By identifying material sustainability matters and the associated impacts on people and the environment, risks, and opportunities, we create the basis for Covestro’s global sustainability activities and for the definition of the focus areas for our sustainability management.
Regularly conducted materiality assessments help us to identify and assess the sustainability matters, as well as their related impacts, risks, and opportunities, that are most important to the company and potentially affected stakeholder groups. We perform both comprehensive materiality assessments every three to five years and annual reviews, an abridged process with reduced scope and effort. In the reporting year, a comprehensive materiality assessment was conducted in accordance with European Sustainability Reporting Standards (ESRS), taking account of “EFRAG IG 1: Materiality Assessment Implementation Guidance.”
The comprehensive materiality assessment conducted in the reporting year followed on from the process used in previous years. For example, compared with the year 2023, a greater degree of detail was applied in identifying and assessing impacts, risks, and opportunities, in order to meet the requirements of ESRS.
In addition, the findings of the human-rights-related risk analysis were integrated into the impact assessment. Likewise, existing risks in Group-wide risk management in relation to sustainability matters are considered as a basis for financial materiality.
The Group perspective was considered by conducting a double materiality assessment that covered the companies included in the scope of consolidation used in financial reporting. In addition to the consolidated subsidiaries, joint operations, equity-accounted associates, financially immaterial subsidiaries, and immaterial associates were assessed with regard to their specific (potential) impacts, risks, and opportunities, e.g., on the basis of their business activities, location, or number of employees. All our own business activities were considered in direct connection with our products and for the upstream and downstream value chains. All material suppliers and customers were taken into account for the latter.
The double materiality assessment started by establishing the context of the company on the basis of information on its business activities and the value chain that had already been reported.
In order to identify and assess the impacts, risks, and opportunities, the entire value chain was examined – from the extraction of raw materials (upstream value chain) through the manufacture of Covestro’s products (own business activities) to the end of the final product life cycle (downstream value chain). We supplemented the topics named in ESRS 1 AR 16 with entity-specific topics, e.g., derived from previous materiality assessments, or with industry-specific topics. This list of topics included environmental, social, and governance topics. In addition, topic-specific inputs into the process were considered.
Relevant stakeholder groups were identified, especially those that might be affected by the impacts of our business activities, as were our formats for exchanging information with these groups. Their views and interests were taken into account with the help of internal representatives, especially for identifying and assessing impacts.
We identified potential and actual, positive and negative impacts for each topic, taking into account whether we have caused or contributed to these impacts, or whether they are connected with our business activities and/or products. For the impacts identified, if applicable, risks and current financial effects and opportunities connected directly with these impacts were determined. Lastly, if not already considered adequately, we identified further risks and current financial impacts and opportunities in connection with the respective topics.
Short-, medium-, and long-term time horizons were applied in identifying the relevant impacts, risks, and opportunities. We took a gross approach to the overall process, i.e., prior to implementing entity-specific mitigation or control actions.
The assessment of the identified impacts, risks, and opportunities complied with the requirements of ESRS 1 or the recommendations of “EFRAG IG 1: Materiality Assessment Implementation Guidance” and was based on the severity and likelihood of occurrence in the case of potential negative impacts on people, including human rights and the environment. The severity was based on scale, scope, and irremediability of the impacts. Actual negative impacts were determined on the basis of their severity. The materiality of actual positive impacts was based on scale and scope; for potential positive impacts, it was based on scale, scope, and likelihood. In the case of (potential) negative impacts on human rights, only the severity was considered. The financial materiality of risks and opportunities was assessed based on the potential magnitude of the financial effects and the likelihood of occurrence.
Impacts, risks, and opportunities were considered material, if they had a rating of more than 3.5 on a scale from 1 to 5. Actual financial effects were assessed as material, irrespective of size.
When the double materiality assessment was conducted, the focus was on actual and potential impacts on emissions of GHG gases within the company’s own business activity as well as in the upstream or downstream value chain. When identifying and assessing the impacts, risks, and opportunities, the same assumptions about future developments and their influence on our GHG emissions were considered that had also been used when setting our reduction targets.
In addition, the explanatory information of our transition plan also contains details of the assumptions and parameters used when identifying and assessing actual and potential impacts, risks and opportunities.
In the reporting year, Covestro performed a physical climate risk analysis for 47 sites for the short-term time horizon through the year 2030, for the medium-term time horizon through the year 2040, and for the long-term time horizon through the year 2050. This selection of time horizons combines the need to investigate physical risks over extended periods to capture the impacts of climate change with the practice of using shorter, foreseeable time periods for strategic planning and capital allocation plans. The assessment of physical climate-related hazards through the year 2030 shows the current and immediate risks affecting Covestro, which should be addressed as a priority. The increasing risks due to climate change, which could affect the sites in the latter parts of their expected service lives, are simultaneously captured by the assessment of climate-related hazards through the year 2050.
