ESRS S2: Workers in the Value Chain

Impacts, Risks, and Opportunities

¹ Time horizon broken down into short-term (S), medium-term (M), and long-term (L).

² Location within the value chain divided into upstream value chain (1), own operations (2), and downstream value chain (3).
For further information, please refer to “Impact, Risk and Opportunity Management.”
For further information, please refer to “Strategy – Interests and Views of Stakeholders.”

Strategy

Material potentially negative impacts resulting from activities of Covestro may extend to workers in the upstream and/or downstream value chain. In the upstream value chain, we consider workers at our suppliers’ sites. We also consider workers of independent businesses (contractors) engaged by Covestro on our company premises. In the downstream value chain, we consider Transport and Logistics workers as well as workers at our customers’ sites.

In relation to health and safety, Covestro continuously enhances its understanding of the potential hazards to workers in the value chain. Particular focus is placed on persons in vulnerable situations working with chemicals and machinery in the production environment, as there is naturally a higher risk of injury events in the production environment than in the administrative environment. Other than that, no operations or groups of workers exposed to significant health or safety risk have been identified.

Groups of persons at greater risk in relation to child and forced labor are minors and lower-skilled workers.

We have no information that suggests that potential impacts could be of a systematic nature. In this context, we also analyze any feedback that we may receive via our grievance mechanism.

For further information, please refer to “ESRS G1: Business Conduct – Policies and Actions.”

For further information, please refer to “ESRS G1: Business Conduct – Grievance Mechanism, and Investigations.”

Through the policies and actions described in this section, we are addressing the material potentially negative impacts and risks for workers in the value chain; no additional adjustment is therefore made to the strategy and business model.

Policies and Actions

Corporate Commitment to Respect Human Rights

Covestro is committed to respecting and safeguarding human rights. The principles contained in the corporate commitment to safeguard human rights extend to all workers in the value chain.

For further information, please refer to “ESRS S1: Own Workforce – Policies and Actions.”

Supplier Code of Conduct

Procurement is responsible for selecting and managing suppliers to ensure that they act in accordance with Covestro’s standards, for example, with regard to labor standards, health and safety, the circular economy, anti-corruption, human rights, product safety, transparency, and environmental protection.

These standards are laid down in the Supplier Code of Conduct, which was updated in the reporting year and published following approval by the Chief Procurement Officer (CPO). The Code of Conduct applies to existing and new suppliers; it is available online in 13 languages. It is based on the principles of the United Nations Global Compact as well as our corporate commitment to respect human rights and thus explicitly addresses critical matters such as human trafficking, child and forced labor, and health and safety. As a matter of principle, new and renewed supply agreements in particular contain special clauses requesting suppliers to observe the sustainability requirements contained in the Code of Conduct and entitle Covestro to review their compliance. All suppliers must agree in principle to comply with the Code of Conduct when they accept the terms and conditions of our contracts and orders; in addition, we expect them to implement these standards in their own upstream supply chains.

Covestro is a member of Together for Sustainability (TfS), Brussels (Belgium), a joint initiative of the chemical industry that aims to harmonize assessment methods for suppliers worldwide. DBy including the criteria of the TfS initiative in the Supplier Code of Conduct, we foster good working conditions and safe workflows in the supply chain and support environmentally friendly and resource-conserving practices by our suppliers.

For further information, please refer to: www.covestro.com/en/company/procurement/sustainability-in-procurement/supplier-code-of-conduct

Preventive and Remedial Measures

Two 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. Numerous measures are implemented with regard to suppliers in order to support sustainability in sourcing and the protection of human rights in the supply chain.

Supplier Risk Analysis

Covestro conducts annual supplier risk analyses as part of the human rights due diligence. The risk analysis focuses on direct suppliers; but Covestro also considers the upstream supply chain. We prioritize human rights risks using a combination of country and industry or sector risks based on external sources.

In the reporting year, our procurement managers were specifically trained in how to analyze suppliers who are potentially at risk in greater depth. On the basis of the results of the analysis, we sent questionnaires to suppliers who are potentially at risk to identify specific areas for improvement and make them aware of actions required. This information was systematically documented in our system to ensure effective tracking and administration.

