Risk Management
Vermilion’s board and senior leadership provide risk oversight, including for sustainability-related risks such as climate.102-30
Our Approach to Risk Management and Why It Matters
Effective risk and crisis management positions the company for better resiliency from the present to the future. We use a multi-layered approach to ensure identification, awareness and effective management of our business-related risks, including sustainability risks. This includes identifying business opportunities that may arise from changing conditions.
How We Manage Risk
Sustainability-related risks and opportunities, including those related to climate, are integrated into multi-disciplinary Company-wide risk identification, assessment, and management processes as part of our ERM system, based on the Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework. This provides an integrated approach to managing risk as it impacts strategy and performance, and includes Operational, Market & Financial, Credit, Organizational, Political, Regulatory Compliance, Strategic and Reputational, and Sustainability categories.
Identifying and Assessing Risks
Overall, risk management is the responsibility of the Board and the Executive Committee based on a Top-Down, Bottom-Up approach to engage all staff. Top-Down begins with our Board and its committees with clear terms of reference, including oversight for identification and management of specific allocations of risk type. This is translated into action by our Executive Committee, which reviews and manages the ERM process through implementation of associated policies and procedures. Our staff help develop systems, standards and procedures. Bottom-Up is how staff implement, maintain and improve risk management processes, applying the hazard-risk-mitigation process in every part of our business.
Risks are identified by key staff across our Company, including our Operations, Finance, Health, Safety and Environment, Economics, Government and Public Relations, and Sustainability teams at corporate, business unit and asset levels. These employees have significant experience, and use a wide array of inputs, including operational and facility assessments, technical and research reports, external stakeholder organizations, government policy and regulation changes, industry initiatives, communities and landowners, and non-governmental entities.
The results are incorporated into our Corporate Risk Register, which provides a consistent framework to ensure the effective tracking and communication of our material risks. Using our Risk Matrix as a prioritization tool, Teams assess severity, likelihood, speed of onset, and vulnerability using scales from 1 to 5 for each factor, described in terms of human, environment, financial, social license and cybersecurity impacts.
Every risk case has also been assessed to determine where sustainability- or climate-related risk is a contributing factor. The results are provided annually at minimum to senior management, the Executive Committee and the Board and its Committees as appropriate, who further assess the risks including interdependencies.
Our sustainability materiality analysis, which assesses issues with impact for both the Company and our key stakeholders, is integrated into our ERM system using the Corporate Risk Register through a collaboration between our Finance, HSE, Operations and Sustainability teams.
Managing Risks
Our risk management approach focuses on reducing the risk to a level as low as reasonably practicable, accepting the risk, and/or controlling it (such as insuring it). For example, if direct mitigation is not possible (e.g. changes in temperature extremes), we would adapt our business processes to reduce the potential impact (e.g. changing work hours to avoid extreme mid-day heat). In other situations (e.g. increasing risk of flood), we may take measures to protect against the risk (e.g. flood controls) while also insuring our operations.
Financial impact is deemed substantive if it could cause a business loss of more than $10 million CAD (unrisked and before mitigation/recovery instruments).?Substantive is defined further using the following thresholds:
- Has persistent but reversible, long-term effects on habitat, ecological communities, land, air, or water. Escalations include irreversible effects on these elements, persistent reduction in sensitive ecosystem function, or effects beyond a regional or operations scale.
- Requires a specific asset to be shut in for unknown duration during regulatory or legal proceedings. Escalations include the permanent withdrawal of authority to operate.?
- Reputational damage is national or international, or stakeholder concerns lead to regional or more widespread interruption of operations?
Emissions Long-Range Planning
To support climate risk identification and management, we previously developed a Carbon Liability Assessment Tool, with Scope 1 emissions quantification and regulatory information for each business unit. We assessed the price of carbon on both a realized cost and shadow pricing basis, and identified likely carbon pricing scenarios for all our operating areas.
In 2021 and 2022, we developed and piloted a an Emissions Long-Range Planning Tool, which uses our 10-year projections of production to estimate our Scope 1 and 2 emissions, associated carbon taxes, and impacts of emission reduction projects. We are now using this to support our planning of production, capital allocation, budgeting, target setting and merger, acquisition and divestment decisions.