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 figures 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, which establishes a framework to facilitate sustainable investment and amends Regulation (EU) 2019/2088 (hereinafter “EU Taxonomy Regulation”) and the Delegated Acts adopted in this regard, was carried out in several phases:

• For the 2021 reporting year, key figures were initially stated only for what are known as 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 is considered taxonomy-eligible if it falls within the regulatory scope of the EU taxonomy.
• For the 2022 reporting year, in addition to the degree to which economic activities making a substantial contribution to climate change mitigation or climate change adaptation as defined by the EU Taxonomy Regulation are taxonomy-eligible, it was also necessary to report the extent to which the identified economic activities are taxonomy-aligned. According to the EU taxonomy, an economic activity qualifies as taxonomy-aligned if it is taxonomy-eligible and makes a substantial contribution to one of the environmental objectives without causing significant harm to the other objectives or failing to fulfill minimum social standards.
• As well as the aforementioned information, the degree of taxonomy eligibility for economic activities making a substantial contribution to the following four additional environmental objectives of the EU were included in the disclosure obligation in the 2023 reporting year: 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 were added, for which the degree of taxonomy eligibility was required to be disclosed in the 2023 reporting year. Reporting on the degree of taxonomy alignment for these newly added environmental objectives was not required at this time.
• From the 2024 reporting year, the degree of taxonomy eligibility and taxonomy alignment must 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 continuously analyzes the existence of taxonomy-eligible and taxonomy-aligned activities in close coordination with representatives of the business sectors and various Group functions.

Identification of taxonomy-eligible economic activities

When implementing the EU taxonomy requirements, the business model of the Group was subjected to a comprehensive analysis. Taxonomy-eligible economic activities were identified using a top-down approach on the basis of 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, the information referred to is also used in connection with the requirements of the REACH Regulation and in the context of customs declarations. The economic activities for the other four environmental objectives were also identified by referring 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”)
• Manufacture of electrical and electronic equipment in the Life Science business sector (environmental objective “transition to a circular economy”)

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)
• Capital expenditure related to the acquisition of products from taxonomy-eligible economic activities and individual actions that enable the target activities to be performed in a low-carbon manner or that reduce greenhouse gas emissions (category C)

On account of its business model, the Group only engages in taxonomy-eligible economic activities in conjunction with the manufacture of active pharmaceutical ingredients, medical products, electrical and electronic equipment, and, to a limited extent, energy-efficient building equipment, meaning it has only limited taxonomy-eligible capital expenditure in category A. There is no capital expenditure in category B to date, as we are not preparing any plans for capital expenditure to transform taxonomy-eligible economic activities into taxonomy-aligned economic activities. Furthermore, the Group has capital expenditure resulting from the acquisition of products of taxonomy-eligible economic activities or attributable to qualifying individual actions (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 must be implemented and operational within 18 months.

In the Group, such capital expenditure exists in connection with the environmental objective of climate change mitigation in particular and covers 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)
• In the previous year: 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 examine the taxonomy alignment of the taxonomy-eligible economic activities, a systematic analysis was conducted of the relevant regulations for the technical screening criteria, which are used to determine whether an economic activity contributes substantially to the environmental objective as well as whether the activity causes no significant harm to any of the other environmental objectives. This was based on the Delegated Acts on the EU taxonomy, which were used to identify taxonomy-eligible economic activities. They define corresponding requirements for the respective economic activities which must be fulfilled in order for them to be classified as taxonomy-aligned. For this purpose, interviews were conducted with business and project managers, and the physical climate risks at the sites were analyzed. Numerous documents were also inspected, including operating permits, product data sheets, environmental product declarations, energy performance certificates, and internal training documents.

Net sales, capital expenditure and operating expenditure in connection with the “climate change mitigation” environmental objective were only identified as taxonomy-aligned economic activities to a very small extent. 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 must be reported for the other four environmental objectives in addition to the degree of taxonomy eligibility. Given the current state of the art, the taxonomy alignment of the activities identified by the Group as taxonomy-eligible cannot be guaranteed. This is due, in particular, to the stringent requirements profile of the technical screening criteria and the criteria for examining whether the activities cause significant harm to other environmental objectives set out in the catalog of the Taxonomy Regulation for the respective activities. With regard to the manufacture of active pharmaceutical ingredients and medical products in particular, the requirements concerning biodegradability and suitability for substitution with a similar active ingredient with the same efficacy cannot be met.

Minimum safeguards

The frameworks for determining minimum safeguards 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 has been systematized and compared with internal documents, including 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 actions are derived from them.

Determination of the taxonomy KPIs

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

Taxonomy KPIs

The following tables present the share of net sales, capital expenditure (CapEx) and operating expenditure (OpEx) attributable to taxonomy-eligible and taxonomy-aligned economic activities.

^(a) The code is the abbreviation of the relevant objective to which the economic activity can make a substantial contribution, as well as the section number of the activity in the relevant Annex covering the objective, i.e.

Climate change mitigation: CCM
Climate change adaptation: CCA
Water and marine resources: WTR
Circular economy: CE
Pollution prevention and control: PPC
Biodiversity and ecosystems: BIO

^(b) Y — Yes, activity is taxonomy-eligible and is taxonomy-aligned with the relevant environmental objective
N — No, activity is taxonomy-eligible but not taxonomy-aligned with the relevant environmental objective
N/EL — Activity is not taxonomy-eligible for the relevant environmental objective

Research and development expenses accounted for € 2,279 million (2023: € 2,445 million) of the presented operating expenditure, with € 1,503 million (2023: € 1,657 million) being attributable to the Healthcare business sector.