Some risks may be due to events in the outside world and affect a certain sector or market, while others are associated with the group’s own business.

The H&M group has an entrepreneurial approach to business development. Launching new initiatives and business ventures makes it necessary to accept business risks to a degree.

Operational risks include the business risks together with events in the outside world which affect a certain sector, market or a brand in the group. Financial risks are related to the use of economic funds and financial resources.

Operational and financial risks are continually analysed, and risk acceptance or mitigation is evaluated quarterly by all brands and group functions for the most significant group risks, together with the corporate governance function.

Evaluation of the business impact determines whether an action is to be taken to reduce the likelihood of a risk, and if so, to what extent. Business decisions also determine the extent to which the consequences of a risk should be mitigated.

There are external risks and uncertainties affecting the H&M group that are related to the shift in the industry, fashion, competitors, logistics resources, information security and cybersecurity, sustainability issues, weather, macroeconomics and geopolitical events, pandemics, foreign currencies, taxes, and various regulations and ordinances.

A description of the H&M group’s operational and financial risks is given in the sections below, with more detailed information concerning financial risks being given in the annual and sustainability report 2022, note 2, Financial risks.

The H&M group’s overall approach to risk management and internal control is described on pages 66-67 in the corporate governance report. The description includes how the H&M group works according to the COSO and TCFD frameworks.

Operational risks

During 2022 there was a further increase over 2021 in the ratio of risks related to external events — such as the war in Ukraine, transport costs, inflation, and energy costs in Europe — compared to business risks. Increasing numbers of purchases are being made online, which have become an increasingly important part of the customer experience. Customers are looking for a smooth, simple and inspiring experience in which stores and online interact and enhance each other. In recent years the H&M group has therefore made substantial investments to provide this. As the competitive landscape is redrawn by new business models and players, profitability in the industry has been impacted by increased competition.

The Covid-19 pandemic has made the group’s brands and functions work hard to manage challenges related to cost levels, supply chain and the customer experience, while still delivering without compromising on the business idea of the group’s brands: fashion and quality at the best price in a more sustainable way. For the H&M group the importance of having good risk mitigation plans alongside issue and crisis management capacity has been accentuated by the pandemic.

Reputational risk

As one of the world’s leading fashion companies, the H&M group’s brands attract great interest and are constantly in the spotlight. To safeguard and manage its brands, it is important that the H&M group continues to be developed and run according to its values, which are characterised by strong business ethics.

It is of utmost importance that the H&M group lives up to the high ambitions set out in its policies and guidelines on business ethics, and that anyone involved in the business has good knowledge and insight into the procedures for the production of its products. It is also crucial that the H&M group can reach its sustainability goals and ambitions. Accurate, transparent and reliable communications can prevent occurrences of reputational risk and can also help mitigate the consequences of any incidents.

Fashion risk

Operating in the fashion industry is a risk in itself. Fashion has a limited shelf-life and there is always a risk that some part of the collections will not be sufficiently commercial, and will therefore not be well received by customers. Purchasing decisions are also increasingly influenced by customers’ desire to live more sustainably.

Within each segment and each collection it is crucial to have the right volumes and a correct balance in the mix between fashion basics and the latest trends. In summary, each collection must achieve the best combination of fashion, quality, price and sustainability. An increasing degree of accuracy in purchasing decisions and volumes will help reduce overall resource consumption and contribute to our climate and circularity goals.

To increase precision, the H&M group works intensively to optimise the extent of ongoing buying during the season in parallel with detailed analysis of day-to-day sales and stock levels in different markets. Today fashion is global, but shopping patterns vary between different markets and sales channels. The start of a season and the nature of a season vary from country to country. Delivery dates and product volumes for the various markets and channels are therefore adjusted accordingly. The capability in the organisation to create regional and local customer offerings has been further developed to meet this demand.

Weather risk

The H&M group’s products are purchased for sale based on assumptions concerning weather patterns. Deviation from these assumptions affects sales. This is particularly true at the point of transition between two seasons, such as from summer to autumn or autumn to winter. For example, a warmer than usual autumn may have a negative effect on sales of weather-related garments in particular, such as outerwear and chunky knitwear. The company’s risk analysis has shown that climate change may have further effects on the conditions for producing and distributing products in certain regions and countries. The increasing effects of climate change mean that these variations will likely increase in the future.

