Risks related to Neste's business

While the macroeconomic outlook has shown some signs of improvement, growth forecasts in Neste's key markets remain modest. A decline in global economic activity could adversely affect demand for Neste's products and associated margins. Furthermore, macroeconomic uncertainty has prompted governments to re-evaluate the affordability and funding of renewable energy. This reassessment could slow the advancement of climate policies or diminish overall climate ambitions, both of which are important for supporting demand for Neste's renewable products.

Geopolitical and trade policy tensions, alongside emerging conflicts, may disrupt international trade, financial markets, and supply chains. For instance, the continuation or escalation of tensions in Europe, the Middle East, and the South China Sea could increase regional instability and disrupt the balance and security of global energy markets. These factors could impact the balance of supply and demand in Neste's key markets and expose supply chains to additional disruption. Such disruptions could materially and adversely impact Neste's access to feedstocks, its ability to deliver products, and the completion of investment projects.

Neste's businesses are exposed to both physical risks (direct and acute) and transition risks. Extreme weather events and natural hazards could expose Neste's production and logistics infrastructure to unexpected disruption. Physical risks could also affect availability of key utilities and viability of different feedstock sourcing initiatives. Policy and legal implications of transitioning to a low-climate-impact economy could include economic and regulatory adjustments that affect e.g. emission trading schemes, technology requirements and valuation of assets. The indirect economic and political consequences of climate change may also contribute to the general uncertainty in the business environment.

Changing regulation presents both an opportunity and a threat to Neste’s business. Neste benefits from increased support for biofuels and renewable fuels, like Renewable Energy Directive III targets for renewable fuels in transport and its implementation in EU member states. However, changes in regulation, especially in the European Union and the United States, also create uncertainties. Regulatory changes may influence the speed at which the demand for renewable products develops, and which raw materials sources are accepted. Increasing nationalism and protectionist regulation may further fragment global renewable markets, leading to more regionalized incentive schemes, like Clean Fuel Production Credit in the US.

Neste’s proprietary NEXBTL production technology is a proven technology for producing high-quality diesel and sustainable aviation fuel (SAF) from renewable raw materials. However, there is no assurance that this competitive position will continue as new players enter the market, and current competitors develop their technologies or preferences, either customer or legislative. The more rapid than anticipated development of alternative feedstocks and production technologies for liquid fuels, the evolution and adoption of engine technologies, and the introduction of alternative powertrains could increase competition for NEXBTL, which may decrease demand and lower margins for Neste’s products. Furthermore, the demand for and margins of Neste’s products could be adversely affected by regulatory preferences for technologies or products that compete with Neste’s.

Increases in global renewable refining and co-processing capacity relative to growth in demand for the renewable products may have a material adverse effect on Neste. Staying ahead of the competition requires continuous improvement, the ability to challenge current business models and a strong focus on innovations such as new production technologies and feedstock platforms. Neste’s ability to source renewable feedstocks at quantities sufficient for its production targets and at acceptable prices is vital to achieving its strategic objectives. If new competitor capacities lead to supplies of renewable products exceeding demand, or if Neste’s renewable products become less competitive, it may reduce Neste’s refining margins for renewable products.

Successful projects play a key role in Neste’s strategy deployment, operational development and the digitization of processes. Possible delays in growth projects or in the ramp-up of new production facilities pose a risk to Neste. Significant delays in project planning or execution may also reduce operational efficiency or impair Neste’s ability to secure its competitive position in the future.

The importance of business continuity management has been highlighted in the changing environment. At the company level, scenario work has played an important role, e.g., in testing potential market environment drivers and resilience to various scenarios.

At the operational level, Neste’s business performance greatly depends on the continuous reliability of its refining activities. Any shutdown of Neste’s operations, whether planned or unplanned, could have a material adverse effect on Neste’s business. In addition to the planned maintenance turnarounds, disruptions in the supply of utilities or breakdown of critical machinery could cause unexpected shutdowns that would affect Neste’s ability to fulfill demand for end products. Likewise, interruptions in the supply chain and logistics network are a risk for Neste including inherent risks in maritime operations.

