Board of Directors' report
2016 was the first year of the current strategy period, 2016 to 2020. After one year, the strategy has proven to be relevant, robust and adequate through challenging market developments and significant changes in global trends, risks and opportunities. However, the accelerated contraction in the oil and gas and maritime markets resulted in currency-neutral negative growth in 2016.
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The Board of Directors believes that DNV GL’s performance in 2016, against a backdrop of difficult markets, demonstrates that the company has responded well to the challenges posed throughout the year while defending its global positions.
Cost-cutting initiatives were accelerated in line with falling revenue, and various parts of the organization have been re-sized and restructured to increase efficiency while maintaining core competencies. The reduction in headcount has required the attention of both the management and Board throughout the year.
The company achieved revenues of NOK 20,834 million in 2016. Lower business volume in Maritime and Oil & Gas in 2016 as well as capacity adjustments led to reduced earnings before interest, tax and amortizations (EBITA), which totalled NOK 984 million.
The Board sincerely thanks the management and employees for the hard work and commitment they have displayed throughout 2016.
DNV GL considers sound corporate governance to be fundamental in securing trust in the company and a cornerstone for achieving the greatest possible value creation over time in the best interests of DNV GL’s customers, employees, shareholders and other stakeholders.
The Board of Directors has decided to report annually on corporate governance in accordance with the Norwegian Code of Practice for Corporate Governance (the “Code of Practice”), and to apply these principles to the extent relevant for the DNV GL Group as a private limited company with two shareholders. The Code of Practice covers 15 topics, and DNV GL’s Corporate Governance report covers each of these topics and describes DNV GL’s adherence to the Code of Practice. The Corporate Governance report also describes the legal basis and principles for DNV GL’s corporate governance structure. The full report can be accessed here.
The management company of the DNV GL companies is DNV GL Group AS, registered in Norway and governed by the Norwegian Private Limited Companies Act. This company is owned by Det Norske Veritas Holding AS (“DNV Holding”) (63.5%) and Mayfair Beteiligungsfonds II GmbH & Co. KG (“Mayfair”) (36.5%) and is the result of the merger of the DNV Group and GL Group in 2013.
DNV GL’s Board of Directors consists of 14 members, of whom nine are elected by the General Meeting based on nominations made by DNV Holding (six members) and Mayfair (three members). Five members are elected by and among DNV GL employees worldwide.
The Board’s combined expertise represents a range of stakeholders, markets and disciplines. The composition of the Board changed in August 2016. Dr Wolfhart Hauser was appointed as the new Vice-Chairman, and Markus Wandt, Sami Badarani and Liselott Kilaas were appointed as new members of the Board. Liv Aune Hagen and Nina Ivarsen were elected as new members of the Board by and from DNV GL employees.
The Board would like to thank J. Hinrich Stahl, Heinrich Frankemölle, Johannes Lafrentz, Hilde Tonne, Silje Grjotheim and Odd E. Sund for their past contributions as board members. The Board held six ordinary board meetings and four extraordinary meetings in 2016. The average attendance at these board meetings was close to 100%. The Board’s Audit Committee held four meetings in 2016 and the attendance at these was 100%. The Board’s Compensation Committee held three meetings in 2016 and the attendance at these was 100%.
Organization and people
The DNV GL Group has operations in close to 100 countries and headquarters located at Høvik, just outside Oslo, Norway. DNV GL is organized in a group structure with five business areas: Maritime, headquartered in Hamburg, Germany; Oil & Gas, headquartered in Høvik, Norway; Energy, headquartered in Arnhem, the Netherlands; Business Assurance, headquartered in London, UK; and Software, headquartered in Høvik, Norway. Global Shared Services provides HR, Finance and IT support services to all business areas and Group functions and is headquartered in Høvik, Norway.
The total number of employees at year-end 2016 was 13,550 (14,954 at year-end 2015), of which 98% are permanent employees. In addition, 6,369 (5,862 in 2015) subcontractors and other personnel were engaged. The decline in the number of employees by almost 2,500 over the last two years reflects the fact that 2016 has been the most challenging year for DNV GL in 30 years due to the continued downturn in the maritime and oil & gas markets. Employee turnover in 2016 was 13% (10% in 2015), with voluntary turnover at 5.5% (5.4% in 2015). Headcount reduction processes were carried out in numerous business and support units in 2016. There are ongoing headcount reduction processes in a few markets, and the cost base is continuously scrutinized. At the same time, the ongoing digital transformation and continued prioritization of investment in innovation are intended to secure future activity.