Negative macroeconomic changes and geopolitical risks

One or more markets may be affected by events that have a negative effect on the macroeconomic situation or geopolitical environment in a country. These changed macroeconomic or geopolitical circumstances, such as political instability, and in the worst case war and also sudden negative events — for example, virus outbreaks in one or more countries — may result in rapid changes in the business environment, such as rising inflation, significant disruption in the supply chain and economic downturn, which is likely to change consumer purchasing behaviour and thus negatively impact the group’s sales. Future markets where an H&M Group brand becomes established may have an increased risk of political instability, corruption, or armed conflict.

Uncertainties exist concerning how fluctuations in external factors such as the price of raw materials, transport costs and suppliers’ capacity will affect buying costs for the group’s products. There are also risks associated with social tensions in sourcing markets, which may lead to instability for suppliers, and in manufacturing and deliveries.

The group therefore needs to monitor such changes closely and have strategies in place to deal with fluctuations as advantageously as possible for both the company and external stakeholders.

Sustainability risks

The H&M group’s sustainability strategies aim to lead the change towards a more sustainable fashion industry. Climate change and its impacts has been identified as one of the company’s most significant risks. Other principal risks identified include shortage of natural resources, failure to uphold human rights early in the value chain, corruption, political and social instability in production and sourcing markets, and changed consumption patterns and customer attitudes. This last factor could ultimately have major effects on the H&M group’s sales — both positive and negative. The outcome depends on how successful the company is in its work to develop relevant and more sustainable customer offerings and business models. For a more detailed description of risks related to sustainability see pages 86-107 in the annual and sustainability report 2022. For the climate risk analysis according to TCFD, see pages 103-107 in the annual and sustainability report 2022.

Competitors

The H&M group is constantly evolving its customer offering and experience, to improve its capability and capacity to have a more relevant and attractive customer offering than its competitors.

Information security and cybersecurity

All companies are exposed to various types of risks related to information technology. The risks to which the H&M group is exposed in this area are generically applicable to any large company, and especially to large companies that also trade online. These risks include hacking attempts on networks, disruption of system stability, and attempts to access customer accounts or login details from employees by means of phishing. The H&M group manages this type of risk continuously. Ongoing investments, adjustments and improvements are made to the organisation, systems, procedures and subcontractors in order to deal with security risks in the best way possible.

Data protection and GDPR

The H&M group works actively with privacy risks to protect customers’ and employees’ data, and to safeguard customer experience and employee confidence.

As legislation in some jurisdictions could lead to significant administrative fees, a central team provides support and guidance on privacy risks, data protection issues and new privacy legislations across countries relevant to H&M Group. Additionally, a central tech team provides support and guidance on how to use artificial intelligence in an ethical way.

Each regional organisation has a data privacy manager tasked with ensuring that the framework established by the central organisation is implemented. Compliance with the framework is governed by the central team and reported quarterly to an oversight steering committee.

Financial risks

Foreign currencies

Nearly half of the group’s sales are made in euros, while the most significant currencies for the group’s purchasing are the US dollar and the euro. Fluctuation in the US dollar’s exchange rate against the euro is the single largest foreign currency transaction exposure for the group.

Large and rapid exchange rate fluctuations, particularly as regards the US dollar as the most important sourcing currency, may also have a significant effect on purchasing costs — even if this may be regarded as relatively competition-neutral over time. To hedge flows of goods in foreign currencies and thereby reduce the effects of future exchange rate fluctuations, payments for the group’s flows of goods — i.e. the group’s purchases of goods and, in the majority of cases, also the corresponding foreign currency inflows from the sales companies — are hedged under forward contracts on an ongoing basis to the companies H & M Finance AB and H & M Hennes & Mauritz GBC AB.

