Sustainability Statement – Environmental Matters

Climate Neutrality

Strategy

Covestro is fully committed to sustainability. Our intention to transform to climate neutrality is derived from our Sustainable Future strategy. This strategy also reflects our commitment to transforming Covestro so that we can prepare for the future and mitigate transitional and physical risks arising from climate change and other factors, and actively take advantage of opportunities by producing our products in a climate-neutral manner. For Covestro – an energy-intensive company with complex value chains – this means not only systematically driving energy efficiency, establishing sustainable production processes, and using climate-neutral sources of energy, but also moving away from the use of fossil-based raw materials and embracing a holistic approach toward sustainable production and business models. This transition will help us launch climate-friendly products on the market and meet specific climate targets.

• See “Strategy.”
• See “Sustainability Management.”

Governance

Under our climate program, which was taken over by the newly established corporate Group Innovation & Sustainability function in September 2023, the actions for reaching net-zero emissions are defined in the form of a CO₂ roadmap; progress is assessed and regularly reported to the Board of Management. The CO₂ roadmap was approved by the Board of Management in fiscal 2022 in order to align Covestro’s existing target for reducing greenhouse gas (GHG) emissions with the corporate vision and regulatory requirements. Actions to reduce emissions are identified in close collaboration between our sites and the relevant corporate functions, such as Group Innovation & Sustainability, which are tasked with developing and implementing new sustainable process technologies and energy efficiency projects. Different software solutions are used to assess the impact of investments on GHG emissions. The roadmap is reviewed and updated annually. Various corporate and decision-making bodies, consisting of managerial employees from the corporate Process Technology, Group Procurement, Engineering, Controlling, Group Health, Safety and Environment, and Strategy functions as well as from the business entities, discuss and allocate resources for the implementation of our climate program.

Transitional and physical risks arising from climate change are captured and assessed in Group-wide risk management and appropriate countermeasures are developed. Risks are reviewed on a regular basis.

• See “Group-wide Opportunities and Risk Management.”

We regard the reduction in GHG emissions as a relevant performance indicator to be used to ensure that the Covestro Group’s business activities are aligned with its vision of becoming fully circular. For this reason, this is also reflected in the compensation policy for all employees.

• See “Management.”
• See Compensation Report, “Long-Term Variable Compensation” section.

Emissions data is captured by the corporate Group Health, Safety, and Environment function using a software solution and regularly discussed with the Chief Technology Officer.

Policies

A policy that is relevant alongside our corporate Sustainable Future strategy and the CO₂ roadmap is the strategy for the procurement of power from renewable energy, for which Procurement is responsible. Our Sustainable Future strategy provides the framework for our CO₂ roadmap. The CO₂ roadmap forms the basis for prioritizing specific GHG reduction actions and will fundamentally be used to address and analyze direct and indirect sources of emissions in accordance with the Greenhouse Gas Protocol (GHG Protocol).

In order to meet the climate neutrality target, we assess our company’s (Scope 1 and Scope 2) GHG emissions and investment projects as part of the investment project management process. Since fiscal 2020, we have performed sensitivity analysis on investments in excess of €5 million, in addition to calculating standard project ROCE (return on capital employed). We have used two complementary concepts since the year 2022 to create incentives for CO₂ reductions. For investment projects, we use a matrix to visualize the compromise between the financial impact (ROCE above WACC) and CO₂ impact (CO₂ equivalents per €1 million of investment) as well as a ROCE calculation, which applies an internal CO₂ price of €100 per metric ton of CO₂ equivalent. Standard sensitivity analysis uses a CO₂ price of €200 per metric ton of CO₂ equivalent instead of the previous €40 per metric ton of CO₂ equivalent. In determining prices as part of our capital allocation, we assume a 10-year timeframe in most cases. The internally applied CO₂ price is regularly reviewed and adjusted if necessary.

Targets

Greenhouse Gas Emissions

Absolute reduction targets were published in fiscal 2022 for reducing our Scope 1 and Scope 2 emissions; they apply to all environmentally relevant sites. In addition, Covestro set itself a new absolute reduction target for its Scope 3 GHG Emissions in the 2023 reporting year. Net-zero Scope 3 GHG emissions are to be attained by the year 2050. Compared with the baseline year of 2021, Scope 3 GHG emissions are to be reduced by 10 million metric tons of CO₂ equivalents by the year 2035. These targets apply to all environmentally relevant sites.

