Note 1: Managing our sustainability agenda

Our purpose and strategic focus

Our sustainability agenda incorporates economic, environmental and social aspects across the value chain. The importance of sustainability to running our business is firmly integrated into our purpose and AkzoNobel’s strategy. As well as being a strategic focus area, it is one of the three core principles (safety, integrity and sustainability) that provide the foundation for our company values and the . In addition, sustainability is being embedded into our company-wide processes, including Innovation, Commercial Excellence, Procurement and Talent Management. Sustainability helps us to enhance and grow our existing business, create new business opportunities, reduce operational costs and minimize risks.

We developed the sustainability elements of our strategy by reviewing our sustainability risks and opportunities against the global trends that will impact our key market segments by 2050. The trends were identified as population growth and the new middle class, and urbanization – both of which provide opportunities for our end-user segments – and long-term constraints of natural resources and climate change, which drive us towards the need for radical resource efficiency and .

We express our sustainability agenda through a concept known as Planet Possible, which highlights our commitment to creating more value from fewer resources across the value chain. Planet Possible encompasses all our programs to make our products and operations more sustainable. As well as driving our own success, putting sustainability at the heart of everything we do means that our customers and employees – not to mention our planet – will also benefit. For more details, see the Strategic performance section of this Report 2016.

The societal aspects of our sustainability agenda are being strengthened through the company’s initiative.

Our strategy has three sustainability focus areas designed to deliver more value from fewer resources, with targets for 2020. Our progress is measured by a special Resource Efficiency Index (), which monitors the gross margin generated divided by the resource/energy use across the value chain (measured as cradle-to-grave ). The three focus areas are as follows:

  • Sustainable business: Creating business value through products and solutions that effectively carry out their primary function and provide other environmental or social sustainability benefits, as well as cost savings from operational efficiencies.
    Target: 20 percent of revenue from by 2020
  • Resource efficiency: Accelerating material and energy efficiency across the value chain. Target: 25-30 percent reduction in cradle-to-grave carbon footprint per ton of sales from 2012 to 2020
  • Capable, engaged people: Engaging our people and partnering with our suppliers and customers to deliver significant changes. There are objectives at Business Area and functional level

By focusing on the full value chain, we aim to drive business, resource and engagement benefits

Consolidated Sustainability statements – Value chain (graphic)Consolidated Sustainability statements – Value chain (graphic)

Sustainability foundations

These strategic objectives are underpinned by foundation programs for other economic, environmental and social aspects that are material for our business. Specifically, these are: people and process safety, product safety/stewardship, talent management, employee engagement, learning and development, community involvement, environmental management, integrity management and human rights. These foundation elements are monitored using key performance indicators with 2020 targets. Other short-term and long-term objectives are set at functional and business level.

The Notes in these Sustainability statements and other elements of this Report 2016 illustrate our performance against the strategic goals and foundation elements.

Sustainability framework

Our strategic sustainability focus areas are a natural next step in our sustainability framework, which maps out a progression towards sustainability and identifies those aspects that are material for our business. The framework has three levels, which include economic, environmental, and social aspects:

  • Invent: Integrate sustainable value propositions
  • Manage: Include sustainability in all aspects of the value chain
  • Improve: Continue to comply and ensure our license to operate

Sustainability framework

Consolidated Sustainability statements – Sustainability framework (graphic)Consolidated Sustainability statements – Sustainability framework (graphic)

The Improve level, with an emphasis on risks – working on integrity, governance and compliance with our standards and applicable laws and regulations – is now part of the compliance framework (see the Governance and compliance section).

The current strategy focuses on creating opportunities for value creation through resource efficiency, innovation and talent development (Invent level), alongside continued integration of sustainability in all aspects of the value chain (Manage level).

The framework diagram indicates the main material issues and programs, which are further detailed in the Notes of these Sustainability statements and in other sections of this Report 2016.

Management accountability

Company level

The Executive Committee has overall responsibility for sustainability. They set company strategy and targets and monitor the sustainability performance of each Business Area, as well as the foundation elements, through the Operational Control Cycle.

