Covestro’s management system is aligned with long-term, profitable growth and continuous value creation. The Board of Management, the main decision-maker for the company, is responsible for our global business and approving the planning derived from our corporate strategy. In order to plan, manage and monitor the development of our business, we use steering parameters which enable the company’s business performance to be evaluated in a comprehensive and holistic manner. In addition, the Board of Management uses defined sustainability goals and selected nonfinancial performance indicators to govern the Group’s sustainable orientation.
The Covestro Group assesses business performance using key management indicators in the areas of growth, liquidity and profitability.
Growth of the Covestro Group is measured in terms of the development of core volume growth*. In contrast to sales, this indicator is less influenced by raw material prices or currency effects.
The ability to generate a cash surplus is measured by the free operating cash flow (FOCF). FOCF is an indicator of our company’s capacity to finance itself and of its liquidity, and corresponds to the operating cash flow less the cash outflows for additions to property, plant, equipment and intangible assets. A positive FOCF serves to pay dividends and interest and to repay debt.
The return on capital employed (ROCE) is the indicator used to assess the profitability of the Covestro Group, measuring the return the company achieves on the capital it uses. If ROCE exceeds the weighted average cost of capital (WACC), i.e., the minimum return expected by equity and debt capital providers, the company has created value. ROCE is calculated annually at the end of each fiscal year.
Income after income taxes plus financial result, income tax, and depreciation and amortization (EBITDA) is the other indicator used to assess the operating profitability of Covestro and its reporting segments during the year.
These management metrics also come into play in the Group’s bonus system, which applies uniformly to all staff from the Board of Management to employees under collective bargaining agreements. The three areas of growth factors, liquidity and profitability each account for one-third of the final assessment and bonus calculation formula. As a result, all employees whose personal efforts contribute to Covestro’s overall positive performance can share in the company’s success.
*Core volume growth refers to the core products in the Polyurethanes, Polycarbonates and Coatings, Adhesives, Specialties segments. It is calculated as the percentage change in externally sold volumes in thousand metric tons compared with the prior year. Covestro also takes advantage of business opportunities outside its core business, for example the sale of precursors and by-products such as hydrochloric acid, sodium hydroxide solution and styrene. These transactions are not included in core volume growth.
We believe that a major factor in Covestro’s success is doing business sustainably. This requires us to integrate sustainability principles into all of our business activities on the one hand, while ensuring that we are sufficiently addressing the issues of greatest relevance to us and our stakeholders on the other hand. Sustainability issues are therefore also integral to corporate governance.
Management and governance
The Sustainability unit advises the divisions by sharing its extensive technical expertise on topics such as life cycle assessment (LCA), human rights and the UN Sustainable Development Goals (SDGs). A network of sustainability officers guarantees access to this expertise for all divisions and all regions in which we operate.
Occupational health and safety and environmental protection are monitored using a Group-wide management system. Support is provided by a centralized team of experts with global responsibility for these issues.
At least once a year, sustainability and health, safety, environment and quality (HSEQ) are topics discussed at length by the Board of Management. The company’s management monitors success, sets priorities and adjusts the allocation of resources when necessary.
Our principles are anchored in internal company policies. They provide concrete specifications on the important issues of value creation, sustainability, innovation, people, HSEQ and compliance. Binding, Group-wide directives that support meeting HSEQ targets are accessible to all employees in an internal Group database. Compliance with these directives is verified during annual internal audits. In addition, issues and action plans as well as target attainment are monitored in a management review. Global and local operating procedures for the relevant processes implement the content of company policies and directives in all operating units. Binding ethical and legal principles are anchored in our Corporate Compliance Policy (Directive). This policy includes important guidelines on fair and respectful working conditions and on fighting corruption. Covestro has implemented a reporting process so that employees can report potential compliance violations anonymously. The contents of the Corporate Compliance Policy are conveyed regularly through targeted communication measures and employee training sessions.
Particularly important issues are coordinated Group-wide. We regularly conduct a materiality analysis to identify the sustainability issues most important to Covestro. This process takes into account feedback and opinions from external and internal stakeholders. These results are reviewed in line with our sustainability approach.
We analyzed and refined the process for determining and updating the material topics in the reporting period. Our objective is to more closely dovetail this approach with existing processes in other divisions such as Strategy and Risk Management to increase the relevance of the results. The new process will be implemented for the first time in 2020.
The issues identified in the materiality analysis in the previous year were reviewed by an internal committee and modified, where necessary, in the reporting period. This committee was composed of representatives of the Sustainability, HSEQ, Accounting and Compliance divisions.
