Disclosures on Sustainability Reporting and GRI Index – Nonfinancial Group Statement

EU Taxonomy

The European Union’s Taxonomy Regulation 2020/852 (EU Taxonomy), and particularly its delegated acts, are the basis for various current and future initiatives by the European Union (EU) to facilitate sustainable financial reporting. The Covestro Group is required to submit a nonfinancial statement and must therefore, in accordance with Article 8(1) of the Taxonomy Regulation, disclose information about how and the extent to which our activities are associated with economic activities which qualify as environmentally sustainable economic activities based on the Taxonomy Regulation. To this end, the Taxonomy Regulation introduces key performance indicators (KPIs) to enable and improve performance measurement.

In fiscal 2022, our report includes information in line with the Taxonomy Regulation and its delegated acts applicable at the reporting date. For fiscal 2021, we exercised the exemptions that allowed us initially to report only on our taxonomy-eligible economic activities associated with the first two environmental objectives. Taxonomy-aligned activities are reported for the first time for the year 2022. Some legal concepts in the EU Taxonomy have not been defined conclusively, which has led to continuing uncertainty regarding their interpretation.

Taxonomy-Eligible Economic Activities

In the fiscal year under review, we centrally identified at Group level the following taxonomy-eligible economic activities associated with the environmental objective of climate change mitigation: 3.10 – Manufacture of hydrogen, 3.13 – Manufacture of chlorine, 3.14 – Manufacture of other organic basic chemicals, 3.16 – Manufacture of nitric acid, and 3.17 – Manufacture of plastics in primary form. In addition, in accordance with Commission Delegated Regulation (EU) 2022/1214 of 9 March 2022 (Complementary Climate Delegated Act), the following taxonomy-eligible economic activity associated with the environmental objective of climate change mitigation was identified in certain energy sectors: 4.30 – High-efficiency co-generation of heat/cool and power from fossil gaseous fuels. Taxonomy-eligible economic activities result in connection with CapEx and operating expenditure (OpEx) (categories b and c): 6.5 – Transport by motorbikes, passenger cars and light commercial vehicles, 7.1 – Construction of new buildings, and 7.7 – Acquisition and ownership of buildings.

No taxonomy-eligible economic activities associated with the climate change adaptation environmental objective were identified, since our business model in the activities covered by the Taxonomy Regulation are aimed at climate change mitigation. Parts of our portfolio are not covered by the EU Taxonomy at present, e.g., the manufacture of diisocyanates such as diphenylmethane diisocyanate (MDI), toluylene diisocyanate (TDI), etc., which are required for processing into polyurethane.

Taxonomy-Aligned Economic Activities

The move to taxonomy-aligned activities can only be made if, in addition to the description of the activity that determines whether an economic activity is taxonomy-eligible, a testing scheme of technical screening criteria (TSCs) is be applied to each environmental objective. One component of these TSCs is criteria for making a substantial contribution to meeting the environmental objective. Secondly, it has to be ensured that no harm is done to any of the five other environmental objectives at the same time (do no significant harm, DNSH). The TSCs contain specific guidance for this as well and specific TSCs have been defined for each of the environmental objectives. For fiscal 2022, the TSCs for the environmental objectives of climate change mitigation and climate change adaptation were in force. The European Commission is expected to publish the TSCs for the other environmental objectives in the course of the year 2023. In addition, compliance with the minimum safeguards pursuant to Article 18 of the Taxonomy Regulation must be examined.

Substantial Contribution

In the year 2021, Covestro assessed whether its economic activities are taxonomy-eligible; in fiscal 2022 we conducted an analysis centrally to determine taxonomy-aligned activities. In this process, we examined the taxonomy-eligible products identified to determine whether they make a substantial contribution to the environmental objective of climate change mitigation. To assess whether the criteria of substantial contribution (and furthermore also the criteria relating to doing no significant harm) are met, the analysis was conducted centrally at the level of the sites. The reason is that the review of the criteria for the same product can deliver different results, depending on the production site (e.g., because power consumption or the energy mix is different at the sites). In such cases, the taxonomy-aligned proportions are allocated to the KPIs according to the production volume at the sites.

