Sustainable Conduct – Responsibility in Value Creation Procurement and Supplier Management The procurement organization supplies the company with raw materials, goods and services all around the world. We exert influence on society and the environment through our procurement activities and supplier relationships. Not only economic, but also ethical, ecological and social principles are therefore anchored in our Procurement Policy, which is binding for all employees worldwide. Procurement is a corporate function, the head of which reports directly to the Chief Financial Officer. Bayer has a diverse procurement portfolio due to the varying nature of its segments. Procurement acts centrally on behalf of all segments and leverages synergies by pooling know-how and procurement spend. €14.9 billion Bayer’s procurement spend in 2017 The following table provides key data on our procurement activities. (XLS:) Download Procurement Activities 2016 2017 2016 figures restated Procurement spend in € billion 14.8 14.9 Spend in OECD countries (mainly Germany and U.S.A.) in € billion 12.2 12.2 Spend in non-OECD countries (mainly Brazil, India and China) in € billion 2.6 2.7 Number of suppliers 97,270 93,330 Number of countries 151 148 In our supply chain we take account of all types of suppliers and supplier diversity. Procurement operates according to uniformly established procurement and supplier management processes. Long-term contracts and active supplier management for strategically important goods and services are important elements here. Thus, we not only minimize procurement-specific risks such as supply bottlenecks or significant price fluctuations, but also safeguard the Group’s competitiveness and ensure smooth production processes. Close cooperation with and systematic integration of selected suppliers in innovation processes gives Bayer access to innovative solutions. Bayer purchases locally schließen Local procurement at Bayer means that goods and services are ordered from suppliers that are based in the same country as the (Bayer) company that receives them. wherever possible in order to respond promptly to the requirements of our sites, thereby simultaneously strengthening local economies. In 2017, this applied to 71% (2016: 71%) of our procurement spend at our main business locations, and to 71% (2016: 71%) of procurement spend in all countries worldwide. An overview of the main direct and production-related procurement materials in 2017 can be found online. Online Annex: A 188.8.131.52-1 limited assurance Main Direct Procurement Materials Pharmaceuticals Active ingredients (e.g. small molecules, biologics), radioactive ingredients (e.g. actinium, radium), intermediates (e.g. epoxy phthalimide), raw materials (e.g. iodine, cell culture media, solvents), pharmaceutical excipients (e.g. celluloses, starches), packaging materials, medical devices, finished products (e.g. Zetia) Consumer Health Active ingredients (e.g. naproxen sodium, loratadine, paracetamol), vitamins (e.g. vitamin C and B), excipients and operation materials, finished products (e.g. Canesten™, Dr.Scholl’s™, Berocca™), packaging materials Crop Science Active ingredients (e.g. mancozeb), excipients and solvents (e.g. rapeseed oil, toluene, ammonia), complex intermediates (e.g. pyridine polyfluoride), packaging materials Animal Health Finished products, active ingredients (e.g. moxidectin, praziquantel, Baycox-isocyanate), packaging materials (e.g. Seresto™ tins, spot-on tubes), raw materials, excipients Renewable raw materials play only a subordinated role at Bayer due to the company’s portfolio. They are primarily used when it makes technical, economic and ecological sense to do so. Online Annex: A 184.108.40.206-2 limited assurance Bayer uses small amounts of palm (kernel) oil and soy derivatives in the formulation of active ingredients or in active ingredient precursors. As part of our activities to promote sustainable agriculture, we are a member of the Roundtables on Sustainable Palm Oil (RSPO) and Responsible Soy (RTRS). To support the production of certified sustainable palm (kernel) oil and soy, we purchased RSPO and RTRS credits schließen RSPO and RTRS credits The credit system is a model that supports the production of ecologically, socially and economically sustainable products with RTRS / RSPO certification through the sale of so-called credits. The financial proceeds from credits benefit farmers, who are able to use the money to offset the additional costs of sustainable production. in 2017 according to the volumes we used. Crop Science also cooperates intensively with the RTRS to provide mutual support in the certification of Brazilian soybean producers according to the high ecological, social and economic criteria of the RTRS. At Pharmaceuticals, a number of hormones are synthesized based on sterols that result during the production of plant oils from soybeans, for example, as well as during wood processing. We additionally purchase various steroids that are manufactured from diosgenin or its intermediate stages. This substance is usually obtained from yam grown in countries such as China. We also use raw materials such