In accordance with the Intergovernmental Panel on Climate Change (IPCC) and the United Nations Framework Convention on Climate Change (UNFCCC), we understand and support climate neutrality as society’s collective goal of attaining net zero GHG emissions by the year 2050. This means that anthropogenic emissions can be removed by the planet through its natural ability to absorb them and as a result no longer impact on the climate. The time horizons of our climate targets are therefore defined in such a way that they conform to international and European ambitions to limit global warming to 1.5°C.

Scope 1 and Scope 2

In the baseline year of 2020, Scope 1 emissions accounted for 22% and Scope 2 emissions for 78% of the combined Scope 1 and Scope 2 emissions. In the reporting year, the ratio was 18% Scope 1 emissions to 82% Scope 2 emissions. Net-zero Scope 1 and Scope 2 GHG emissions are to be attained at all environmentally relevant sites by the year 2035. We are currently assuming that residual emissions of 0.1 to 0.2 million metric tons of CO₂ equivalents could remain in the year 2035. We reserve the right, if necessary, to offset these residual emissions with high-quality compensation actions. The options are still being assessed. This means that our net-zero target for the year 2035 corresponds to a reduction in gross emissions by 96.5% to 98.2% compared with the baseline year of 2020. On the way to meeting this target, the company plans to reduce direct and indirect GHG emissions of 5.6 million metric tons of CO₂ equivalents in the baseline year of 2020 by 60% to 2.2 million metric tons of CO₂ equivalents by the year 2030 (excluding compensation actions).

OUR CLIMATE NEUTRALITY SCOPE 1 AND SCOPE 2 TARGET

STATUS 2023
compared to 2020 levels

–8.4%

GHG emissions¹
(–0.47 million metric tons)

2022: –11.8%
(–0.66 million metric tons)

2021: –2.8%
(–0.16 million metric tons)

By the year 2035, we want to reach net-zero GHG emissions in our own production (Scope 1) and from the provision and use of energy produced outside the company (Scope 2) at all environmentally relevant sites.

Covestro pursues a growth strategy, and we therefore assume that our annual Scope 1 and Scope 2 GHG emissions will gradually increase by 1.0 million metric tons of CO₂ equivalents by the year 2035. This is set against external factors that are having a beneficial effect on our climate neutrality; they are expected to make an annual contribution of 0.7 million metric tons of CO₂ equivalents by the year 2035. This includes, for example, Germany’s target to reach a renewable energy share of 80% in the German power mix by the year 2030 and Germany’s plans to phase out coal.

The implementation of sustainable production processes as the first action area is expected to contribute to a reduction of 1.8 million metric tons of CO₂ equivalents, while the transition to electricity from renewable sources – the second action area – should enable savings of 2.3 million metric tons of CO₂ equivalents. As for the third action area – climate-neutral steam – a reduction in emissions by 1.8 million metric tons of CO₂ equivalents is to be achieved by changing the supply of process heat.

Scope 3

In addition, Covestro set itself a new absolute reduction target for its Scope 3 GHG Emissions in the 2023 reporting year. Net-zero Scope 3 GHG emissions are to be attained by the year 2050. On the way to meeting this target, the company plans, by the year 2035, to reduce GHG emissions from upstream and downstream processes in the value chain by 30% (equivalent to 10 million metric tons of CO₂ equivalents) compared with the baseline year of 2021. The four relevant categories, “Purchased goods and services,” “Fuel- and energy-related activities,” “Upstream transportation and distribution,” and “End-of-life treatment of sold products,” are considered in setting the targets.

OUR CLIMATE NEUTRALITY SCOPE 3 TARGET

STATUS 2023
compared to 2021 levels

–27.8%

GHG emissions¹
(–6.08 million metric tons)

2022: –22.4%
(–4.89 million metric tons)

We want to achieve net-zero GHG emissions along our company’s value chain (Scope 3) by the year 2050.

