Strategic risks

Updated 14.2.2024

Wärtsilä’s strategic target positioning is focused on shaping the decarbonisation of the marine and energy markets. As a technology leader in the decarbonisation transformation, Wärtsilä has significant value creation potential as a pioneer and leading partner for decarbonisation.

Strategic risk assessment is an essential part of the strategic planning process. This is central to risk management in the Group to identify and evaluate threats to the long-term value drivers in a timely manner.

Business and market environment

Business cycles and megatrends in the global economy, and in customer industries, influence the demand for Wärtsilä’s products, as well as its financial condition and operating result. Wärtsilä enjoys a certain level of stability in a cyclical market thanks to its flexible manufacturing model based on capacity outsourcing, its customer base in two separate end markets with different demand drivers, and a large share of sales deriving from service activities where we have good future growth potential.

The ongoing war in Ukraine and the conflict in the Middle East have resulted in various risks to both the demand and supply environment of various commodities globally, contributing to an increased uncertainty over the macroeconomic outlook. Business operations globally are being impacted by inflationary instability, changing trade flows and volumes, altered financial conditions, the volatility of the geopolitical environment including risk of trade wars, and the sanctions in place and planned against Russia. These are all contributing to a slowdown in global economic growth. The increased probability of a global recession poses a risk for top-line growth if economies stagnate.

Changes in climate policies and regulations cause uncertainty in the markets, as they may impact technology choices for customers. Geopolitical tensions and the implications of trade barriers create notable challenges to the demand environment. Nevertheless, Wärtsilä receives orders from all geographic regions, thus limiting the risk of a single market dependency. Finally, all Wärtsilä’s customer segments in the energy market are represented in its order intake.

Wärtsilä, along with its customers and suppliers, is indirectly affected by various important economic developments. These include environmental regulations, the liquidity and solvency of financial institutions including their capability and willingness to extend credit, capital costs, and the counter cyclical stimulus programmes adopted by governments – especially in the power and infrastructure sectors. Among other influencing factors are the activities of multilateral financial institutions, and the availability of export credit and guarantee schemes.

Decarbonisation will transform the world and create new business opportunities for Wärtsilä, both in marine and energy. However, a material delay or an unpredictable change in the implementation of environmental policies and legislation may, however, directly or indirectly, impact customer decision making.

In marine, the shipping and shipbuilding markets are faced with increasing regulatory, financial, and end-customer pressure to decarbonise their operations. EU taxonomy, Poseidon principles, and ESG affect access to capital. The cost of carbon (e.g. EU Fit for 55, IMO carbon levy and local green policies) will significantly increase the overall cost of conventional fuels. Hence, the importance of fuel efficiency and fuel flexibility is clearly visible, driving accelerating interest in environmental solutions, alternative fuels, as well as in electric and hybrid solutions.

The investment appetite of ship owners and operators, for both their newbuilding programmes and their existing fleets, is critical. However, the currently limited development of alternative fuel infrastructures, the lack of financial incentives, the substantial price gap between conventional and alternative fuels, uncertainties concerning the regulatory environment, and risks associated with the uptake of new technologies may raise barriers for the green transition. Simultaneously, the investment appetite for new ship capacity has moderated due to many shipyards, especially those in China and South Korea, having their orderbooks close to full, forcing owners to wait longer and pay a substantially higher price for their new ships. Wärtsilä is well represented in all the major shipbuilding markets and is active in all the main vessel segments. This, along with the company’s large product portfolio and global service network, which provides lifecycle support to a wide range of vessels and customers globally, mitigates both geographical and single customer risks.

A clear and foreseeable development of the regulatory environment is a fundamental condition for the decarbonisation of shipping. In response, in July 2023, the International Maritime Organisation (IMO) revised its strategy on greenhouse gas emission reductions from ships to be more ambitious, aiming at net zero by or around 2050. As a result, stakeholders are more aligned globally on the requirements and the investments needed to decarbonise the industry. Consequently, shipping companies need to update their plans for decarbonising their operations and increase their investments in newbuilds to replace non-compliant assets. They must also make efficiency upgrades, fuel conversions, and maintenance activities in order to keep the existing fleet compliant and competitive. Shipowners are increasingly focused on fuel flexibility and upgradeability. The switch to carbon neutral and zero carbon fuels will be progressive, with drop-in fuels, hybrid solutions, and abatement technologies being key to reaching short-term reduction targets. However, achieving long-term reduction targets will require a fundamental shift towards sustainable fuels and abatement solutions. With its existing comprehensive product offering for decarbonisation, Wärtsilä can enable customers to reach their intermediate and 2050 targets.

The energy sector is moving towards a 100% renewable future, with policies and regulations accelerating the overarching trend towards renewable energy sources such as wind and solar. At the same time there is a growing energy demand. According to IEA World Energy Outlook 2023, electricity generation would need to grow by almost 3X and renewables by 8X to reach Net Zero targets by 2050. Many countries have set ambitious and more progressive climate pledges, and the gradual replacement of coal and other baseload fossil fuelled energy generation is ongoing. However, more targets, policy changes, and market redesigns are needed to encourage flexibility and accelerate the shift to high renewable power systems. The pace of this shift is the principal driver in the growth of battery energy storage and thermal balancing technologies.

Going forward, the increasing levels of intermittent renewable energy in power systems are expected to further accelerate the need for various flexible balancing solutions. At the same time, power systems are becoming increasingly complex with different types of generation assets. Sustainable fuels, together with flexible engine power plants, balance the grids in an affordable and sustainable way, including for extended shortages in intermittent renewable generation supplies. Consequently, Wärtsilä’s addressable thermal balancing power market is estimated to grow +4X and the energy storage market +3X by 2030.

