Sustainability Statement – Environmental Matters

Circular Economy

A key component of Covestro’s Group strategy is the aim to become fully circular. This helps us address the environment-related sustainability aspects of our activities in particular. This firstly means moving away from the use of fossil-based raw materials and secondly demonstrates a holistic orientation toward regenerative production and business models in order to adjust the environmental footprint of our business activities, such as the concentration of CO₂ in the atmosphere, to within planetary boundaries. In our pursuit of a circular economy, we aim in particular to minimize our fossil footprint by replacing the use of primary raw materials with alternative raw materials.

Governance

At Covestro, the issue of the circular economy is addressed in all business entities and managed on the basis of initiatives driven by the corporate functions. This is done by providing incentives for continual implementation, planning, and target-setting in which the corporate Group Innovation & Sustainability function takes the lead on key aspects. Important fundamental decisions on environmental, social, and governance (ESG) issues are taken by the ESG Governance Body (ESG GoB) or its successor, the Sustainability & Innovation Governance Body (SI GoB), and the Board of Management. In addition, risks relevant in connection with the circular economy are taken into account in the Group-wide risk management.

Strategy

We are aware that the circular economy involves more than just switching raw material sources. As a resource-intensive company, we believe that addressing this issue is an important factor in achieving a steady increase in the use of alternative raw materials compared with the use of fossil-based primary raw materials. This is why alternative raw materials are an essential pillar of our Sustainable Future strategy. We firstly want to produce these raw materials in our own innovative processes and secondly drive their use by pursuing a procurement strategy focused on circular raw materials.

• See “Procurement.”

Another pillar on which we focus is the outflow of resources, especially products we pass further down the value chain. Our strategy in this area is aimed at enhancing the recyclability of our precursors and materials with innovative recycling technologies and forging alliances within the value chain to arrive at specific circular models. With the Circular Intelligence (CQ) label for specific solutions, we are laying the foundation for a clearly identifiable circular portfolio. An important lever we have observed in this regard is the constantly changing regulatory environment, which is leading to higher minimum recycled content in various plastics applications and will be among the factors influencing our circular strategy. The difference between inflows and outflows of raw materials is the third strategic pillar of our circular strategy. This takes the form of losses of raw materials and waste, which we intend to minimize in future.

With regard to inflows and outflows of resources as well as waste, we are developing and establishing suitable measures and targets, strategic actions, and policies.

Transformation to the circular economy

Our target is to return products and materials to the value cycle at the end of their life cycle – as a whole, in the form of polymers, or in molecular or other chemical forms. The use of other renewable sources of carbon and the intended full conversion to regenerative methods of production, e.g., with renewable energy, are supplementary actions Covestro will take. They are aimed at helping the company become fully circular in the future and on this basis achieve climate neutrality within the company and increasingly launch products with a more climate-friendly footprint. In the reporting year, Covestro took additional steps to meet these targets.

Efforts toward building a circular economy in the company can be measured by verifying the degree to which we can replace fossil sources of carbon for production with alternative raw materials and produce renewable inorganic compounds to run each of them in loops. This also entails sales of solutions that qualify as circular in the marketplace. We are therefore working to develop suitable targets for Covestro that will increase performance in all areas that are key to the circular economy and will in the long term lead to an absolute reduction in the use of primary raw materials.

OUR CIRCULAR ECONOMY TARGET

STATUS

We are actively working on identifying suitable circularity targets and indicators.

We intend to create more value sustainably and increase our carbon productivity by continually using fewer carbon-based fossil resources, taking a regenerative approach, and closing material loops. The target is to decouple our value-generating activities from nonrenewable and noncircular raw materials such as fossil carbon.

Actions

Policies and Actions

With the global Circular Economy strategy program, which was launched in the year 2019, we have laid the foundation for Covestro to become fully circular. In the reporting year, the newly created Sustainability Transformation & Business Building department, which is part of Group Innovation & Sustainability, took on responsibility for providing additional details for this vision and for planning it and carrying it through on the basis of strategic implementation projects. This process involves all corporate functions currently undergoing transformation in order to identify key transformation steps and bring them to a point where decisions can be taken.

In fiscal 2023, Covestro managed a number of different initiatives under this program, with a special focus on market design as well as the development of technology paths and the evaluation of appropriate nonfinancial indicators. We also made waste markets a particular area of attention.