The high-emission scenario SSP5-8.5 based on the Sixth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC) was chosen for the assessment; this gives the greatest weight to the physical risks and is therefore considered to be the worst-case scenario.
In the SSP5-8.5 scenario, global population numbers will peak mid-century and then start to decline. Total demand for final energy will increase sharply, with fossil fuels accounting for a significant proportion of the energy mix.*. This scenario assumes no additional climate change mitigation actions. Covestro’s physical climate risk analysis covers all 28 risks described by ESRS E1, including both acute and chronic risks.
The geospatial coordinates of the sites were used to obtain site-specific climate projections or to calculate distances to regions affected by certain hazards. The projections and distances were then compared with predefined, science-based thresholds for each risk. If the threshold for a risk at a site was exceeded, the facilities and business activities at this site were considered vulnerable to the respective risk. Depending on the risk, its magnitude, duration, likelihood of occurrence, or extent was used to assess exposure.
The most significant limitation in the scenario analysis is the fact that the current generation of climate models is unable to simulate all 28 risks. On the one hand, climate variables with a resolution of 90 m × 90 m are used to map the largest possible number of the 28 risks. On the other, additional data sources, such as geographical information systems (GIS), publications, historical data, and others are used, both to ensure more precise reasoning and to describe specific risks. One example is the risk of glacial lake outburst, which cannot be simulated by climate models, although the distance from an existing glacier can be used to determine whether there is a potential risk. For this reason, the analysis of some risks is based on historical data or distances rather than on climate projections.
As described, the climate risk analysis conducted is based on a worst-case scenario and considers the potential extent of the damage caused by physical climate-related hazards at our sites in combination with defined time horizons. The climate-related assumptions made during the preparation of the consolidated financial statements place the focus on the potential impairment and useful lives of Covestro’s assets as of the respective reporting date. The climate risk analysis conducted did not provide any indications that our assets may be impaired or their useful lives have to be adjusted.
The physical climate risks in the upstream and downstream value chain were identified and assessed on the basis of qualitative assumptions derived from the high-emission scenario SSP5-8.5. No material risks were identified in this analysis.
In addition, we consider climate-related transition risks and opportunities as part of established Group-wide opportunity and risk management. These are opportunities and risks that may arise from climate-related transition events in the areas of policy and legal, technology, market, and reputation. If associated opportunities and risks were identified during the risk management process, they were taken into account accordingly in the double materiality assessment. The time horizons defined in ESRS 1.77 were considered in this process. The identification and assessment of the transition events was based on qualitative assumptions on the basis of the 1.5°C Net Zero Emissions by 2050 scenario of the International Energy Agency (IEA).
The assessment did not identify any material transition risks and opportunities with regard to the sustainability matters of “climate change adaptation,” “climate change mitigation,” and “energy.” In the overall context, however, a material opportunity arose in connection with resource use and circular economy.
As part of the double materiality assessment, we considered our business activities and plausibility-checked the results for the most significant regions, in particular the production sites there. Specifically, the Dormagen (Germany), Leverkusen (Germany), and Krefeld-Uerdingen (Germany) sites in the EMLA region, the Baytown, Texas (United States) site in the NA region, and the Shanghai (China) site in the APAC region were selected, since they are our largest production sites in the respective regions. These sites are the most significant, e.g., in relation to production volume, resource use, number of own workers in production, or the type of their work. This approach allowed us to identify and assess not only the (potential) environmental impacts relevant to the Group as a whole, but also regional focus areas, without resorting to a detailed assessment of individual sites. Since the potential impacts on people and the environment and the contribution to business performance are greatest at these sites, and other sites in the regions perform similar activities, mostly to a smaller extent, they are well suited to representing the respective regions and the other sites. Our methodology is based on the informed opinions of our professional experts, who made a holistic assessment. In this process, the regional experts consulted also acted as general counsel for local communities.
