Material risks and uncertainties

Risk assessments are performed at all levels of the organization. Material risks for our Business Units and our Business Partner functions are reported to the Executive Committee and the Audit & Risk Committee twice a year.

In addition, the Executive Committee has a separate discussion to determine the Group’s material risks. These are shared with and reviewed by the Audit & Risk Committee and the Board of Directors and form the basis for the risk disclosures below.

Our risk profile

The table below details the five most important short-term risks that might have a material impact within three years and have the potential to prevent us from successfully implementing our strategy and achieving our targets. For each of these risks, the mitigating actions we are taking to reduce our exposure are described. These risks are labeled as top risks either because the exposure on dsm-firmenich’s EBITDA is an indicative €45 million or more, or because they have a major non-financial impact, such as on the company’s reputation.

Data management and digital transformation

Poor data governance and data management carry the risk of data breaches, resulting in failure to maintain data confidentiality and/or unauthorized access to sensitive information, leading in turn to financial losses and reputational damage. Data management forms the backbone of our digitalization roadmap. The successful execution of our roadmap is important for delivering on our strategic and financial targets. The implementation of this roadmap remains complex. This, in combination with certain resource constraints, means there is a risk that the digital transformation roadmap may not be implemented according to plan or may not deliver targeted benefits in full.

We established a governance structure around data management, under the oversight of our Data Council. A Data Governance policy was launched and Data Domain owners have been identified for priority data domains. Data leaders from the Data and AI unit have been appointed to enhance governance across all business platforms and data domains. A Data Governance roadmap is in place to measure progress. Additional information on data governance and AI is provided under Cybersecurity, information security, data governance and artificial intelligence. In our operating model, Business Partners allocate dedicated resources to drive digitally-enabled process excellence. Furthermore, our capacity and capability in Digital & Tech are continually strengthened. The Group Investment Committee supports the Executive Committee in managing the digital project portfolio, setting the right priorities and allocating resources accordingly. All key projects are subject to quality reviews by an independent, multi-disciplinary team of experts at specific moments throughout project implementation.

Geopolitical instability

We operate globally and could therefore be affected by geopolitical instability and related economic decline, such as:

Trade restrictions, raw material and energy shortages, and supply disruptions, hampering our ability to supply our customers
Lower economic growth and declining disposable income, impacting demand for our products
Inflation, putting pressure on our margins

Our business continuity management governance and processes are key components of our operating model. To reduce the impact of potential disruptions, preventive actions are taken, such as reducing single-source positions, qualifying back-up manufacturing sites, and optimizing safety stocks. Continuous monitoring of potential disruptions in our supply chains enables us to act with speed as and when necessary. We hedge part of our exposure to purchasing price fluctuations and currency fluctuations.

Commodity markets

We operate in highly competitive markets. There is a risk that some competitors may benefit from a lower cost position. Where we cannot differentiate ourselves sufficiently, this could impact our sales volumes and margins.

We prioritize high-growth and higher-margin market segments and we monitor the competitive landscape. To address the needs of customers and end-consumers in these segments, we develop innovative products and services and offer differentiating value propositions. We make full use of our wide-ranging expertise, our scientific, technical, and data-driven innovation capabilities, and portfolio of natural and renewable ingredients. In all our Business Units, we focus on maximizing operational performance. In 2024, we continued the vitamin transformation program launched in 2023 to improve profitability, structurally reduce our exposure to price fluctuations, and deliver significant savings.

Talent availability

Our success depends on our employees, including – but not limited to – scientists, researchers, perfumers, flavorists, and experts in digital and data science. In view of the tight labor market and the ongoing challenges of the macro-economic environment, there is a risk that we may be not able to attract, retain, develop, and engage the people with the required expertise, experience, and mindset needed for the implementation of our strategy.

We operate a range of company-wide initiatives addressing topics such as integrated rewards, people development, well-being, engagement, and Diversity, Equity & Inclusion. We monitor retention rates as well as employee engagement, taking appropriate action as and when needed. We frequently connect with our employees to update them on the company’s performance, its position in the various markets we serve, and the challenges and opportunities before us.

Cyber security

As external cyber threats remain high, we are exposed to the risk of cyber-attacks. This could lead to discontinuity of operations and the loss of integrity or confidentiality of information.

We invest in our information security systems to strengthen our security. We have a single cyber security framework covering IT, operations technology, and R&D laboratory systems. Since the ‘human firewall’ remains critical, we have intensified our phishing tests to keep employee awareness high. To mitigate the impact of a potential attack, we have developed robust business continuity and disaster recovery plans. Additional information on Cyber security is provided under Cybersecurity, information security, data governance and artificial intelligence.

Cyber security, information security, data governance, and artificial intelligence

We have robust policies on everything from cybersecurity and information security to data governance and Artificial Intelligence.

Cybersecurity and information security

Robust cybersecurity and information security involves guaranteeing that proper safeguards and protections are in place on data privacy rights for individuals, companies, and other entities, as well as assuring access to IT systems, networks and other data. Rigorous processes and systems, as well as strict data handling and security practices, are essential to prevent IT system failures and major information security or cybersecurity incidents, among other issues. The risk associated with cybersecurity and information security has been identified as a material risk for our company, and the topic of cybersecurity and information security is reviewed twice a year by the Audit & Risk Committee.

