Sustainability in the Supply Chain

Covestro regards adherence to sustainability standards within the supply chain as a fundamental factor in value creation and an important lever for minimizing risks. For this reason, Covestro sets not only economic standards but also social, ethical, and environmental standards as well as those related to corporate responsibility when selecting new suppliers and in our relationships with existing suppliers. All required standards are defined in Covestro’s Supplier Code of Conduct, which is available online in 13 languages and is the basis for our collaboration with suppliers. The Code is derived from the principles of the UN Global Compact and our Corporate Commitment on human rights. It is integrated into the electronic ordering systems and contracts across the Covestro Group. New and renewed supply agreements in particular generally contain special clauses requesting that suppliers adhere to the sustainability requirements outlined in the Code of Conduct and entitling Covestro to verify compliance.

Covestro has set ambitious measurable targets through 2025 aimed at systematically promoting sustainability in supplier management. All suppliers must comply with our code of conduct, which they commit to by accepting the conditions of our purchase orders or contracts. In addition, relevant suppliers accounting for a repeat purchasing value exceeding €100,000 per year are assessed. They comply with Covestro’s sustainability requirements by meeting the minimum result as defined by us in the supplier evaluations described below. In the year under review, around 95% of our total purchasing value was attributable to these target-relevant suppliers. In addition, we work closely with our strategically most important suppliers to improve their sustainability performance. We have also incorporated this approach into our sustainability goals.

Evaluation methods and processes of the Together for Sustainability (TfS) initiative

Covestro is a member of Together for Sustainability AISBL, a joint initiative undertaken by the chemical industry that now includes 29 companies. This nonprofit organization pursues the goal of establishing a program of global standards for responsibly sourcing goods and services and standardizing supplier evaluation methods worldwide. Covestro supports all criteria by the TfS initiative concerning the areas of ethics, employee rights, human rights, health and safety, and the environment.

As a member of TfS, Covestro is responsible for monitoring and auditing the sustainability performance of its suppliers. TfS supports this effort by providing the infrastructure for online assessments and on-site audits of suppliers by third parties. The results of these supplier evaluations can be shared via an online platform. During the reporting year, Covestro once again played an active role in all TfS work streams in designing and improving the TfS program and the associated evaluation process.

Covestro uses a standardized TfS assessment process to evaluate whether the suppliers maintain the required sustainability standards. Covestro uses a structured prioritization process to select the suppliers to be evaluated and initiates either an online assessment or an on-site audit for these suppliers – provided that there are no current results. In prioritizing the suppliers for these evaluations, Covestro considers a combination of country and material risks. The risk assessment for country and material groups that we use for our risk analysis is based on recognized external sources.

EcoVadis SAS (EcoVadis), an established external provider accredited by TfS, conducts the online assessments. It evaluates the degree to which suppliers’ business practices are aligned with sustainability principles. The questionnaire suppliers complete for the online assessment is based on internationally recognized sustainability standards and includes 21 sustainability criteria grouped into the categories of environmental protection, labor and human rights, ethics, and sustainable procurement. The section on sustainable procurement also inquires about the extent to which the sustainability standards of upstream suppliers are considered. Certain suppliers that do not engage in wholesale trade and do not employ more than 25 people receive an abbreviated questionnaire that does not address the topic of “Sustainable Procurement”.

The questionnaire is dynamically adapted by EcoVadis depending on factors such as the industrial sector, company size, and country risk. Suppliers must document their responses to the questionnaire with corresponding supporting documents. The EcoVadis analysts assess supplier responses and supporting documents under consideration of international standards, such as the UN Global Compact, and consolidate the data into a scorecard available online that shows results by category. This scorecard information includes a detailed overview of identified strengths and areas for improvement as well as a weighted overall result for the suppliers analyzed.

External, independent auditors trained and accredited by TfS conduct on-site audits of selected companies – and follow-up audits, if necessary, based on the TfS sustainability criteria. For the purpose of monitoring the quality of the audits, the initiating TfS member takes part in audits selected on a random basis and evaluates them using a standardized checklist.

Covestro analyzes and documents the online assessments and on-site audits. The number of supplier evaluations conducted and the overall results are reviewed regularly and reported to the Board of Management member responsible for Production and Technology. In the event of noncompliance with our sustainability requirements, we work with suppliers to define specific improvement measures and corresponding targets, and Covestro constantly verifies the implementation of the required improvements.

In spite of the coronavirus pandemic and its effects on our suppliers, the number of supplier evaluations conducted in the reporting year rose to 846 (previous year: 778).

Supplier evaluation results*

At the end of fiscal 2020, the number of supplier evaluations whose results met our sustainability requirements amounted to 1,204 (previous year: 1,133). Of these supplier assessments, 950 involved our target-relevant suppliers, who account for 79% (previous year: 81%) of our target-relevant purchasing value. Furthermore, 60% of our target-relevant suppliers who underwent a repeat assessment in fiscal 2020 have improved compared with their previous results.

Our supplier management goal

All of our suppliers with regular purchasing volumes of more than €100,000 per year are expected to comply with our sustainability requirements by 2025.

Status

2020: 79%
2019: 81%

In the year 2020, assessment results considered critical by Covestro were identified for nine target-relevant suppliers (previous year: nine); that is, these suppliers failed to meet the required minimum result by a significant margin. Covestro responds to such infractions with specific action plans and demands that the suppliers in question implement appropriate corrective measures; supplier assessments will be conducted in future to verify compliance.