For economic activity 3.10 – Manufacture of hydrogen, we potentially make a substantial contribution to the environmental objective of climate change mitigation for selected sites. However, we are not yet able at present to fully meet the stringent quality requirements (e.g., product-related lifecycle assessments [LCAs] that go beyond externally certified methodology assessments) that the EU Taxonomy imposes on the evidence to be provided.

Do No Significant Harm (DNSH)

For an activity to qualify as a substantial contribution to one environmental objective, the EU Taxonomy requires that it does not cause significant harm to the five other environmental objectives. In connection with the environmental objective of climate change mitigation, a climate risk and vulnerability assessment was conducted for activity 3.10 – Manufacture of hydrogen at site level, using Representative Concentration Pathways RCP 2.6, 4.5, and 8.5. With regard to the environmental objective of sustainable use and protection of water and marine resources, a risk assessment was likewise performed to establish any possible environmental damage at site level. For the environmental objective of transition to a circular economy, no criteria had been defined for the economic activity analyzed at the time of publication of this report. As a result, compliance is currently not bound by any criteria. The criteria for ensuring that no significant harm is done for the environmental objective of pollution prevention and control were reviewed in two steps. Employees with the relevant professional expertise examined compliance with the requirements for the environmental objective of climate change mitigation set out in Appendix C of Annex 1 of the Commission Delegated Regulation on climate change mitigation in connection with the specified guidelines and regulations. At the same time, compliance with the emission values in connection with the best available techniques (BATs) was verified for the sites at which products are manufactured with which we make a substantial contribution to meeting the environmental objective of climate change mitigation. Finally, a check was performed at site level to make sure that no significant harm is done to the environmental objective of protection and restoration of biodiversity and ecosystems.

For activity 3.10 – Manufacture of hydrogen, proof could be provided for the environmental objective of climate change mitigation that no significant harm was done to the other five environmental objectives. The only exception is Appendix C of Annex 1 of the Commission Delegated Regulation for the environmental objective of climate change mitigation due to interpretation uncertainty about the provision of evidence, especially in relation to subitem g. Taxonomy-eligible products that either do not make a substantial contribution to meeting the environmental objective of climate change mitigation or cause significant harm to at least one environmental objective are not classified as taxonomy-aligned.

Minimum Safeguards

Article 18 of the Taxonomy Regulation requires companies to establish processes and procedures to ensure compliance with different rules and regulations. They relate in particular to human rights (including labor and consumer rights), corruption and bribery, taxation, and fair competition. These requirements correspond to Covestro’s culture, which we have made an integral part of our actions on the basis of existing Corporate Commitments, the Supplier Code of Conduct, and various Group regulations. To ensure compliance with all legal and Group-wide provisions, regulations, guidelines, and standards, including those relevant to the minimum safeguards of the EU Taxonomy, we have implemented processes and controls (e.g., as part of the compliance management system, the internal control system, or the integrated Health, Safety, Environment, Energy and Quality management system).

• See “Corporate Policies.”
• See “Health and Safety.”
• See “Sustainability in the Supply Chain.”
• See “Human Rights.”
• See “Compliance.”
• See note 26 “Legal Risks” in the Notes to the Consolidated Financial Statements.

The review of the minimum safeguards for human rights relates to Covestro’s overarching management approach to respecting human rights, and primarily to the risk analysis conducted as part of the human rights due diligence. In addition to the company’s own business activities, this also covers our direct suppliers. It also considers the upstream supply chain, especially if there are specific allegations. The comprehensive and ongoing risk analysis covers all of Covestro’s own sites, the supply chain, as well as the use phase and end-of-life of our products. Depending on the respective risk assessments, various measures are agreed with the suppliers, e.g., supplier assessments under the TfS initiative* or special human rights training.

• See “Sustainability in the Supply Chain.”
• See “Human Rights.”