as water, glucose, yeast, soybean starch, castor oil and corn steep water in our fermentation processes. Consumer Health uses extracts of plants to manufacture plant-based pharmaceuticals. We take great care in the cultivation and extraction of raw materials, which are performed according to international standards, e.g. the GACP (Good Agricultural and Collection Practice) guidelines. Bayer sustainability requirements defined in its Supplier Code of Conduct Our supply chain is designed at both a global and regional level according to clear, sustainability-oriented criteria and standards. Bayer regards adherence to these standards as a crucial value-adding factor and an important lever for minimizing risks. A four-step process is thus established throughout the Group to improve sustainability practices in the supply chain, comprising the elements awareness-raising and supplier selection, evaluation and development. It is defined in a special instruction and centrally steered by the Sustainability team in Procurement. The process is implemented through cross-functional cooperation between the Procurement and the Health, Safety & Sustainability corporate functions. Our sustainability requirements are established in the Bayer Supplier Code of Conduct, which is based on the principles of the U.N. Global Compact and our Human Rights Policy. It is available in 14 languages and covers the areas of ethics, labor, health, safety, environment and quality, and management systems. The code lays out the general basis of cooperation with our suppliers and is applied in their selection and evaluation. The Supplier Code of Conduct is integrated into electronic ordering systems and contracts throughout the Bayer Group. Furthermore, our standard supply contracts contain clauses that authorize Bayer to verify suppliers’ compliance with our sustainability requirements. Evaluating the sustainability performance of our suppliers Bayer verifies the observance of the code requirements by our suppliers through online assessments and on-site audits by external auditors. Suppliers are selected for these evaluations based on a combination of country and category risks as well as according to their strategic importance in line with our Group targets. Group target 2017: evaluation of all strategically important suppliers Group target 2020: evaluation of all potentially high-risk suppliers with significant Bayer spend Bayer’s goal was to have evaluated all strategically important suppliers by the end of 2017. This group includes suppliers with a major influence on business in terms of, for example, procurement spend and long-term collaboration prospects (three to five years). All in all, 99.5% (2016: 98%) of these suppliers were evaluated, the missing coverage being due to fluctuations inherent in the business. The remaining evaluations are scheduled to take place in the first quarter of 2018. By 2020, furthermore, we aim to evaluate all those suppliers with a significant procurement spend (> €1 million p.a.) that are regarded as potentially high-risk suppliers due to their combined country and category risk. Our target attainment as of 2017 was 93% (2016: 83%). In the case of new suppliers of this type, Bayer reserves the right to review their sustainability performance through an online assessment or an on-site audit. The online assessments are carried out on Bayer’s behalf by the service provider EcoVadis. The assessment criteria correspond to the requirements of our code and also take into account country- and industry-specific conditions and supplier size. EcoVadis evaluated 622 (2016: 649) suppliers on our behalf in 2017. In addition, 57 (2016: 52) of our suppliers were audited on-site by external, independent auditors in 2017. The audit criteria include both the specifications of our code and industry-specific requirements that we have jointly laid out in the industry initiatives Together for Sustainability (TfS) and the Pharmaceutical Supply Chain Initiative (PSCI). The initiatives are intended to help standardize the sustainability requirements of suppliers in the chemical and pharmaceutical industries. Synergies are also created through the exchange of assessment and audit results within the respective initiatives. This will help us achieve our target of developing and introducing a new sustainability standard for our suppliers by 2020. Within the TfS initiative, a total of 1,794 (2016: 1,773) sustainability assessments were performed, also through EcoVadis, in 2017, along with 441 (2016: 241) audits, including in China, Japan, India and Brazil. Within the scope of PSCI the corresponding number of audits was 67 (2016: 51), including in India, China and Russia. Group target 2020: development and establishment of a new sustainability standard for our supply base In addition, Bayer auditors evaluate selected new and existing suppliers particularly with regard to health, safety and environmental protection. Among others, these audits are performed on contract and toll manufacturing suppliers with an increased risk potential. A total of 115 (2016: 168) suppliers were evaluated by Bayer auditors in 2017. Bayer reserves the