A career in DNV GL should not be hindered by nationality, gender or age if the employee has the competence, attitude and values needed for the role. The Board considers the company’s purpose, vision and values to be instrumental in attracting and retaining the diverse workforce necessary in global markets. The Board also emphasizes the importance of sound management of human and labour rights. The DNV GL statement pursuant to the UK Modern Slavery Act is signed by the Board and published on the company website.
The employees represent 115 countries, and groups of more than 100 employees come from 20 of these nationalities. The largest regions in terms of number of employees are the Nordics, West and South-East Europe, North America, Central Europe and Northern Asia. 87% (87%) of permanent employees have higher education. The proportion of female employees is 31% (31%) and the proportion of female managers is 23% (22%). The weighted average female salary is 99% (99%) of the weighted average male salary.
The DNV GL Board of Directors consists of 7 (8) men and 7 (6) women from 5 (5) nationalities. The Executive Committee consists of 7 (6) men and 2 (3) women from 4 (3) nationalities.
DNV GL scores high for employee enablement and on par for employee engagement, benchmarked with the Korn Ferry Hay Group’s reference group of high-performing companies, as measured by the annual People Engagement Process survey.
DNV GL’s strategy sets ambitious goals for further developing the company’s established leadership positions within the maritime, oil & gas and energy industries, and within management system certification services and software solutions. Customers will experience a more agile, responsive and data-smart company, catering even better to their business needs.
After one year, the strategy has proven to be relevant, robust and adequate through challenging market developments and significant changes in key global trends and risks.
To build further resilience to volatile market conditions in its existing core industries, the company wants to also become a trusted assurance provider within the life science sector. Both organic and non-organic growth are being pursued within healthcare and food safety and sustainability, which are markets with a significant growth potential. The objectives of safeguarding life and building trust and confidence in these industries fit well with the company’s purpose, vision and values.
In the maritime industry, DNV GL’s goal is to maintain its position as the leading classification society for ships and mobile offshore units, with the largest or second-largest market share in each major segment. The company is taking the lead in driving safety at sea, and customers will continue to experience DNV GL as the standard setter and most innovative classification society through applied R&D, cutting-edge advisory services and data-smart, customer-centric solutions and support.
DNV GL aspires to be the leading global provider of assurance, risk management and technical advisory services to the upstream, midstream and downstream oil and gas market. It aims to use its technical expertise, innovation capabilities and unique laboratories to enable the oil and gas industry to rapidly improve its efficiency in order to meet the challenges of low oil and gas prices, while not compromising on safety and environmental performance.
With a growing world population, urbanization and increasing demand for energy, DNV GL helps its customers in the energy sector to manage the reliability and end-user affordability of electricity while safeguarding the environment. DNV GL will continue to address all three legs of this energy trilemma by: retaining its globally leading position as a provider of advisory and certification services to both the onshore and offshore wind energy sectors; building a leading position in solar and energy storage; strengthening its position as the world leader in the independent testing, inspection and certification of grid components; and further expanding its energy efficiency services.
DNV GL aspires to be the world’s number one Management System Certification provider by revenue. It aims to generate at least 50% of its Business Assurance revenues from offerings other than Management System Certification in segments such as sustainability, supply chain management and product certification by 2020.
As a software provider, DNV GL wants to further strengthen its position in the oil & gas and maritime industries and establish a leading position in renewable energy and power transmission, distribution and use.
The strategy also sets ambitions to stay at the forefront in terms of technology and continuously develop the skills and knowledge of its employees. The company will continue to increase its use of digital solutions to offer better services to customers, improve efficiency and generate new revenue streams.
In the maritime world, 2016 presented a set of particularly challenging market conditions for most shipping segments as well as the offshore segment. Rates remained under substantial pressure, asset values continued to deteriorate and 2016 was the third-highest year ever for scrapping. Despite this, the world fleet grew by 1% in terms of number of vessels and 3% in terms of gross tonnage (GT), as 2,618 ships with a total of 67 million GT were delivered. In the newbuilding market, just 940 ships, 18.3 million gross tonnes (GT), were contracted in 2016. This represents a 70% drop compared to 2015 and is the lowest total in 32 years (in terms of GT). The offshore market came more or less to a complete halt, with new builds being cancelled or delayed from the yards and existing units being laid up on a vast scale.