Energy Usage

For an energy-intensive company like ours, the reduction in the amount of energy we use plays a key role in efforts to reduce our Scope 1 and Scope 2 emissions. Covestro’s energy usage includes the primary energy used in production and during self-generation of electricity and steam as well as additionally acquired quantities of electricity, steam, refrigeration energy, and process heat (secondary energy).

Under our existing energy target, we aim to halve specific energy usage at main production sites by the year 2030 compared with the baseline year of 2005. In order to bring our energy usage even more closely in line with the climate neutrality target, we are working toward adjusting the energy target with the intention to replace the existing target in the next fiscal year.

Actions

To enable the company to reach net-zero emissions, Covestro anticipates investments of between €250 million and €600 million by the year 2030. Greater energy efficiency is expected to cut operating expenses by €50 million to €100 million a year. Conversely, on the road to net-zero emissions, Covestro is anticipating higher annual operating costs in a low three-digit million euro amount. These cost assumptions are based on past experience that prices for fossil-based sources of energy are lower than for renewable energy.

On the basis of an analysis of the political support for transforming the chemical industry, we believe that the current political framework will not have any negative effect on reaching our reduction targets. The analysis was published in 2022 by the Low-Carbon Emitting Technologies initiative of the World Economic Forum (WEF), in which Covestro actively participated. The Russian war against Ukraine is not expected to have any impact on target attainment either.

We have defined three action areas to reach our net-zero target, and their implementation pertains to all environmentally relevant sites. We are planning to optimize our production processes to facilitate the sustainable and energy-efficient manufacture of our products. In addition, we intend to increase significantly the proportion of electricity from renewable sources. We will likewise aim to make greater use of green steam as a renewable source of energy in future. With a view to reducing the GHG emissions of purchased raw materials, actions such as transitioning to alternative raw materials are being investigated. In terms of possible residual emissions in the future, i.e., those that are technically unavoidable, the use of technical and natural CO₂ sinks, or compensation actions to potentially balance all GHG emissions (Scope 1, Scope 2, and Scope 3) are currently being evaluated.

Actions for reaching the Scope 1 and Scope 2 net-zero target

million metric tons of CO₂ equivalents per year; apart from the figures for the year 2020, all figures are expected values

More Sustainable Production Processes

We will continue to invest in expanding existing and building new production capacities in the future, while committing to using state-of-the-art climate-friendly technologies. The focus here is both on reducing energy consumption through increased efficiency and on cutting process emissions during production. The projects of our long-term investment planning have already been included in formulating the climate targets and the associated roadmap. To improve energy efficiency, we established hot combination technology in the TDI production process in the reporting year. This has resulted in a 16 GWh reduction in annual energy consumption, thus reducing emissions by 4,300 metric tons of CO₂ equivalents.

Electricity from Renewable Sources

In addition to more efficient energy usage in our production processes, the transition to renewable energy is an important lever on the road to climate neutrality. In the future, Covestro therefore intends to meet all of its energy needs with renewable energy. Actions we have taken toward this goal include developing new supply plans and signing purchase contracts for renewable energy, particularly electricity. To further drive the shift toward more sustainable sources of energy (in relation to Scope 2 emissions), we will above all apply innovative collaborative models and technologies.

Alongside existing agreements to procure electricity from renewable sources, e.g., for our sites in Antwerp (Belgium) and in the German state of North Rhine-Westphalia, we entered into additional agreements worldwide in the reporting year. In this process, Covestro made use of special power purchase agreements and power certificates (e.g., certificates of origin in Europe) as a way to underpin its strategic alignment toward sustainability. Likewise, this is intended to contribute to shrinking the carbon footprint in production, in our products, and in our customers’ applications.

• See “Energy Usage.”
• See “Procurement.”

Climate-neutral Steam

Furthermore, we are evaluating options for using biogenic and renewable sources of energy, such as hydrogen and hydrogen derivatives or direct electrification, as well as the use of carbon capture technologies to supply climate-neutral process heat to our sites. These technologies can contribute substantially to reducing GHG emissions in the future, e.g., by using hydrogen and its derivatives for generating energy and as a production input in CO₂ conversion in the chemical industry.