In addition, as part of the review to establish compliance with the minimum safeguards, we verified at Group level that no final court judgments have been handed down against Covestro in connection with the above issues. Although no economic activities were reported as taxonomy-aligned in the year 2022, there are no indications based on the review described above to suggest that Covestro does not meet the minimum safeguards under Article 18 of the EU Taxonomy Regulation.

We are planning further activities to be undertaken by our cross-functional Human Rights Task Force, such as additional training for buyers, the completion of guidance for buyers with various measures for suppliers prioritized during the risk analysis, or the introduction of a Group-wide guideline on our human rights-related management system.

Result of the Alignment Check

In fiscal 2022, we did not identify any taxonomy-aligned economic activities associated with the environmental objective of climate change mitigation.

Calculation of Taxonomy KPIs

We calculate taxonomy KPIs and report on the nature of taxonomy-eligible and taxonomy-aligned economic activities in accordance with Article 10(3) and Article 11(3) of the Taxonomy Regulation. We are required to report the share of turnover, capital expenditure (CapEx), and operating expenditure (OpEx) that are generated by taxonomy-eligible and taxonomy-aligned activities. The way in which we define and document these KPIs and run the data queries for the calculations prevents double-counting amounts when allocating turnover, CapEx, and OpEx to our economic activities. Where data could not be definitively allocated or KPIs had to be split between economic activities, we applied allocation models appropriate for the particular process to reflect the technical circumstances in the KPI calculation. The taxonomy KPIs are determined with system support in processes established for the purpose. Validation steps are taken and the data is checked against the figures in the Group’s Consolidated Financial Statements to ensure the data is complete and correct. Controls in our Internal Control System are used to support the underlying systems and processes.

• See “Main Features of the Internal Control System.”

Turnover

In order to determine the turnover generated by Covestro from taxonomy-eligible economic activities, we allocated the relevant Covestro products to these activities. The corresponding turnover for fiscal 2022 was then calculated for the identified products and a ratio derived using the Covestro Group’s sales reported in the Income Statement (denominator). Turnover generated from the activity of high-efficiency co-generation of heat/cool and power from fossil gaseous fuels is calculated in the same way.

• See “Covestro Group Consolidated Income Statement.”

Capital Expenditure

In order to determine capital expenditure (CapEx) associated with taxonomy-eligible economic activities as defined in the Taxonomy Regulation, we use the investments in and acquisitions of property, plant and equipment and intangible assets, excluding acquired goodwill, as reported in the Notes to the Consolidated Financial Statements in this Annual Report (denominator). This must be used as the basis for determining the proportion of taxonomy-eligible and taxonomy-aligned CapEx relating primarily to additions to noncurrent assets (numerator). To this end, the products identified as originating from these economic activities were allocated to the corresponding CapEx (category a). Furthermore, taxonomy-eligible and taxonomy-aligned CapEx could be identified that is part of a plan to expand taxonomy-eligible and taxonomy-aligned economic activities or a plan to allow taxonomy-eligible economic activities to become taxonomy-aligned (category b). In addition, individual capital expenditure from the acquisition of products from taxonomy-eligible and taxonomy-aligned economic activities and individual measures implemented to reduce greenhouse gas (GHG) emissions had to be taken into account (category c). We cannot provide proof of the purchase of taxonomy-aligned category c products because we have no documentary evidence from suppliers. CapEx associated with the activity of high-efficiency co-generation of heat/cool and power from fossil gaseous fuels is calculated in the same way.

• See note 13 “Goodwill and Other Intangible Assets.”
• See note 14 “Property, Plant and Equipment” in the Notes to the Consolidated Financial Statements.