Based on our analysis, we have not identified any indication of child or forced labor in our value chain. The key issues we identified at our direct suppliers relate primarily to working conditions and health impacts on workers in the supply chain.

Supplier Screening

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 supplier assessment infrastructure for online assessments and on-site audits of suppliers by third parties. In addition, TfS and the European Chemical Industry Council (Cefic) collaborate in auditing logistics service providers. Cefic uses the SQAS (Safety & Quality Assessment for Sustainability) system. The resulting 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 is 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 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.

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. Depending on the topic, workers from various departments may be involved in conducting the audits. 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.

All the results from the online assessments and on-site audits are available to members of the initiative on an online platform, thereby enabling continuous 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.

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 CTO. 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, e.g., through future supplier assessments.

Opportunities for Offering Training and Dialogue

For Covestro, it is important for our own procurement staff has, in particular, to have comprehensive understanding of the significance of sustainability in sourcing. Awareness of this issue was raised among employees again in fiscal 2024 in company-wide training on sustainability plus region- and country-specific training on evaluation methods and processes. 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. Continuously improving our suppliers’ sustainability performance is a priority for Covestro and is supported by the TfS initiative, which regularly organizes annual education and training courses, for example. The TfS Academy – a knowledge-sharing platform for procurement employees and their suppliers – provides access to a large number of courses in several languages.

For further information, please refer to: www.tfs-initiative.com

Actions for Suppliers with a Specific or Potential Human Rights Risk

Further actions were defined for suppliers where a specific or potential human rights risk was identified. These actions include targeted human rights training, contractual obligations, and online assessments or on-site audits. Supplier dialogues may also be performed. These are based on a dialogue guideline containing questions on all material matters. Depending on the questions, workers from various supplier departments are involved. The actions were published in a guidebook for supplier managers and, together with other support materials, made available to these workers.

Health and Safety

We counter potential negative impacts on the health and safety of workers in the upstream and downstream value chain who work at our sites with strategies and policies defined in our Group “Occupational Health and Safety” policy. We derive actions against negative impacts from continuous monitoring of accident rates and cause-effect analyses.

For further information, please refer to “ESRS S1: Own Workforce – Policies Relating to Health and Safety.”

For further information, please refer to “ESRS S1: Own Workforce – Actions Relating to Health and Safety.”

Transport & Logistics Safety

We address potential negative impacts on the health and safety of workers in the downstream value chain in the area of transportation, handling, and storage of raw materials, intermediates, and end products with policies and actions that we group under transport & logistics safety. The applicable Group “Transport & Logistics Safety” policy defines the obligations and responsibilities in this regard for safe transport and logistics operations. Overall responsibility lies with the corporate Supply Chain & Logistics function, whereas the management teams of the Covestro Group companies are responsible for implementation. The key actions taken to counter negative impacts include selecting logistics service providers on the basis of security and quality checks and assessing transport risks and risk management. Actions taken under the HSEQ management system, such as monitoring of accident rates and cause-effect analyses, are also relevant. These actions follow the PDCA cycle described in ESRS S1, which ensures continuous improvement through regular reviews and feedback loops.

For further information, please refer to “ESRS S1: Own Workforce – Actions Relating to Health and Safety.”

Customer Sites

We have identified a material impact on workers in the downstream value chains, namely the negative impact of potentially inadequate health and safety standards of workers at the sites of our customers. Covestro’s has limited interactions with workers at customer sites and does not have access to data on health- and safety-relevant incidents of customers. Apart from technical consulting support relating to our products, which at the request of customers could be provided at their production sites in the presence of their workers, we mostly interact with customers through their procurement, technology development, and/or sustainability departments.

The health and safety of workers – not only in our own operations but also along our value chains – is of utmost importance to Covestro. By implementing stringent policies and actions under the Group “Product Stewardship” policy and training on the safe handling of products, we are contributing indirectly to a good health and safety standard for workers at customer sites. Since the extent of compliance and liability is shared with our customers and downstream business partners, we do not pursue any targets relating to the above-mentioned potential negative impact. Our strategy or business model has not been adjusted in this regard either.

Product Stewardship

As described “Impacts, Risks, and Opportunities,” we identify potential negative impacts resulting from the use of our products on the personal health and safety of employees in the downstream value chain. This gives rise to a potential financial risk due to resulting liability claims. We report elsewhere on potential impacts of our business activities on the environment.

