Sustainability

As a company, Covestro is fully committed to sustainability. This is stated clearly in our purpose “to make the world a brighter place” as well as underscored by our vision and our Group strategy with the strategic chapters which state our intention to “Drive sustainable growth” and “Become fully circular.” We set ambitious sustainability targets as early as fiscal 2016. We started including sustainability criteria in our long-term variable compensation system for Covestro’s Board of Management and executives as of the reporting period. Starting in fiscal 2022, these and other sustainability criteria will be applicable to not only the Board of Management but to all employees as part of the short-term variable compensation system.

We integrate sustainability into our business activities, while at the same time ensuring adequate focus on the issues of greatest relevance to us and our stakeholders. In addition to our responsibility for the environment, we also want to fulfill our social responsibility within society in accordance with our purpose. This is why we strive to add value at the social, environmental, and economic levels. Our decisions and our actions take into account the three dimensions of sustainability: people, planet, and profit (PPP). We are oriented toward a positive impact on at least two of the dimensions, while at the same time ensuring the third one is not negatively impacted. Every decision, every action we take, and the resulting consequences are considered holistically, that is, throughout the entire value cycle.

Sustainability formula

United Nations Sustainable Development Goals (SDGs)

Against this backdrop, the United Nations Sustainable Development Goals (SDGs) are critically important to us as a guideline for improving living conditions worldwide. The SDGs serve primarily as a source of direction and inspiration for innovation and as indicators for the future positioning of the company.

Covestro already makes positive contributions to all 17 SDGs and many sub-goals. The majority of these relate to products in our core business that, for example, help conserve large amounts of energy during their use phase or are used in other sustainable applications. Additional contributions stem from our own production activities, workflows, and business practices, from our social engagement, and from solutions for underserved markets (the inclusive business segment). In addition to evaluating the positive contributions to the SDGs that Covestro is already making, we believe that any analysis of SDGs must also aim to identify potential additional requirements that Covestro could face. By this, we mean topics that, from the perspective of stakeholders, could potentially be seen as having a negative impact on individual SDGs if there was any inactivity or neglect.

We are aligning our research and development (R&D) portfolio to the SDGs to increase our contributions further.

Covestro’s contributions to the SDGs

Material Sustainability Topics

We identify material sustainability topics to create a foundation for Covestro’s worldwide sustainability efforts and provide focal points for our sustainability management activities. Detailed information for specific targets, measures, and management approaches for the respective material sustainability topics is provided in the relevant chapters of the Group’s Management Report.

Regularly conducted materiality assessments help us to identify and prioritize the sustainability topics most important to the company. We perform both full materiality assessments every three to four years and annual reviews, an abridged process with reduced scope and effort. The most recent comprehensive materiality assessment was conducted in the 2020 fiscal year. In all other years, such as the reporting year, we review all material topics and modify them as necessary in line with the latest developments. We complete a thorough process every three to four years to identify the material sustainability issues and compile an extensive list of topics from internal and external sources. These are assessed based on their relevance to Covestro, taking into account the feedback and opinions of internal and external stakeholders. To identify the material sustainability topics for Covestro, we apply the three dimensions of materiality: “business relevance,” “stakeholder relevance,” and “impact of Covestro’s activities on the respective sustainability aspects.” The topics are subsequently combined into thematic areas and assigned to four categories – Innovate, Manage, Observe, and Acknowledge – to reflect the need for different actions depending on the management approach in each case. The material topics and their assignment to the categories are reviewed and acknowledged annually by the head of the corporate Sustainability & Public Affairs function (Chief Sustainability Officer, CSO) and the Board of Management.

In the reporting year, the annual review was conducted by a group of employees from the corporate functions, (including Strategy; Portfolio Development; Investor Relations; Group Health, Safety and Environment), along with Risk Management employees and the topic owners. This group was tasked with responsibilities including bringing in the views of stakeholders from inside and outside the company. The material sustainability topics identified in the 2020 comprehensive analysis were confirmed in the 2021 annual review. No additional or new topics were identified for Covestro as a result of the acquisition of the Resins & Functional Materials business. In the year under review, the Corporate Governance topic was incorporated into the “Responsible business and governance” cluster. “Product stewardship” was assigned to “Sustainable business solutions.” Two topics from the previous year were combined into the topic of “Sustainable finance”: “Addressing expectations of sustainability-oriented investors” and “Financial instruments linked to sustainable performance.” In addition, some designations were modified, but this did not affect the topic definitions.