Operating Expenditure

In order to determine operating expenditure (OpEx) as defined in the Taxonomy Regulation, we use the Covestro Group’s expenditure on maintenance and repairs, renovations, research and development, and short-term leasing costs (nominator). Of these, the share of taxonomy-eligible or taxonomy-aligned OpEx must be determined (numerator). To this end, the products identified as originating from the corresponding economic activities were allocated to the respective OpEx (category a). Furthermore, taxonomy-eligible OpEx was identified that is part of a plan to expand taxonomy-eligible and taxonomy-aligned economic activities or a plan to allow taxonomy-eligible economic activities to become taxonomy-aligned (category b). In addition, individual operating expenditure from the acquisition of products from taxonomy-eligible and taxonomy-aligned economic activities and individual measures implemented to reduce GHG emissions and renovate buildings had to be taken into account (category c). We cannot provide proof of the purchase of taxonomy-aligned category c products because we have no documentary evidence from suppliers. The OpEx data determined in this way is gathered exclusively for taxonomy reporting. OpEx associated with the activity of high-efficiency co-generation of heat/cool and power from fossil gaseous fuels is calculated in the same way.

Other Information

In fiscal 2022, Covestro published a Green Financing Framework under which the company can issue green bonds and other green debt instruments. These financing instruments are to be used to finance products or projects with a clear benefit for the environment and/or society. Under the Green Financing Framework, a bond amounting to €500 million was issued in fiscal 2022. No taxonomy-aligned CapEx or OpEx is currently being financed with the green bond.

• Further information at: www.covestro.com/en/investors/debt/green-financing-framework

Reporting of Taxonomy KPIs

The purpose of the EU Taxonomy is to set out details for the EU’s Sustainable Finance Action Plan. It outlines objectives and steering options to inspire companies to develop sustainable products. The Taxonomy Regulation classifies the chemical industry, for example, as a sector with transitional activities because it operates at a point of transition from fossil-based raw materials toward renewable and alternative raw materials.

Covestro’s portfolio contains a small proportion of potentially taxonomy-aligned activities. Some activities in our portfolio are not covered by the taxonomy at present, e.g., the manufacture of diisocyanates such as diphenylmethane diisocyanate (MDI), toluylene diisocyanate (TDI), etc., which are required for processing into polyurethane. In the case of activities relevant to Covestro in support of the environmental objective of climate change mitigation, the Taxonomy defines sustainability in particular with regard to the carbon footprint of the production process. However, this process does not consider the entire lifecycle of our products, with the result that the positive effect of our products, known as handprint, does not become apparent during application and use of the Covestro products. Low taxonomy KPIs do not mean, therefore, that we do not make any contribution to achieving a circular economy and climate neutrality. Our objectives are reflected in particular in our vision of becoming fully circular, from which our Group’s Sustainable Future strategy and our sustainability targets – including a focus on climate neutrality – are derived. The review of sustainability in accordance with this vision and with our sustainability targets relates to Covestro’s entire product portfolio.

• See “Organization and Business Model.”
• See “Management.”
• See “Sustainability.”
• See “Circular Economy.”
• See “Climate Neutrality.”
• See “Sustainable Products.”
• See “Innovation.”

The calculation of the KPIs considers separately the activities of the Resins & Functional Materials business (RFM) acquired from Koninklijke DSM N.V., Heerlen (Netherlands), in the year 2021. Due to the ongoing systems integration process, they could not be analyzed in detail in fiscal 2021 and were therefore not included in the taxonomy-eligible share of Covestro’s activities. The share attributable to RFM (for OpEx only where available) was included in the denominator of all of KPIs for the year 2021. Completion of the system integration in June 2022 meant that RFM’s products could also be fully included in the OpEx denominator. In the assessment of taxonomy-eligible and taxonomy-aligned activities (numerator), RFM’s products could be included for turnover for the full year and for CapEx and OpEx from the date of completion of the system integration. Since the system integration was completed, RFM has been reflected in full.

The year-over-year rise in the taxonomy-eligible share of CapEx is primarily due to the fact that the acquisition of the RFM business was included in the numerator and denominator in the previous year.

The KPIs below were calculated according to the abovementioned methods:

Activities covered by separate reporting requirements in the Complementary Climate Delegated Act must be disclosed on the basis of templates. In this context, Covestro has identified the economic activity of high-efficiency co-generation of heat/cool and power from fossil gaseous fuels. Following completion of the alignment check, Covestro has only taxonomy-eligible activities to report here. For this reason, templates 2 and 3, which relate to taxonomy-aligned activities, are not reported separately.