Materiality Assessment
We identify material sustainability topics to create a foundation for Covestro’s worldwide sustainability efforts and define focal points for our sustainability management activities. Specific targets, measures, and management approaches for the respective material sustainability topics are specified in the detailed information of the relevant chapters of the sustainability report.
Materiality Assessment Process
Regularly conducted materiality assessments help us to identify and prioritize the sustainability topics most important to the company and potentially affected groups of stakeholders. We perform both comprehensive materiality assessments every three to five years and annual reviews, an abridged process with reduced scope and effort. Prompted by the EU Corporate Sustainability Reporting Directive (CSRD), whose reporting requirements become effective for Covestro from 2024 onward, a comprehensive materiality analysis was conducted in the reporting year. In this context, the method for conducting the materiality analysis was aligned in the reporting year to fit more closely with the requirements of the European Sustainability Reporting Standards (ESRSs). This alignment involved providing more detailed guidance for the materiality dimensions already used in prior years – “impacts on people and the environment” and “financial materiality” – as well as a number of additional assessment points, such as the value chain – to the extent that information was already available, time horizons, or stakeholder groups affected.
Topics were identified and assessed from the Group perspective. Any differences, e.g., in relation to regionality or segments, were documented and did not lead to divergent assessments. The assessment of impacts on people and the environment has been harmonized with the risk assessment method in the human rights management system. The assessment of the financial materiality of a topic on the basis of risks and opportunities is similar to the assessment in Group-wide risk management. In principle, each assessment is conducted on a gross basis in accordance with the double materiality requirements laid down in ESRS 1 “General Requirements.”
Both comprehensive and annual reviews of the materiality analysis are conducted in four steps: identify, assess, validate, implement.
Steps in the materiality assessment process
Identify
We complete a comprehensive analysis every three to five years to identify the material sustainability topics that could be relevant for Covestro and compile an extensive list of topics from internal and external sources. As a minimum, the external sources contain the matters proposed in ESRS 1 “General Requirements, Appendix A Application Requirements.” Other sources comprise professional experts and internal representatives of relevant stakeholder groups or other external sources. Potential material sustainability topics are identified on the basis of the business model and Group strategy described in the Company Profile. At the annual review, we assess the previous year’s material issues using an abridged process and adapt them or add new issues.
Assess
For both the comprehensive materiality assessment and annual reviews, experts from various relevant expert functions assess the material sustainability topics for their relevance to Covestro and potential impacts on people and the environment. This process takes feedback and opinions of external and internal stakeholders into account. To assess the sustainability topics material to Covestro, we apply the two dimensions of materiality: “impacts on people and the environment” and “financial materiality.”
The impacts on people and the environment also refer to impacts relating to environmental, social, and governance aspects. To determine the impacts of a topic on the environment and people, including human rights, the first step is to determine where – based on the information available to the professional experts – they could occur along the value chain, how they could be linked to Covestro’s business activities, business model, and/or products, and which stakeholder group could be impacted. This is followed by an assessment of actual or potential, positive or negative impacts on the basis of severity and likelihood of the impact. Severity is measured according to the criteria of scale, scope, and irremediability of the impacts. The assessment also takes into account the extent to which it must be expected that the impact of the respective topics will change over short-, medium-, or long-term time horizons. Topics whose impacts on people and the environment are rated at least medium on a scale from very low to very high are considered material.
To determine the financial materiality of a topic, the opportunities and risks were determined on the basis of the size of the financial impacts on Covestro and the likelihood of occurrence. The size is determined on a quantitative or qualitative basis; the latter also considers the ability to continue using or procuring the resources required as well as dependence on business relationships. Assessments already available in the Group-wide risk management system are used as the basis for this assessment. Where relevant, they take account of financial impacts, e.g., in the form of potential claims or reputational damage due to impacts on people and the environment, if there is a risk that could be related to our business activities and the impacts on people and the environment were to be confirmed. Another consideration is to establish the extent to which the opportunities or risks associated with the respective topics should be expected to change over short-, medium-, or long-term time horizons. Topics whose financial impact on Covestro is rated at least medium on a scale from very low to very high are considered material.
