Sustainability Statement

EU Taxonomy

In accordance with the European Union’s Taxonomy Regulation (2020/852) (EU Taxonomy or Taxonomy Regulation) as the basis for various future and ongoing European Union (EU) initiatives relating to sustainable financial reporting, the Covestro Group is required to issue a nonfinancial statement and reports taxonomy KPIs.

In fiscal 2023, our report includes information in line with the Taxonomy Regulation and its delegated acts applicable at the reporting date. Taxonomy-aligned activities were reported for the first time for the year 2022, since the exemptions had been exercised in the year 2021 and only our taxonomy-eligible economic activities associated with the first two environmental objectives were initially reported. The publication of the new delegated acts on the EU Taxonomy on June 12, 2023, defines the economic activities and corresponding technical screening criteria for the four environmental objectives not yet addressed. These objectives include the sustainable use and protection of water and marine resources, the transition to a circular economy, pollution prevention and control, and the protection and restoration of biodiversity and ecosystems.

This means that all six environmental objectives have since the year 2023 been covered by delegated acts. A second delegated act has also amended the Climate Delegated Act. This second delegated act comprises both the inclusion of new economic activities and the selective amendment of existing economic activities (in particular the amendment of existing technical screening criteria). Some legal concepts in the EU Taxonomy have not been defined conclusively, which leads to uncertainty regarding their interpretation.

Taxonomy-Eligible Economic Activities

As in the prior year, we identified the following taxonomy-eligible economic activities in fiscal 2023 associated with the environmental objective of “climate change mitigation” at Group level:

• Activity 3.10 – “Manufacture of hydrogen,”
• Activity 3.13 – “Manufacture of chlorine,”
• Activity 3.14 – “Manufacture of organic basic chemicals,”
• Activity 3.16 – “Manufacture of nitric acid,”
• Activity 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:

• Activity 4.30 – “High-efficiency co-generation of heat/cool and power from fossil gaseous fuels.”

Other taxonomy-eligible economic activities result in connection with capital expenditures (CapEx) and operating expenditure (OpEx) (categories b and c). There were changes here compared with the prior year. Other taxonomy-eligible economic activities were identified for the environmental objectives of climate change mitigation and transition to a circular economy:

Climate Change Mitigation

• Activity 6.2 – “Freight rail transport,”
• Activity 6.5 – “Transport by motorbikes, passenger cars and light commercial vehicles,”
• Activity 6.8 – “Inland freight water transport,”
• Activity 6.10 – “Sea and coastal freight water transport, vessels for port operations and auxiliary activities,”
• Activity 7.1 – “Construction of new buildings,”
• Activity 7.7 – “Acquisition and ownership of buildings.”

Transition to a Circular Economy

• Activity 3.1 – “Construction of new buildings,”
• Activity 3.3 – “Demolition and wrecking of buildings and other structures,”
• Activity 3.4 – “Maintenance of roads and motorways,”
• Activity 4.1 – “Provision of IT/OT data-driven solutions.”

Furthermore, no taxonomy-eligible economic activities associated with “climate change adaptation” were identified, since our business model in the activities covered by the Taxonomy Regulation are aimed at “climate change mitigation.” Potentially, economic activity 3.1 – “Construction of new buildings” is also taxonomy-eligible for the environmental objective of “transition to a circular economy.” Taking account of the technical screening criteria, (TSC), new construction projects were individually reviewed and can only be allocated to the environmental objective of climate change mitigation. This prevents double counting when calculating the metrics. Some activities in our portfolio are not covered by the EU Taxonomy, e.g., the manufacture of diisocyanates, such as diphenylmethane diisocyanate (MDI) or toluylene diisocyanate (TDI), which are required for processing into polyurethane.

The economic activities associated with the environmental objectives of “sustainable use and protection of water and marine resources,” “pollution prevention and control,” and “protection and restoration of biodiversity and ecosystems” were assessed by experts with regard to their implementation at Covestro. No need for additions or extensions were identified for fiscal 2023. In principle, there is a phase-in period for the environmental objectives three to six and for newly included activities under the Climate Delegated Act in the 2023 reporting year, which means that nonfinancial companies only have to provide information on taxonomy eligibility (proportion of taxonomy-eligible and taxonomy-non-eligible turnover, CapEx, and OpEx) for these activities in the 2023 reporting year.

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 also contain specific details for this. A separate TSC is defined for each environmental objective. The TSCs for all six of the above environmental objectives were in force for fiscal 2023. In addition, compliance with the minimum safeguards pursuant to Article 18 of the Taxonomy Regulation must be examined.

