Risks and Opportunities
Risks and opportunities are inherent in all aspects of our business activities and embedded in our routine management decision-making. Effective management of these risks and opportunities is critical to our success as a strategic supplier to our customers, a key customer to our suppliers, a trusted employer to our employees, and a good investment to our investors.
The Novanta Leadership Team leads the overall risk management program at Novanta. Business unit General Managers and their leadership teams and corporate functional leaders are responsible for the execution of the respective components of the risk management program.
Our risk universe is updated annually based on changes in the overall economic environment and specific trends affecting Novanta businesses. All material risks are disclosed under Item 1A of our annual report on Form 10-K filed with the SEC. Short-term market dynamics are analyzed and discussed as part our quarterly business operating reviews to address any new or emerging risks and opportunities that need to be taken into account to deliver on our annual and strategic goals. Key Performance Indicators (“KPIs”) are developed, agreed to, and monitored in response to any significant adjustments made to the original action plans. If any new material risk is identified in our quarterly review processes, we will add appropriate disclosures in our Quarterly Report on Form 10-Q.
Enterprise Risk Assessment
Our independent Internal Audit function performs an annual update to Novanta’s enterprise risk assessment by conducting interviews of various senior leaders within the Company. The risk management program is designed to engage Novanta leaders, including both corporate leadership and business unit leadership, in identifying, monitoring, and managing key risks and opportunities that affect our business and the execution of our strategic initiatives. All risks are ranked based on both the likelihood of occurrence and the severity of the potential impact. The results of the risk assessment are summarized and reviewed by the Novanta Leadership Team. Based on the updated risk assessment, internal audit plans are developed to evaluate and monitor management’s processes and controls around the higher ranked risk areas. Internal audit plans and risk assessments are then reviewed and approved by the Audit Committee of the Board of Directors.
In 2021, we expanded the existing risk management program to incorporate a broader ESG assessment and a specific climate-related risks and opportunities assessment, utilizing the recommendations of the TCFD and SASB’s Sustainability Accounting Standards for Electrical & Electronic Equipment industry and Medical Equipment & Supplies industry as key inputs to this process with respect to our identification, assessment, and monitoring of climate-related risks. We evaluated both the likelihood and the potential impact of risks and opportunities relevant to our business. The results of these assessments were reviewed with the ESG Committee of the Board.
Climate Risks and Opportunities
One of the highest-ranked climate-related risks stems from the medical consumable products that we produce and sell to our medical OEMs in our MIS business. Single-use medical consumable products play a significant role in patient safety and outcomes. However, at the end of their use, even when disposed of properly by end users, they have an impact on the environment. We plan to develop strategies to continuously improve how we manufacture and distribute our products, aiming to reduce the negative environmental impact from such medical consumables products. We have also started to embed environmental and sustainability requirements into our new product development processes. Nonetheless, barring any unexpected fundamental shifts in patient safety requirements, we are not anticipating any material adverse financial effect in the near term from our efforts to reduce the environmental impact of our medical consumables.
Another of the highest-ranked climate-related risks is the potential disruptions to the business operations of our facilities and our suppliers and customers as a consequence of energy supply shortages or damages from extreme weather conditions and natural disasters caused by global warming. While the risk is inherent and unavoidable in nature, we are developing strategies to mitigate the risk to the extent possible by identifying alternative suppliers and distributors, sourcing raw materials from different supplier and distributor locations, modifying our product designs to allow for alternative components to be used without compromising quality, performance, or other requirements, and in-sourcing production of parts where feasible.
With the heightened focus on climate change, we also identified growth opportunities in product offerings to the green technology applications, such as electric vehicles and robotics. Several of our existing businesses are already supplying components to OEMs that make products for the green technology space. We will continue our R&D new product development efforts to develop new products and expand our product offerings in this area.
We maintain comprehensive insurance programs to best protect the Company from various identified enterprise risks through careful evaluations of the risks and the related cost and benefit of third-party insurance policies. Our insurance programs currently include, among others, general liability, workers compensation, business interruption, professional liabilities, employment practices, cybersecurity, global cargo, property and casualty, global pollution, and directors and officers insurance.