Consequently, DNV GL’s newbuilding order intake was much lower than in recent years. However, in a very depressed market, our share was significantly higher than in 2015 and DNV GL led all classification societies, with 25% of global orders by GT. In a highly competitive market for the fleet in service, strong efforts in Greece and Germany resulted in positive class entries in these regions. At the end of 2016, the DNV GL-classed fleet stood at 12,404 vessels and MOUs, totalling 277.5 million GT, an increase of 3.3% in gross tonnage.
The cruise market was once again a bright spot – with cruise newbuilding orders more than tripling and the majority of orders going to DNV GL. In contrast, in the container market, 2016 was possibly the most impactful year since the invention of the 20-foot box. Global container capacity equalling nearly 600,000 TEU was removed from service – particularly the “out of favour” Panamax-size vessels. This segment has been influenced by an accelerated consolidation trend, with operators trying to combat overcapacity with mergers.
Several new initiatives were launched in 2016 to help customers perform at the highest level, especially in compliance with international rules. The Port State Control (PSC) Initiative worked to raise crew awareness of the detainable items found on DNV GL ships and the preparation procedures for PSC inspections. This led to the DNV GL-classed fleet’s PSC statistics continuing to improve in 2016.
During 2016, DNV GL launched new digital services and tailored apps to make life easier for its customers. These include enabling customers to check regulatory compliance (MRV readiness), search for potential digital weaknesses and find new opportunities quickly and easily through the MyDNVGL customer portal.
Direct Access to Technical Experts (DATE) is a service where customers can connect with the relevant expert and set a time for a request to be resolved. The service was used more than 20,000 times in 2016, with over 97% of requests being completed by the customer’s deadline and with 90% of customers giving the service a 4- or 5-star rating (out of 5).
In challenging market conditions, our customers’ focus has been on cost containment and reducing operating costs. The value proposition for our software for ship management and operations has proven attractive and we have achieved good growth and profitability for these software solutions. We experience good traction for these products in all markets, especially Asia.
The oil and gas industry is adjusting to a new normal, with more volatile oil and gas markets and lower price levels for all energy sources. All players have been forced to take painful cost-cutting measures by reducing their capital expenditure and headcount. Several companies throughout the value chain are also making strategic shifts in their portfolio towards lower-cost projects, shorter investment cycles and higher levels of flexibility.
DNV GL has kept a strategic focus on long-term value creation for its oil and gas customers through investments in innovation and competence building. There has been a specific focus on digitalizing DNV GL’s service portfolio. This provides enhanced value for customers through models and information which are easily updated and utilized for the project’s lifetime. For example, the first digitally-enabled standards were introduced for the warranty approval of marine operations. The company also introduced an interactive reporting service with 3D visuals that brings quantitative risk assessments into the digital age.
By providing a neutral ground for industry collaboration and building on its deep technical expertise, the company launched 43 new joint industry projects to help oil and gas customers reduce both complexity and cost.
A solid order book for the pipeline business – with growth in demand for services across Europe and the Americas last year – reflected DNV GL’s expert position and track record for innovation in this area. In 2016, DNV GL celebrated the 40th anniversary of the industry’s first and still relevant global standard for the design, construction and operation of offshore submarine pipelines.
DNV GL continues to be at the leading edge of implementing new technologies in the pipeline market and is supporting a UK gas distribution operator with a project that will pave the way for networks that can handle mixed-source gas with varying energy content cost-effectively and securely.
In these challenging times, oil and gas customers are focusing on maintaining a high uptime and improving the efficiency and productivity of their assets. Our software solutions for the oil and gas market have seen good growth and increased their market share in upstream as well as midstream and downstream segments. Our integrity management and asset optimization solutions have experienced increased traction.
New important oil and gas contracts include a new master service agreement with Statoil for pipeline technology, platform technology, safety and structural reanalysis; in-service verification services to Australia’s Ichthys project; and a significant contract with a major Middle East-based operator for site inspection services.
Demand increased for DNV GL’s due diligence services, which support buyers, sellers and financers throughout the value chain as they update their portfolios to be better positioned in the current market. At the same time, planning for the decommissioning of old oil and gas infrastructures has increased, and DNV GL is playing an important role to ensure this can be done in a safe and environmentally sound manner.