Sustainable Raw Materials

Actions to attain the Scope 3 target include the procurement of climate-friendly raw materials, the use of waste-based or biobased raw materials, and process and product innovation.

• See “Actions” in the “Circular Economy” section.

Metrics

Greenhouse Gas Emissions

Methodology

The reporting of direct GHG emissions, e.g., from burning fossil energy sources and from our production processes (Scope 1), of indirect GHG emissions from the provision and use of energy produced outside the company (Scope 2), and of GHG emissions from upstream and downstream processes in the value chain (Scope 3), is based on the requirements of the Greenhouse Gas Protocol Standard (2004 version) as well as the GHG Protocol Scope 2 Guidance (2015 version) and the Guidance for Accounting & Reporting Corporate GHG Emissions in the Chemical Sector Value Chain (2013 version).

Covestro’s GHG emissions along the value chain

In addition to CO₂, the inventory of Scope 1 emissions comprises all relevant GHGs, including nitrous oxide (N₂O), methane (CH₄), partly fluorinated hydrocarbons, sulfur hexafluoride (SF₆), and nitrogen trifluoride (NF₃). They are disclosed as CO₂ equivalents using the global warming potential (GWP) factors. The relevant factors are those from the Sixth Assessment Report by the Intergovernmental Panel on Climate Change (IPCC). Scope 1 emissions comprise stationary, mobile, process-related, and fugitive sources of emissions.

Scope 2 emissions are reported using the location-based and market-based methods. Location-based emissions factors from generally accepted sources (e.g., International Energy Agency* emissions factors) were used when calculating location-based Scope 2 GHG emissions. Market-based emissions factors were used when calculating market-based Scope 2 GHG emissions; where these were not available, location-based emissions factors were used. For Covestro, the market-based method is the leading calculation method for Scope 2 GHG emissions. Market-based instruments are used at almost all major production sites; they may include specific purchasing contracts for electricity from renewable sources or the purchase of electricity or steam from fence-line partners. Moreover, some smaller production sites already purchase up to 100% of their electricity from renewable sources.

If, in our efforts to achieve climate neutrality, actions are taken to offset emissions in relation to our Scope 1 and Scope 2 GHG emissions, they are disclosed in accordance with the Greenhouse Gas Protocol.

We record our Scope 1 and Scope 2 GHG emissions for all consolidated companies. Since these metrics are calculated only at the end of the year, they include the group of companies consolidated as it stands at year-end. In this process, we incorporate data from all environmentally relevant Covestro sites, i.e., all production sites and relevant administrative sites. In order to comply with publication deadlines, the sites estimate the environmental data for the final weeks of the current fiscal year on the basis of established estimation methodologies that ensure accurate reporting of data as close as possible to the actual figures for the year. If, however, in the course of the following year, we become aware of material deviations based on internally defined thresholds, the figures in question are corrected retroactively. This was not required in fiscal 2023 for the preceding fiscal year 2022.

At Covestro, upstream and downstream GHG emissions data along the value chain (Scope 3 emissions) is determined for all sites and business activities that indirectly cause relevant GHG emissions according to the categories and methods of the GHG Protocol and the Guidance for Accounting & Reporting Corporate GHG Emissions in the Chemical Sector Value Chain by the World Business Council for Sustainable Development (WBCSD). Accordingly, all categories as defined in the GHG Protocol were reviewed for relevance in order to quantify all emissions associated with Covestro’s business activities as completely as possible. Out of the total of 15 categories, 9 are relevant for Covestro and we report the appropriate emission values for them. The basis for calculating the other indirect GHG emissions (Scope 3) are internal activity data and emission factors. The six main categories reported separately in the “Metrics” section are responsible for 99.7% (previous year: 99.7%) of our Scope 3 emissions. The activity data used for these categories is based exclusively on actual operating data collected through standardized processes with system support. The emission factors used for these categories are based exclusively on commercially and publicly available sources, or sources recommended by the GHG Protocol. The individual calculations of the emissions for each Scope 3 category are described in detail in our latest Carbon Disclosure Project (CDP) questionnaire, which is publicly available. By continually improving the data basis and calculation methods used, we will further advance the accuracy of our Scope 3 emissions reporting on an ongoing basis.