right to terminate a supplier relationship if especially critical sustainability weaknesses have been identified during an online assessment or on-site audit and no improvement is observed during a re-evaluation. In 2017, Bayer was not prompted to end any supplier relationship due solely to sustainability performance. Online Annex: A 220.127.116.11-3 limited assurance (XLS:) Download Assessments and audits of Bayer suppliers 2016 2017 2016 figures restated 1 Initial and re-assessments of suppliers working for Bayer; initiated by Bayer and shared via EcoVadis as part of the TfS initiative 2 Initial and follow-up audits of suppliers working for Bayer; initiated by Bayer and shared as part of the TfS and PSCI initiatives 3 Health, safety, environment Sustainability assessments1 via the EcoVadis platform 649 622 Sustainability audits2 by external auditors 52 57 Sustainability / HSE3 audits by Bayer auditors 168 115 The online assessments and on-site audits are analyzed and documented in order to define specific improvement measures in the case of unsatisfactory results. In 2017, this applied above all to the categories of sustainable procurement and health and safety. In the event of critical results, Bayer requests the suppliers to rectify the identified weaknesses within an appropriate period of time based on specific action plans. Our regular monitoring shows that in 2017 348 of our 679 suppliers evaluated have improved their sustainability performance. Online Annex: A 18.104.22.168-4 limited assurance The online assessments undertaken by EcoVadis in 2017 identified a need for suppliers to improve particularly in the areas of sustainable procurement, environment and fair business practices. Suppliers who achieve less than 25 of 100 possible points are regarded as critical in terms of their sustainability performance. Results of Online Supplier Assessments by Category Audited suppliers demonstrated the greatest need for improvement in 2017 in the areas of health & safety and management systems. This concerned both audits initiated by Bayer and those shared within the TfS and PSCI initiatives. A supplier receives a critical result if a serious violation or several major findings in sustainability performance are identified. In 2017, 20 suppliers (3% of all assessed and audited suppliers) showed a critical result with regard to their sustainability performance. Improvement measures in the supply chain taking effect Through re-assessments or follow-up audits, we monitor the implementation of the improvements requested by us. In 2017, 550 suppliers underwent a re-assessment through the EcoVadis platform, of whom more than 60% improved their sustainability performance. Numerous suppliers voluntarily undergo a re-assessment after successfully implementing corrective measures. Ten follow-up audits verified sufficient rectification of previously identified deficiencies. Additional verification processes were established for the fulfillment of further international regulations such as those requesting companies to disclose the origin of certain raw materials. This concerns, for example, so-called conflict minerals schließen Conflict minerals are those mined in conflict regions. They include tin, tungsten and tantalum ores, gold or their derivatives. Armed conflicts over the control of these resources occur particularly in the eastern part of the Democratic Republic of Congo and neighboring countries. from regions such as the Democratic Republic of the Congo or neighboring countries. All 101 of our first-tier suppliers (2016: 117) who could potentially be impacted by this issue have been checked. “Conflict-free” status was confirmed for 60% (2016: 53%) of them. It was agreed with the remaining suppliers that they must ensure compliance with the requirements. Training measures and dialogue on the issue of sustainability We support our procurement employees in the implementation of sustainability requirements with targeted Group-wide training measures. We also offer our suppliers a wide range of development and dialogue opportunities on this subject. Online Annex: A 22.214.171.124-5 limited assurance Within the scope of our supplier sustainability evaluations, we have identified a country risk particularly for China and India. In this connection, we carried out intensive workshops and training courses in India both for our local procurement personnel and for external auditors of the PSCI Initiative. In China, Bayer used its Supplier Day 2017 to communicate its sustainability requirements. In 2017, we also conducted supplier training and workshops in China and India in cooperation with PSCI and TfS. Our two industry initiatives offer additional advanced training modules for our suppliers through the TfS Supplier Academy and the PSCI Sustainability Webinars. Tackling child labor in the seed supply chain A key challenge is tackling child labor in the seed supply chain of the Crop Science segment. Our position on child labor is unequivocal: Child labor is strictly prohibited at Bayer in accordance with the core labor standards schließen ILO core labor standards The eight core labor standards of the ILO (International