Sustainability management at GF
GF believes that sustainability and business are very closely linked. Therefore, in line with the growing importance of sustainability in its business activities, GF declared 2021 “the year of sustainability”. The strategic priority of sustainability in the company is reflected in GF’s governance structure and overall approach to sustainability management.
The ultimate responsibility for sustainability at GF lies with the Board of Directors. In 2020, GF formed a Sustainability Committee to support the Board of Directors in strengthening its focus on environmental, social, and governance (ESG) topics. The Sustainability Committee is embedded in the Nomination Committee. The Charter of the Nomination and Sustainability Committee stipulates that regular meetings must be held at least twice a year. In 2021, the committee met on three occasions. The committee’s agenda mainly focuses on GF’s sustainability initiatives (such as the implementation of the EU Taxonomy, the SBTi, or the TCFD disclosures) and GF’s eight sustainability goals for 2025. GF’s overall progress is measured against a predetermined timeline and the strategy cycle of 2025.
The Sustainability Committee also has the essential role of ensuring that executive remuneration is linked to ESG targets and aligns with the eight goals of GF’s Sustainability Framework 2025. As a result, each Executive Committee member has GF’s company-wide CO2e target as a remuneration incentive. In addition, they also have individual targets such as the zero-accidents campaign, circular economy benchmarks, or the target to implement the TCFD’s recommendations and publish GF’s first TCFD report in March 2022 as part of its Annual Report.
The Executive Committee has a direct overview of GF’s progress on reaching the strategic goals and targets. In addition, the Executive Committee conducts performance reviews between two and four times per year and within each division’s management meetings. These reviews enable the Executive Committee to take the required strategic and operational actions to ensure GF’s target achievement remains on track.
For the roll-out of the Sustainability Framework 2025, GF established a Corporate Sustainability Council (CSC) at the Executive Committee level. The CSC coordinates and steers all sustainability-related activities. It is headed by the CSC Chairwoman, who advises the Executive Committee. The CSC consists of the CEO, CFO, Divisional Presidents, corporate and divisional sustainability teams, and high-level members of management.
The CSC’s key responsibilities include the reporting and tracking of progress and measures regarding the Sustainability Framework 2025; supporting the Executive Committee on deciding on cross-divisional strategic sustainability projects and initiatives; coordinating and supervising projects and initiatives, and reporting their progress to the Executive Committee. The CSC meets at least twice every year. At the first council meeting on 4 October 2021, members exchanged ideas on how to:
- reduce GF’s CO2e emissions by committing to the SBTi (Science Based Targets initiative), implementing energy-saving measures, and purchasing renewable energy;
- innovate sustainable products and solutions by following the EU Taxonomy regulations and the principles of a circular economy;
- report on climate-related risks and opportunities by following the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD); and
- foster greater diversity and inclusion at GF.
In addition, GF’s divisions also presented insights into their innovations, progress, and strategies in the area of sustainability. From 2022 onwards, the CSC is expected to meet twice a year with the possibility of additional meetings as required.
All departments and divisions are responsible for continuously integrating aspects of sustainability into GF’s daily activities, thus helping to achieve the targets set out in the Sustainability Framework 2025. The topic is coordinated at the corporate level by the Corporate Sustainability Team (CST). The CST is positioned within the Corporate Finance organization and led by the Head of Investor Relations & Sustainability.
The Head of Sustainability Transformation leads key strategic, cross-functional sustainability-related projects and initiatives. The Head of Corporate Sustainability participates in the Sustainability Committee meetings and is a member of the Corporate Risk Council. He is responsible for sustainability reporting, including engagement with ESG rating agencies. Both the Head of Sustainability Transformation and the Head of Corporate Sustainability report directly to the Head of Investor Relations & Sustainability.
The CST works in close contact with the three divisions’ dedicated sustainability teams to track the progress of individual locations, business units and divisions against set targets. The CST is also responsible for raising organizational awareness about sustainability and climate-related risks.
The divisional sustainability units evaluate their sustainability performance each quarter and present their respective management teams with the results. The sustainability units review the following aspects: the achievement of sustainability targets and the implementation status of agreed-upon actions; the monitoring of GF’s business partners’ sustainability performance; and the development and marketing of products and solutions that provide GF’s customers with sustainability benefits.
