Sustainability Statement – Overarching Sustainability Topics

Sustainability in Sourcing

Strategy

The corporate Group Procurement function focuses on supply security, financial contributions, and qualitative requirements, acting at all times in accordance with ethical, environmental, social, and economic principles. Sustainability and circular economy is one of the four strategic principles in procurement. Covestro regards adherence to sustainability standards within the supply chain as a fundamental factor in value creation and, at the same time, an important lever for minimizing risks. Both current and new Covestro suppliers must meet not only economic standards but also social, ethical, and environmental standards as well as those related to corporate responsibility. Working conditions and health effects on people working in the supply chain are particularly important to us, which is why they are a key topic of our cross-functional Human Rights Office. Although the risk analysis conducted there as part of human rights due diligence focuses on direct suppliers, it also considers the upstream supply chain, especially if there are specific allegations.

• See “Human Rights.”
• See “Procurement.”
• Additional information is available at: www.covestro.com/en/company/profile/procurement/sustainability-in-procurement/supplier-code-of-conduct

Governance

Procurement is responsible for managing our suppliers to ensure that they act in accordance with Covestro’s standards, for example, with regard to human rights, labor standards, environmental protection, product safety, transparency, and anti-corruption, as described in Covestro’s Supplier Code of Conduct. Our supplier management goal is broken down each year for the individual procurement categories and communicated by the head of our Corporate Procurement function (Chief Procurement Officer, CPO). The status of target attainment is reported internally on a regular basis.

Two designated members of the corporate Group Procurement function support the cross-functional Human Rights Office. Additionally, our CPO is the risk owner for procurement-related issues in Group-wide risk management. Procurement’s responsibilities include the identification and assessment of risks in the upstream supply chain and the implementation of appropriate measures.

The CPO reports directly to the company’s Chief Technology Officer (CTO).

• See “Human Rights.”

Policies

Our expectations are documented in Covestro’s Supplier Code of Conduct, which will be revised and published next year. The Code of Conduct is available online in 13 languages and forms the basis for collaborative projects. The Code is derived from the principles of the UN Global Compact and our Corporate Commitment on human rights. It is integrated into the electronic ordering systems and contracts across the Covestro Group. Covestro expects its suppliers and subcontractors to agree to the principles in this Code of Conduct. We also expect our suppliers to implement these standards in the upstream supply chain. New and renewed supply agreements in particular generally contain special clauses calling on suppliers to adhere to the sustainability requirements under the three dimensions of people, planet, and profit (PPP) outlined in the Code of Conduct and entitling Covestro to verify compliance.

• Additional information is available at: www.covestro.com/en/company/profile/procurement/sustainability-in-procurement/supplier-code-of-conduct

In addition to our Supplier Code of Conduct, we have also formulated a human rights declaration of principles that includes the basis of our human rights due diligence. It contains information on our human rights strategy, including in relation to our suppliers, and on how we comply appropriately with our due diligence obligations, taking into account the requirements of the German Act on Corporate Due Diligence Obligations for the Prevention of Human Rights Violations in Supply Chains. Zero tolerance toward child labor, forced labor, modern slavery, and human trafficking is a key component of our human rights declaration of principles and also forms part of our Supplier Code of Conduct.

• See “Human Rights.”
• Additional information is available at: www.covestro.com/-/media/covestro/corporate/sustainability/documents-and-downloads/policies-and-commitments/documents/covestro-commitment_human-rights-policy-statement.pdf

Targets and Metrics*

Our Supplier Management Goal

OUR SUPPLIER MANAGEMENT GOAL

STATUS 2023

76%

of suppliers

2022: 80%

2021: 80%

100% of our target relevant suppliers are expected to comply with our sustainability requirements by the year 2025.

Covestro has set ambitious measurable targets through 2025 aimed at systematically promoting sustainability in supplier management. All suppliers must comply with our code of conduct, which they commit to by accepting the conditions of our purchase orders or contracts. We consider target-relevant suppliers to be suppliers with regular purchasing volumes of more than €1 million per year and suppliers belonging to a corporate group that reaches an aggregate regular purchasing volume of more than €1 million. The supplier evaluation is conducted at the individual level or at the level of the corporate group. As of the end of the year 2022, these suppliers were defined as the target-relevant basis for the remaining years. They are also evaluated and covered 84% (previous year: 90%) of our total purchasing value in the reporting year. They comply with Covestro’s sustainability requirements by meeting the minimum result as defined by us in the supplier evaluations described below.