To minimize the financial impact in case a cyberattack might occur, we are covered through cyber insurance.

We experienced no major cyber incidents in 2024. In 2023, however, a service provider had a data compromise in which non-sensitive employee data was exposed. Immediate actions were taken with the service provider to remediate the incident, security policies and guidelines for software and service providers were strengthened, and our data security measures and awareness were reinforced. For further information, see Material risks and uncertainties.

Data governance

At dsm-firmenich, data governance is fundamental to building robust data foundations, accelerating transformation programs, and harnessing emerging technologies. The implementation of our recently launched Data Governance policy will play a crucial role in enhancing customer experience, driving innovation, and improving operational efficiency. By implementing clear frameworks, standards, and ownership, we ensure the protection and optimal management of critical data across our company. Our approach focuses on improving the quality, accessibility, and reusability of data, which in turn reduces operational costs and risks, enhances operational excellence, and enables faster, more effective and ethical use of data. Through business-led initiatives supported by our Data Council, we foster a data-driven culture that aligns with our strategic goals and drives sustainable change.

Artificial intelligence (AI)

We are leveraging the transformative potential of artificial intelligence to enhance customer experiences, drive innovation, and improve operational efficiency. Our strategic deployment of AI technologies enables us to deliver more personalized services while streamlining our own processes to better serve our global stakeholder community.

Leadership in the adoption of AI comes with profound responsibilities. Our AI governance framework emphasizes transparency, fairness, and ethical considerations throughout the development and deployment lifecycle. We are committed to responsible AI practices that prioritize the interpretability of outcomes, operational stability, and active identification and mitigation of potential biases. The Board of Directors and the Executive Committee completed a training course on AI in 2024, and the risks and opportunities of AI are periodically reviewed by the Board of Directors.

We recently launched a policy on Responsible AI. The policy establishes a Responsible AI Committee to supervise its implementation and a governance framework for this rapidly evolving field. It is accompanied by procedures that describe how to conduct any data science and AI projects in an effective and responsible manner. As we continue to advance our AI capabilities, we remain focused on creating sustainable value while upholding the highest standards of responsible innovation. We maintain a strong competitive position while actively addressing both emerging challenges and new opportunities in the digital transformation of the flavor, fragrance, and nutrition industries.

Competitive advantages

Our extensive proprietary database, acquired through decades of scientific research and market leadership, is a significant competitive advantage in developing AI-powered solutions. This unique asset, combined with our deep understanding of molecular science and formulation expertise, enables us to create AI models that are both innovative and viable.

Strategic challenges

The acceleration of digital transformation across our industry presents challenges that need close attention. We recognize the need to modernize our technological infrastructure to fully capitalize on the opportunities of AI and generative AI. We also face more competition for specialized AI talent in a highly competitive market. We are actively addressing these challenges through targeted investments in technology and talent development programs.

Market opportunities

We see significant potential in developing integrated solutions that combine our advanced AI capabilities with our established expertise in natural and synthetic ingredients. The market increasingly demands innovative, sustainable solutions, and our AI initiatives are conceived to address evolving customer needs.

Competitive environment

The emergence of technology-focused startups in our industry has intensified competition, particularly in digital solutions and AI-driven product development. Agile competitors leverage publicly available data and advanced AI models to target specific market segments. We are responding proactively by accelerating our own digital initiatives and by leveraging our extensive proprietary datasets, while maintaining our commitment to scientific excellence and regulatory compliance.

Forward-looking strategy

Looking ahead, we are implementing a strategy to strengthen our competitive position in an AI-enabled market. This data strategy focuses on maximizing the value of our proprietary information while incorporating relevant external data sources. We continue to invest in our digital infrastructure and AI capabilities across all business segments. Through our corporate venture program, we actively evaluate strategic partnerships as well as investment opportunities in promising AI technologies. Most importantly, we are focusing our innovation efforts on areas where our traditional scientific expertise creates unique synergies with our advanced AI capabilities.

We believe this balanced approach to AI integration, combined with our established market leadership and scientific expertise, positions us strongly for continued success in an evolving competitive landscape.

Other important risks

In 2023, certain competition authorities commenced an industry-wide investigation into the fragrances sector. As part thereof, unannounced inspections were carried out at several Firmenich offices and Firmenich received a subpoena from the Antitrust Division of the United States Department of Justice.

The company is fully cooperating with the authorities. The investigations are expected to continue at least until 2025. As per the date of release of this Report, no further update on the status or outcome of the investigation is available. In addition, multiple civil lawsuits have been filed against the company relating to the investigation.

Information relating to sustainability risks (including climate risk) is disclosed in the Sustainability Statements. Material sustainability risks are integrated and managed as part of the regular Enterprise Risk Management framework. The impact of physical climate change and loss of biodiversity on our value chain is included as a long-term risk.

There are also other business risks, such as innovation, business continuity, product quality, tax, changing regulations, increasing non-financial reporting requirements, and the separation of our Animal Nutrition & Health business. Our Enterprise Risk Management framework is set up to adequately monitor and respond to these risks.

All relevant risks are considered in the preparation of our financial statements.

Integrated Annual Report 2024