Beyond some short-term setbacks (such as slow permitting of renewables), the mid-term energy transition remains strong. Energy and climate policies around the world continue to evolve towards more ambitious decarbonisation targets. Power generation related regulatory changes support the uptake of thermal balancing (e.g. the US Federal and State bills, EU electricity market reform and China market reform). A notable step forward in climate policy was the 2022 launch of the Inflation Reduction Act in the U.S.A. This allocates substantial incentives for renewables, battery energy storage, and other clean energy technologies. The European Commission is implementing its REPowerEU plan, also launched in 2022, that is, amongst other things, speeding the green transition and promoting massive investment in renewable energy in the EU. The new milestone was reached at the end of 2023 when more than 120 countries pledged to triple global renewable energy capacity by 2030. The COP28 final text also called for transitioning away from fossil fuels, which is in line with Wärtsilä’s vision of a 100% renewable energy future.

Political and regulatory risks

The ongoing war in Ukraine and the conflict in the Middle East have caused a rising risk related to geopolitical fragmentation and volatility. Trade tensions and the enforcement of sanctions or embargos, pose a risk to Wärtsilä’s scope of international business activities. Being globally present in 283 locations in 79 countries, and having delivered power plants to 180 countries, political developments and changes in legislation can have a significant impact on Wärtsilä’s business. Wärtsilä actively monitors political, regulative and legal developments in its markets and engages in a dialogue with various official bodies on projects of importance to its operations. Much of this engagement takes place through interest groups and trade organisations. The company monitors political and legislative changes at both the corporate and subsidiary levels.

There is increased regulatory activity by different governments worldwide. Wärtsilä’s focus is on ensuring regulatory compliance and awareness, as appropriate. For example, ongoing and changing trade sanctions are closely monitored and complied with as required.

Similarly, policies related to the energy and electricity markets have direct and indirect impacts on future energy capacity and the generation mix. For example, energy and climate policy may speed up or delay the energy transition. Recent years have highlighted the role of geopolitics in energy market policy and investment decisions.

Climate change and sustainability risks

Wärtsilä progresses towards its “Set for 30” commitment to become carbon neutral in its own operations and to provide a product portfolio ready for zero carbon fuels by 2030. Wärtsilä’s sustainability targets focus on three long-term themes: Towards carbon neutrality, Enhancing safety diversity and wellbeing, as well as being An active and responsible member of society. All these targets have nominated target owners, who prepare action plans, oversee their implementation, and report on the proceedings.

Being at the forefront of technological development and decarbonisation efforts in the marine and energy sectors represents a major opportunity for Wärtsilä. Over the years, Wärtsilä has worked continuously to improve the efficiency of its products, while at the same time developing futureproof technologies. Additionally, Wärtsilä offers a variety of retrofittable conversion solutions, allowing customers to follow their own choice of fuel and decarbonisation alternatives. In the energy sector, Wärtsilä’s energy storage and energy management systems enable customers to integrate and optimise the utilisation of renewable energy sources in their energy systems.

Rapidly evolving environmental regulations are driving the demand for decarbonisation enablement. Risks are mainly related to the complexity of the overall landscape of different emissions in the marine and energy sectors, the balance between commercially available fuels and their resulting emissions, available abatement technologies, and the financial feasibility of the various alternative ways to meet regulatory demands for decarbonisation.

Wärtsilä has thousands of suppliers in its global supply chain. This means that there may be potential sustainability and reputational risks related to, for example, non-compliance with human and labour rights obligations, occupational health and safety, and environmental management. Wärtsilä has clear expectations, policies, and procedures for managing these risks.

Wärtsilä identifies and assesses on an annual basis its sustainability risks, including climate change risks, in both its strategic and operative risk assessments. In general, sustainability risks, both strategic and operational, are assessed to be low for Wärtsilä.

In 2023, Wärtsilä carried out a development project on climate related disclosures based on the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations. Also, during 2023, Wärtsilä began preparations for the mandatory Corporate Sustainability Reporting Directive (CSRD). Wärtsilä’s first CSRD report will be published in 2025 covering data from the 2024 financial year.

Technology risks

Wärtsilä as a large corporation can invest in various technologies and thereby reduce the risk of obsolescence. While R&D and innovation is a major opportunity, competitors commercialising similar technologies faster or more efficiently than Wärtsilä, or novel disruptive technologies, can be seen as a potential risk. The company is increasing the competitiveness of its solutions and managing technology risks and opportunities through continuous and strong R&D efforts and innovation. To accelerate decarbonisation technology development, Wärtsilä has increased its R&D investments from its historical ~3% of net sales to ~4%. In 2023, the company’s R&D investment accounted to 4.3% and was largely related to the decarbonisation of the marine and energy sectors.

With the development of new products and solutions, the company is focused on optimising lifecycle value for customers, as well as on reducing the environmental impact of their operations. This is achieved with Wärtsilä’s broad portfolio of engines, digital technologies, propulsion systems, hybrid technology, and integrated powertrain systems that deliver the efficiency, reliability, safety, and environmental performance needed to support our marine customers during the transformation and beyond. In energy, Wärtsilä is supporting its customers in decarbonisation with future-fuel enabled balancing power plants, hybrid solutions, as well as energy storage and optimisation technology. For both industries, Wärtsilä is progressing in accordance with its plan to have a product portfolio ready for zero carbon fuels by 2030.