In addition, we work closely with our strategically most important suppliers to improve their sustainability performance. We have also incorporated this approach into our sustainability goals. We also added a risk-based approach on the protection of human rights to our procedure in the reporting year. A supplemental risk analysis considers all suppliers, irrespective of purchasing value, on the basis of industry and country risks with regard to potential human rights risks. Additional measures can be taken for any potentially high-risk suppliers identified with regard to human rights.

Evaluation Methods and Processes of the Together for Sustainability (TfS) Initiative

Covestro is a member of Together for Sustainability AISBL, Brussels (Belgium), a joint initiative undertaken by the chemical industry that now includes 50 companies. This industry-led initiative pursues the goal of establishing a program of global standards for responsibly sourcing goods and services and standardizing supplier evaluation methods worldwide. Covestro supports all criteria by the TfS initiative concerning the areas of ethics, labor & human rights, health and safety, and the environment.

As a member of TfS, Covestro is responsible for monitoring and auditing the sustainability performance of its suppliers. TfS supports this effort by providing the infrastructure for online assessments and on-site audits of suppliers by third parties. The results of these supplier evaluations can be shared via an online platform. During the reporting year, Covestro once again played an active role in the TfS work streams in designing and improving the TfS program and the associated evaluation process.

In order to avoid duplication of audits, increase acceptance by suppliers, and save resources, TfS and the European Chemical Industry Council (Cefic) have entered into a partnership aiming to work jointly on audits of logistics service providers in particular. Cefic uses the SQAS (Safety & Quality Assessment for Sustainability) system for this purpose, a standardized assessment process for European logistics service providers and chemicals distributors that covers quality, safety, environmental, Responsible Care™, and corporate social responsibility criteria. The SQAS reports prepared by Cefic are recognized by TfS as equivalent to a TfS audit report.

Using a standardized TfS assessment process, Covestro evaluates whether the suppliers maintain the required sustainability standards. A structured prioritization process is then carried out to select the suppliers to be evaluated and either an online assessment or an on-site audit initiated for these suppliers – provided that there are no current results. In prioritizing the suppliers for these evaluations, Covestro considers a combination of country and commodity risks. The risk assessment for country and material groups that we use for our risk analysis is based on recognized external sources.

EcoVadis SAS (EcoVadis), Paris (France), an established external provider accredited by TfS, conducts the online assessments. It evaluates the degree to which suppliers’ business practices are aligned with sustainability principles. The questionnaire suppliers complete for the online assessment is based on internationally recognized sustainability standards and includes 21 sustainability criteria grouped into the categories of environmental protection, labor and human rights, ethics, and sustainable procurement. The section on sustainable procurement also inquires about the extent to which the sustainability standards of upstream suppliers are considered. Certain suppliers that do not engage in wholesale trade and do not employ more than 25 people receive an abbreviated questionnaire that does not address the topic of sustainable procurement.

The questionnaire is dynamically adapted by EcoVadis depending on factors such as the industrial sector, company size, and country risk. Suppliers must document their responses to the questionnaire with corresponding supporting documents. The EcoVadis analysts assess supplier responses and supporting documents under consideration of international standards, such as the UN Global Compact, and consolidate the data into a scorecard available online that shows results by category. This scorecard information includes a detailed overview of identified strengths and areas for improvement as well as a weighted overall result for the suppliers analyzed.

External, independent auditors trained and accredited by TfS or Cefic conduct on-site audits of selected companies – and follow-up audits, if necessary, based on defined sustainability criteria. For the purpose of monitoring the quality of the audits, the initiating TfS member takes part in audits selected on a random basis and evaluates them using a standardized checklist.

The number of supplier evaluations conducted was down slightly from the previous year, totaling 956 in the reporting year (previous year: 969).

Supplier Evaluation Results*

At the end of fiscal 2023, the number of supplier evaluations whose results met our sustainability requirements amounted to 1,289 (previous year: 1,236). Of these supplier assessments, 507 involved our target-relevant suppliers, who account for 76% (previous year: 80%) of our target-relevant purchasing value. Furthermore, 53% of our target-relevant suppliers who underwent a repeat assessment in fiscal 2023 have improved compared with their previous results.

The share of online assessments in which suppliers met the minimum result we defined (45%) was 86% for the online assessments conducted in the year under review (previous year: 82%). Thanks to our joint efforts toward continually improving our sustainability performance as well as training opportunities offered, the results of the online assessments improved year over year.

Overall results of the online assessments completed in the reporting year

The share of on-site audits in which suppliers met the minimum result we defined (45%) was 100% for the on-site audits conducted in the year under review (previous year: 93%).

