Risk Management Report

Risk Management Report

Description and Statement Relating to Risk and Compliance Management

Integrated Approach to Risk and Compliance Management

Risk and compliance management are an integral part of corporate management at WACKER. As a global company, we are exposed to numerous risks directly attributable to our business activities. Starting from an acceptable overall level of risk, the Executive Board decides which risks we should take to seize the opportunities available to the company. The goal of risk management at WACKER is to identify risks as early as possible, evaluate them adequately, and take appropriate steps to reduce them. We define risks as internal and external events that may have a negative effect on the attainment of our targets and forecasts. In the reporting year, we geared the existing risk management system even more towards taking ESG (environmental, social, governance) risks into account.

As a chemical company, we have a particular responsibility to ensure plant safety and protect human health and the environment. At all our production sites, there are employees who are responsible for plant and workplace safety and for health and environmental protection. Our risk management system complies with the statutory requirements and is integral to all our decisions and business processes. The Executive and Supervisory Boards are regularly informed about the current risk status in the Group and at each business division.

WACKER follows the Three Lines of Defense model to effectively manage corporate risks and ensure compliance with legal provisions and the ethical principles of corporate management.

The first line of defense lies with the managers of operating activities. They are responsible for handling risks there, including risk responses and risk control. This involves setting up functioning internal control systems in their operational units.

The second line of defense is formed by risk management and compliance management. Risk management involves systematically tracking the main risks facing operational units and reporting on the risks to the Executive Board. Compliance management ensures that the ethical principles of corporate management are observed. The Compliance Management team identifies the relevant legal requirements and amendments, forwards them to all affected corporate units and holds courses on compliance for employees. They are intended to increase the awareness of all employees to ensure that they do not breach the law – particularly with a view to preventing bribery and corruption, competition and antitrust law, as well as other forms of economic crime. All customer-facing employees also receive extensive training in issues of competition law on a regular basis.

The tax compliance management system ensures that Wacker Chemie AG and its subsidiaries comply fully and punctually with their obligations under tax law. Early involvement of the tax department and checks on preliminary tax-related processes help minimize the corresponding risks.

Three Lines of Defense Model

The third line of defense is provided by the Corporate Auditing department, which acts as an independent monitoring body for the Executive Board. This department conducts audits at regular intervals to review the risk management activities in place at the various corporate units and to check whether the internal control systems run by the operational units are effective. Corporate Auditing also liaises with the Compliance Management team, for example if anti-corruption investigations are undertaken or related measures implemented.

Internal Control System (ICS) and Internal Control System for Accounting

Our internal control system (ICS) is an integral component of our risk management system. The objective of the internal control system for accounting is to ensure consistent compliance with legal requirements, generally accepted accounting principles and International Financial Reporting Standards (IFRSs), and thus avoid misstatements in Group accounting and external reporting.

In addition to the ICS principles already mentioned, we perform assessments and analyses to help identify and minimize any risks that may directly influence financial reporting. We enlist the support of external experts to reduce the risk of accounting misstatements in complex and challenging issues, such as pensions.

Our internal accounting control system is designed to ensure that our accountants process every business transaction promptly, uniformly and correctly, and that reliable data on the Group’s earnings, net assets and financial position are available at all times. Our approach here complies with statutory provisions, accounting standards and internal accounting rules. The accounting manual, which is applicable groupwide and available on the WACKER intranet, represents a key accounting guideline. The manual specifies binding rules for groupwide accounting and assessment. The Group regulation on accounting contains uniform stipulations for the organizational responsibility of accounting-related topics. The organizational workflow is also defined in accounting and organizational regulations, and in book-entry instructions. Corporate Accounting is the central unit for monitoring compliance with reporting obligations and deadlines. By breaking down financial functions into the categories accounting, statement analysis and strategy, we ensure that potential errors are identified prior to finalization of the statements and that accounting standards are complied with.

Our subsidiaries ensure that all regulations are implemented in their local regions. Corporate Accounting assists them in this task and monitors the process. The reported data is verified both by automatic system validation, and by reports and analyses. We safeguard the effectiveness of controls not only by gathering feedback from the employees involved, but also by continually monitoring key financial indicators in our monthly management reports and in system-based test runs. Moreover, regular external reviews and internal audits are carried out at the end of each year as well as at the end of the first six months of each year.

Each quarter, managers at our divisions, corporate departments and subsidiaries confirm for their areas that all key issues for the quarterly and annual financial statements have been reported.

Risk Management System

The Supervisory Board is also integrated into the internal control system through its Audit Committee. In particular, the Audit Committee monitors the accounting process, the effectiveness of the internal-control and risk-management systems, and the auditing procedures. Further, the Committee reviews the documents for Wacker Chemie AG’s separate financial statements and the WACKER Group’s annual and quarterly consolidated financial statements, as well as the combined management report for these statements, and discusses them with the Executive Board and the auditors.

We deploy user authorization systems, data release policies and access restrictions to protect all financial systems from misuse. However, even with adequate and functioning systems in place, we can never guarantee that the internal control system will be 100-percent effective.

Risk Response

WACKER focuses on identifying, evaluating, responding to, and monitoring risks as part of a transparent and comprehensive risk management and control system for all company processes. The system is based on a defined risk strategy and an efficient reporting procedure. The Executive Board regularly reviews and enhances the risk strategy and provides the Supervisory Board’s Audit Committee with regular briefings on existing risks.

All corporate areas are integrated into the risk management system. It consists of three intermeshed aspects:

• Division-specific risk management and early-warning systems
• Groupwide risk coverage
• Groupwide risk mapping

The CFO has overall responsibility for the appropriateness and effectiveness of the risk management systems. The internal control system is the subject of regular inspections conducted by WACKER’s internal auditing department and of the audits carried out by the Integrated Management System (IMS). These inspections detected no material faults. Pursuant to Sec. 317 (4) of the German Commercial Code, when auditing our financial statements, the auditors also examine our early warning system for detecting risks and the internal accounting control system. There were no matters that would have required reporting. Risk management, internal auditing, compliance management and sustainability matters are also the subject of regular reports to the Audit Committee. The Executive Board declares that at the time this report was prepared, there had been no issues that would give rise to the assumption that the internal control and risk management systems were not appropriate or effective (unaudited).