In an initial alignment with the CSRD, sustainability topics are considered material if they have at least medium relevance in one of the two materiality dimensions. The reporting is based on current applicable law. The final materiality assessment under the CSRD for fiscal 2024 may deviate from this.
Validate
The material topics and their assessment are reviewed and acknowledged annually by the Chief Sustainability Officer (CSO) and the Board of Management.
Implement
The material sustainability topics are handled and managed by the topic owners from the respective corporate functions according to the need for action identified and their potential impacts on people and the environment. This also includes the respective financial and nonfinancial opportunities and risks as well as any measures required that are mapped in the Group-wide risk management system. In accordance with the company’s internal rules on Group-wide risk management, the relevant corporate function also reports to the Board of Management and Supervisory Board.
Details of the material sustainability topics and the corresponding management approaches are provided in the nonfinancial section of the Group Management Report.
As part of the methodical revision in the reporting year, all topics specified in ESRS 1 “General Requirements, Appendix A Application Requirements” and other topics identified were first examined and pre-assessed together with experts and then grouped according to the company’s internal management approaches. Each topic was initially assessed according to the double materiality principle with representatives of the relevant corporate functions, which represent the Group perspective. This was supplemented with insights from surveys of the Board of Management, ESG GoB, the management team of the corporate Sustainability & Public Affairs function, which existed until August 2023, and internal representatives of relevant external stakeholder groups, such as the capital market, customers, the media and the general public, policymakers and lawmakers. The individual inputs were calibrated together with representatives of the relevant corporate functions and submitted to the CSO and Board of Management for approval.
Material Sustainability Topics in Fiscal 2023
The comprehensive materiality assessment conducted in the reporting year confirmed the material sustainability topics most relevant to Covestro. As in the previous year, they reflect our Sustainable Future strategy.
Changes in other material sustainability topics related, e.g., to the definition of the topic concerned or the assessment of the topic on the basis of adjusted assessment criteria.
The “Corporate governance” topic was no longer managed as a separate sustainability topic in the reporting year, as the different governance structures are found in the respective descriptions of the other material sustainability topics. The “Sustainable finance” topic was no longer classified as material since activities in this area are not the central focus of our business activities. One of the objectives of sustainability reporting is to achieve transparency for sustainability in finance. In the reporting year, we identified GHG emissions and other environmental impacts as direct impact drivers for biodiversity loss and assessed these impacts as relevant; we report on them in the subsequent sections of the sustainability report. The “Biodiversity” topic, with its significantly more restrictive definition in relation to (industrial) land use change and soil sealing, is not material for us.
Materiality matrix1
1 Axes truncated. Topics listed alphabetically within quadrants.
Due to its strategic significance, the “Circular economy” topic continues to be of particular relevance for us. In relation to resource inflows, alternative raw materials play an important role for us. As for resource outflows, both our products, their recyclability, and end-of-life solutions and the waste generated by our business activities take a high priority in our efforts to become fully circular. Another focus is on new business models, since partnerships and initiatives help us make progress in the areas mentioned earlier.
The material sustainability topic of “Climate neutrality” covers Scope 1, Scope 2, and Scope 3 GHG emissions as well as our energy usage. It reflects the components of our goal to become climate neutral by the year 2035 in our own production (Scope 1 emissions) and in the purchase and use of energy produced outside the company (Scope 2 emissions) at all environmentally relevant sites. Moreover, we set ourselves a new target in the reporting year, of achieving net zero GHG emissions by the year 2050 for our Scope 3 GHG emissions. We acknowledge that GHG emissions contribute to the loss of biodiversity worldwide. We consider our efforts to reduce our Scope 1, Scope 2, and Scope 3 GHG emissions to be a valuable contribution to mitigating this impact driver.
The material sustainability topic of “Sustainable solutions” plays a key role for us in fulfilling our purpose of becoming fully circular and making our contribution to climate neutrality. In this process, we consider both our products on the market, such as our Circular Intelligence (CQ) products or climate-neutral applications, and those in the R&D pipeline that promote sustainability. Covestro’s goal is to devote 80% of its R&D costs by 2025 to projects that contribute to achieving the SDGs, thus driving sustainable product development.