2016 was characterized by lower energy costs. Renewables have now become mainstream in the market and interests have shifted to optimizing operations and managing assets. Consolidation in the wind turbine market led to fewer new models and less demand for type certificates, but wind project certification is a growing market in the US and Asia. In addition, new players, including oil companies, are entering the market and investing in large-scale infrastructure projects.
The integration of renewables into grids and rise of storage as a back-up solution require transmission and distribution grids to adapt and become more flexible. This drives the need for DNV GL’s services for validating investments in storage, complex control systems and energy management. New, more complex grid infrastructures and the rise of super grids in Asia are driving the need to quality test high-voltage and high-power grid equipment.
With ageing grid infrastructures, asset reliability and performance is a key focus area for the company’s grid and utility customers. DNV GL experienced good growth in the related software segment and sees increasing traction internationally.
To strengthen its energy services, DNV GL acquired power systems expert Gothia Power in Sweden and Spain’s Green Power Monitor, a global leader in solar monitoring.
As a global assurance provider, DNV GL - Business Assurance works with a diverse customer base which continues to call for assurance in many ways and forms. Stakeholder and legislative drivers, coupled with complex and global value chains, continued to increase the need for independent third-party certification. Management system certification remained the main service.
The overall ISO management system certification market expanded by 3% worldwide (2015 figures). Within this market, DNV GL is maintaining a leading position in terms of market share and innovation.
The expansion of DNV GL’s assurance portfolio continued, with growth of 13% in Product Assurance and 14% in Supply Chain Management and other assurance services that help companies work towards responsible consumption and production. Within the food and beverage industry, growth exceeded expectations once again. Similarly, healthcare services accelerated in 2016.
The integration of Noomas was completed successfully, supporting the expansion of the aquaculture portfolio to address the entire aquaculture value chain.
In 2016, we initiated projects exploring big data concepts and data custodian roles in the aquaculture and healthcare sectors. Due to the collaboration with industry players, experts and governmental bodies, these projects have the potential to address major industry challenges by building trust into digital platforms, data sharing and data analytics. Working to preserve health or provide food, the activities will continue to support our Life Science strategy in 2017 and beyond.
Despite continued challenging and contracting markets in 2016, all DNV GL - Software’s product lines either maintained or increased their revenue.
All product lines grew their market share. Sales to new customers accounted for 27% of the total sales. DNV GL - Software secured 255 new accounts in 2016, while the total volume of new licence sales contracted by 14% compared to 2015. Software consulting services once again experienced strong annual growth in revenue.
Operational efficiency and cost management are continuing to improve the financial performance of our software business. All product lines except for one show profitable operations, and are still in accordance with our business plan.
DNV GL Group AS achieved operating revenues of NOK 20,834 million in 2016, a revenue decline of NOK 2,556 million from 2015. The nominal growth is -11%, and reflects a contraction in the business volume from the maritime and oil and gas segments. Currency-neutral organic growth was -12%, while non-organic growth accounted for 1%. The non-organic growth includes the acquisitions of Noomas, Gothia Power and GreenPowerMonitor and the divestment of the Oil & Gas Material & Failure Analysis laboratory in Germany. The positive currency effect weakened throughout the year and ended at 2%.
The Maritime business area recorded revenues of NOK 8,216 million. That corresponds to a contraction of 17% compared to 2015, with an accelerated business-volume contraction in the second half of 2016. The Oil & Gas business area reported revenues of NOK 4,955 million, representing a contraction of 18%. The Energy business area posted revenues of NOK 3,583 million, reflecting a nominal growth of 2% that comes from favourable currency effects and the acquisitions of Gothia Power and GreenPowerMonitor. Business Assurance concluded the year with a nominal growth of 4% and revenues of NOK 3,146 million. Supply chain management and Assurance services contributed to significant growth beyond the MSC services. The Software business area delivered a profitable nominal growth of 4% and external revenues of NOK 859 million in a challenging market.
Lower business volume in Maritime and Oil & Gas in 2016 as well as capacity adjustments led to a reduction in the earnings before interest, tax, amortization and impairment (EBITA) from NOK 2,274 million in 2015 to NOK 984 million in 2016, reflecting an EBITA margin just short of 5%. Significant one-off cost elements related to the downsizing of the organization and reduction in office space were booked in 2016.
Goodwill impairment test at year-end 2016 showed that Energy is in an impairment situation. A goodwill impairment of NOK 299 million has been reflected in the income statement for 2016.