Results of the materiality assessment

Material Sustainability Topics in the “Innovate” Category

The material topics in the “Innovate” category are highly relevant to our business and for stakeholders, and provide opportunities for direct influence by Covestro’s business activities on the respective sustainability topics. New management approaches must be defined and established for these topics of future relevance.

The “Circular economy & climate neutrality” cluster has become increasingly important in the public debate and from the business perspective, which is also reflected in our company’s vision and our strategic chapter “We will be fully circular.” Specific action items in our Group’s circular economy strategy program were identified for implementation and approved by the Board of Management. Furthermore, our activities in the areas of “Recyclability & end-of-life solutions,” “Alternative raw materials,” and” New business models” underscore our circular economy ambitions. We devote our expertise in chemical processes to supporting the development of recycling processes for used materials for plastics production. Covestro aims to use “Alternative raw materials” to switch the fossil raw materials we use in production to renewable.

We intend to help achieve climate neutrality by reducing the volume of fossil raw materials employed in production and upstream and downstream links in the value chain. An important way to achieve this is cutting greenhouse gas emissions in our production processes. We have set a goal of decreasing our specific greenhouse gas emissions per metric ton of product by 50% from 2005 levels by the year 2025. In the future, we also aim to obtain 100% of the electricity required by all of our sites from renewable energy sources.

In the year under review, the “Sustainable Business Solutions” cluster was also very significant. We have been aligning our activities, including our innovation efforts, more closely to the SDGs since the year 2017. Covestro’s goal is to devote 80% of its R&D costs by 2025 to projects that contribute to achieving the SDGs. Another important topic is the “Sustainable product portfolio.” We are working on developing a methodology for assessing our product portfolio from a sustainability perspective. This provides key points of reference to “Product stewardship.” We consolidate our “Inclusive business” activities in a program under which we aim to meet needs in what are known as underserved markets.

The cluster of “People & culture” plays a key role in our sustainability positioning and is a pillar of our Group strategy. Now and in the future, Covestro works to develop innovative solutions to advance issues that affect employees, including our efforts to increase our “Employer attractiveness.” We also advocate for “Diversity, equity, and inclusion.”

Material Sustainability Topics in the “Manage” Category

The material topics in the “Manage” category are also highly relevant to our business and for stakeholders, and provide opportunities for direct influence by Covestro’s business activities on the respective sustainability topics. In contrast to the “Innovate” category, Covestro already applies well-developed management approaches to “Manage” topics, which are continually reviewed and improved when necessary.

The “Environmental impact of own operations” cluster is an integral part of our integrated Health, Safety, Environment, Energy and Quality (HSEQ) management system. In addition, “Air quality,” “Waste,” and “Water & wastewater” are environmental topics integral to our management and business processes. Emissions are recorded and analyzed as part of determining the Group’s environmental impact. We strive to reduce waste streams by disposing of waste by type and implementing economically feasible recycling processes. At Covestro, we view water and wastewater holistically with regard to water usage and quality as well as wastewater volumes and possible plastic waste in the world’s oceans.

The cluster of “Health & safety” is also addressed in our integrated HSEQ management system. “Health & safety of our workforce” and “Process & plant safety” are equally important to us. As a chemical company, we bear a special responsibility for the health and safety of our stakeholders. This is why we strive to eliminate workplace incidents and accidents and operate our plants safely to protect people and the environment.

