Economic value creation

Our sustainability agenda aims to create value for our customers by providing products with excellent functionality that generate resource or performance benefits ahead of competitive products. In turn, this creates value for our business by focusing on our end-user segments – delivering growth and profitability.

We also realize that in order to achieve sustained business success, we need to generate more value from fewer resources across our entire value chain to decouple business growth from resource use. We measure this through our Resource Efficiency Index.

We have improved our performance on eco-premium solutions. We are also seeing an improvement in our cradle-to-grave carbon footprint performance, but a lower gross margin resulted in a broadly flat Resource Efficiency Index. See Notes 4, 5 and 8.

Value chain assessments

We use lifecycle assessment as the basis of our sustainability work. This was initially focused on environmental impacts and benefits, but more recently we have been involved in developing social assessments and associated externalities. This lifecycle thinking is incorporated in a number of our common processes, both at company and Business Area level.

Innovation process

Our Innovation process for product and process development covers an assessment of market segments and strategic alignment, including sustainability. AkzoNobel’s eco-premium solutions concept requires the assessment of both the environmental and social aspects of sustainability along the value chain. It also encourages the development of more innovative, sustainable products.

Commercial excellence processes

Including sustainability in marketing propositions is an essential aspect of our Planet Possible agenda. We are developing our marketing activity and train our salesforce in sustainability. See Note 6.

Suppliers and sourcing

A fundamental requirement of our strategy is to work together with our suppliers in order to create a sustainable supply base and deliver customer benefits, as well as improving resource efficiency. This means that we have to collaborate effectively. We have supplier management programs in place that support both performance improvement and opportunities for joint developments.

In 2016, we made good progress with some suppliers to identify carbon footprint improvements, as well as extending collaborations in our supply chains. See also the examples in Note 8 under Bio-based raw materials. Further information on our engagement with suppliers and the management processes is included in Note 7.

Product portfolio management

We manage hazardous substances in our products through our priority substance program. Active for several years, it promotes the use of safer and more sustainable products and means we often take action to manage harmful substances in advance of legislation, future-proofing our products against changes in regulations. At the same time, we have set ourselves stretching targets for the amount of revenue and growth which should come from solutions with a sustainability benefit for our customers, versus the mainstream product solutions in the market.

In 2016, we piloted a combination of these approaches in three units of our business. We carried out a full analysis of sustainability and product safety risks and opportunities for our product portfolios. This has been used to support product portfolio planning through our marketing and research and development teams. In addition, using our Customer-Focused Product Stewardship (CFPS) process, we have also engaged our customers on sustainability and product safety. The CFPS process allows us to align customer purchasing characteristics with their product safety and sustainability ambitions.

We are further developing this methodology for product portfolio assessment together with other companies in the chemical cluster group of the WBCSD. We will continue to develop this portfolio work across our businesses to help manage our future product portfolios and to create more value for our customers.

The process

In the pilots, we segmented our product portfolio into five categories to reflect the sustainability risks and opportunities of each product and end use (see below).

Assessment criteria

We have used the same criteria as in our eco-premium solutions program, assessed across the full value chain:

• Economic: Energy efficiency and waste
• Environmental: Eco-toxicity, natural resources/raw materials, emissions and land use
• Social: Human toxicity, risks and health and well-being

We already know that 20 percent of our revenue is from eco-premium solutions. The majority of our other products is in the light green and yellow categories. Many of our solutions provide sustainability benefits even though they do not meet our strict eco-premium definition. For example, the main drivers for carbon footprint reduction are estimated to cover about half of our sales (see Customer product solutions in Note 8). Improvements in the sustainability of the overall portfolio will be driven by our product development processes as products are updated or replaced. Less than 1 percent of revenue is from products with substances that already have a phase-out date.

Future plans

We are now evaluating the results of the pilots and reviewing opportunities to combine the basic categorization with other data, such as carbon footprint, to provide further insights.

Investment decisions

All our major investment proposals (more than €5 million) require a sustainability evaluation alongside the financial case. This includes assessments at different stages in the project development. At the point of application for capital, the requirements include an eco-efficiency assessment, as well as a full review of health and safety, natural resource/raw material requirements and environmental impacts. The proposals are reviewed by subject matter experts, who give input to the Executive Committee, to provide a strong basis for the investment decision.

Carbon pricing

In order to help move the business to a lower carbon future, we will introduce carbon pricing into relevant investment decisions and procurement. Standard financial calculations on the cradle-to-gate carbon footprint will be presented in investment cases with and without a price applied to carbon (based on impacts from our raw materials and own operations). If an investment is significantly less attractive as a result of including a carbon price, currently €50 per ton, we will identify value re-engineering mitigation activities in order to lower the carbon impact and re-present the case with these included.

The aim of attaching a financial number to the carbon impact associated with our investment and procurement processes is to drive further awareness of the environmental and future economic impact of major decisions and, more importantly, to make better decisions and strengthen the sustainable business portfolio as a result. With many countries now discussing different schemes to put a price on carbon as part of their legally binding COP21 carbon reduction targets, it is important to recognize that carbon will be priced, enabling sustainability leaders to de-risk their businesses.