After the goodwill impairment and NOK 531 million amortization of intangible assets, the operating profit (EBIT) decreased by NOK 1,584 million, from NOK 1,738 million in 2015 to NOK 154 million in 2016.
The net financial expenses were NOK 18 million in 2016, compared to NOK 12 million in 2015. The main financial items in 2016 were positive currency effects (NOK 50 million), which were more than offset by net interest costs from defined benefit pension plans (NOK 37 million), interest costs on the external credit facility and other interest costs and financial expenses.
The 2016 tax expense is NOK 352 million. The high tax level is partly due to non-tax-deductible items like goodwill impairment, withholding taxes on remitted earnings and losses from operations without recognition of tax assets.
The loss for the year was NOK 216 million, compared to last year’s net profit of NOK 1,014 million.
The net cash flow for the year was negative by NOK 628 million due to investments, the repayment of external credit facility and distribution of dividends. The cash flow from operations was NOK 662 million in 2016, positively influenced by improved accounts-receivable collection and an overall reduction in working capital. The cash flow from investments was NOK 682 million in 2016. Net investments of NOK 284 million in tangible fixed assets were mainly in laboratories in Arnhem, the Netherlands, as well as office-related and IT-equipment investments. Of the investments in intangible assets, NOK 327 million was primarily related to new software platforms. Acquisitions totalled NOK 235 million and divestments NOK 155 million in 2016. The NOK 607 million negative cash flow from financing activities includes NOK 100 million net repayments of the external credit facility and dividend payments of NOK 507 million. At the year-end, the DNV GL Group had liquidity reserves of NOK 3,628 million plus a credit line of NOK 1,500 million.
The Group has a strong balance sheet with an equity ratio of 65% of total assets. Due to the strengthening of NOK against most currencies, foreign currency losses of NOK 1,057 million relating to net investments in foreign subsidiaries were reflected in the equity in 2016.
Net actuarial losses of NOK 86 million from defined benefit pension plans were reflected in equity at year-end. NOK 159 million of the actuarial losses was caused by changed assumptions in the actuarial calculations, while gains of NOK 100 million follow from the actual return on the plan assets in the Norwegian pension fund in excess of the discount rate.
The accounts of the parent company, DNV GL Group AS, show a profit for the year of NOK 152 million. The Board proposes to transfer the profit for the year to other equity.
The Board confirms that the going concern assumption applies and that the financial statements have been prepared on this basis. Although the Board regards DNV GL’s financial performance for 2016 as unsatisfactory, the equity ratio and liquidity is strong. Both parameters contribute to a robust platform to achieve our strategic targets and maintain our independence as a financially strong and trusted company. The Board also confirms that, to the best of its knowledge, the information presented in the financial statements gives a true and fair view of the assets, liabilities, financial position and results of the DNV GL Group for the period, and that there are no material events after the balance sheet date affecting the 2016 financial statements.
Innovation is a cornerstone of DNV GL’s business model. It is also central to the differentiation strategy that enables DNV GL to meet its strategic goals and has allowed the company for many decades to be a preferred and trusted risk-management and technology advisor to the maritime, energy, oil & gas and life science industries.
Consequently, the company is upholding its commitment to invest 5% of its annual revenues in research and innovation activities despite ongoing cost-cutting measures. The purpose is to deliver the best insight and technical capabilities to help its customers work safer, smarter and greener. Innovative solutions and foresight are co-created and shared with the industries in which DNV GL is active.
Of the total 5% of annual revenues invested in research and innovation, one fifth is allocated to long-term strategic research. To support the company’s strategic ambition of becoming a data-smart company, over half of the research and innovation activities are dedicated to digitalization and automation.
One example of foresight provided by the strategic research programme is the Technology Outlook 2025 report that was launched globally in Shanghai during the first half of 2016. Here DNV GL explores the technologies likely to be taken up in the next ten years.
For DNV GL, corporate sustainability is about delivering long-term value in financial, environmental, social and ethical terms; this is embedded in the Group’s purpose, vision and values. The Board considers this approach, and the fostering of a company culture beyond compliance, as fundamental in securing the Group’s business success.
DNV GL has been a signatory to the United Nations Global Compact since 2003, and the Board sees the integration of the ten principles on human rights, labour standards, environmental performance and anti-corruption as critical for capturing long-term value.
In 2016, DNV GL continued to enable sustainable performance through three pillars: activities within its own organization, business activities for customers, and collaborative activities through partnerships.