The material sustainability topic of “Product stewardship” forms the basis for our actions. It reflects our commitment to providing products to our customers that we assess to be safe. Product stewardship refers to the risk assessments and measures that we take to make our products safe for the intended use along their life cycle. This entails thorough testing, compliance with product safety regulations, and transparent communication with our customers about product risks, and the safe handling of our products.
The topic of “Environmental impacts of own operations” is a fixed component of our integrated Health, Safety, Environment, Energy and Quality (HSEQ) management system and therefore integrated into our management and business processes. Emissions into the air and water are included in the data we collect and assess for their environmental impact throughout the Group. The topic also addresses possible emissions into the soil of microplastics and certain other substances. We acknowledge that entries into the environment contribute to the loss of biodiversity worldwide. We manage our environmental impact by operating our plants in accordance with applicable national legislation and by systematically incorporating the production processes into the integrated HSEQ management system.
- See “Environmental Impact of Own Operations.”
- See “Integrated Management System for Health, Safety, Environment, Energy, and Quality.”
In the reporting year, we assessed the topic of “Water resources” separately for the first time. The availability and accessibility of clean water is important for our production sites. The topic covers the water withdrawn for our production, water consumption, and the volumes of water discharged.
Our activities relating to the material sustainability topic of “Human rights” in the previous year are reflected in a large number of areas in the company, such as human resources, as well as in our supplier management. In the reporting year, we highlighted the topics of “Worst forms of human rights violations at our own sites” and “Worst forms of human rights violations at the sites of our suppliers” to give expression to the potential higher impact on people associated with such violations. We have established a management system to contribute to respect for all human rights in all the Covestro Group’s activities and throughout global supply chains and value chains, and to the prevention of potential human rights violations.
As a chemical company, we bear a special responsibility for the health and safety of our stakeholders. Safety is a fundamental principle of our actions. The material “Health and safety at our own sites” sustainability topic also covers process and plant safety as well as transportation safety. It is an integral part of our integrated management system for HSEQ. We strive to eliminate workplace incidents and accidents and operate our plants safely to protect people and the environment.
- See “Health and Safety.”
- See “Integrated Management System for Health, Safety, Environment, Energy, and Quality.”
Our “We Are One” culture is intended to enable us to pursue our Sustainable Future strategy and therefore contributes to Covestro’s success now and far into the future. This is why the material sustainability topic of “Working conditions of our own workforce” plays a critical role. Under this topic, we include offerings and arrangements for our employees relating to, e.g., working times and working time models, adequate wages, including collective bargaining agreements, education and training, and secure jobs. Against the backdrop of growing skills shortages, we continue to drive our efforts to win qualified expert staff and retain them for the long term.
“Diversity, equity, and inclusion,” which are elements of our “We Are 1” culture and therefore part of the foundation of our Group strategy, play an important role in the company’s sustainability position. We therefore continue to pursue innovative solutions to topics that concern our employees. Fair pay is part and parcel of our ethos, as is action against violence and harassment in the workplace and against discrimination.
Our commitment to sustainability also extends to our suppliers. With social, human rights-related, ethical, and ecological standards for new and existing suppliers, we promote “Environmental responsibility in the supply chain,” “Health and safety at the sites of our suppliers,” and “Working conditions at the sites of our suppliers.” In addition, we campaign for measures against “Worst forms of human rights violations at the sites of our suppliers.” We have set ourselves the goal of having 100% of our suppliers with regular purchasing volumes of more than €1 million comply with our sustainability requirements by the year 2025. The assessments of our suppliers in this regard are an integral part of our processes.
We consolidate our activities around the sustainability topic of “Inclusive business” in a program under which we aim to meet needs in what are known as underserved markets. We continue to pursue the aim to have 10 million people in these underserved markets benefit from our solutions by the year 2025.
The material sustainability topic of “Compliance” is the basis of our business practices and firmly embedded in our organization’s processes. In this regard, the protection of people who blow the whistle on violations of external or internal regulations plays an important part. Ethical business practices also pertain to our conduct in dealings with suppliers.