Our material sustainability topic review in the reporting year resulted in the “Corporate Governance” topic being included in “Responsible business and governance” cluster. This reflects our view that environmental (E), social (S), and governance (G) aspects are equally important within our material sustainability topics. Moreover, Covestro clusters “Compliance,” “Transparency & trust,” “Human rights,” “Sustainability in sourcing,” “Sustainable finance,” and “Social engagement” in the “Responsible business and governance” thematic area. “Compliance” and “Transparency & trust” form the foundation of our business practices. Likewise, it goes without saying that we are committed to respecting and safeguarding human rights, another material topic. Our commitment to sustainability also includes our suppliers. Covestro promotes “Sustainability in sourcing” with social, ethical, and environmental standards for existing and new suppliers, with the goal of having 100% of our suppliers with regular purchasing volumes of more than €100,000 comply with our sustainability requirements by 2025.

Our commitment to sustainability extends to finance. The material sustainability topic “Sustainable finance” covers Covestro’s sustainability-oriented investors as well as financial instruments linked to sustainable performance. In the first case, we want to increase our attractiveness for investors interested in sustainability, while in the second, financial instruments linked to sustainable performance offer attractive possibilities. Covestro’s performance in the relevant strategic sustainability rankings directly influences the cost of these financial instruments and therefore creates incentives for action on sustainability.

Besides core business activities, “Social engagement” is another way Covestro aims to contribute to sustainable development.

Material Sustainability Topics in the “Observe” Category

In addition to the “Innovate” and “Manage” categories, the “Observe” category highlights topics that may become more important for Covestro in the future.

In the review of material sustainability topics conducted in the reporting year, the “Financial instruments linked to sustainable performance” topic from the previous year was transferred to “Sustainable finance” in the “Manage” category. No material sustainability topic is currently assigned to the “Observe” category.

Material Sustainability Topics in the “Acknowledge” Category

Topics with major social importance are included in the “Acknowledge” category, such as “Biodiversity,” a significant issue for our stakeholders. That is why we include the topic in this category. Our commitment to a circular economy, environmental protection, and the associated increase in the use of biobased raw materials will make the topic of biodiversity more and more important for Covestro in the future.

Sustainability Management

Covestro’s Sustainability Targets

The company applies a comprehensive approach to sustainability targets, which covers the entire product life cycle, including social, environmental, and economic aspects. Our sustainability targets contribute to achieving the SDGs and reflect the aims of some of our material sustainability topics in the “Innovate” and “Manage” categories. We continually observe developments outside the company and develop our sustainability targets in line with our vision and corporate strategy. In the reporting year, we worked on updating our CO₂ roadmap and our sustainability target for GHG emissions. We are planning to define and publish new target values in the year 2022 and report on details and progress against our sustainability targets in the appropriate sections of the Group’s Management Report:

• We want our research and development (R&D) project portfolio to be aligned with the SDGs. By the year 2025, 80% of project expenditures for R&D will take place in areas that contribute to reaching these goals. In the year 2021, 54% of R&D project costs met this target (previous year: 51%).

• 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. During the year 2021, 80% of relevant suppliers met our sustainability requirements (previous year: 79%).

• Specific greenhouse gas emissions per metric ton of product manufactured are expected to be reduced by 50% from the 2005 benchmark by the year 2025. By the end of fiscal 2021, we achieved a reduction of 53.9% (previous year: 46.2%).

• We want 10 million people in underserved markets to benefit from our solutions by the year 2025. The goal is to improve their standard of living primarily through affordable housing, sanitation, and food security. By the end of fiscal 2021, our solutions had already reached 3.2 million people (previous year: 1.1 million people).

• We intend to create more value and increase our carbon productivity by using fewer carbon-based fossil resources. The goal is to decouple our value-generating activities from these non-renewable and non-circular raw materials. We see our circular economy activities as a key lever for shifting the previously linear use of resources in our business toward circularity and regeneration.

Monitoring

Sustainability is a core element of our Group strategy with an increasing impact on our business activities. Oversight of sustainability at Covestro begins with the highest governing body, the Supervisory Board, whose Sustainability Committee was established in the reporting year; it is dedicated to working on sustainability issues at Covestro. On the Board of Management, the Chair is responsible for the topic of sustainability. The CSO, who is head of the corporate Sustainability & Public Affairs (S&PA) function, reports to the Chair of the Board of Management.