Every year, the divisions determine a set of actions needed to implement the company’s sustainability targets. Each divisional sustainability manager ensures their locations define and submit initiatives to meet the set goals, aggregates an overview for their division to track progress, and coordinates with the CST on status, cross-divisional experience-sharing, and, where needed, dispute escalation. For example, in 2021, GF Machining Solutions established a divisional sustainability working group that meets every quarter and brings together key functions and the divisional management team to define the next steps towards target achievement.
GF incentivizes corporate target achievement at various levels. For example, individual goals are defined for the Executive Committee members as well as for the corporate and divisional sustainability teams.
In 2021, GF announced its vision of becoming a sustainability and innovation leader providing superior customer value. GF’s sustainability strategy, the Sustainability Framework 2025, will guide GF’s sustainability efforts during the current five-year strategy cycle. The Sustainability Framework 2025 is intertwined with GF’s Strategy 2025, underlining the clear link between sustainability and business. Further information regarding the strategic goals and targets of the Sustainability Framework 2025 is provided in the chapter Sustainability Framework 2025.
As part of its strategic focus on sustainability, GF’s management developed an implementation roadmap for the strategy period 2021–2025. In addition, it focused on strengthening the organizational setup at corporate and divisional levels, as well as launched several sustainability initiatives. For example, as part of the sustainability focus, GF set short-term incentives for the Executive Committee linked to its achievement of sustainability targets and implemented a range of sustainability initiatives at the site level. In addition, GF certified its newly built Chinese production plants in accordance with the Leadership in Energy and Environmental Design.
Communication on sustainability
To help embed sustainability aspects into GF’s daily business, the CST and the divisional sustainability teams communicate with GF employees through various channels. The next global GF sustainability conference will be held in 2022. To reflect GF’s increased focus on sustainability, the scope of the conference will be extended to include a more diverse audience that represents GF’s global operations. In 2022, the conference will focus on developing a concept that brings together all relevant functions and departments in contributing to the strategic goals of the Sustainability Framework 2025.
Additionally, the CST worked closely with the divisional teams to organize employee workshops on the Science Based Targets initiative (SBTi) and diversity and inclusion.
Sustainability management progress in 2021
GF continuously monitors international sustainability developments to ensure it integrates relevant issues into its business decisions and processes. In 2021, GF made significant progress regarding science-based targets, the circular economy, climate-related financial disclosures, and the EU Taxonomy.
GF’s GHG emissions per scope (2021)
In % of total emissions
In line with the 2015 Paris Agreement, governments and businesses are working to find practical and effective solutions to significantly limit global warming. Recently, the IPCC’s Sixth Assessment Report reinforced the urgent need to reduce global warming to 1.5°C (as opposed to well below 2°C) above preindustrial levels. To reach this goal, the United Nations Environment Programme (UNEP) has calculated that the world must halve annual greenhouse gas emissions by 2030.6
GF firmly believes it has a responsibility to contribute to meeting these goals. It therefore uses the official protocols of the Science Based Targets initiative (SBTi) and is committed to setting a science-based target aligned with the 1.5°C ambition level across all three scopes. In 2021, GF made significant progress. Firstly, it comprehensively recorded all emissions for scope 1, 2, and 3. Across the 15 categories of scope 3 emissions, GF identified two specific categories as material: purchased goods and services, and use of sold products. The emissions from these two categories represent approximately 89% of GF’s total scope 3 emissions. The assessment showed that the category purchased goods and services (category 1) is only relevant for GF Piping Systems and GF Casting Solutions due to the nature of their business. The category use of sold products (category 11) is only relevant for GF Machining Solutions.7
Secondly, GF identified reduction potentials and targets for its emission scopes across all three divisions. In this context, GF conducted several cross-divisional and cross-functional workshops and interviews with site managers to establish emission-reduction pathways aligned with the SBTi. In this process, GF determined the reduction potential of energy efficiency measures, purchasing renewable electricity, and switching to low-carbon suppliers and materials.
GF found the majority of its GHG emissions are scope 3 emissions created either by suppliers during their manufacturing processes or by customers when using GF’s products or solutions. Only 18% of the total GHG emissions are directly emitted by GF.
In 2021, according to the official protocols of the Science Based Targets initiative (SBTi), GF aligned its GHG reduction goals with the Paris Agreement’s aim to limit global warming to 1.5°C above preindustrial levels. Accordingly, GF adjusted the target of its Sustainability Framework 2025 to reducing its CO2e emissions in absolute terms by 21% (scope 1 and 2 emissions) compared to 2019.