Recyclability of Production and Plastic Waste

Production Waste

Under economic considerations, Covestro’s manufacturing processes apply a maximum of efficiency when it comes to the use of materials. We observe and evaluate our manufacturing processes on an ongoing basis to minimize material consumption and disposal volumes and reuse materials internally wherever possible. If waste cannot be avoided, reused, or recycled in an economically expedient way, we make a point in our waste management of applying safe disposal methods, separated by type of waste. Some of the waste created by our production processes with a high heating value is burned as fuel to generate steam for our production facilities. There may also be cases where local regulations require us to take waste to landfill. Production fluctuations, building demolition and refurbishment, and land remediation can also influence waste volumes and recycling paths.

Plastic Waste

Our core technical competence is the development and application of complex chemical procedures and processes. In particular, we want to use this expertise to establish innovative chemical and biochemical recycling and production processes for a circular economy. We want to establish specific processes that will allow us to focus on producing from plastic waste the raw materials that Covestro requires. The use of these recycled raw materials in our production processes will lead to products with a lower carbon footprint and increase the recycling rate. In addition, we also want to use raw materials that were recycled in upstream stages of the value chain. To this end, we use ISCC PLUS-certified raw materials and intermediates. On the whole, chemical recycling processes are an important tool to help Covestro in gradually replacing the use of fossil-based materials and in closing carbon loops. We therefore want to use the circular economy and our climate targets as a way to reduce the environmental footprint of our product portfolio and make it climate-neutral. These processes will continually be verified by means of a life cycle assessment (LCA), in other words, taking into account effects and contributions throughout the entire life cycle.

Covestro is currently researching recycling processes for its own products and materials in more than 20 projects. Of particular importance for Covestro are processes with which materials can be chemically or enzymatically transformed back into their molecules. The secondary raw materials obtained in this manner are of a comparable quality and have properties similar to conventionally manufactured raw materials, and can therefore be reused to manufacture products and materials.

• See “Strategic Partnerships and Collaborations.”

Both pyrolysis and depolymerization are being investigated and enhanced as possible chemical recycling technologies for polycarbonates and rigid polyurethane foams.

Covestro is already testing the thermal decomposition of chemical compounds at elevated temperatures (pyrolysis) in laboratories in Antwerp (Belgium) and Dormagen (Germany). These facilities can break down polycarbonate as well as rigid foam into high-quality molecules that can then be recycled and integrated into production processes as raw materials. Our low-temperature pyrolysis process enables us to eliminate several steps and therefore to considerably cut carbon emissions compared with conventional high-temperature pyrolysis.

In depolymerization, polymers are turned back into smaller fragments such as monomers and intermediates using solvents, catalysts, and heat, and under pressure if necessary. CIRCULAR FOAM, an EU project to research circular solutions coordinated by Covestro, was launched to this end in the year 2021.

• See “Strategic Partnerships and Collaborations.”

Another strategic option for Covestro is enzymatic recycling, which involves using enzymes to very selectively break down plastics into monomers at low temperatures. These monomers can then be reused to produce new, equally high-quality plastics. Enzymatic recycling is still in the early phase of development, but due its high selectivity (generating few to no by-products) and low processing temperatures, this technology is very promising. Covestro has identified this potential and, in addition to our own research, has entered into key partnerships to deploy this innovative technology in recycling and take it closer to an industrial scale.

• See “Strategic Partnerships and Collaborations.”

Furthermore, in the year 2023, Covestro made progress in the chemical recycling of flexible polyurethane foam from mattresses. After commissioning a pilot plant in Leverkusen (Germany) in fiscal 2020, we continued to research detailed process parameters in the reporting year and were therefore able to confirm the laboratory results to date. This innovative technology enables us to supply high-purity recycling polyol that meets customer specifications and recycled toluylene diamine (TDA), which can in turn be processed into toluylene diisocyanate (TDI). We forge alliances along the entire value chain to close product loops on an industrial scale. The convergence of the chemical and recycling industries is aimed at creating new value cycles for the circular economy.

• See “Strategic Partnerships and Collaborations.”

Covestro also provides solutions to support the expansion of wind energy, which is a crucial technology for generating power from renewable sources and for decentralizing energy supplies. The recyclability of wind turbine rotor blades is currently one of the remaining challenges on the road to a more sustainable energy industry. We are working on developing a solution to this problem on the basis of a unique polyurethane structure.

