Arla Foods Annual Report 2020

Management Review Our Strategy Our Brands and Commercial Segments Our Responsibility Our Governance RISK AND COMPLIANCE MANAGEMENT (CONTINUED) Our Performance Review Our Consolidated Financial Statements Our Consolidated Environmental, Social and Governance Data Risk Owner Mitigation TYPES OF RISK STRATEGIC: risks arising from external or internal trends or events that may have material impact on the realisation of our strategic objectives OPERATIONAL: risks that may compromise the execution of business functions FINANCIAL: risks that may cause unexpected volatility in milk price, net sales, margins or market shares LEGAL AND REGULATORY: risks related to legal or regulatory developments that may have material impact on our realisation of business objectives IMPACT We differentiate risks within each major category by their potential impact. Impact indicates the level of monetary and/or reputational loss. In this report, we focus on critical and major risks, but in our internal risk management we also track and mitigate risks below these materiality levels. Major: Long term impairment of market position and/or national media coverage resulting in damage to brands/image and/or monetary loss 10-50 EURm. Critical: Permanent reduction of brand value and/or extensive international media coverage damaging the image of Arla and/or monetary loss in excess of 50 EURm. Likelihood: When we talk about the movement of risk, we refer to change in the likelihood of the risk materialising, considering the mitigation activities and controls lowering that likelihood. Strategic risks Negative consequence of Brexit The UK is a significant market for Arla, accounting for 26 per cent of sales. The Free Trade Agreement between the UK and the EU was welcomed, however, the non-tariff barriers within the deal will create friction resulting in additional complexity and cost. : Peter Giortz-Carlsen, Chief Commercial Officer : Since the Brexit vote in 2016, we have developed detailed scenario and mitigation action plans, and we have continuously been mapping potential impacts of various outcomes of the Brexit negotiations. Looking into 2021, despite the Free Trade Agreement, Brexit is placed as a mission critical project on our business plan, and we are well prepared to handle the impacts of Brexit on our UK business. To read more go to page 20. Impact: 2020 movement: Political instability and economic turmoil (Covid-19 impact) Political instability across the countries where Arla operates is a major risk with potential of significantly affecting our sales and profitability. Political uncertainty impacts exchange rates, interest rates, international trade relationships, the 'free' movement of goods and services, production, etc. : Peder Tuborgh, Chief Executive Officer : During 2020, political uncertainty impacted our business in multiple places from Lebanon in the Middle East, over Sub-Saharan Africa to South East Asia and most recently Brexit in Europe. With our broad international footprint and agile supply chain, our organisation is set up to deal with uncertainty, and we can use our resilience and agility to face the challenges. On a global scale, Covid-19 has also increased the uncertainty with regard to the economic outlook, but as a global company we have plans in place to act in various scenarios. Impact: 2020 movement: New Transformation of consumer preferences (Covid-19 impact) An example of the changing consumer preferences is the increased demand for more sustainable products. Recent studies show that 35 per cent of global consumers are willing to trade up for a more sustainable product. This is a great opportunity, but also a great risk due to today's significant GHG emissions in dairy production, which potentially could lead consumers towards dairy alternatives. : Hanne Søndergaard, Chief Marketing Officer : As part of our 'Stronger Planet - Stronger People' sustainability strategy, we continuously work to develop more sustainable packaging and products. In 2021, we plan to step up our health and sustainability proposition through big plays for the Arla Brand while accelerating our communi- cation to consumers regarding the many steps that we take on our sustainability journey. We will also continue to develop products that fit consumers' demand for value offering. Read more in our Responsibility Report. Impact: 2020 movement: Stable 51 ARLA FOODS ANNUAL REPORT 2020

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