GF will submit the targets determined in this process to the SBTi by March 2022. GF is looking forward to officially joining the group of companies taking action according to the protocols of the SBTi. GF’s commitment to the SBTi is an important step on the company’s path towards net zero.
Circular economy as a path to net zero
GF believes it is vital to ensure responsible resource and waste management. It is therefore working to redesign its production processes, find new materials, and create new business cases to close material loops. In addition, reducing waste during the manufacture of GF’s products has always been in focus. GF recognizes the concept of a circular economy is an important driver towards achieving a carbon-free economy.
In 2021, GF initiated a circular economy project featuring a series of workshops where a cross-divisional and cross-functional team, including GF’s CFO, developed a common understanding of the approach and concepts to promote its adoption. The team also defined new pilot projects. These projects include new business models, modularity improvements, and product simplification to enable reuse within the material cycle. GF will implement these projects throughout 2022 and beyond.
EU Taxonomy for sustainable activities
The European Commission has set climate and energy targets for 2030 underpinned by an action plan – the European Green Deal – to make the EU economy climate-neutral by 2050. The Commission considers direct investments in sustainable projects and activities as essential for reaching these targets. Therefore, in June 2020, the EU issued the EU Taxonomy Regulation, a framework that defines the specific types of economic activities that qualify as environmentally sustainable.
In 2021, GF assessed its business activities against the developed EU Taxonomy criteria. The review of eligible activities has been completed for the environmental objectives regarding climate mitigation and climate adaptation. In 2022, GF will extend the assessment to the alignment criteria and the remaining four environmental objectives.
Guidance of the Task Force on Climate-related Financial Disclosures
It has become evident that climate change will have both immediate and long-term impacts on businesses around the world. GF firmly believes that companies that fail to recognize climate-related risks and opportunities and adjust their operations accordingly will ultimately become less competitive. In addition, as more investors become sensitive to the financial impact of climate change on businesses, these companies will also find it harder to access capital.
The Task Force on Climate-related Financial Disclosures (TCFD) issued a set of recommendations in 2017 to increase the transparency of how companies are addressing climate change. The TCFD’s purpose is to help companies provide meaningful climate-related disclosures so that investors can make more informed investment decisions.
In 2021, a key component of GF’s TCFD-aligned risk management strategy was a scenario analysis assessing GF’s possible climate-related impacts between now and 2050. As a result, GF defined material physical and transition risks and opportunities as a foundation for future risk management, as well as various adaptation and mitigation activities.
With its first index published in 2022, GF is reflecting on the TCFD’s growing importance among investors and businesses. GF’s TCFD report emphasizes three critical topics: the climate-related opportunities that can help GF remain competitive, the specific physical risks GF is exposed to, and the transition risks facing GF’s operations. Full information on GF’s climate-related disclosures can be found in GF’s first TCFD report. GF’s TCFD Report 2022 will focus on the financial quantification of transition risks and opportunities.
Management performance objectives
The compensation applicable to the Board of Directors is reviewed every two to three years based on competitive market practice and its basic structure is kept as constant as possible. The last benchmarking analysis was conducted in 2021. Based on the outcomes of this analysis, the Compensation Committee proposed to the Board of Directors to adjust the fees for the Board Chairmanship, for the Chairmanship of the Compensation Committee and for the Chairmanship of the Nomination & Sustainability Committee. The adjustments were approved by the Board of Directors and have been effective as of the 2021 Annual Shareholders’ Meeting.
The short-term incentive (STI) is a variable incentive designed to reward the achievement of business and sustainability objectives of the Corporation and its divisions, as well as the fulfillment of individual performance objectives. The STI is expressed as a target in % of the annual fixed base salary. The target STI amounts to 100% of the annual fixed base salary for the CEO and to 60% of the annual fixed base salary for the other Members of the Executive Committee. The STI payout is capped at 150% of target level.
Sustainability objectives for the STI
Sustainability objectives are based on environmental, social, and governance (ESG) criteria material to the company and its stakeholders. The Corporate sustainability targets – as outlined in the Sustainability Framework 2025 – are specifically reflected in the sustainability roadmaps of the divisions and are well represented in the objective setting of the Executive Committee.
Sustainability objectives are a separate element of the performance measurement accounting for 10% of the STI, and are not part of the individual objectives.