88 STRATEGICALLY ADVANCING identified, mapped and updated into the existing Key Risk and Control Matrix to ensure the ongoing relevance of the identified risks for ESR-REIT. An environmental risk assessment was conducted to assess the environmental risks applicable to ESR-REIT. The identified environmental risks are incorporated into the Key Risk and Control Matrix. In addition, the identified risks and controls are reviewed by the respective head of departments quarterly (or more frequently if the business environment warrants) to ensure the Key Risk and Control Matrix stays relevant and effective. Managing Key Risks The Manager has identified the following top key risks faced by ESR-REIT and the Managers, and corresponding controls have been established to manage the risks: (i) Strategic Risk Poor business decisions and the lack in responsiveness to geopolitical, macroeconomic and market developments may lead to ESR-REIT not achieving its business objectives and result in economic loss. The Manager may also face the risk of potential conflicts of interest between the Sponsor and the objectives of ESR-REIT, which may lead to the erosion of stakeholders’ trust as well as potential financial and reputational damage. Economic trends and trends of end-users and consumption patterns are monitored to keep up with the changes in the business and operating environment. The Manager ensures that investments are progressively diversified geographically, with focus on markets where the Sponsor has operational scale, and the underlying political fundamentals are more stable. All investment and divestment opportunities are subject to a disciplined and rigorous due diligence process, taking into consideration the potential for yield enhancement, longterm sustainability and asset valuation. The strategy and business plan of ESR-REIT is also reviewed regularly. In managing potential conflicts of interest between the Sponsor and ESR-REIT, the Manager has instituted procedures to adhere to for all interested party transactions. Additionally, a Transaction Review Committee has been set up to, when directed, assist the Board in ensuring that transactions with interested parties are conducted on an arm’s length and transparent basis. For more information on how the Manager deals with potential conflicts of interest, please refer to the Corporate Governance Report on page 92. RISK MANAGEMENT PROCESS The Manager adopts a four-step risk management process comprising risk identification and assessment, risk management application, risk monitoring as well as risk reporting. This framework provides a structured process for the Board and the Manager to establish riskbased strategies, identify potential risk issues that may affect ESR-REIT and manage these risks to a manageable residual level. (A) Risk Identification and Assessment The Board approves the Risk Appetite Statements (the “RAS”) which identify the nature and extent of material risks that ESR-REIT should be taking to achieve its strategic and business objectives. The RAS serve as a “traffic light alert system”, with the risk indicator of each risk based on the colours of a traffic light — Red, Amber and Green. Green is within the acceptable risk level, Amber signals increasing risk which needs to be monitored and reduced as necessary and Red means it is outside the risk level that ESR-REIT and the Managers are willing to undertake and thus, mitigating measures and steps need to be put in place to reduce the risk level to within the acceptable range. The RAS are monitored on a quarterly basis to ensure that all risks are appropriately managed within the levels as approved by the Board. The RAS are reviewed and tabled to both the ARCC and the Board every quarter for their notation, and the metrics adopted for each measure in the RAS are reviewed at least annually (or more frequently if the business environment warrants). The Board also conducts a prospective risk assessment based on the leading risk indicators of ESRREIT, including rental reversion trends, interest rate environments, macroeconomic indicators, and industry benchmarking data, as well as the Key Risks identified below. This assessment is forward-looking up to 24 months, which enables the Board to plan and prepare for potential risks impacting long-term objectives while staying adaptable and responsive to evolving market conditions or regulatory changes. In addition, an overall Key Risk and Control Matrix has been put in place by the Manager to proactively identify ESR-REIT’s and the Managers’ material risks and the likelihood and impact of such risks and establish corresponding mitigating controls to manage these risks. Risk assessments were conducted with the involvement of the ARCC members and the Management via a topdown approach as well as bottom-up engagement with the employees of the Managers, where key risks were
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