The Board finds collaboration and proactive stakeholder engagement important for the company to continue to build trust and strengthen its market positions. Internally, DNV GL continued to strengthen its global governance systems by preparing group-wide systematic sustainable procurement practices. DNV GL continued to support the World Business Council for Sustainable Development, the Global Opportunity Network, the Red Cross, and the WWF. In 2016, DNV GL launched the ‘Future of Spaceship Earth’ report at the UN Headquarters along with 17 other companies at the frontier of targeting the UN’s global Sustainable Development Goals (SDGs).
Going forward, DNV GL sees the SDGs as a framework for strengthening its market positions. DNV GL provides strong business solutions for many of the SDGs, including 3) Good Health and Well-being; 7) Affordable and Clean Energy; 9) Industry, Innovation and Infrastructure; and 13) Climate Action. The Board considers the Sustainable Development Goals to be relevant indicators of market trends and foresees stronger business positions for goals 11) Sustainable Cities and Communities, 12) Responsible Consumption and Production and 14) Life below Water, and this is reflected in the Group strategy.
The Board refers to the Annual Report for a complete account of corporate sustainability, including information on materiality, management approach and performance within health and safety, business ethics and anti-corruption, people, environment and climate, sustainable procurement as well as partnerships.
DNV GL reports in accordance with the GRI Standards at the Comprehensive Level, and a third party has conducted a limited assurance of the report.
Health, safety and environment
DNV GL’s purpose is to safeguard life, property and the environment. The Group aims to be the safest place to work compared to other companies in its industries and is committed to managing and continually improving its health and safety performance. The overall goal is to prevent injuries and occupational diseases among its employees and workforce. DNV GL has been certified in accordance with OHSAS 18001 since 2011, and the Board considers this to be a key indicator for ensuring that the Group itself operates in a safe manner.
In 2016, there were no fatalities involving DNV GL employees or other workers. At year-end, the 12-month rolling average was 1.4 (1.5) for the Injury Rate, 0.9 (1.0) for the Occupational Disease Rate , 29.3 (49.2) for the Lost Day Rate and 2.5% (2.2%) for the Total Absence Rate. The number of lost day injuries was 34 (40), the number of occupational diseases resulting in absence was 23 (36), the number of injuries with no lost days was 162 (183) and the number of near-accidents was 410 (582). The long-term trend for injuries and occupational diseases is stable and the trend for lost days has improved, but the absence trend has worsened. All in all, DNV GL’s health and safety performance is average compared with industry benchmarks, and a programme is in place to continuously improve the health and safety culture.
DNV GL’s governing Procurement document includes compliance with equivalent health and safety requirements for services rendered on the DNV GL premises and for subcontracted survey-type work outside normal office locations.
The Group is committed to managing and continually improving its environmental performance. DNV GL has been certified in accordance with ISO 14001 since 2008.
Environmental measurements, incident reporting and performance monitoring of significant topics such as energy consumption, emissions to air and waste management are followed up annually. Internal and external audits are undertaken to assure performance.
The Board is monitoring the implementation of the Group strategy to ensure that DNV GL takes measures to become carbon neutral in relation to office buildings and travel activity by the end of 2020. The pilot in Norway achieved the carbon neutral operation of Norwegian offices and travel in 2016, with necessary offsets verified by an independent third party.
In 2016, zero cases of non-compliance with environmental regulations and zero fines related to environmental aspects were reported. The recorded energy consumption was 87.5 GWh (90.2 GWh), a decrease mainly due to the lower number of locations. Scope 1 and 2 greenhouse gas emissions came to 29,993 tCO2e (28,099 tCO2e), an increase mainly due to 30% higher greenhouse gas emissions from the expanded Arnhem Power TIC Laboratories. The specific energy consumption per employee was 8.5 MWh (7.5 MWh) and specific greenhouse gas emissions per employee were 2.9 tCO2e (2.5 tCO2e).
From 2016, credible travel carbon-footprint tracking for 93% of employees has been included. The baseline for these Scope 3 greenhouse gas emissions was 17.3 tCO2e. The programme to help employees reduce their personal environmental footprint was put on hold due to the extraordinary market conditions and ongoing cost-cutting initiatives across the Group.
Business ethics and anti-corruption work
The DNV GL value, “We never compromise on quality or integrity” is the leading principle for fostering a common culture of integrity across all operations. DNV GL has a zero-tolerance policy for corruption and unethical behaviour that applies to all employees, subcontractors, agents and suppliers. DNV GL, its stakeholders and the Board emphasize the necessity of remaining professionally objective and independent in the services the Group delivers to customers and society at large.