For further information, please refer to “ESRS E2: Pollution.”

We counter these potential impacts and risks of our products on people and the environment with a large number of activities, most of which are grouped under the term “product stewardship” at Covestro.

We want our products to be safe throughout their entire life cycle when used as intended. To Covestro, product stewardship means comprehensively evaluating health, safety, and environmental risks in connection with the use of our products. In this context, we concentrate on the safe processing of our products at our direct customers with a focus on those workers in the global downstream value chain who could come into contact with our products during their handling and further processing. Further potential impacts on other work-related rights of workers in the value chain are dealt with elsewhere in this section.

The actions on product stewardship, which are described in more detail below, are part of the Health, Safety, Environment, Energy and Quality (HSEQ) integrated management system (IMS).

For further information on the HSEQ IMS, please refer to “ESRS E2: Pollution – Policies and Actions.”

The Group “Product Stewardship” policy, which applies to all own workers, defines minimum requirements on our products and business activities for the legally compliant and safe use of products, thereby addressing the potential impacts on people and the environment, including in the downstream value chain, described in “Impacts, Risks, and Opportunities.” The rules and regulations can be accessed by all own workers, and training anchors the topic within the organization. Overall responsibility lies with the Group Innovation & Sustainability function, whereas the management of the Covestro Group companies is responsible for implementation.

As explained in “ESRS E2: Pollution,” there may be hazards associated with the desired function of our products.

For further information, please refer to “ESRS E2: Pollution.”

In line with legal requirements, we analyze the resulting risks for our products (risk assessments) and take any necessary action to mitigate these risks. All product groups at Covestro undergo a multiple-step product evaluation process before they are placed on the market for the first time or if there are any relevant modifications. At first, we identify chemicals that are subject to statutory regulation and record the corresponding rules. We then examine the risk potential of our products. Should the assessment or new findings reveal that it is not safe to use a certain product, we take the necessary risk mitigation measures. They include, for example, technical measures such as protective equipment and revised application recommendations. Finally, we produce safety data sheets and labeling for all products in up to 40 different languages.

Given the global trade in chemical products, it is important to promote broad-based communication on their safe handling and use. Accordingly, our customers receive information about the risk potential and safe handling and use – even beyond the legal minimum. This includes access to comprehensive information via our information portals as well as safety data sheets and labeling – including for non-hazardous products. As a result, our customers can safely process our products and design their products to be safe for the end user. Compliance with global chemical control regulations is an essential prerequisite for the ability to market chemicals and chemical products. This is particularly important for products intended for use by especially vulnerable groups (e.g., children) or applications covered by specific legislation.

We continually collect, document, and analyze all information about the safe and compliant use of our products in a global information system, which provides the basis for further improvements. We also use these processes to review the effectiveness of the above product stewardship actions. This includes product surveillance and reporting on product-related and compliance incidents. Our global regulations for the Group contain rules and guidance on when and how this information is to be used. For example, this helps us improve the information on the safe handling of our products and provide customers with specific training. They also govern the process for any product recalls.

For fiscal 2024, we know of no material incidents of noncompliance with regulations or voluntary codes – either concerning the health and safety impacts of products and services, or relating to product information and labeling. As a consequence, there were no product recalls in this context in the reporting period.

In the context of product stewardship, our compliance management system and the actions on transportation safety are additionally relevant.

For further information, please refer to “ESRS G1: Business Conduct – Policies, and Actions.”

For further information, please refer to “ESRS S2: Workers in the Value Chain – Transport & Logistics Safety.”

Processes for Engaging with Value Chain Workers about Impacts

We report on the engagement of potentially affected stakeholders in “Interests and Views of Stakeholders.” This engagement also extends to the upstream and downstream value chain.

Examples of interaction with suppliers and their workers include

• the Together for Sustainability initiative and the associated audits, events, and workshops with suppliers on the subject of sustainability;
• as well as continuous exchange via employees responsible for procurement, including Supplier Code of Conduct and reporting suspected or potential human rights abuses using our existing whistleblower tool.

