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Operating Environment

Our business exists in an environment influenced by internal and external factors both in and out of AGL’s control. We use several processes and techniques to identify risks and opportunities in our external operating environment, facilitate strategic decision making and drive resource allocation. This ensures we are best placed to mitigate negative impacts while capitalising on opportunities to deliver value to our customers, shareholders and other stakeholders.

AGL recognises the importance of embedding robust processes to effectively achieve our strategic priorities even when faced with changes in our external operating environment, and is committed to ongoing engagement with our key stakeholders to ensure that concerns are communicated and factored into decision-making. AGL’s approach to the management of our strategic risks, and to stakeholder engagement, is set out below. These processes are central to AGL’s identification of its key areas of focus for FY20 and have, in turn, informed the content of AGL’s 2020 Annual Report.

Strategic risks

AGL’s comprehensive, enterprise-wide risk management program, which is aligned with the principles and requirements of the international standard for risk management (ISO 31000), is detailed in the 2020 Corporate Governance Statement at agl.com.au/corporategovernance.

Through this framework, we identify factors that are critical to the successful delivery of our strategy and our ability to create value into the future.

We undertake a comprehensive annual process to assess the key risks to achieving our strategic priorities over the next three to five years. We define these as Tier 1 Strategic Risks. The Tier 1 Strategic Risks for FY20 (as identified at the end of FY19) are summarised on the following page.

Risks are assessed through the lens of AGL’s strategic priorities of Growth, Transformation and Social Licence by undertaking an extensive consultation process across each division of AGL involving key senior management representatives and operational managers to gain an understanding of strategic risks relevant to their area. This process is designed and facilitated to allow common concepts to arise and their implications in relation to each Business Value Driver to be considered.

Risk mitigation strategies are in place for each of these risks, and the risks have been monitored throughout FY20 by the Audit & Risk Management Committee.

The COVID-19 pandemic has impacted AGL's strategic, financial and operational risk profiles, broadly increasing AGL's risk exposure. Despite this, AGL's business remains relatively resilient to the external shocks resulting from the pandemic. In addition, measures implemented by AGL through crisis management governance continue to prepare the organisation for the ongoing and medium-term impacts of the COVID-19 crisis, including recovery phases. The pandemic continues to present challenges and the outlook is inherently unpredictable, particularly the depth and impact of a recession.

The broad changes identified in AGL's strategic risk profile over FY20 comprise:

  • An increase in financial risk (wholesale market pricing and volatility and market disruption). The pandemic and its economic impacts have led to uncertainties in electricity pricing and increased credit risk. While the current position is better than forecast, there remains significant uncertainty on the depth and length of any recession.
  • Operational and people related risks (resilience of generation, organisational culture, customer privacy and cybersecurity) increased in the short term but then reduced to some degree as the pandemic progressed and additional mitigations were adopted by the business in response. This will continue to evolve as the pandemic progresses to the ‘new normal’ and as new threats emerge. Crisis management and executive team governance will continue to monitor this closely.
  • AGL’s longer-term strategic risks (government intervention, regulatory intervention and climate change) remain and have been heightened by the uncertainties created by the pandemic. The pandemic will likely continue to change the external context, particularly in relation to how government policy evolves. This leads to greater uncertainty and higher risk for AGL in the interim.

Legend

Increasing risk level compared to FY19

Stable risk level compared to FY19

Small increase in risk level compared to FY19

Decreasing risk level compared to FY19

Tier 1 Strategic Risk

Risk level over FY20

Relevant Business Value Driver

Market disruption: AGL does not (or cannot) adequately or appropriately respond to changing customer expectations and preferences regarding energy sources, prices and related products and services.

Government intervention1: AGL is not able to effectively anticipate, plan or respond to an increasing uncertainty regarding government policy.

Regulatory intervention1: AGL is not able to effectively anticipate or plan for regulatory intervention, or added restrictions and diversion of resource puts wider business objectives at risk.

Climate change: AGL is unable to meet expectations and/or deliver on its commitments to transition to a low carbon future within an acceptable timeframe.

Investment decisions: AGL’s major investment decisions do not deliver on their intended benefits or outcomes for shareholders, customers and the community.

Stakeholder trust: AGL’s strategy to deliver on its social licence to all stakeholders is unclear, inconsistent, and/or poorly executed.

Customer privacy: AGL does not obtain, handle, process and store customer data in an appropriate, compliant, transparent or secure manner.

Organisational culture: AGL is unable to foster a resilient and agile organisational culture that is built on strong and ethical behaviours, talented people, a focus on safety, and a customer-centric mindset.

Resilience of generation2: AGL is unable to generate and maintain a resilient energy supply.

Wholesale market pricing and volatility2: AGL is unable to effectively manage the impact of wholesale price changes and market volatility.

Access to gas: AGL is unable to source sufficient quantities of gas to meet its future demand.

Cybersecurity: AGL’s critical systems, platforms and technology infrastructure are compromised by a cyber event.

COVID-19 operational response3

New / emerging

  1. 1 The previous 'government intervention' risk in FY19 has been split into two risks: 'government intervention' and 'regulatory intervention'.
  2. 2 Risk name/definition has been updated slightly since FY19.
  3. 3 New for FY20.

Stakeholder issues

We engage in constructive dialogue with our stakeholders throughout the year to understand and respond to issues that are important to them, and to ensure our strategy and plans consider the legitimate concerns of stakeholders as well as the impact of emerging trends.

Key issues for our stakeholders during FY20 are summarised below, and have been mapped to the relevant Business Value Drivers. The stakeholder issues were identified based on customer and community sentiment research, employee consultation exercises, regulator and consumer group publications and AGL-commissioned external research, as well as discussions with subject matter experts throughout AGL.

Stakeholder issue

Relevant Business Value Driver

Affordability

Climate change

Liddell Power Station closure

Local environmental impacts

New supply / security of supply

Reliability

Safety

Support for vulnerable customers

AGL’s 2020 Annual Report and the accompanying disclosures in the FY20 ESG data centre have been prepared in accordance with the GRI Standards: Core Option. This requires the identification of ‘material themes’, defined as areas in which AGL has a significant impact on the economy, the environment and/or society. These themes are available in the GRI Index in the ESG data centre, and have determined the nature of the disclosures required for AGL to meet the Core Option.

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