BASF Report 2021 Management’s Report – Our Steering Concept 42 Our Steering Concept Creating long-term value as a company means more than generating earnings that cover the cost of capital employed. Our steering concept encourages and supports all employees in thinking and acting entrepreneurially. Our key financial management indicator is the return on capital employed (ROCE). The BASF Group’s most important nonfinancial key performance indicators are CO emissions and Accelerator sales. 2 Our financial targets follow a steering concept that is aligned with Calculating ROCE and cost of capital based on the financing costs of the BASF Group. The cost of capital our values. The return on capital employed (ROCE) is used as the percentage for 2022 is 9% (2021: 9%). key target and management indicator for the BASF Group. As ROCE is calculated as the EBIT of the segments as a percentage of stated in our strategic goals, we aim to achieve a ROCE consider- the average cost of capital basis. ably above the cost of capital percentage every year. With ROCE, Calculation of CO emissions 2 the same logic and data is used for our value-based management, To calculate the EBIT of the segments, we take the BASF Group’s external communication with the capital markets and variable EBIT and deduct the EBIT of activities recognized under Other, We calculate our absolute CO emissions on the basis of green- 2 compensation. This means we use the same yardstick for internal which are not allocated to the divisions. house gas emissions, which are the sum of direct emissions from manage ment, employee incentivization and our shareholders’ production processes and the generation of steam and electricity expectations. The cost of capital basis is calculated using the month-end figures (Scope 1), as well as indirect emissions from the purchase of energy and consists of the operating assets of the segments. These com- (Scope 2). Direct emissions from the generation of energy for third As part of our corporate strategy and the sustainability targets prise the current and noncurrent asset items of the segments, parties are not considered here. Relevant emissions include other derived from this, we have also used CO emissions and Accelerator including tangible and intangible fixed assets, integral investments greenhouse gases according to the Greenhouse Gas Protocol, 2 sales as the most important nonfinancial key performance indicators accounted for using the equity method, inventories, trade accounts which are converted into CO equivalents. 2 since the 2020 business year. Two targets are based on these receivable, other receivables and other assets generated by core indicators: sustainability-oriented portfolio management with our business activities and, where appropriate, the assets of disposal We set ourselves even more ambitious targets with our roadmap Sustain able Solution Steering method and reducing absolute CO groups. The cost of capital basis also includes customer and sup- to climate neutrality, which we presented in March 2021: Compared 2 emissions. We reached our Accelerator sales target in 2021, earlier plier financing. with the 2018 baseline, we want to reduce greenhouse gas than planned. Consequently, we will adjust our portfolio steering emissions by 25% by 2030.1 We aim to achieve net zero emissions target over the course of 2022. We have integrated the cost of capital percentage into our (Scope 1 and Scope 2) by 2050. ROCE target as a comparative figure. This is determined using the For more information on CO2 emissions and our climate protection targets, see page 126 onward weighted cost of capital from equity and borrowing costs (weighted average cost of capital, WACC). To calculate a pre-tax figure similar to EBIT, the cost of capital is adjusted using the projected tax rate for the BASF Group for the business year. In addition, the projected net expense of Other is already provided for by an adjustment to the cost of capital percentage. The cost of equity is ascertained using the capital asset pricing model. Borrowing costs are determined 1 In March 2021, we replaced our previous target of CO -neutral growth until 2030 (baseline 2018: 21.9 million metric tons of CO e) with a new, more ambitious climate protection target to reduce absolute CO emissions by 25% compared with 2018 (new target: 16.4 million metric tons of CO e). 2 2 2 2