Integrated Annual Report 2021

As MISC ventures forth amidst a highly challenging operating environment, we take cognisance of the presence of risks in our decisions and activities. In view of this, we acknowledge the importance of carefully managing our risk exposure whilst pursuing our strategic and business objectives, with the ultimate aim of ensuring sustainable value creation over the long term for our stakeholders. In 2021, we have updated our emerging risks to include ‘Extreme Weather and Sea Level Risk’ as one of the risks our business faces in light of climate change concerns. The following are the key risks that the Group is currently facing and our responses to those risks. OUR RISKS AND MITIGATION STRATEGIES STRATEGIC REVIEW Details of the Group’s risk management framework and processes can be found in the Statement on Risk Management and Internal Control on pages 271 to pages 285. CRUDE OIL DYNAMICS, SUPPLY, DEMAND AND PRICE Description The persisting COVID-19 pandemic and the transition towards a low carbon economy may cause investors to move away from new upstream oil and gas projects, thus prolonging low and volatile oil prices. This will reduce opportunities and growth for the Offshore Business, Petroleum & Product Shipping and Marine & Heavy Engineering segments. Mitigation/Response • Maintaining a diversified portfolio of core businesses. • Continue to strengthen business model and strategic direction focusing on long-term contracts which are not affected by short-term oil price movements. • Developing and venturing into new recurring businesses and broadening our asset portfolio into new asset classes such as ethane carriers. • Pursuing/Participating in low carbon business solutions to capitalise on emerging business opportunities associated with energy transition. • Establishing partnerships to maximise capital utilisation, capabilities and service offerings in order to maintain competitive advantage in current secured income stream as well as future opportunities. PROJECT AND FINANCIAL PERFORMANCE FINANCIAL/PHYSICAL Material Matters: Capitals Affected: Trend: Upward BUSINESS CYCLICALITY Description The cyclical nature of the shipping market challenges players with generating consistent and predictable cash flows and earnings, to match and sustain borrowings on capital expenditures. Charter rates may drop in the event of tonnage oversupply in the petroleum and LNG shipping sectors. Mitigation/Response • Continue to strengthen the business model of focusing on stable long-term income generation, without losing sight of taking on short-term opportunities during positive cycles in favour of the Group. • Maintaining appropriate floor and ceiling rates on spot vessels where possible to minimise revenue volatility during low summer seasons and peak winter seasons. • Continue to diversify the Group’s revenue by developing and growing new recurring income segments, such as shuttle tankers and ethane carriers. PROJECT AND FINANCIAL PERFORMANCE FINANCIAL/PHYSICAL Material Matters: Capitals Affected: Trend: Neutral EVOLVING LNG MARKET Description The LNG market continues moving towards commoditisation, with activities growing in the spot segment, stiffer industry competition and expected shortening of LNG contract tenures in a more volatile and dynamic market. This evolving market structure may result in compressed profit margins and affect the Group’s core business in the long run. Mitigation/Response • Being selective in our investments and new project involvement in strategic conventional LNG carriers by targeting top tier clients and opportunities. • Expanding and exploring new asset classes i.e. small and mid-scale LNG market segment and other niche markets such as ethane and other gas transportation. • Exploring opportunities to diversify asset portfolio by offering integrated and new solutions i.e. LNG to Power (L2P) solutions. PROJECT AND FINANCIAL PERFORMANCE/CUSTOMER SATISFACTION FINANCIAL/PHYSICAL/SOCIAL & RELATIONSHIP Material Matters: Capitals Affected: Trend: Upward INCREASING CLIMATE-RELATED REGULATIONS AND REQUIREMENTS Description Towards achieving international decarbonisation goals, regulators and lawmakers, including those in the maritime industry, are enforcing stricter greenhouse gas (GHG) emission standards and regulations. The introduction of new and stricter shipping regulations may affect current and planned assets’ specifications, and result in higher capital expenditures to retrofit existing fleets to meet these new requirements and higher operational costs due to the implementation of carbon pricing. Mitigation/Response • Keeping abreast of relevant regulatory requirements and continuously monitoring the Group’s fleet specification against minimum regulatory requirements. • Detailed progressive planning and project management on retrofitting of existing fleets which require upgrades, in order to achieve new regulations/ standards requirements ahead of enforcement of regulations. • Continue investing in more sustainable and environmentally-friendly shipping solutions i.e. high efficiency LNG dual-fuel engine vessels in the near term, whilst progressively moving into zero-emission vessels in the long run e.g. ammonia fuelled vessels. • Establishing long-term decarbonisation pathway plan in line with increasing environment standards and international decarbonisation goals. CLIMATE CHANGE/OCEAN HEALTH /NATURAL RESOURCE USE/VALUES AND GOVERNANCE NATURAL/HUMAN Material Matters: Capitals Affected: Trend: Upward GEOPOLITICAL INSTABILITY Description Geopolitical instability in the form of sanctions, terrorism, trade wars, territorial disputes and piracy could potentially lead to adverse commercial impact, operational safety and opportunity loss (i.e. inability to conduct business with sanctioned countries or entities). Mitigation/Response • Selective and prudent approach towards bidding for new projects and business opportunities, and ensuring all factors, including geopolitics, are taken into account. A holistic risk assessment is performed on each project and business opportunity. • Perform detailed background reviews and assessments on potential clients and partners to ensure they are not exposed to intolerable geopolitical risks. • Seek continuous improvement and further strengthen contracts and agreements to protect the Group’s interests. • Increase operating controls on existing projects and tighten security of assets. PROJECT AND FINANCIAL PERFORMANCE FINANCIAL/PHYSICAL/SOCIAL & RELATIONSHIP/HUMAN Material Matters: Capitals Affected: Trend: Neutral MISC Berhad 78 Integrated Annual Report 2021 MISC Berhad Integrated Annual Report 2021 79