Note 4: Sustainable business

Resource Efficiency Index

The adoption of a Resource Efficiency Index as a key financial indicator results from the conviction that global population growth and increasing resource constraints will drive new business models in the materials and energy intensive industry sectors. In the chemicals industry, sustained business success will require product and process innovations that generate much more added value from each unit of raw materials and energy used across the value chain – be it with our suppliers, in our own operations or with the users of our products.

The Resource Efficiency Index is defined as gross margin divided by cradle-to-grave carbon footprint – reported as an index. The index development was based on input from a range of financial analysts and environmental specialists and wide internal consultation:

• We selected gross margin as an indicator of added value as it is comparatively stable and captures the effects of efficiency improvements
• Carbon footprint is a good proxy for resource efficiency across our value chains

We are initially monitoring the Resource Efficiency Index and expect it to be a long-term indicator for AkzoNobel. Although margin variability may affect performance in any given year, the long-term trend must be upwards. A review of our performance over the past six years reveals a variable trend. We have seen increases from factors such as:

• Improvements in energy efficiency
• Increased renewable and low carbon energy supply
• The ongoing switch towards waterborne coatings
• Margin improvements as a result of higher value added products

However, alongside these positive factors we have seen tighter margins, together with expansion in markets that are slower in adopting low VOC coatings and have a high proportion of high carbon energy supplies. The drop this year is due to our carbon footprint performance: we have initiated a detailed review of our plans to achieve this 2020 target.

Eco-premium solutions

We maintain our intention to lead by example in the area of improving the sustainability and environmental performance of our products and processes, which we measure through our development of eco-premium solutions (EPS). They are a fundamental driver of our Planet Possible agenda for creating more value from fewer resources and minimizing the environmental impact/footprint of the products we sell and the processes we use to manufacture them.

EPS are defined as being new products and processes that meet the sustainability-related criteria set out below. When assessed across the entire value chain, against currently available solutions in the market, they provide the same or better functionality and offer significantly better performance in at least one of the following aspects:

• Toxicity and eco-toxicity
• Energy efficiency/consumption
• Use of natural/renewable raw materials
• Emissions and waste
• Land use
• Risks (in production, transportation, use or disposal)
• Health and well-being

They also have no adverse impacts in their performance in any one of these aspects.

Introduced in 2012, EPS with downstream benefits is a measure which focuses on products and services that provide customers and consumers in our downstream value chain with the same sustainability advantages as those defined as criteria for the broader, historical EPS measure above. EPS with downstream benefits deliver advantages to our direct customers: through their use as components/ingredients in our customers’ products; their use by consumers; or in their end-of-life phase – be that disposal, recycling or re-use.

Recent examples of EPS with downstream benefits include:

• EvCote barrier coatings: Used for beverage and food paper packaging, particularly for single serving uses such as paper cups and French fry sleeves, which provide a unique sustainability offering due to the use of recycled and bio-renewable components in the base resin. A zero VOC waterborne coating with the ability to be re-pulped, recycled or composted after use. The current use of fluorocarbon waxes or polyethylene as the coating automatically consigns the used packaging to landfill
• Dulux Forest Breath: A high performance waterborne interior wood stain for the Chinese market which has anti-bacterial properties and improves indoor air quality by absorbing and destroying atmospheric formaldehyde – enhancing the well-being of families
• Ecosel AsphaltProtection: An environmentally harmless additive for de-icing which prevents formation of hard ice inside asphalt pores and substantially reduces frost damage to roads. Proven to reduce winter road damage by up to 50 percent, the additive enables substantial savings on road maintenance, repair and the consumption of asphalt and also makes a significant contribution to traffic safety
• Sikkens Rubbol Express: Cobalt-free decorative paints, available as extremely fast-drying primers and best-in-class leveling high gloss top coats. Excellent drying times in adverse climatic conditions, enabling outdoor painting at temperatures between 3°C and 30°C throughout the year
• LignuPro: A label-free, ultra-low formaldehyde emitting adhesive for the internal wood flooring market. The only product on the market which has been awarded French A+ air quality certification, while maintaining excellent bonding strength and passing the ANSI bonding tests

In 2014, revenue from eco-premium products and services with downstream benefits totaled €2.7 billion, or 19 percent of total revenue. Revenue from all eco-premium solutions (with benefits anywhere in the value chain) were €3.5 billion, or 24 percent of total revenue.

Year-on-year progress will be impacted not only by our own innovation drive, but also by competitor activity and legislation changes. Furthermore, the introduction of new products into the market whose performances equal those of our current EPS offering will redefine the standards that we will have to surpass to acquire future EPS status.

VOC in products

In 2009, we embarked on our VOC challenge to manage the transition to a product portfolio lower in average volatile organic compound (VOC) content, and to minimize the potential social and environmental impact from these substances. While our vigilance in driving technological change towards reduced VOC content is unchanged, we maintain a close eye on developments in the marketplace and changes in our sales mix.

In our Decorative Paints products, we are introducing reformulated products with much reduced and virtually zero VOC content and this reduction trend will continue in the future. Our Performance Coatings business is also achieving a declining average VOC content, despite the significant technical challenges involved in maintaining product performance while reducing VOC content.

We are keenly aware, however, that although we are making technological progress, we must also keep up with the market and match our product offering to customer demand. For example, while we have key projects in place in the Chinese coatings market, this market is still not migrating as quickly as other regions towards low or zero VOC products.

Our evaluation for 2013 shows that compared with our starting position in 2009, we realized a 7 percent reduction in average VOC content across our coatings and paints product ranges. This compares to a 10 percent reduction achieved in 2012. While we see a declining trend in the VOC content in all our Decorative Paints activities, our divestment of the North America and Building Adhesives businesses – which were comparatively low in VOC content – has resulted in an increase in the VOC content across the resulting product mix. If we correct for these divestments, the VOC content of the total AkzoNobel product portfolio reduced by 3 percent between 2012 and 2013. Both Decorative Paints and Performance Coatings contributed to this reduction.