A central governance body for environmental, social, and governance (ESG) issues was set up to ensure continual progress and permanent integration of these topics into all areas of the company. The new ESG Governance Body (ESG GoB) is staffed with top-level executives from the business entities and relevant coporate functions and is responsible for Group-wide sustainability issues, oversees mission-critical projects and activities, and possesses the corresponding decision-making powers. In addition, in-depth discussions are held throughout the Group to identify important issues and trends and to promote the implementation of the sustainability agenda in the corporate functions and business entities. The goal here is to manage sustainability issues consistently and holistically and to accelerate Covestro’s sustainability agenda.

Due to the multi-faceted nature of this committee, various corporate functions and business entities are regularly involved, and depending on the topic, additional internal and external guests may be invited to participate. The Chief Executive Officer (CEO) chairs the committee, and the Head of Sustainability is tasked with organization and execution.

Composition of the ESG Governance Body (ESG GoB)

As a corporate function, S&PA defines the sustainability strategy and spearheads general sustainability projects and programs in the company. In addition, S&PA coordinates Covestro’s sustainability activities and supports the other corporate functions and business entities in implementing them in operations. Furthermore, it represents Covestro’s interests outside the company.

The corporate function was reorganized in the year under review: Central teams responsible for circular economy, climate and energy, sustainable product portfolio management, stakeholder engagement, and social issues are the points of contact with extensive expertise in these topics in the function. The teams are supported by additional regional functions that pursue an integrated sustainability and interest agenda while taking into account regional requirements. The central teams report to the CSO, who is also Head of S&PA corporate function and reports to the CEO.

Stakeholder Dialogue

An open and continuous exchange with our regional, national, and global stakeholders is the foundation for mutual understanding and societal acceptance of Covestro’s decisions. At the same time, these discussions provide new inspiration and important recommendations. We have a close and collaborative relationship with our stakeholders. They assess our company not only from a legal standpoint, but also according to whether we do business in a sustainable and ethical manner. In order to identify material sustainability topics, we continually analyze the interests, expectations, and needs of our major stakeholders and incorporate the results into our materiality analysis, our sustainability agenda, and our opportunity and risk management activities.

See “Material Sustainability Topics.”

The following chart provides an overview of our key stakeholder groups and the relevant dialogue formats.

Covestro’s transparent dialogue with important stakeholders

Depending on the topic and its relevance, Covestro’s departments identify and prioritize major stakeholders and select the appropriate dialogue format and frequency of contact in each case. Covestro has been using various digital dialogue formats (for example, for the Annual General Meeting as well as employee and customer events) to ensure that the company stays in touch with its stakeholders during the coronavirus pandemic.

Public Recognition

Our sustainability activities relating to environmental, social, and governance (ESG) are regularly evaluated by third-party organizations such as rating agencies. Sustainability ratings are not only a decision-making basis for institutional investors and customers, but also help us to continually review our sustainability activities and supplement them as needed. We have identified five strategic ratings and actively engage with the agencies. In the year 2021, Covestro received recognition from the rating agency ISS ESG, just as in fiscal 2020. ISS ESG again awarded us Prime status with an overall score of B–. This puts Covestro among the best 10% of rated companies in the chemical industry. Additionally, Covestro was ranked above average once more by another rating agency, Sustainalytics, placing it fifth out of 124 specialty chemical companies assessed. In the year 2019, the international rating agency EcoVadis gave us its top Gold rating, and we also retained the previous year’s A rating from MSCI ESG Research, one of the world’s largest provider of sustainability analyses and ESG ratings. In addition to the above-named ratings, we also qualified to remain listed in the important FTSE4Good Series. Covestro participated in the Carbon Disclosure Project’s (CDP) Climate Change rating for the first time in the reporting year, receiving the second best score of A– right out of the gate. This demonstrates Covestro’s great willingness to disclose a wide range of climate-related information and report extensively on the opportunities and risks for the company inherent in climate change.

Covestro has already entered into financing arrangements that link financing costs to a sustainability rating. Examples in the past included our revolving credit facility and bridge financing. Covestro continually observes whether other financial instruments can be linked meaningfully to sustainability aspects.

Assessments by third-party organizations

We consider the results in these ratings and the inclusion in sustainability indices an indication of our ESG performance. The details of these ratings also show us how we can continue to improve.