Market Design for Alternative Raw Materials

We want to be a pioneer in the circular economy of plastics and play an active role in shaping the market transformation. A key aspect in this regard is to continuously expand our product portfolio by adding sustainable products based on the use of alternative raw materials.

In addition to Covestro’s own production of recycled and biogenic raw materials, the strategic alignment of our raw material and energy procurement activities is vitally important to our corporate vision. We aim to continually increase the share of alternative raw materials used in production and reach 100% in the long term. Covestro defines alternative raw materials as all raw materials made from biomass, CO₂, or waste, or manufactured on a nonfossil basis using renewable energy.

In fiscal 2023, Covestro continued the procurement of alternative raw materials. In total, we purchased over 27,000 metric tons of alternative raw materials (previous year: over 55,000 metric tons) for use in production activities in Antwerp (Belgium), Changhua (Taiwan, Greater China), Dormagen (Germany), Filago (Italy), Leverkusen (Germany), Krefeld-Uerdingen (Germany), Map Ta Phut (Thailand), and Shanghai (China). The goal here is to be able to offer a broad market a steadily growing portfolio of sustainably manufactured materials. The decline in the amount of alternative raw materials used in the fiscal year is due to a difficult market environment throughout the industry and decreases in production.

We continued the ISCC PLUS certification and auditing process of our production sites and certified additional sites to reflect the certification of these raw materials for further use along the entire value chain. The sites with new ISCC certificates are Newark (United States), Niihama (Japan), Schoonebeck (Netherlands), and Waalwijk (Netherlands). International Sustainability and Carbon Certification (ISCC) is a recognized system for certifying the sustainability of biomass and bioenergy. The standard, which covers all stages of the value chain, is widely used worldwide.

Labeling of Circular Solutions in the Product Portfolio

To enhance the transparency of circular solutions in the market, Covestro introduced new products under its Circular Intelligence (CQ) product label in the reporting year. The purpose of the CQ label is, for example, to identify products that have minimum alternative or recycled raw material content. The minimum threshold is 25%, although some products receive the cradle-to-gate^* assessment on the path to climate neutrality. The “climate neutral” claim is the result of an assessment of a segment of the product’s entire life cycle based on ISO standard 14040. In the reporting period, the business entities identified various products to be established under the CQ label.

Circular Economy Partnerships and Stakeholder and Value Chain Engagement

We also promote the circular economy by participating in regional and global initiatives. When we engage in dialogue with politicians and the public, we advocate for structuring the required regulatory environment for establishing a circular economy with space for innovation and, in addition to established recycling methods such as mechanical recycling, also recognizing chemical recycling processes as complementary methods. Another aim is to lower other regulatory hurdles to the integration of alternative raw materials and to increase the gradual substitution of fossil-based raw materials.

Along with companies representing the entire plastics value chain, Covestro was a founding member of the Alliance to End Plastic Waste, a global non-government and non-profit organization. This Alliance has set itself the target of preventing or minimizing the entry of plastic waste into the environment by establishing waste management and recycling systems through support for established, sustainable, and scalable projects on the road to a global circular economy. Covestro terminated its membership of the Alliance at the end of 2023. Covestro had provided financial support to the Alliance, taken an active part in projects and working groups, and conducted its own internal actions against plastic waste since the year 2019.

In the reporting year, Covestro expanded its involvement in the Global Impact Coalition to strengthen the circular economy. Initially launched as the Low Carbon Emitting Technologies Initiative (LCET) and incubated by the World Economic Forum (WEF), it evolved into the independent, nonprofit Global Impact Coalition (GIC), which is headquartered in Switzerland.

The GIC wants to drive change in the chemical industry by supporting specific projects and research and development partnerships that accelerate the transition to net zero greenhouse gas emissions.

By translating insights into action-based strategies, the Coalition intends to speed up the sustainability transformation and to this end also mobilizes the involvement of interest groups and promotes innovation across the industry. The first sub-project in this context is the R&D Hub for Plastic Waste Processing (R&D Hub), which was launched in May 2023 by Covestro and other chemical companies. The R&D Hub will primarily focus on the development of new waste processing technologies that have a smaller carbon footprint and allow plastic waste recycling on a larger scale than is possible at present. As a private-sector initiative, the R&D Hub is intended to contribute to enhancing mechanical and chemical recycling processes.

In the year 2024, we want to strengthen our stakeholder engagement further with a focus on initiatives tailored to the circularity of our material use in products.