Examples for customers and their workers are

• personal dialogue via employees in the sales and marketing units; customer surveys, audits and inquiries;
• participation in international trade fairs, webinars, and digital showrooms;
• reporting suspected or potential human rights abuses using our existing whistleblower tool.

Exchanges with our stakeholders are conducted by the relevant internal expert groups. We have a number of different channels available to facilitate the dialogue.

Beyond that there is no direct cooperation with workers in the value chain or their legitimate representatives; we address the potential negative impacts identified on workers in the value chain with the interactions described above and the strategies, actions, and policies detailed above.

For further information, please refer to “Strategy – Interests and Views of Stakeholders.”

Processes to Remediate Negative Impacts and Channels for Value Chain Workers to Raise Concerns

All workers in the value chain have access to the different confidential and anonymous ways of reporting illegal and unethical conduct on which we report in “ESRS G1: Business Conduct.”

Covestro explicitly encourages reporting of suspected human rights abuses in the Group, as well as at our direct and indirect suppliers. If there are reasonable grounds for suspicion or concrete indications of human rights abuses in Covestro’s supply chain, it investigates them carefully and consistently. Covestro expects its business partners to cooperate in clarifying the surrounding facts within a reasonable timeframe. If Covestro determines that its business activities have contributed to human rights abuses through one of its direct or indirect suppliers, Covestro is prepared to take measures to address the violation. Depending on the severity of the violation, Covestro reserves the right to respond appropriately in connection with its business partners. There were no indications of human rights abuses within Covestro’s supply chain in the reporting year.

For further information, please refer to “ESRS G1: Business Conduct – Grievance Mechanism and Investigations of Suspected Compliance Cases.”

Moreover, our integrated HSEQ management system has been established to mitigate and avoid negative impacts on health and safety; this system is aimed, for example, at proactively preventing accidents and continuously improving occupational safety performance. This also applies to contractors working at our sites.

For further information, please refer to “ESRS S1: Own workforce – Policies Relating to Health and Safety.”

Targets

In the year 2019, Covestro set itself ambitious measurable targets, to be met by the year 2025, aimed at systematically promoting sustainability in supplier management: 100% of our target-relevant suppliers are expected to comply with our sustainability requirements by the year 2025. Suppliers comply with Covestro’s sustainability requirements by achieving the minimum result as defined by us in the supplier evaluations described in this section. This minimum result of 45% applies to all target-relevant suppliers. This target is in direct relation to our policies and actions described above, which comprise the suppliers’ agreement with Covestro’s standards in key areas such as labor standards, health and safety, or human rights. 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. They covered 82% (previous year: 84%) of our total purchasing value in the reporting year. The findings of the evaluations are the starting point for our active supplier management, which reduces the potentially negative impacts on workers in the value chain,

Our supplier management goal is broken down each year for the individual procurement categories and communicated by the head of our Corporate Procurement function (CPO). The status of target attainment is reported internally on a regular basis. The CPO reports directly to the company’s Chief Technology Officer (CTO).

Our commitment to the Universal Declaration of Human Rights, the fundamental International Labour Organisation Conventions, the United Nations Global Compact (UNGC), the UN Guiding Principles on Business and Human Rights, the OECD Guidelines for Multinational Enterprises, and compliance with applicable laws is reflected in our Code of Conduct and our sustainability target for suppliers. Since our target comprehensively considers sustainability matters and is in line with internationally recognized standards, we do not pursue any direct cooperation with workers in the value chain or their legitimate representatives in defining the target.

Metrics

The total number of supplier assessments performed amounted to 1,615 (previous year: 1,590), 56 of which (previous year: 67) were conducted as on-site audits. At the end of fiscal 2024, the number of supplier evaluations whose results met our sustainability requirements amounted to 1,386 (previous year: 1,289). Of these supplier assessments, 571 involved our target-relevant suppliers. Based on this figure, 79% (previous year: 76%) of target-relevant suppliers met our sustainability requirements.

Of our target-relevant suppliers who underwent a repeat assessment in fiscal 2024, 63% have improved compared with their previous results.

None of the supplier assessments conducted revealed any indication of child or forced labor. In addition, Covestro saw no reason 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.

In the year 2024, 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.

In analyzing the supplier evaluations for the year 2024, 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.