Labour Organization) that define the minimum requirements for humane working conditions are internationally recognized “qualitative social standards.” They represent universal human rights that are deemed valid in all countries regardless of their economic development status. of the International Labour Organization (ILO). We therefore also obligate our suppliers to strictly refrain from employing children. Bayer has taken systematic action for years to prevent child labor in the cotton, rice and vegetable seed supply chain in India, Bangladesh, China, Thailand and the Philippines through its Child Care Program and conducts inspections locally. This program is being established in those countries in which there could be cases of child labor in seed production based on our risk assessment. We raise awareness of the issue among our suppliers and clearly communicate our requirements. Risk assessments were undertaken in 2017 for countries such as Paraguay, Uruguay, Argentina, Peru and Chile. The risk of child labor in our seed supply chain in those countries was found to be low due to government-based monitoring and the extensive use of mechanized processes in seed production. However, Bayer also audits suppliers in these countries and sensitizes our employees to this issue. We recorded the majority of cases of child labor in India, which is why it is there that we implement most of our measures and inspections. The corporate auditor EY (formerly Ernst & Young), India, additionally carries out unannounced visits to cotton seed producers in four Indian districts. The absolute number of child labor cases was in decline until 2016. However in 2017, we detected an increase in cases of child labor among cotton hybrid seed suppliers in India. These cases were identified predominantly among new suppliers in regions where Bayer had not previously been active. Bayer expanded the activities of the Child Care Program in the areas around the affected sites and carried out follow-up audits. We expect a reduction again in cases of child labor in the coming year as a result of our commitment. Online Annex: A 126.96.36.199-6 limited assurance Bonuses and sanctions for suppliers Crop Science’s comprehensive activities in its Child Care Program include the monitoring of the seed produced through wage-based labor. In this connection, specialized Bayer employees visit the fields of cotton, rice and vegetable seed producers, particularly during the planting season. Suppliers who can verify that they strictly observe our ban on child labor receive a bonus along with training in raising agricultural efficiency. Graduated sanctions are applied for non-compliance. These range from written warnings to termination of the contract in the case of repeated noncompliance. Supporting school education as a key element Bayer regards school attendance not only as essential for children’s development but also as an effective tool for preventing child labor. We therefore also visit the parents of children we find working in the fields to convince them of the importance of school education. We promote this in India, for example, with the Learning for Life initiative within our Child Care Program, which focuses both on fostering scientific knowledge and on general vocational training. This covers everything from reintegrating children into the regular school system to vocational training measures. Between 2005 and the end of 2017, Learning for Life reached more than 6,400 children and young people. Thanks to a stringent monitoring system, which is supported by local information and educational initiatives, there are only very few instances of child labor among our contractors. We immediately put a stop to any cases we detect and closely track further developments in this context through our Child Care Program. The Child Care Program Advisory Council, comprised of international experts and recognized professionals, supports Bayer in the protection of children’s rights and the objective of seed production without child labor. We measure the success of our comprehensive program using the indicator “Child Labor Incidence in Relation to the Total Number of Laborers Monitored in the Production of Cotton and Vegetable Seed for Bayer.” Online Annex: A 188.8.131.52-7 limited assurance The graph informs about the development of this indicator. Child Labor Incidence in Relation to the Total Number of Laborers Monitored in the Production of Cotton and Vegetable Seed for Bayer1 1 The figures cover several growing cycles per cultivation year. In India the cultivation year runs from the middle of one year to the middle of the next, depending on climatic conditions and the various seed types. Cumulated depiction on the basis of control inspections performed (at least 3 per cultivation season for vegetables and up to 6 per season for cotton) 2 Child labor incidence cases in 2016 / 2017 were mainly identified among new suppliers in regions of India where Bayer had not previously been active. Through our commitment we are expecting a further reduction in child labor incidence for the coming year. The first figures for the current season 2017 / 2018 confirm this.