DNV GL’s compliance programme and related instructions are based on the Code of Conduct and are the responsibility of the Board. Anti-corruption, anti-trust, export controls, sanctions and data protection are the programme’s focus areas, and respective instructions are in place.
Compliance risks are regularly assessed as part of the corporate risk management process to evaluate the focus areas and continuously improve the compliance programme. The Group Compliance Officer reports new developments and case statistics to the Board’s Audit Committee quarterly, as well as to the Executive Committee when relevant. In 2016, 44 (40) potential compliance cases were reported and handled, with no confirmed incidents of corruption.
Communication, training and mandatory e-learning courses are used to raise and maintain awareness. Information on how to report potential misconduct is published on the company website and the intranet and there is also an ethical helpline and anonymous whistle-blowing channel. Governing documents related to compliance for subcontractors, export control, data protection and sponsorships were published in 2016. An extended global export control network was started, and regular communication and training with the Regional Data Protection Representatives took place. In addition, an automatic sanctions-check tool was integrated into the Customer Relationship Management systems.
Corporate risk management
The Board underlines the importance of continuously having a comprehensive understanding of the risks facing DNV GL that could affect corporate values, reputation and key business objectives. DNV GL has processes in place to proactively identify such risks at an early stage to initiate adequate mitigating measures and actions.
DNV GL’s risk management policy is part of the management system and ensures that the risk management processes and culture are an integral part of everything the company does. The policy is aligned with the ISO 31000 framework.
The Board formally reviews the risk management status and outlook twice a year. The review of risks and opportunities is conducted as part of both the strategy revision process and the annual plan process.
DNV GL calculates its risk-adjusted equity on an annual basis, taking into consideration the most important risk factors. Based on value-at-risk methodology, the analysis includes potential losses from operations, foreign-exchange exposure, financial investments and pension plan assets and liabilities. The book equity less the maximum calculated loss illustrates DNV GL’s total risk exposure and the amount that can be lost in a worst-case scenario. This exercise gives the Board a measurable overview of the key quantified risks and DNV GL’s capacity to take on additional risk.
The drop in the oil price and its effect on the demand for DNV GL’s services were a focus area in the Board’s risk assessments throughout the year. Developments in the maritime sector were another issue of great concern. Both the declining newbuilding market and the competitive situation in the classification industry have been assessed as part of the risk picture facing DNV GL. Mitigating actions addressing overcapacity and the cost base have been prioritized.
Serious quality, safety and integrity risks in the company represent another focus area. Numerous barriers exist to minimize the chance of such events occurring, and DNV GL’s management system is constantly being scrutinized to ensure we are managing this risk satisfactorily.
The company’s ambitions to take a role in the emerging digital economy entail an increased cyber security risk. Among other mitigating actions is the work to achieve ISO 27001 certification. The Board will review the cyber security risk annually going forward.
DNV GL’s main financial risks are market risk (interest rate and foreign currency risk), credit risk and liquidity risk.
Interest rate risk: as the company has limited external borrowings, its exposure to interest rate risk is primarily due to its defined benefit pension commitments. Lower interest rates over the past few years have led to an increase in the pension commitments. The company has closed all existing defined benefit pension schemes to new entrants. In addition, there is limited exposure to the risk of changes in market interest rates for DNV GL’s forward exchange contracts.
Foreign currency risk: DNV GL has revenues and expenses in approximately 70 currencies. Of these, six (NOK, EUR, USD, CNY, KRW and GBP) make up approximately 75% of the total revenue. In most currencies, the company has a natural hedge through a balance of revenue and expenses. The foreign currency policy is to focus on hedging expected cash flows, primarily in US dollars. However, DNV GL is also materially exposed to the re-evaluation of balance sheet items, including net investments in foreign subsidiaries.
Credit risk: receivable balances are monitored on an ongoing basis with the result that the company’s exposure to bad debts is limited. There are no significant concentrations of credit risk within the company. In 2016, there was a special focus on accounts receivable processes and systems. With respect to credit risk arising from the other financial assets, which comprise cash, cash equivalents and certain derivative instruments, DNV GL’s exposure to this arises from any default of the counterparty, with a maximum exposure equal to the market value of these instruments.
