risks, it is important to cooperate with authorities, educational institutions and various NGOs as well as participate in societal debate. Proactive risk management also involves participation in research in the field and the preparation of various carbon calculations. Tornator pursues open communication with an emphasis on the positive overall responsibility of the company’s forestry activities and corporate values.
Tornator also aims to continue expanding its operations outside Finland, in countries where the related growth potential is considered profitable. Geographic expansion is both a way to manage risks and a risk in itself. With regard to Tornator’s operations, Romania and Estonia score relatively poorly in corruption statistics. Tornator makes economic, social and environmental responsibility an integral part of its business, guided by a Code of Conduct that is common to all its countries of operation.
Furthermore, the risks associated with expansion are managed by selecting competent partners and reliable customers, and by balancing out long and short-term timber sales agreements. The company performs internal control in all its countries of operation, and the group has a whistleblower channel in place.
Attracting and retaining skilled employees is a risk in forestry as well. Tornator has prepared for rising numbers of retirements among forest workers by signing on new contractors and increasing machine work. With regard to salaried employees, the company collaborates with educational institutions and recruits proactively. The risk is also managed with active HR management and development. Because of the war, workers from Ukraine have not been available for forest management work. Future reconstruction could cause a shortage of forestry workers in Tornator’s countries of operation, should forestry labour move from these countries to Ukraine.
Operational risks
To manage internal business risks, Tornator has operational processes that are approved by the Board of Directors and senior management. Operational work is increasingly carried out with entrepreneurs’ resources, which poses challenges in terms of control of environmental damage and occupational safety, among other things. The expansion of the silviculture services business throughout Finland has increased the risks posed to Tornator through factors such as an increase in the number of contractors used. This control is being improved by means of training and the use of information technology.
Greater frequency of natural disasters due to climate change pose an ever-greater risk to forest assets. For Tornator, the size and geographic extent of its holdings, the good health and growth of its forests, and the measures required by the Forest Damages Prevention Act (1087/2013) form an intrinsic risk management tool. In addition, Tornator has a Finnish forest insurance policy that covers damage in the case of a major disaster. However, the company regards the insurance of its forest holdings abroad as unprofitable, because the target countries lack an operational forest insurance market. The threat of a cyberattack on corporate information systems may also be considered a risk. Tornator is prepared for this by utilising advanced security technology and by providing instructions and training to users.
Financial risks
A substantial proportion of loan capital in the company’s balance sheet constitutes a risk which Tornator manages with special attention. Ready access to the capital markets will enable the successful refinancing of loans. The company adjusts its loan portfolio depending on the financial market situation, so that loans mature over several years and as far into the future as possible. The company has diversified the risks related to acquisition of funds by issuing bank loans and bonds with various maturity dates in different years. The company has prepared for market interest rate changes through derivative contracts.
Interest rate hedging reduces the interest rate risk on loans. Liquidity management is based on advance payments and up-to-date cash management. The company also has a commercial paper program to optimise the need for cash. Cash reserves are invested in bank deposits and short-term, liquid and fixed income funds.
Tornator manages customer risks by advance payments based on sales agreements.
Climate risks and opportunities
Sustainable forestry plays a key role in mitigating climate change. Our mission is to ensure the carbon sequestration capacity and ecosystem services of the company’s forests in changing conditions by keeping them diverse, healthy and in good growing condition. Tornator remains committed to sustainable forestry, increasing biodiversity and certification of forests.
In 2021, Tornator launched its own Climate Programme for the 2021–2030 period. The programme includes goals for increasing the carbon sequestration of forests and the substitution effects of forest use. The growth and carbon sequestration capacity of forests is ensured through the correct allocation of forest regeneration methods, fertilisation, and the use of genetically improved nursery stock. Tornator is working to identify potential wind farm sites in an effort to enable wind farms to be built on the company’s land.
Tornator’s Board of Directors has approved the objectives and measures included in the Climate Programme and will be provided with annual progress reports. The Management Group will monitor and coordinate the implementation of the programme in the company’s business processes. Climate-related matters are also discussed in the annual Green Finance Investor letter. The company’s Head of HR, Communications and Responsibility is in overall charge of reporting related to Task Force on Climate-related Financial Disclosures (TCFD).
Year 2023 of the Climate Programme
In 2023, the measures in the climate programme were carried out largely as planned. The company’s forests were fertilised with fertiliser on about 7,000 hectares (target 8,000 hectares). In contrast, about 750 hectares of forest were remedially fertilised with boron. In line with the objectives, forest planting was carried out with genetically improved seedlings, which have about 20 per cent better growth than unmodified seedlings. The forests continued to grow rich and diverse, and healthy. The company also managed to exceed its land acquisition targets. Overall, the carbon sequestration capacity of the growing stock increased to approximately 4.5 million tonnes of CO2 per year. However, the substitution effects remained at the same level as in the previous year. Regarding felling opportunities, we are still well within the target schedule. The cumulative calculated substitution effects of felling opportunities were approximately 0.07 million tonnes of CO2 per year. In the case of wind and solar power production, the substitution effects were also approximately 0.07 million tonnes of CO2 per year. It had already been previously recognised that the commissioning of additional capacity would be more emphasised towards the end of the programme period.
Identifying, assessing and managing climate-related risks
Identifying climate-related risks and opportunities is made possible by existing knowledge, but new research is also required. Information on the risks and opportunities related to climate change will be obtained through research, by collecting the observations of the company’s field organisation and by analysing the changes in the operating environment. Tornator is involved in several climate-related research projects, such as the multidisciplinary Hiilestä kiinni – Catch the carbon research and innovation programme funded by the Ministry of Agriculture and Forestry. We determine the expectations and views of our stakeholders through materiality studies.
The company will systematically monitor the quality of forest management and other measurable indicators related to carbon sequestration. The carbon footprint of Tornator’s forests is included in the forest resource calculations.
Tornator produced its first carbon footprint calculations and scenario analyses in 2018. The calculations have been refined since then, and further studies have been carried out on the possibilities for crediting carbon sequestration. Through these calculations, we have identified the major sources of greenhouse gas emissions from Tornator’s operations, and we have calculated the carbon sequestration capacity of our forests. The company’s operations do not produce significant greenhouse gas emissions: carbon sequestration in forests exceeds the emissions of our own operations by over a thousandfold. Tornator has minimised its emissions by favouring remote working to reduce energy consumption in offices and by developing digital applications to improve productivity and reduce commuting. Tornator is truly a carbon-negative company.