Neste has insurance programmes in place to provide protection e.g. in respect of its industrial assets. However, Neste is not insured against all potential losses. Neste could incur significant uninsured losses arising from events including operational catastrophes, deliberate sabotage or natural hazards. Such events could have a material adverse effect on Neste's business and results of operations

As Neste operates in a high-hazard industry there are inherent safety risks to people and the environment. To manage these risks Neste has robust safety and environmental management systems in place. Neste’s products and services must also continuously meet customer requirements related, e.g., to product quality and sustainability. Evolving customer requirements, complex sourcing and logistics networks and production methods increase the exposure to quality risks that need to be managed well to maintain the high-quality brand image. As risk mitigation, Neste has implemented systematic quality management measures, both in its own operations and in partner networks.

Neste’s financial results are primarily affected by the price differential, or margin, between refined petroleum and renewable product prices; and the prices for the crude oil, different vegetable oils and other feedstock used. Historically, refining margins have been volatile, and they are likely to continue to be so in the future. The main factors that may affect the refining margins include:

• Changes in the aggregate demand for and supply of raw materials and products;

• Changes in the demand for and supply of specific raw materials and products;

• Raw materials and product price fluctuations; and

• The evolution of worldwide refining capacity, and especially the development of refining capacity related to petroleum and renewable products similar to Neste’s.

Volatility in oil and gas markets is expected to remain high due to eg. supply risks associated with the Ukraine war, conflicts in the Middle East and trade tensions. In the renewable fuels market, fuel supply and demand are impacted by changing regulation and trade politics, both on the feedstock and product side. Overall supportive trend for energy transition has incentivized growth in renewables production capacity whereas demand and renewables margin levels are highly dependent on both regulatory and voluntary demand growth.

As a part of risk management, Neste uses derivative instruments to protect its position against fluctuations in commodity prices. Neste is exposed to foreign exchange risks because most of the sales are denominated in US dollars, whereas operating expenses (except the purchase of raw materials) are recorded in euros. Neste limits the uncertainties related to changes in foreign exchange rates by hedging its currency risks in contracted and forecasted cash flows and balance sheet exposures. More information about market risks can be found in the Financial statements Note 3 section of the Annual Report.

Neste’s operations and products are subject to extensive regulation (incl. environmental, health and safety, sustainability). General regulatory requirements in areas like commodity trading and data protection have also contributed to the formalization of operating procedures. As Neste’s supply base has become more fragmented and diversified, and global supply chains have expanded, there is an increased exposure to regulatory requirements, as well as business conduct and sustainability risks. It is critical that Neste stays at all times compliant with various regulatory acts and sanction regimes. Non-compliance with applicable regulation or external requirements would have both adverse financial and reputational impact on Neste.

Counterparty risk arises from all business relationships where Neste is exposed to the counterparty’s failure to perform according to Neste’s requirements and contractual commitments.The extent of counterparty risk has increased along the continued diversification of Neste’s supply base and customer segments. To manage the risk, Neste has implemented systematic controls for counterparty screening and monitoring. Especially on the sales side, Neste is also exposed to credit risk, i.e., the potential failure of a counterparty to meet its contractual payment obligations. Risk magnitude depends on the size of the exposure concerned and the counterparty’s creditworthiness, which is assessed systematically both during onboarding and during the relationship.

The most significant sustainability risks that relate to Neste’s own operations or to the extended enterprise have been reported in line with the requirements of the Sustainability statement as a part of the Review by the Board of Directors.

Neste's core business processes rely heavily on the secure and reliable operation of its information technology (IT) systems and the availability of critical data. While Neste leverages digitalization and emerging technologies to enhance operational efficiency and innovation, it recognizes the evolving threat landscape posed by increasingly sophisticated cyberattacks, particularly targeting the oil and gas sector.

Neste acknowledges that disruptions to its key IT systems, data breaches, violations of data privacy regulations, malicious cyberattacks or any other malicious attempts targeting operational technology (OT) and industrial control systems (ICS) could significantly impact business operations, profitability, and reputation. Therefore, Neste is committed to implementing and maintaining a robust cybersecurity program to ensure the confidentiality, integrity, and availability of its critical assets.