Reporting in accordance with the EU Taxonomy Regulation

Fundamentals

The EU taxonomy for sustainable activities (hereinafter “EU Taxonomy”) is a classification system that translates the climate and environmental objectives of the European Union (EU) into criteria for sustainable economic activities. For this purpose, the EU Taxonomy defines various key performance indicators and qualitative information that the Group must disclose. The introduction of the disclosure obligation under Article 8 of Regulation (EU) 2020/852 of the European Parliament and of the European Council dated June 18, 2020 on establishing a framework to facilitate sustainable investment and amending Regulation (EU) 2019/2088 (hereinafter “EU Taxonomy Regulation”) and the Delegated Acts adopted in this regard is being carried out in multiple phases:

• For the 2021 reporting period, key performance indicators were stated only for so-called taxonomy-eligible economic activities and were limited to those that make a substantial contribution to climate change mitigation or climate change adaptation as defined by the EU Taxonomy Regulation. An economic activity qualifies as taxonomy-eligible if it is within the scope of the EU Taxonomy.
• For the 2022 reporting period, apart from the degree of taxonomy-eligible economic activities making a substantial contribution to climate change mitigation or climate change adaptation within the meaning of the EU Taxonomy Regulation, it is also necessary to report the taxonomy-aligned share of the identified economic activities. According to the EU Taxonomy, an economic activity qualifies as taxonomy-aligned if it is taxonomy-eligible and makes a substantial contribution to one or more of the environmental objectives without doing significant harm to the other objectives or failing to fulfill minimum social standards.
• As well as the aforementioned information, the degree of taxonomy-eligible economic activities making a substantial contribution to the following four additional environmental objectives of the EU will be included in the disclosure obligation from the 2023 reporting period: 1) sustainable use and protection of water and marine resources, 2) transition to a circular economy, 3) pollution prevention and control, and 4) protection and restoration of biodiversity and ecosystems. Furthermore, new economic activities for the environmental objectives of climate change mitigation and climate change adaptation have been added for which the degree of taxonomy eligibility will be required to be disclosed in the 2023 reporting year. Reporting on the degree of taxonomy alignment for the newly added environmental objectives is not planned for the time being.
• From the 2024 reporting year, the degree of taxonomy eligibility and the degree of taxonomy alignment will have to be reported for all six environmental objectives.

Approach

To ensure the legally compliant fulfillment of its disclosure obligations, the Group has established an interdisciplinary project team that is continuously analyzing the existence of taxonomy-eligible and taxonomy-aligned activities in close coordination with the representatives of the business sectors and various Group functions.

Identification of taxonomy-eligible economic activities

In the course of implementing the EU Taxonomy requirements, the Group business model underwent a comprehensive analysis. Taxonomy-eligible economic activities were identified in line with a top-down approach using structured inquiries submitted to the relevant specialist departments. For the environmental objectives of climate change mitigation and climate change adaptation, the results of this analysis were supplemented by big data-supported analyses as part of a bottom-up approach. Among other things, information was used that can also be found in connection with the requirements of the REACH regulation as well as in the context of customs declarations. The economic activities for the other four environmental objectives were also identified by reference to existing reporting structures and hierarchies.

As a result of this process, taxonomy-eligible activities generating net sales were identified only in conjunction with the following economic activities:

• Manufacture of energy-efficient building equipment in the Electronics business sector (environmental objective “climate change mitigation”),
• Manufacture of active pharmaceutical ingredients in the Healthcare and Life Science business sectors (environmental objective “pollution prevention and control”),
• Manufacture of medical products in the Healthcare business sector (environmental objective “pollution prevention and control”), and
• Manufacture of electrical and electronic equipment in the Life Science business sector (environmental objective “transition to a circular economy”).

With respect to capital expenditure, the EU Taxonomy Regulation differentiates between three categories of capital expenditure:

• Capital expenditure that relates to assets or processes associated with taxonomy-aligned economic activities (category A),
• Capital expenditure that is part of a plan to expand taxonomy-aligned economic activities or to transform taxonomy-eligible economic activities into taxonomy-aligned economic activities (category B), and
• Capital expenditure related to the acquisition of products from taxonomy-eligible economic activities and individual measures that carry out the target activities in a low-carbon manner or reduce greenhouse gas emissions (category C).