We have established a Sustainability Council, which advises the Executive Committee on strategy developments, monitors the integration of sustainability into management processes and oversees the company’s sustainability targets and overall performance. The Council, which meets quarterly, is chaired by the CEO and includes representative managing directors from our Business Areas, as well as the Corporate Directors of Strategy, Integrated Supply Chain/Research and Development, Procurement, Human Resources, Sustainability and Communications. The Council maintains an external perspective by including input from value chain partners and thought leaders during regular meetings. AkzoNobel also takes part in leading external organizations.

The Corporate Director of Sustainability reports directly to the CEO and has a sustainability expertise team, including a group focusing on lifecycle and sustainability assessments, as well as members with experience in other functions. In 2012, we formed a team of senior Business Area representatives to work with the expertise team and the business teams to ensure effective roll-out of the new strategy.

Businesses and functions

Accountability for managing sustainability and delivering against targets lies with the businesses and functions. The managing director of each business is responsible for managing sustainability as an overall part of business operations. All businesses have appointed a sustainability manager, or focal point, to support the embedding of sustainability throughout their operations. They bring together an appropriate team to develop and implement the sustainability agenda for the business. Focal points work together at Business Area level to accelerate performance improvements. They also exchange best practices and identify opportunities for further development at company level.

Each function in the value chain has identified focus areas for sustainability. Functional management teams, such as Procurement, Supply Chain and RD&I, are in place to support the implementation of the functional strategy, including the sustainability elements. These management teams include corporate and business representatives.

The foundation elements are managed by processes in the Human Resources and Health, Safety and Environment functions. The compliance framework and the management structure for integrity, human rights and compliance aspects are detailed in the Governance and compliance section under Compliance and integrity management.

Management processes

Material aspects

The management of each Business Area has identified sustainability priorities in line with the company strategy and market drivers. They have also developed a dashboard – with KPIs and targets – which is used to monitor progress. Some improvement programs and activities are managed at Business Area level to improve effectiveness. For cross-business activities, each function in the value chain has identified focus areas for sustainability, with targets where appropriate.

The sustainability aspects material to the company are summarized in the company strategy and sustainability framework. These are reviewed annually, with input from internal and external stakeholders (see Materiality in Note 2). Full details of the boundaries and management processes for each aspect are included in the Global Reporting Initiative (GRI) G4 additional information document, which is available on our corporate website.

Where there are specific sustainability risks or issues of concern to stakeholders, we develop a company position and an improvement plan owned by a subject matter expert. Examples of challenges and dilemmas we have managed this year include:

  • AkzoNobel is aware that the production of certain natural mica in particular parts of the world is associated with child labor. We are engaging with suppliers and NGOs in order to contribute to the eradication of child labor and improve the livelihood of communities that are dependent on the production of natural mica, while at the same time applying responsible sourcing practices. For more information on how we manage human rights in our supply chain, see Notes 7 and 16
  • Nanomaterials: We support the responsible development and use of nanomaterials, as they can bring positive benefits to society. However, as a new technology, we recognize there is public concern over their safety. We thoroughly assess the risks and ensure nanomaterials are managed safely. In addition, we contributed to discussions with government policy makers and industry groups that encouraged sensible and effective regulation
  • Chromates: Although coatings containing these substances are widely used in certain markets to prevent corrosion, we actively promoted the use of chromate-free products to customers in our metal coatings business – including in countries where their regulation is not planned or anticipated in the future. See Note 14 for more details.

Goals and targets

AkzoNobel has three strategic sustainability KPIs and company level targets for strategic and foundation elements. The business dashboards reflect the main sustainability drivers for that business and the contribution to company targets.

Global standards and programs – foundation elements

Global functions oversee the foundation elements of our sustainability agenda. They set global standards and processes and implement improvement programs in partnership with the Business Areas. These standards are also the basis of our supplier management processes.

Common processes

We include material sustainability issues in our company, business and functional processes: strategy and planning; risk management and internal control; compliance; the Operational Control Cycle; as well as in our internal audit and external assurance processes. These are reported in other sections of this Report 2016. See Strategic performance and Governance and compliance.