The share of online assessments in which suppliers met the minimum result we defined –45 out of 100 possible points – was 71% for the online assessments conducted in the year under review (previous year: 70%). Thanks to our joint efforts toward continually improving our sustainability performance, the results of the online assessments improved year over year.

Overall results of the online assessements completed in the reporting year

The share of on-side audits in which suppliers met the minimum result we defined –45 out of 100 possible points – was 100% for the on-side audits conducted in the year under review (previous year: 100%).

None of the supplier assessments conducted revealed any indication of child or forced labor. In addition, Covestro had no cause to terminate a supplier relationship in the reporting year or in the previous year solely on account of an externally determined result or a serious sustainability deficit, e.g., human rights violations like child labor or forced labor.

Sustainability training and dialogue

For Covestro, it is important for our own procurement staff, in particular, to have a comprehensive understanding of the significance of sustainability in the supply chain. Awareness of this issue was raised among employees again in fiscal 2020 in company-wide sustainability training plus region- and country-specific training on evaluation methods and processes.

During the reporting year, we continued to promote the implementation of four strategic principles in procurement (reliability, sustainability, cost transformation, and innovation). Moreover, our Regional Program Managers in the EMLA, NAFTA, and APAC regions are working on permanently improving our sustainability program.

Dialogue and close collaboration are essential in enabling suppliers to successfully comply with Covestro’s sustainability requirements. We therefore offer our suppliers a range of opportunities for training and dialogue. This provides the foundation for building reliable relationships and enables us to identify and eliminate issues at an early stage. Continually improving our suppliers’ sustainability performance is a priority for Covestro and is supported by the TfS initiative, which regularly organizes supplier days and promotes further training, among other activities. TfS provides a wide range of information materials and various online training courses on its website. In fiscal 2020, six online training sessions were offered in various languages, and one supplier day was held in China.

Worldwide supplier evaluations through the TfS initiative*

Since the start of the TfS industry initiative in the year 2011, the now 29 members of TfS have evaluated the sustainability performance of a total of 13,776 suppliers through online assessments and have performed 2,202 on-site supplier audits.

All of the results from the online assessments and on-site audits are available to members of the initiative on an online platform, thereby enabling continual monitoring of suppliers with a view to improvements. The TfS initiative also benefits suppliers because their standardized evaluations can be viewed by all TfS members. This means they do not have to complete multiple evaluation surveys by various (potential) customers.

In fiscal 2020, TfS members conducted a total of 5,315 online assessments and 258 on-site audits across the globe.

The new “TfS Grow & Deliver” strategy applicable for the next five years was approved at the TfS Steering Committee meeting held in February 2020 in Germany and ratified by the Annual General Meeting. The strategy focuses on four key pillars: Stronger Community, Higher Standards, Closer Collaboration, and Extended Reach.

Additional information is available at: www.tfs-initiative.com

Detailed results of the supplier evaluations*

We regularly analyze the results of the online assessments in the areas of environment, labor and human rights, ethics, and sustainable procurement. The results of the assessments carried out in the previous year and the reporting year are summarized in the following chart:

Detailed results of the online assessments completed in the reporting year

The detailed results in all areas indicate a neutral or positive trend (unchanged or increased share of online assessments reaching a score of 45 or higher).

In analyzing the supplier evaluations for the year 2020, we identified deviations from our sustainability requirements in all listed areas. This was due to factors including missing documentation of policies and measures relating to waste management, emissions, and energy, as well as a lack of occupational safety measures such as a failure to install emergency exits or exceeding the weekly working hours according to the TfS standard. 

* The results provided by the external providers EcoVadis SAS and Together for Sustainability AISBL were not subject to the audit by KPMG AG Wirtschaftsprüfungsgesellschaft.

Procurement of key products

In fiscal 2020, the procurement spending of Covestro’s main sites in Germany, the United States, and China accounted for just under 79% of Covestro’s global spending. Most of this amount – around 79% – went to local suppliers in the individual countries.

Conflict minerals

International regulations such as the Dodd-Frank Act in the United States obligate companies to disclose the origin of certain raw materials to ensure that “conflict minerals” such as tin, tungsten, tantalum, and gold (3TG) from the Democratic Republic of Congo or neighboring states do not enter their products through the supply chain. European Union Regulation (EU) 2017/821, which entered into force on January 1, 2021, stipulates an expanded duty to perform human rights due diligence for the 3TG that includes all global conflict and high-risk regions. Covestro uses tin-containing compounds in production and therefore monitors all its suppliers of tin-containing raw materials. The requirements of the EU regulation on conflict minerals are being reviewed and integrated into the processes.

Using a structured survey process, we verify that our suppliers and their upstream suppliers obtain tin-containing material that is free from conflict minerals. Confirmations of conflict mineral-free procurement are documented centrally in the respective material/supplier combinations in our database.

Our requirements regarding conflict minerals are clearly communicated in our Supplier Code of Conduct. Covestro has obtained confirmations of compliance as regards conflict minerals from 100% of the suppliers from whom it actively purchases such minerals (38 material/supplier combinations) and who were identified as potentially affected by this issue. We update a list of potentially affected suppliers on an ongoing basis, and monitor the validity of all existing supplier confirmations. To date, there have been no critical results and no need for action regarding this issue.