Owing to its business model, the Group only engages in taxonomy-eligible economic activities in conjunction with the manufacture of active pharmaceutical ingredients, manufacture of medical products, the manufacture of electrical and electronic equipment and, to a small extent, the manufacture of energy-efficient building equipment, it has only limited taxonomy-eligible capital expenditure in category A. There is no capital expenditure in category B to date as the Group does not prepare any capital spending plans to transform taxonomy-eligible economic activities into taxonomy-aligned economic activities. Furthermore, the Group has capital expenditure resulting from the acquisition of products classified as taxonomy-eligible economic activities or attributable to qualifying individual measures (category C). In order to be taxonomy-eligible, this capital expenditure must correspond to one of the economic activities named in the Delegated Acts and be implemented and operational within 18 months.

In the Group, such capital expenditure exists especially in connection with the environmental objective of climate change mitigation in the following areas:

• Electricity generation using solar photovoltaic technology (activity 4.1 of the Delegated Act on the “climate change mitigation” environmental objective),
• Transport by motorbikes, passenger cars and light commercial vehicles (activity 6.5 of the Delegated Act on the “climate change mitigation” environmental objective), and
• Renovation of existing buildings (activity 7.2 of the Delegated Act on the “climate change mitigation” environmental objective and activity 3.2 of the Delegated Act on the “circular economy” environmental objective).

Determination of taxonomy alignment

Technical screening criteria

In order to check the taxonomy alignment of the taxonomy-eligible economic activities, the relevant regulations for the technical screening criteria under which certain economic activities qualify as contributing substantially to the environmental objective as well as for determining whether the activity causes no significant harm to any of the other environmental objectives were systematically analyzed. The basis for this was the Delegated Acts on the EU Taxonomy, which were used for the identification of taxonomy-eligible economic activities. In these, corresponding requirements are defined for the respective economic activities, which must be fulfilled for a classification as taxonomy-aligned. For this purpose, interviews were conducted with business and project managers and the physical climate risks at the sites were analyzed. Furthermore, operating permits, product data sheets, environmental product declarations, energy performance certificates and internal training documents were inspected, among other things.

Net sales, capital expenditure and operating expenditure in connection with the “climate change mitigation” environmental objective were identified as taxonomy-aligned economic activities to a very small extent only. No additional taxonomy-eligible and taxonomy-aligned net sales, capital expenditure or operating expenditure were identified for the “climate change adaptation” environmental objective. From 2024, the degree of taxonomy alignment will have to be reported for the other four environmental objectives in addition to the degree of taxonomy eligibility. Based on the information currently available, the degree of taxonomy alignment for the other four environmental objectives will also be very low. A more accurate statement is not yet possible owing to the uncertain questions regarding the interpretation of the regulations and the current progress of the project.

Minimum safeguards

The minimum safeguard frameworks include the OECD Guidelines for Multinational Enterprises, the United Nations Guiding Principles on Business and Human Rights, the fundamental conventions of the International Labour Organization, and the International Bill of Human Rights. The requirements profile of the frameworks was systematized and compared with internal documents. This included an analysis of the Code of Conduct, work instructions, guidelines and training documents. Compliance with the due diligence process required by the framework in the area of human rights is ensured with respect to the individual business activities. Risk analyses are carried out with regard to the minimum safeguard requirements and appropriate measures are derived from these.

Determination of the taxonomy KPIs

The three key performance indicators (KPIs), namely net sales, capital expenditure and operating expenditure, were mainly derived from existing financial reporting systems; for capital expenditure inquiries were made to the Investment Controlling unit in some instances. The principle of materiality was applied.

Taxonomy KPIs

The following tables present the share of sales, capital expenditure and operating expenditure attributable to taxonomy-eligible and taxonomy-aligned economic activities in respect of the environmental objective “climate change mitigation”. The tables also contain information on the share of taxonomy-eligible economic activities for the four additional environmental objectives:

Research and development expenses accounted for 2,445 Mio. € (2022:2,521 Mio. €) of the reported operating expenditure, with 1,657 Mio. € (2022: 1,694 Mio. €) of this being attributable to the Healthcare business sector.