Worldwide Supplier Evaluations through the TfS Initiative*

In the year 2023, the now 50 members of TfS evaluated the sustainability performance of a total of 11,421 suppliers through online assessments and performed 492 on-site supplier audits.

All the results from the online assessments and on-site audits are available to members of the initiative on an online platform, thereby enabling continual monitoring of suppliers with a view to improvements. The TfS initiative also benefits suppliers because their standardized evaluations can be viewed by all TfS members. This means they do not have to complete multiple evaluation surveys from various (potential) customers.

Detailed Results of the Supplier Evaluations*

We regularly analyze the results of the online assessments in the areas of environment, labor and human rights, ethics, and sustainable procurement. The results of the assessments carried out in the previous year and the reporting year are summarized in the following chart:

* The assessments provided by the external providers EcoVadis SAS, Together for Sustainability AISBL, and the European Chemical Industry Council (Cefic) were not subject to the audit by KPMG AG Wirtschaftsprüfungsgesellschaft, Düsseldorf (Germany).

Detailed results of the online assessments completed in the reporting year

The detailed results in all areas indicate a positive trend (increased share of online assessments reaching a score of 45 or higher).

In analyzing the supplier evaluations for the year 2023, we identified deviations from our sustainability requirements in all listed areas. This was due to factors including missing documentation of policies and measures relating to waste, water, and environmental management as well as a lack of occupational safety measures such as insufficient or no signage installed at emergency exits or exceeding the weekly working hours according to the TfS standard.

Human Rights Due Diligence – Risk Analysis Covering Direct Suppliers

Human rights due diligence and the materiality analysis performed in the reporting year identified human rights risks at direct suppliers of Covestro. The key issues we identified at our direct suppliers relate primarily to working conditions and health impacts on persons working in the supply chain. The risk analysis focuses on direct suppliers, but it also considers the upstream supply chain, especially if there are specific allegations. Conflict minerals in the upstream supply chain are one area relevant to human rights that we prioritize. They include, e.g., tin, tungsten, tantalum, and gold (3TG) from conflict or high-risk regions. Conflict minerals can enter our company’s products through the upstream supply chain. To minimize the risk of including conflict minerals in our production processes, our requirements in this regard are communicated in our Supplier Code of Conduct.

• See “Human Rights.”

Actions

Corrective Actions Following Supplier Evaluations

Covestro analyzes and documents the online assessments and on-site audits. The number of supplier evaluations conducted and the overall results are reviewed regularly and reported to the Chief Technology Officer. In the event of noncompliance with our sustainability requirements, we work with suppliers to define specific improvement measures and corresponding targets, and Covestro constantly verifies the implementation of the required improvements.

In 2023, assessment results considered critical by Covestro were identified for one target-relevant supplier (previous year: one target-relevant supplier), meaning that the required minimum result was not met by a significant margin. Covestro responds to such infractions with specific action plans and demands that the suppliers in question implement appropriate corrective actions; supplier assessments will be conducted in future to verify compliance.

None of the supplier assessments conducted revealed any indication of child or forced labor. In addition, Covestro had no cause to terminate a supplier relationship in the reporting year or in the previous year solely on account of an externally determined result or a serious sustainability deficit.

Sustainability Training and Dialogue

For Covestro, it is important for our own procurement staff, in particular, to have a comprehensive understanding of the significance of sustainability in sourcing. Awareness of this issue was raised among employees again in fiscal 2023 in company-wide sustainability training plus region- and country-specific training on evaluation methods and processes. Moreover, our regional program management in the EMLA, NA, and APAC regions is working on permanently improving our sustainability program. Function-wide training events on the topic of human rights were held in the reporting year. These training events were used to teach employees of the corporate Group Procurement function the principles of human rights and to explain our human rights management approach, risk analysis of direct suppliers, including the results, and the planned future steps. Dialogue and close collaboration are essential in enabling suppliers to successfully comply with Covestro’s sustainability requirements. We therefore offer our suppliers a range of opportunities for training and dialogue. This provides the foundation for building reliable relationships and enables us to identify and eliminate issues at an early stage. Continually improving our suppliers’ sustainability performance is a priority for Covestro and is supported by the TfS initiative, which regularly organizes education and training courses, for example. The TfS Academy was launched in April 2022, a platform for buyers in the chemical industry and their suppliers on which they can expand and deepen their knowledge, keep up to date with trends, and make their contribution to creating more sustainable, more innovative, and more resilient supply chains. The TfS Academy is constantly expanding and currently provides access to more than 390 courses in 11 languages.

• Additional information is available at: www.tfs-initiative.com