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Social
Responsibilities

As a company that is aware of its role in society and its social responsibilities, H&R operates in an ever-growing regulatory framework yet always takes advantage of opportunities to evolve.

H&R KGAA’S
BUSINESS MODEL AND STRATEGY

With the help of modern refineries and smart processes, we use crude oil derivatives to produce more than 800 high-grade chemical-pharmaceutical specialty products such as label-free process oils, white oils and par- affins. High-precision plastic parts complete our product portfolio. Our products are an important component in the processes and products of numerous industries, for example, in the automotive industry.

Today, we manufacture and sell our products worldwide through an organically developed network. We rely on our own facilities and sales/distribution units, as well as on production partnerships. We aim to use this strategy to boost the share in revenue attributable to ChemPharm Sales.

Strategie

In the ChemPharm Refining segment, we are currently faced with the challenge of mounting competition in the base oil market. For this reason, we have developed a strategy with which to further develop the operating model of the Hamburg refinery. We aim to rise to the competition in the base oil segment, for exam- ple, by significantly reducing the proportion of base oils we produce and instead focusing on the production of high-quality specialty products. Faced with the Covid-19 pandemic, this approach gave rise to new challenges in 2020. The raw materials and by-products with which we intended to make our processes more flexible were not available in the market or were only available in insufficient quanti- ties because the suppliers we had identified were likewise operating under lockdown conditions or were having to respond to changes in buyer behavior.

At the same time, we are focusing more heavily on the topic of sustainability with our three-pillar strategy. This strategy outlines our transformation from using predominantly petroleum-based raw materials, to increasingly using renewable components, to producing synthetic qualities. We intend to produce these by using long-chain hydrocarbon compounds methanated from hydrogen and CO2 in our refinery processes. We produce the hydrogen by means of water electrolysis with the aid of wind power, while the CO2 is washed out of the fumes from our thermal waste recovery. Due to the high degree of waste sorting, the waste used as a raw material here is highly biogenic, meaning the captured CO2 can like- wise be considered “green”.

As far as our production sites in Germany are concerned, we have set ourselves the logical long-term target of implementing the Green Refinery concept. This reflects our efforts to reduce the proportion of combustion products to an absolute minimum and to significantly expand the production of these synthesized specialty products over the next ten years. Here, too, our focus or that of our customers is the use of materials.

In the area of precision plastics, we plan to establish the H&R subsidiary GAUDLITZ GmbH as a producer of durable plastic in response to the growing trend toward e-mobility. 2021 is likely to be a key year for the automotive industry. Going forward, not only is the market for plug-in hybrids likely to grow, for which experts consider double-digit percentage growth in Europe to be entirely realistic – so too will the market for fully electric vehicles. This is possibly not good news for all industry players as this new drive technology may represent a major challenge in particular for the traditional suppliers, some of which generate much of their sales with internal combustion engine components. GAUDLITZ plastic parts are already being used in a variety of ways, however, and their use is not limited to traditional IC engine drives. As such, whether these vehicles are run purely on electricity or on hydrogen may be inconsequential to GAUDLITZ.

We refer to this overarching strategic ap- proach as G.A.T.E., as in a “gateway to the future”: in line with our objective of achieving further internationalization, we see ourselves as a company that thinks on a global scale. At the same time, we are building regional con- nections and we operate at a local level. The most important driver of our economic activity is our proximity to the market, which enables us to always act with a deep understanding of our customers’ specifications and needs in a user-oriented manner. We also remain “technovative” by ensuring that our sites are always on the cutting edge of technological development and by keeping a close eye on innovative process and product solutions. We successfully combine economy and ecology, acting in an economically prudent way, with full awareness of the resources we are using. Eco2, i.e., “ecology x economy”, increases the potential in both areas exponentially while representing a key step toward sustainability.

SUPPLIER
MANAGEMENT

The H&R production and processing sites can call upon a flexible network of suppliers to secure their raw material requirements. These tend to be other refineries, some of which are operated by renowned oil companies operating in the fuel refining sector.

We share an H&R-wide Code of Conduct with our suppliers, expecting them to respect and adhere to the principles set out in the Code. The Code is based on the recognized principles of sustainability: economic growth with a view to the long term, respect for the environment, the careful use of resources, employee protection and the quest to improve quality of life for present and future generations alike.

Compliance with this Code of Conduct is an integral part of the supplier selection and evaluation process within the H&R Group. We use supplier audits based on ISO 9001 to check compliance with the Code, meaning that no supplier is added to our system without an audit being conducted. If complaints or indications that the Code has been breached arise during the course of the contractual relationship, the audit is repeated.

If we discover any material breaches of the Code of Conduct, H&R also considers this to constitute a breach of the contractual relationship as a whole. The first step in such cases involves asking the supplier to remedy the breach. If the supplier fails to meet our request to our satisfaction, we reserve the right to terminate the contractual relationship.

