Annual Report 2021

Responsible supply chain

One of the goals of our supplier management endeavors is compliance with fundamental environmental and social standards, in addition to high-quality, reliable delivery and competitive prices. We have introduced relevant strategies, processes and guidelines that we are continuously improving in order to prevent violations of supply chain standards and improve our sustainability performance. We ensure that all legal requirements are taken into account and that corresponding measures are initiated where necessary. For this purpose, we set up an internal working group in 2021 tasked with ensuring that we are compliant with the German Supply Chain Due Diligence Act.

To achieve our corporate sustainability goals, our Group Procurement team works closely with our suppliers. We aim to create transparency in all our sourcing regions and fully integrate sustainability into all our value chains.

Therefore, we have set two new key indicators that will measure our journey towards increasing this transparency by evaluating the sustainability performance of our relevant suppliers with valid sustainability assessments. Our definition of valid sustainability assessment includes assessments carried out over the last three years and performed by a reliable, approved source. Relevant suppliers either indicate a specific country and industry risk or contribute to a major part (50% minimum) of our purchase volume. For the risk evaluation, we apply the risk data provided by EcoVadis for almost our complete purchase volume (98%). For the calculation of our purchase volume, we consider sourcing-relevant third parties (excluding expenses such as taxes and customs, as well as fees and memberships). We measure these key indicators using two equally weighted metrics: coverage in terms of purchase volume (2021: 65%), and the number of suppliers (2021: 21%).

Supplier Decarbonization Program

Our Supplier Decarbonization Program is a key element contributing to reduce our emissions in line with our decision to join the Science Based Targets initiative. Through the program, we aim to reduce greenhouse gas emissions associated with purchased goods and services as well as capital goods.

Risk management process

To ensure supply security, we select our suppliers based on various criteria, such as country risk, material and supplier risk, and their strategic importance to the business. This helps our sourcing managers to identify potential mitigation actions with relevant suppliers and support them in making improvements.

The approach towards our strategic suppliers, which account for approximately 53% of our total spending, includes the identification, monitoring and assessment of supply security risks. It comprises four main elements:

  • Supplier Risk Assessments: to capture the overarching risks at supplier legal entity level, including multiple risk domains.
  • Alert system: to notify our Procurement Organization in the event of a risk or production issue arising with any of our suppliers.
  • Material Risk Assessments: to determine the risks of relevant materials used in our most significant finished products.
  • Risk Response Tracker: to create and monitor risk mitigation activities.

We calculate risk factors for suppliers and raw materials by multiplying risk probability and risk impact. For the supplier evaluation, we consider 29 risk titles, including, but not limited to economic freedom, social unrest, unfair business practices, and poor labor practices. We have also included criteria for identifying supplier relationships impacted by key sustainability risks, such as mineral sourcing or animal welfare. In 2021, we further developed our supplier risk assessment, focusing on the more relevant risk titles and thus sharpening our approach.

Due diligence process for responsible sourcing of minerals

Our company sources and sells products that contain minerals commonly summarized under the term “3TG” (tin, tungsten, tantalum, and gold – collectively also known as conflict minerals). Our overall aim is to source materials in a responsible and conflict-free manner and not to contribute to adverse impacts through our sourcing activities. Therefore, we developed a comprehensive due diligence program and respective practices to address minerals originating from conflict-affected and high-risk areas (CAHRAs). Our program framework is in alignment with applicable laws and international standards.

Our Responsible Minerals Sourcing Charter forms the basis of our due diligence program. We are continuously working to improve our due diligence practices and ensure conflict-free sourcing of 3TG.

We are a member of the Responsible Minerals Initiative (RMI). RMI provides us with tools and resources to make sourcing decisions that improve regulatory compliance and support responsible sourcing of minerals from CAHRAs. RMI uses third-party auditors to audit smelters and refiners and to investigate working conditions as well as environmental, health and safety issues. In the event that sufficient RMI-based information is not obtained, we conduct further research to determine whether an appropriate level of due diligence is ensured.

Roles and responsibilities

Group Procurement is responsible for integrating sustainability requirements into the relevant stages of our sourcing and supplier management processes. Our Center of Excellence for Supply Security coordinates the relevant measures, such as updating our guidelines where necessary, examining processes and coordinating our participation in external initiatives.

Our commitment: Guidelines and standards

We expect all our suppliers and service providers to comply with our environmental and social standards, which are primarily derived from the core labor standards of the International Labour Organization (ILO) and the UN Global Compact. These are defined in our Responsible Sourcing Principles. We expect our suppliers to ensure that their subcontractors respect the same rules.