As part of the double materiality assessment, we considered our business activities and plausibility-checked the results for the most significant regions, in particular the production sites there. Specifically, the Dormagen (Germany), Leverkusen (Germany), and Krefeld-Uerdingen (Germany) sites in the EMLA region, the Baytown, Texas (United States) site in the NA region, and the Shanghai (China) site in the APAC region were selected, since they are our largest production sites in the respective regions. These sites are the most significant, e.g., in relation to production volume, resource use, number of own workers in production, or the type of their work. This approach allowed us to identify and assess not only the (potential) environmental impacts relevant to the Group as a whole, but also regional focus areas, without resorting to a detailed assessment of individual sites. Since the potential impacts on people and the environment and the contribution to business performance are greatest at these sites, and other sites in the regions perform similar activities, mostly to a smaller extent, they are well suited to representing the respective regions and the other sites. Our methodology is based on the informed opinions of our professional experts, who made a holistic assessment. In this process, the regional experts consulted also acted as general counsel for local communities.
During the double materiality assessment, we looked at our business activities and plausibility-checked the results for the most significant production sites. The impacts and dependencies relating to biodiversity were assessed using the Exploring Natural Capital Opportunities, Risks, and Exposure (ENCORE) database. ENCORE is a database that assesses the impacts and dependencies of biodiversity at sector level. In its Locate Evaluate Assess Prepare (LEAP) approach, the Task Force on Nature-related Financial Disclosures (TNFD) describes it specifically as a tool for this purpose. The analysis revealed emissions of toxic soil and water pollutants in connection with our production as the only potentially significant impact. It was concluded on the basis of this analysis that no specific actions are required to mitigate the impact on biodiversity and that appropriate actions are covered by the climate change (ESRS E1) and pollution (ESRS E2) matters. As the data has been recorded for the first time in accordance with ESRS provisions, it is not possible to draw a comparison with the previous year. The analysis is to be reviewed annually.
As part of the double materiality assessment, transition risks and opportunities were also assessed and systemic risks to biodiversity and ecosystems were taken into account. This approach allows us to identify and assess regional focus areas, in addition to the potential impacts relevant to the entire Group. Our methodology is based on the informed opinions of our professional experts, who made a holistic assessment. In this process, the regional experts consulted in writing or orally also acted as general counsel for local communities.
As part of the double materiality assessment, we considered our business activities and plausibility-checked the results for the most significant regions, in particular the production sites there. Specifically, the Dormagen (Germany), Leverkusen (Germany), and Krefeld-Uerdingen (Germany) sites in the EMLA region, the Baytown, Texas (United States) site in the NA region, and the Shanghai (China) site in the APAC region were selected, since they are our largest production sites in the respective regions. These sites are the most significant, e.g., in relation to production volume, resource use, number of own workers in production, or the type of their work. In this process, we assumed that, as a result of our flexible production processes, broad customer and supplier portfolios and the regional approach of our business activity, there are no material differences in relation to our assets. This approach allowed us to identify and assess not only the (potential) impacts, which are relevant to the Group as a whole, on resource use and the circular economy, but also regional focus areas, without resorting to a detailed assessment of individual sites. At the same time, it enabled us to identify and assess not only the (potential) impacts on waste relevant to the Group as a whole, but also regional focus areas, without requiring a detailed assessment of individual sites. Since the potential impacts on people and the environment and the contribution to business performance are greatest at these sites, and other sites in the regions perform similar activities, mostly to a smaller extent, they are well suited to representing the respective regions and the other sites. Our methodology is based on the informed opinions of our professional experts, who made a holistic assessment. In this process, the regional experts consulted also acted as general counsel for local communities.
As part of the double materiality assessment, we considered our business activities and plausibility-checked the results for the most significant regions, in particular the production sites there, as well as the business relationships with our local supply and value chains. Specifically, the Dormagen (Germany), Leverkusen (Germany), and Krefeld-Uerdingen (Germany) sites in the EMLA region, the Baytown, Texas (United States) site in the NA region, and the Shanghai (China) site in the APAC region were selected, since they are our largest production sites in the respective regions. These sites are the most significant, e.g., in relation to production volume, resource use, number of own workers in production, or the type of their work. This approach allows us to identify and assess regional focus areas, in addition to the potential impacts relevant to the entire Group. Since the potential impacts on people and the environment and the contribution to business performance are greatest at these sites, and other sites in the regions perform similar activities, mostly to a smaller extent, they are well suited to representing the respective regions and the other sites. Our methodology is based on the informed opinions of our professional experts, who made a holistic assessment. In this process, the regional experts consulted sometimes also acted as general counsel for stakeholders.
The identification, assessment, and monitoring of impacts on people and the environment have been harmonized with the risk assessment method in the human rights management system. The latter one is based on the UN Guiding Principles on Business and Human Rights and on the OECD (Organisation for Economic Co-operation and Development) Guidelines for Multinational Enterprises.
The assessment of (potential) human-rights-related impacts on people and the environment was conducted as described above.