Liquidity risk: DNV GL monitors its liquidity risk on a continuous basis. The liquidity planning considers the maturity of both the financial investments and financial assets (e.g. accounts receivable, other financial assets) and projected cash flows from operations.
The global economic outlook remains influenced by low growth, low interest rates and low commodity prices. Growth in Asia is significantly influenced by the uncertainty related to the Chinese economy. Developments in the hydrocarbon sector are being heavily influenced by low prices due to oversupply. Meanwhile, the falling costs of renewable energy are altering the power generation mix. Overall, growth in the consumption of all energy forms in the developing world has been offset by efficiency measures in the developed world. Globalization is being challenged in several major countries, as evidenced by the UK Brexit vote and the election of President Trump in the USA. Several European countries face national elections in 2017, including Germany, France and Norway, and these may exacerbate this trend. Globally, the geopolitical situation became more tense during 2016.
Cyber security at global, company and personal levels is now a serious emerging risk. Hence, overall, we see a higher level of uncertainty regarding national and regional protection measures being introduced on free trade, the movement of people and the transfer of technology.
Against this complex backdrop, the Board believes the challenging market situation for shipping and offshore oil & gas will continue during the period ahead, even allowing for a more optimistic outlook in selected sectors such as the cruise industry. The overcapacity situation is continuing, and several vessels are still to be delivered from the yards, resulting in continued net fleet growth despite the limited increase in seaborne trade. The ship newbuilding market dropped considerably again in 2016 and we can only expect a modest recovery towards 2019, or even 2020. Newbuildings for the offshore sector will probably take longer to recover, with only select opportunities in floating production and re-gasification. Classification societies must adapt to this challenging market situation, but the Board regards the aggressive price competition by certain competing classification societies as unsustainable and potentially undermining the value of classification. However, DNV GL is committed to uphold its contribution to quality and safety at sea.
The oil and gas sector is heavily influenced by lower energy prices for both its own products and those from competing energy sources. Projects with shorter investment cycles attract more interest in the market, and unconventional resources contribute to market volatility. At the same time, production from existing fields must be maximized while ensuring much-needed efficiency and productivity gains. The volatility in the upstream sector is reflected further down the value chain with more short-term trade agreements and larger variations in the quality of the products to be routed through pipeline systems, terminals, refineries and distribution networks. The shift in the market opens new opportunities for DNV GL to support active portfolio management throughout an asset’s lifecycle, as well as in areas where digital service offerings combined with in-depth technical expertise can drive the necessary efficiency gains in entire energy systems.
Within the energy sector, the company will continue to focus on renewable energy, power transmission & distribution and sustainable energy use. Investments in the renewable energy sector are influenced by the reduced cost of fossil fuel, new trade agreements, political decisions and subsidies. However, the Board believes this sector will grow significantly due to the drop in the cost of both renewable energy and energy storage that largely offsets renewable energy’s interruptible nature, making this combination increasingly competitive. The expansion and interconnectivity of transmission and distribution grids and increased focus on energy efficiency will also continue to create several opportunities for DNV GL in the coming years. The company has a strong position within Testing, Inspection and Certification for these industries and has an extensive service and competence platform on which to build.
The demand for management system certification is expected to increase in the near term due to the introduction of an updated ISO 9001 standard. Other business assurance services, such as supply chain management, that focus on sustainable business development, global best practices, new standards and business innovation will continue to grow, and DNV GL is well positioned to be at the forefront in these areas. The company will explore opportunities within the Life Science domain, with a focus on healthcare and food supply risk. Aquaculture, which combines these opportunities with DNV GL’s historic marine capabilities, will be a focus area.
In general, we are seeing a paradigm shift due to digitalization. The way we deliver value is changing, brought on by a revolution in information technology. We are starting to rely on new networks and new ways of working. The Cloud offers limitless computing power and storage capacity. The additional power made available through the Internet of Things (IoT) and machine learning provides opportunities that were previously unthinkable. DNV GL’s ‘Veracity’ data platform will bring industries together in digital eco-systems, enhancing the exchange of data, creating new insights and building new services. DNV GL will continue to invest in in-house software development to meet the growing demand for software-as-a-service and mobile applications.
The Board of Directors believes that DNV GL’s performance in 2016 against a backdrop of difficult markets demonstrates that the company has responded well to the challenges posed throughout the year. The company has, and will continue to develop, a broad competence and resource base to provide guidance and support to customers in a business environment where the need for technical and digital expertise, trust and risk management is evident.