Our Responsible Minerals Sourcing Charter demonstrates our commitment to responsible sourcing of minerals from CAHRAs. It applies to all our legal entities and subsidiaries worldwide, all our employees as well as any third party acting on our behalf. The charter complements the requirements set out in our Responsible Sourcing Principles.

Moreover, we support the Compliance Initiative of the German Association for Supply Chain Management, Procurement and Logistics (BME) and have endorsed the BME Code of Conduct.

To ensure that we work based on industry standards and can rely on comparable data analytics and expert analysis, we collaborate with our peer companies in industry initiatives. We are member of both Together for Sustainability (TfS) and the Pharma Supply Chain Initiative (PSCI).

We invite our suppliers to let us or trusted partners conduct assessments or audits to increase our supply chain transparency and identify fields of activity in order to improve sustainability performance or mitigate infringement risks.

Together for Sustainability supplier assessments and audits

Through the TfS initiative, suppliers are assessed either based on information obtained during audits or based on self-reported and publicly accessible information provided by EcoVadis, an independent rating agency. EcoVadis assesses suppliers from more than 160 countries and 200 sectors across the four categories of Environment, Labor and Human Rights, Ethics, and Sustainable Procurement. The results are shared among TfS member companies in compliance with all restrictions stipulated by antitrust law.

Through the TfS initiative, we have access to more than 1,460 valid scorecards on the assessment of our suppliers, 882 of which completed a new assessment or re-assessment in 2021. In some cases, these were initiated by us and in other cases by other TfS members.

Our approach to responsibility in the mica supply chain

Mica is an important raw material for our effect pigments, which are used in automotive, cosmetic, and industrial coatings, as well as in plastics. We procure the majority of our mica from the Indian states of Jharkhand and Bihar. By procuring mica from these areas, where political instability, poverty, and child labor are widespread, we are supporting this region by safeguarding local employment and livelihoods. We source the raw material only from suppliers acting in formal working environments and monitor compliance with our standards, including the prohibition of child labor.

Our mica suppliers are informed of our standards and have confirmed that they adhere to the principles of our Human Rights Charter as well as the requirements of our Responsible Sourcing Principles. In the event of non-compliance with our standards, we work with suppliers to ensure the appropriate implementation of corrective measures.

We do not tolerate child labor and contractually prohibit our suppliers from employing children. If one of our suppliers were found to be using child labor, our company would terminate the business relationship immediately. We drive initiatives and take measures to improve the conditions of mica sourcing based on our high standards. We continuously review our monitoring processes to improve their effectiveness.

Auditing our mica supply chain

We have implemented a series of oversight mechanisms using a system that monitors and audits conformity with our social and environmental standards. In addition to visits by Group employees, regular inspections are conducted by third parties, who conduct comprehensive announced audits as well as frequent, unannounced verification visits.

Environmental Resources Management (ERM), a leading global provider of environmental, health, safety, risk, and social consulting services, conducts external audits of mines and processing plants, investigating working conditions as well as environmental, health and safety issues. The audit reports document any identified shortcomings in this respect and propose corrective actions. Our employees in Kolkata (India) and Darmstadt (Germany) take action to address any issues identified. If the corrective measures are not respected, we may suspend or even terminate our business relationship.

Since 2013, IGEP Consult, an Indian non-governmental organization, has conducted regular unannounced inspections to review labor standards throughout our supply chain. During these visits, IGEP officials monitor occupational safety as well as compliance with laws preventing child labor. In 2021, its inspections focused on medical check-ups for workers as well as the implementation of health and risk assessment concepts and safety training. In addition, IGEP has revised and improved the escalation process: Biweekly review meetings are now held with Group representatives to assess suppliers. These meetings help identify any required actions, which our sourcing teams then discuss and implement with our suppliers. Our suppliers have successfully improved the working conditions on the sites.

Evaluating and tracking mica sources

We use a tracking system to help ensure that the mica we purchase is derived from sources qualified by our company and to monitor their productivity. Based on written records of the daily extraction quantities, we review the volumes of mica reported and supplied to the processing facilities.

Our processes undergo constant review and improvement. We are also evaluating other sources for mica in accordance with our quality, social and environmental standards both in India and in other regions. In 2021, we obtained a considerable amount of our mica from Brazil, where we have also established oversight mechanisms to monitor and audit adherence to these standards. In addition, we manufacture effect pigments based on synthetic substrates as an alternative to pigments based on natural mica.

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