Metrics

Total Scope 1, Scope 2, and Scope 3 emissions declined by 4.6% to 20.86 million metric tons of CO₂ equivalents in the reporting year (previous year: 21.87 million metric tons of CO₂ equivalents).

The Scope 1 and Scope 2 GHG emissions of all environmentally relevant sites were up 3.9% year over year to 5.11 million of CO₂ equivalents (previous year: 4.92 million metric tons of CO₂ equivalents). In this context, direct GHG emissions fell by 6.1% to 0.93 million metric tons of CO₂ equivalents (previous year: 0.99 million metric tons of CO₂ equivalents) and indirect GHG emissions increased by 6.4% to 4.18 million metric tons of CO₂ equivalents (previous year: 3.93 million metric tons of CO₂ equivalents). One main driver was a more emission-intensive energy mix for purchased power and steam at our site in Baytown, Texas (United States).

Scope 3 emissions were 7.0% lower at 15.75 million metric tons of CO₂ equivalents (previous year: 16.95 million metric tons of CO₂ equivalents), thus representing 75.5% (previous year: 77.5%) of the Group’s total GHG emissions. Most of our Scope 3 emissions are attributable to categories upstream in our value chain. Categories 1 “Purchased goods and services,” 12 “End-of-life treatment of sold products,” and 3 “Fuel- and energy-related activities” are the main contributors to our other indirect GHG emissions. Biogenic CO₂ emission equivalents stemming indirectly from the value chain totaled 73,605 metric tons of CO₂ equivalents (previous year: 118,659 metric tons of CO₂ equivalents) in the reporting period in absolute terms and are disclosed separately from the total volume of Scope 3 emissions in accordance with the GHG Protocol and the WBCSD.

Energy Usage

Methodology

We record energy volumes using the same system as for GHG emissions, i.e., we capture our data at all environmentally relevant production sites. This includes both primary energy usage (e.g., natural gas) for production and our own energy generation and secondary energy usage from purchased electricity, steam, and refrigeration. Moreover, we record energy from renewable sources separately and only report energy volumes from renewable sources that have been specifically assigned to Covestro through contractual instruments (e.g., specific energy purchase agreements or certificates of origin). If the “renewable energy” attribute cannot be reliably proven (e.g., on the basis of Guarantees of Origin), these volumes are recorded as non-renewable energy. If a utility mix also includes a proportion of renewable energy, this is currently not explicitly reported.

• See “Methodology” in the “Greenhouse Gas Emissions” section.

Due to the manufacture of chemical products, Covestro belongs to a group of companies attributed to the high climate impact sectors, and this requires us to make detailed disclosures on our fossil fuel consumption. They can be found next to our disclosures on renewable sources of energy in the table entitled “Energy consumption and energy mix.”

Metrics

Our continued long-term positive trend indicates an overall 40% improvement in energy efficiency compared to the 2005 base year as shown in the following figure.

Changes in specific energy usage at main production sites

(annual change in specific primary energy usage per metric ton of product compared with the 2005 baseline year – presented in %)¹

Compared to the previous year, equivalent primary energy usage at these sites decreased by 4.3% and the production volume by 2.1%. This means that the equivalent primary energy usage for a given production volume (energy efficiency) was down 2.2% from the previous year due to production utilization.

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Energy usage in the Covestro Group at main production sites

				2022		2023
Equivalent primary energy usage1		in megawatt hours (MWh)		18,934,000		18,124,000
Production volume2		in million metric tons		14.13		13.83
Specific energy usage (energy efficiency)3		MWh per metric ton		1.34		1.31
1 Sum of all individual energy figures translated into primary energy at our main production sites, which account for more than 95% of our energy usage 2 All in-spec key products – which, in addition to our core products, also include precursors and by-products – manufactured at main production sites, which are responsible for more than 95% of our energy usage. 3 Ratio of equivalent primary energy usage to production volume.

In the year 2023, total energy usage in the Group was down 3.3% year-over-year. The main drivers were declines at the Lower Rhine sites due to production utilization.