Substantial Contribution

Following the assessment of the taxonomy eligibility of Covestro’s activities in the year 2021 and the central analysis of taxonomy alignment in fiscal 2022, this status was updated in fiscal 2023 as the required substantial contribution to the environmental objective of climate change mitigation was not achieved or could not be demonstrated for any activity.

We potentially made a small material contribution to the environmental objective of climate change mitigation for selected sites for economic activity 3.10 – “Manufacture of hydrogen” in the year 2022. 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 in the 2022 reporting year 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 in the 2022 reporting year to establish any possible environmental damage at site level. This was not repeated for the 2023 reporting year. 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. This means that compliance is currently not tied to any criteria. At the same time, in the year 2022, 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, and also most recently in the year 2022, 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. As no appropriate evidence of a substantial contribution could again be provided for the 2023 reporting year, the DNSH analysis described here from fiscal 2022 was not repeated for the reporting year under review.

For the 2022 reporting year, evidence could be provided for activity 3.10 “Manufacture of hydrogen” in relation to 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. In the course of amendments to the Climate Delegated Act (EU) 2023/2485, this subitem was deleted and two new subitems were added. 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. Since the criteria for a substantial contribution to activity 3.10 – “Manufacturing of hydrogen” are not yet fully met and this activity does therefore not qualify for taxonomy alignment, no additional review of the two subitems in Appendix C of Annex 1 was conducted.

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. In the reporting year, we did not perform the review of minimum safeguards requirements specifically for the EU Taxonomy.

The requirements relating to minimum safeguards 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, 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 “Business Conduct (Compliance).”
• See “Corporate Policies.”
• See “Health and Safety.”
• See “Human Rights.”
• See “Sustainability in Sourcing.”
• See note 26 “Legal Risks” in the Notes to the Consolidated Financial Statements.

Result of the Alignment Check

In fiscal 2023, we did not identify any taxonomy-aligned economic activity associated with the environmental objectives of “climate change mitigation” and “climate change adaptation” and the environmental objectives of “sustainable use and protection of water and marine resources,” “transition to a circular economy,” “pollution prevention and control,” and “protection and restoration of biodiversity and ecosystems.”

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 taxonomy KPIs are determined with system support in processes established for the purpose. The KPIs are mainly determined by allocating master data directly to the economic activities. In the case of CapEx and OpEx, this is unfortunately not always possible due to the complexity of the value flows. In these cases, the taxonomy-eligible shares are allocated on the basis of the taxonomy-eligible turnover determined for each economic activity. 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 “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 (sales) recognized in the Consolidated Income Statement for the reporting year was then calculated for the identified products (numerator) 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.”

As a result of the continued automation of calculating the metrics, the rule-based calculation was refined in the reporting year. To make the components of turnover during the reporting year more comparable to those of the previous year, individual prior-year figures in the table of KPIs were adjusted. The adjustments have been identified by means of footnotes.

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 well as additions of right-of-use assets pursuant to IFRS 16, 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 13.1 “Goodwill and Other Intangible Assets” in the Notes to the Consolidated Financial Statements.
• See note 13.2 “Property, Plant and Equipment” in the Notes to the Consolidated Financial Statements.

The increase in the taxonomy-eligible share of CapEx compared with the prior year was primarily due to investments relating to economic activity 3.17 – “Manufacture of plastics in primary form” and investments relating to economic activity 6.2 – “Freight rail transport,” which was additionally included in the reporting year.

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. Under this financing framework, a bond amounting to €500 million was issued in fiscal 2022. All the proceeds from the bond issue were used by fiscal year 2022 to finance products or projects with a clear benefit for the environment and/or society. No taxonomy-aligned CapEx or OpEx was financed with the green bond. No financing from this bond was available for CapEx or OpEx in the reporting year.

• 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 “Company Profile.”
• See “Management.”
• See “Sustainability Statement.”

The KPIs below were calculated according to the abovementioned methods:

Pursuant to Annex V of Commission Delegated Regulation 2023/2486 of 27 June 2023, the disclosure requirements for the turnover, CapEx, and OpEx key performance indicators have been expanded. Non-financial undertakings are now additionally required to report the scale of the taxonomy-eligible and taxonomy-aligned activities for each environmental objective. Activities that materially contribute to more than one objective must be reported for each environmental objective. The corresponding disclosures are shown in the tables below:

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.