The review indicated that some identified issues had become more relevant over time. No completely new issues were identified.
The circular economy has become increasingly important in public discussions. When the program on this topic was launched in early 2019, specific action items were identified and approved by the Board of Management that will provide Covestro’s strategic direction on this issue.
The importance of human rights due diligence (HRDD) has increased further in the reporting period. In 2019, we therefore developed a project for establishing a Group-wide framework for HRDD. Covestro plans to systematically implement the recommendations stemming from this project in the coming years. The goal is to further stress the importance of this significant issue in the Group and, where necessary, build the capacity to more quickly address the requirements that will arise in the future.
As in the previous year, the following issues were rated as having high or very high relevance for internal and external stakeholders:
Innovative solutions for addressing climate change (mitigation and adaption)
The advance of climate change is rising in prominence in public discussions, but the basic questions and challenges have not changed as compared with the previous year. In conjunction with our customers, Covestro continues to work full speed ahead on developing new and refining existing solutions to protect our climate and help people adapt to climate change.
Innovative solutions that contribute to the SDGs
As early as 2017, we began aligning our innovation activities more strongly with the SDGs. We validated the assessment methodology we developed, and integrated it into our innovation portfolio management system in the reporting period. It is now applied to all new projects without exception.
Our tried-and-tested system for fulfilling our responsibility regarding safe handling of our products is presented in the “Product stewardship” section.
Occupational health and safety
As a company in the chemical industry, we have a special responsibility with respect to safety and health. We manage this responsibility with our integrated HSEQ management system.
Environmentally efficient operations
The issue of environmental protection at our production and operation sites is another integral part of our integrated HSEQ management system.
Sustainability in the supply chain
For many years, we have been continually refining and expanding our processes to ensure a sustainable supply chain.
In 2016, we set targets for key nonfinancial topics. We report on our progress in the relevant sections:
- Our project portfolio for research and development is aligned with the SDGs. By 2025, 80% of project expenditures for research and development will go toward areas that contribute to reaching these goals.
- All of our suppliers representing a regular purchasing volume of more than €100,000 per year comply with our sustainability requirements.
- Specific greenhouse gas emissions per metric ton of product manufactured are expected to be reduced by 50% from the 2005 benchmark by 2025.
- We want ten million people in underserved markets to benefit from our solutions by 2025. The goal is to improve their standard of living primarily through affordable housing, sanitation and food security.
- Our goal is to extract the maximum benefit from carbon. Increasing carbon productivity enables us to create more value with fewer carbon-based fossil resources. In addition to our efforts toward improving energy efficiency in our production processes, we consider our circular economy activities to be a key factor in this regard.
Part of the supplementary sustainability information (not form part of the statutory audit of the annual financial statements)
We work closely with our stakeholders in a collaborative manner. After all, they evaluate the company not only in terms of legal aspects, but also with regard to our adherence to sustainable and ethical principles. To identify crucial sustainability issues, we continually analyze the interests, expectations and requirements of our key stakeholders and incorporate the results into our target program and into the management of opportunities and risks.
Open, ongoing discussion with our regional, national and global stakeholders is the foundation for mutual understanding and for societal acceptance of our business decisions. At the same time, these conversations provide us with new inspiration and crucial input.
The following chart provides an overview of our key stakeholder groups and communication channels.
Depending on the relevance of a particular issue, our various departments identify and prioritize key stakeholders and select the appropriate communication channels and frequency of contact.
Contribution to the SDGs
In their entirety, the UN Sustainable Development Goals (SDGs) are vital for the development and improvement of living conditions throughout the world. We therefore place importance on not losing sight of these overarching SDGs. In our opinion, the SDGs are all equally important and are closely interconnected. We seek to contribute to and maximize our influence on reaching these goals. Above all, the SDGs are a source of inspiration for innovations and indicators for the future direction of our company.
We are aware that, as part of the chemical industry, Covestro bears a special responsibility. Therefore, we seek to make positive contributions to the SDGs, in all areas, but especially in particularly challenging ones, or at least ensure our activities do not have a negative impact.
Covestro already makes positive contributions to all 17 SDGs at different levels. Most of these contributions relate to our core products, who help save large amounts of energy during their use phase, and to our own workflows and business practices.
Our focus in the year under review was mainly on aligning our research and development portfolio with the SDGs. We also aimed to raise overall awareness of the SDGs within the Covestro Group and to promote innovative thinking. We accomplished this with initiatives such as workshops at the Innovation Celebration employee event.