In addition to the effects of transaction exposure, translation effects also impact the group’s results. These effects arise due to changes in exchange rates between the local currencies of the various foreign sales companies and the Swedish krona compared to the same period the previous year. The underlying profit/loss in a market may be unchanged in the local currency but may increase when converted into SEK if the Swedish krona has weakened or decrease if the Swedish krona has strengthened.

Translation effects also arise in respect of the group’s net assets on consolidation of the foreign sales companies’ balance sheets. For more information on currency hedging see note 2, Financial risks.

Trade intervention

Purchasing costs may be affected by decisions at a national level on issues such as export/import subsidies, customs duties (see more below), textile quotas and embargoes. The effects primarily impact customers and companies in individual markets. Global companies with operations in many countries are affected to a lesser extent, and among global corporations’ trade interventions may be regarded as largely competition neutral. In the event of a major trade war between two countries, not just sourcing costs but generally also the entire flow of goods from production to the customer would be affected, which companies would need to mitigate.

Customs issues: Related party customs valuation continues to attract attention at a global, regional (the European Union) and national level, both from authorities and importers such as the H&M group. It will therefore continue to be important for the H&M group to proactively monitor and manage future developments in this area. One challenge is that customs authorities around the world are not taking a consistent approach to the assessment of pricing between related parties, even though the basis for customs duties is established according to the same global World Trade Organisation (WTO) customs valuation rules.

Taxes

For multinational companies, today’s global environment involves complex tax risks, such as the risk of double taxation and tax disputes. As a large global company, the H&M group closely monitors developments in the field of tax. The H&M group is present in many countries and through its operations contributes to the community via various taxes and levies such as corporate tax, customs duties, income taxes, and indirectly via VAT or sales tax on goods sold to customers.

The H&M group complies with national and international tax legislation, and always pays taxes and levies in line with local laws and regulations in the countries where the H&M group operates. The H&M group complies with the Base Erosion and Profit Shifting (BEPS) principles and does not shift its income or profits between jurisdictions in a manufactured way, or abuse low-tax or secrecy jurisdictions (tax havens) to gain any tax or financial secrecy benefits. The H&M group’s tax rate for the financial year 2021/2022 was 42.6 (23.0) percent.

The H&M group’s tax policy, which can be found at hmgroup.com/about-us/corporate-governance/ policies, reflects and supports H&M’s business. The H&M group follows the Organisation for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines, which means that profits are allocated and taxed where the value is created. The tax policy aims at a sustainable tax rate for the H&M group as a whole, and therefore also for the individual countries in which the company operates. Details of individual jurisdictions’ tax positions are made available in the country-by-country reporting as communicated with tax authorities around the globe. The H&M group has been successfully compliant with its tax policy for the financial year 2022 and the company’s quality management system for international tax and transfer pricing has received an ISO 9001:2015 certification.

The H&M group works continually to ensure its tax strategy is designed to limit any distortion arising from differences in tax legislation in different parts of the world. The company is committed to operate not just within the letter of the law, but also within the spirit of all tax laws that apply to the group’s operations — carrying out tax planning commercially and not aggressively or in a manufactured way, and only claiming tax reliefs that the group is entitled to and in the way they were intended to be claimed.

The OECD guidelines on transfer pricing can be interpreted in various ways, and consequently, tax authorities in different countries may question the outcome of the H&M group’s transfer pricing model even though the model complies with the OECD guidelines. For each subsidiary, the tax residence is the same as its place of domicile, and no subsidiary is tax resident in more than one jurisdiction. The company’s Taiwan operations are a branch of the Netherlands operations for administrative reasons. Tax is paid in Taiwan and corresponding operational results are tax consolidated in the Netherlands. The whereabouts of the main business activity for each subsidiary, by the country-by-country reporting definition of activities, can be found as an enclosure to the Tax policy.

On 18 December 2020, the OECD published its Guidance on the transfer pricing implications of the Covid-19 pandemic, which represents the consensus view of the 137 members of the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) regarding the application of the arm’s length principle and OECD Transfer Pricing Guidelines to the situations and challenges associated with the Covid-19 pandemic. The H&M group applied the guidance in its transfer pricing model for 2022.

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