When identifying risks and opportunities, the risks and opportunities in Group-wide risk management, especially those that required disclosure under risk management rules and were sustainability-related, were used as a basis. Any risks and opportunities identified in addition were assessed under the same requirements. For risks and opportunities assessed as material that went beyond Group-wide risk management, a decision was taken with the experts responsible on a case-by-case basis whether to refer them to Group-wide risk management. This ensures that reportable risks and opportunities related to sustainability from Group-wide risk management are taken into account in the double materiality assessment so that non-financial reporting complements traditional financial reporting within the meaning of the ESRS. As part of Group-wide risk management, all risks are treated equally, including those that are sustainability-related.
Risks and opportunities that are directly connected with impacts may relate to, for example, potential claims or reputational damage, if there could be a connection with our business activities and the impacts on people and the environment were to be confirmed.
The magnitude of the financial effects and the likelihood of occurrence as applied in Group-wide risk management were used to assess the risks or current financial effects and opportunities for both the absolute and the relative values. The magnitude of the financial effect was assessed on a scale of 1 to 5, with 5 the largest financial effect that could be assumed. A scale of 1 to 5 was also used to assess the likelihood of occurrence, with 5 reflecting the highest likelihood. In the case of actual financial effects, only the magnitude of the impact was assessed that immediately led to materiality.
Despite harmonization with Group-wide risk management, there may be differences for the reporting requirement. This is due to the different approaches applied, such as the net approach to short-term risks and opportunities adopted in the Opportunities and Risks Report and the gross approach to short-, medium, and long-term risks and opportunities used in the Sustainability Statement, and the associated reporting thresholds.
Opportunities and how they are pursued are considered appropriately, e.g., in developing the Group strategy and the segment strategy.
The process controls introduced for the double materiality assessment are aimed at ensuring that the impacts, risks, and opportunities identified are complete and correct, including how they are presented in the Sustainability Statement. The experts and representatives of stakeholder groups selected are intended to help ensure that the assessments are appropriate and balanced. The relevant professional experts are responsible for identifying and assessing impacts, risks, and opportunities. A central team of experts from the corporate GIS function has the project management responsibility for conducting the double materiality assessment. Once all the assessments have been reviewed by the experts and are deemed to be appropriate for the reporting year, a validation is performed. This process includes, e.g., validating whether material impacts, risks, and opportunities apply equally to all parts of the value chain. Internal representatives of stakeholder groups may be involved here. Upon conclusion of the calibration, the outcome is approved by the Chief Sustainability Officer and then reviewed and approved by the Board of Management.
For the Group Sustainability Statement, all information was classified as material if the corresponding topic or subtopic was assessed as material in the double materiality assessment due to the associated impacts, risks, and opportunities. If no targets were defined for a material matter in particular, this is noted in the corresponding section. Within the meaning of the materiality of information about performance indicators in accordance with ESRS 1.34, information was classified as relevant if it was necessary to understanding the reported sustainability topics or could play a significant role in taking decisions in respect of the interests and views of stakeholders considered in the double materiality assessment.
Sustainability targets are intended to facilitate mitigating impacts and risks and taking advantage of opportunities.
We have embedded sustainability-related factors in our company’s management system in order to further drive the implementation of our Sustainable Future strategy.
Information about our sustainability targets is contained in “ESRS E1: Climate Change, Sustainable Solutions” and “ESRS S2: Workers in the Value Chain.”
Our sustainability targets contribute to achieving the SDGs and we use them to pursue an approach that covers the entire product life cycle while reflecting some of our material sustainability matters and the associated impacts, risks, and opportunities. We continuously observe developments outside the company and develop our sustainability targets.
Our Scope 1 and Scope 2 reduction targets are not limited to specific products, services, or customers. The targets cover our environmentally relevant sites. 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 our Scope 3 reduction targets. Apart from that, there is no limitation to certain customer categories or geographical areas. We believe that our climate-related targets meet the expectations of various stakeholders, such as the capital market or customers. Our goal in the area of sustainable solutions relates exclusively to our R&D-based innovation portfolio. Specific customer groups or geographical areas are not excluded. By setting this goal, we want to develop products that are even more closely aligned with the SDGs and will in turn lead to more sustainable solutions at our customers. Our supplier management goal does not exclude any products, services, or geographical areas either. Customer categories are irrelevant for this goal. The goal relates exclusively to suppliers with regular purchasing volumes of more than €1 million. We plan to revise our sustainability targets in the years ahead. They will then include our existing ambition relating to the circular economy, which aims, among other things, to create more value sustainably and increase carbon productivity by consistently reducing the use of carbon-based fossil resources, taking a regenerative approach and closing material loops.