There were no breaches of our Code by any of the suppliers last year.

MAJOR
RISKS

In order to comply with the CSR Directive Implementation Act (CSR-RUG), we have to report the material risks associated with our business activities if they are very likely to materialize and could have a serious negative impact on non-financial aspects and on the business model. As a success-oriented, responsible-minded company, we operate an integrated, Group-wide risk and opportunity management system. Our goal is to identify, assess, communicate and manage relevant risks at an early stage in order to prevent or limit damage to our company. We also want to identify relevant opportunities early on so that we can take maximum advantage of them.

Our risk management system is based on a structured process for identifying and managing risks. This involves our also incorporating sustainability criteria into our risk analysis and above all our opportunities analysis. For example, we see the move away from the internal combustion engine and the promotion of e-mobility as sustainability aspects, but see these more as an opportunity than a risk.

All relevant risks are classified uniformly throughout the Group. A risk is classified as low, medium or high based on the parameters “Likelihood of occurrence” and “Potential financial impact”. The resulting risk classification matrix is shown in the following table:

In the risk process, a distinction is made between macroeconomic and industry risks, operating and corporate strategy risks, and financial risks. The system also covers technical production risks – which may include risks from operating the plants or accidents and may harm people and the environment – as well as risks arising from product liability and personnel risks. The aforementioned risks are already being managed by our Group-wide risk management system and are shown in the table below.

None of the corporate risks have been identified as having a high probability of occurrence or potentially serious consequences for our business or our business relationships. No other material risks resulting from our business activities that could potentially have serious consequences in those areas covered by the CSR-RUG were identified.

UNDERSTANDING OF SUSTAINABILITY AND
MATERIAL TOPICS AT H&R

At H&R, as part of an owner-managed group of companies, we have always based our corporate policy on sustainability. We are convinced that the successes that come from quality management, safety, protection of the environment and human health, and compliance not only enhance our reputation, but also ensure our profitability and, as a result, our ability to sustainably increase our company’s value and guarantee our future viability.

This conviction is expressed in our motto – “Oil is far too valuable to burn!” – which obliges us to strive for maximum resource conservation while systematically protecting the environment. At the same time, we take seriously our responsibility as an employer and place the highest priority on employee safety and development.

We combine these aspects with our goal of flawlessly controlling and continuously improving production processes and associated services. This is the only way in which we can ensure that the quality of our products will continue to be impeccable in the future and thus meet our quality objective to provide consumers with high-quality and safe products that are in no way harmful to human health.

To accomplish this, we rely on an integrated management system (IMS) that encompasses all corporate processes and their associated workflows. The IMS gives equal consideration to the aspects of occupational health and safety, environmental protection and quality requirements based on requirements for internationally recognized certifications (such as ISO 9001, ISO 14001, OHSAS 18001, ISO 13485, ISO 50001, ISO/TS 16949 and IATF 16949). The IMS is regularly audited for compliance with the requirements by an independent outside testing body.

As a specialty chemicals company, we face a wide variety of challenges with our business model. One of the major challenges stems from our vertical integration. The degree of processing involved in our production of high-grade specialty products far exceeds that of other refineries, whose processes end with the generation of fuels and base oils. As a result, our process involves higher energy costs and greater consumption of resources.

We also consider demographic change to be a further challenge that requires us to retain our skilled employees over the long term. We can only succeed in doing so if we offer our employees good jobs and enhanced job security while positioning ourselves as a responsible employer.

Our customers’ focus is changing, too. Today, they demand not just the same proven product quality, but also expect the H&R Group to be in a position to deliver environmentally friendly products which, wherever possible, are backed by the appropriate certifications.

Guidelines intended to guarantee ethical conduct are becoming more and more important and extend to all partners in addition to our own company. This also encompasses both upstream and downstream aspects of our own value chain.

The Covid-19 pandemic was without a doubt a particular challenge last year, and one which presented itself on a number of levels. In particular, the endeavors to contain the spread of infections resulted in massive direct burdens on economies and social structures around the world. Especially in the first half of the year, the resultant closure of key industries and the slowed development of the global growth markets indirectly had a material impact on the underlying economic and market developments. At the same time, our primary focus in this period of pronounced economic volatility was, of course, protecting the health of our employees, which we did by means of extensive logistical and administrative protective measures.

A company like H&R has to show a certain sense of responsibility toward its shareholders, i.e., toward its majority shareholders and the shareholders that have a vested interest in the company’s performance. But other stake- holders influence our activities, too: without employees, our business would be impossible. Without reliable raw material suppliers, we would hardly be able to produce anything at all. And the customers who need our products are particularly indispensable when it comes to ensuring our commercial success. Then, there are our financing partners and analysts, as well as stakeholders from the world of politics and civil society, the media and the general public.