Improvement plans and programs

Improvement programs for strategic objectives are developed at business, Business Area or company level. In 2016, for example, there was a company level review of the forward program for operational led by the Integrated Supply Chain function, reviewed by the Sustainability Council and Executive Committee.

During the year, we also refined our functional excellence improvement tool, which reflects the strategic objectives, management processes and good practice implementation. The purpose is to accelerate sustainability performance against strategy/targets by raising the capability of people and processes, supporting good practice implementation, providing challenges to the operating businesses and focusing improvement actions on where they are needed most. Each business carries out a self-assessment of the current situation, sets ambition levels based on company requirements and business priorities, and develops focused improvement plans. These assessments are subject to a peer review/challenge by cross-business colleagues to hone improvement options and identify the need for common improvement programs. In the future, the overall improvement plans will be reviewed alongside current performance as part of the Operational Control Cycle.

We have made good progress on the improvement areas that were identified in 2015, including supplier engagement/procurement training, improvement plans and capability development in marketing and sales teams. The outcomes from the 2016 assessment reflect this progress, and are reported in Notes 6, 7 and 9.

Priorities for 2017 include:

  • Accelerated work with suppliers
  • Increased focus on operational improvements identified in each Business Area
  • Business-specific priorities with customers
  • Capability development for marketing, sales and procurement activities

Incentives

We aim to equip all employees to contribute and be accountable for our sustainability performance, using training and other engagement processes, which include business and site level activity and web-based resources. This responsibility continues to become anchored in the personal targets and remuneration packages of managers and employees. 30 percent of the conditional grant of shares for Board of Management members and all executives is based on AkzoNobel’s performance in the over a three-year period (see Remuneration report in the Governance and compliance section). This link to sustainability performance has been in place since 2009.

Monitor, benchmark and review

The business dashboards are reviewed at least every six months by Business Areas and the Executive Committee as part of the Operational Control Cycle. Relevant sustainability aspects are also discussed in other functional Operational review meetings.

Material sustainability issues are integrated into corporate compliance and audit processes, which are supplemented by specialist functional audits. We also benchmark our performance against our peers using external assessment processes, such as the RobecoSAM assessment for the Dow Jones Sustainability Indices.

Code of Conduct

Our Code of Conduct defines our core principles and how we work. It incorporates fundamental principles on issues such as business integrity, labor relations, human rights, health, safety, environment and security and community involvement.

Circular economy

An economic system which is restorative and regenerative by design, and which aims to keep products, components, and materials at their highest utility and value at all times, distinguishing between technical and biological cycles.

Human Cities

Everything we do for and with society is channeled through our Human Cities initiative. This incorporates AkzoNobel’s Community Program, which encourages and gives financial support for employees to get involved, hands-on, in their local communities; and our “Let’s Colour” program, which uses the power of color to improve people’s lives.

REI

Resource Efficiency Index is gross margin divided by cradle-to-grave carbon footprint. The index measures value created from use of raw materials and energy.

Carbon footprint

The carbon footprint of a product is the total amount of greenhouse gas (GHG) emissions caused during a defined period, of the product lifecycle. It is expressed in terms of the amount of carbon dioxide equivalents CO2(e) emitted.

Eco-premium solutions with downstream benefits

A measure of the eco-efficiency of our products. An eco-premium solution is significantly better than competing offers in the market in at least one eco-efficiency criterion (toxicity, energy use, use of natural resources/raw materials, emissions and waste, land use, risks, health and well-being), and not significantly worse in any other criteria. Downstream benefits include a tangible sustainability benefit for our customers.

Eco-efficiency

Eco-efficiency means doing more with less; creating goods and services while using fewer resources and creating less waste and pollution.

Operational eco-efficiency

Refers to the eco-efficiency of our manufacturing operations. Our aim is to improve operational eco-efficiency by reducing the resources used and emissions/waste from our sites during the manufacture of our products.

RobecoSAM assessment

Tthe Dow Jones Sustainability Index (DJSI) tracks the performance of global sustainability leaders. The index comprises the top 10 percent in each industry for the 3,400 largest companies.