Today, all of these stakeholders operate within the same media network, influencing each other and voicing what they expect of our company. At the same time, the exchange of information and the speed at which we form our opinions have become much faster due to the transparency of the Internet. Our responsibility is to provide all of the relevant players with information that is tailored to the needs of the specific target group and to shape a process of active dialogue.

Our reporting system makes a key contribution to this process of communication. It provides an insight into how we design internal structures and processes, into the goals we set ourselves and the measures we take to build on our performance and systematically drive the company in its further development. In 2020, we could only engage in direct dialogue, something which we value greatly, to a limited degree. By focusing more on digital means of communication, we nevertheless succeeded in making or staying in contact with our stakeholders, be it at major events such as the Annual Shareholders’ Meeting, at conferences or in one-on-one discussions with policymakers or representatives from the authorities.

In 2017, we put together a list of the relevant non-financial issues internally for the first time with the help of an external consultant and coordinated them with the Executive Board. This included an examination of the value chain of the H&R Group and the topics discussed, up until 2017, in the “Non-financial Performance Indicators” section of the company’s annual report. The key issues arise primarily from the challenges referred to above and how we deal with them, as well as from relevant industry and macroeconomic developments. In addition, the company maintains close contact with its relevant stakeholders throughout the year. This process, despite the fact that it is generally a bilateral one at departmental level, provides the Executive Board with an overall picture of our position within the relevant competitive, market and, most importantly, social network across various reporting and decision-making levels. A materiality analysis involving internal and external stakeholders was not performed for this NFR.

For purposes of the CSR-RUG, the material topics we have identified from the challenges above are:

SOCIAL
COMMITMENT

At its production sites, the H&R Group is not only a company and employer, but also a neighbor. Suggestions and complaints from the public are investigated accordingly; the remedy is usually direct and unbureaucratic. In addition, H&R holds regular events at its sites such as “Open House” or, specifically in Hamburg, an event as part of the “Lange Nacht der Industrie” (long night of industry). In 2020, such events had to be postponed as a result of the Covid-19 pandemic, of course.

To date, H&R does not have an overriding, Group-wide policy regarding its social commitment. However, we take our social responsibility seriously. Our sites are responsible for their own social activities, which are adapted to the circumstances of the countries in question. In Germany, for example, we support the Landmann Foundation, which provides funding for one or two students each year in our specialty areas (chemistry/engineering sciences).

The H&R Group also sponsors sporting events and youth programs and provides financial support for various institutions. The annual total is in the moderate five-digit range. We are especially proud of our many dedicated employees who voluntarily and on a good-will basis get involved in various religious, sociopolitical and neighborhood activities near our sites. Above all, they are making a difference in areas where what is needed is helping hands, not financial resources. This hands-on approach includes the following example: In the early part of the year, the management in Hamburg asked their colleagues in China to organize the procurement of masks that were widely available there in order to protect against the Sars-CoV-2 virus because there were insufficient masks available at that time in Germany. When our supply of medical masks was also secured without any issues and we were able to provide our employees at the refineries with masks, we donated the high-quality FFP2/3 masks that we had received from China to the City of Hamburg for distribution to medical staff in the city.


RESPECT FOR
HUMAN RIGHTS

Naturally, good compliance also involves observing recognized human rights at our locations and in our business relationships. Above all, this means protecting the personal dignity and privacy of each individual. In addition, we recognize employees’ and/or business partners’ rights to freedom of assembly and association.

Compliance with human rights is enshrined both in our Code of Conduct and in our corporate policy, which guides our actions as a company.

In order to ensure that human rights are respected in our supply chain, both our corporate policy and a separate Supplier Code are integral parts of the contracts we conclude with our suppliers.

If a supplier hires a subcontractor, they must ensure that the subcontractor is aware of and complies with all the obligations that our supplier has entered into with us. These issues are not explicitly reviewed, but general supplier audits are conducted by the departments and/or companies in charge.


COMBATING CORRUPTION
AND BRIBERY

H&R places high priority on dealing with business partners, customers and public authorities in a proper manner. This also includes ensuring that in their business dealings, all employees avoid any appearance of dishonesty or corruption.

Combating corruption and bribery is therefore one of the central pillars of our Compliance Management System. Our Code of Conduct clearly states that award decisions are based exclusively on a performance evaluation. Accordingly, our success is based on the quality of our performance and we will not tolerate any kind of corruption or other unfair business practices that could help to obtain advantages. As a result, the Code of Conduct also contains unambiguous rules covering, among other things, the granting or acceptance of benefits or gifts and the participation in primarily non-commercial events, or sponsorships.

The Code of Conduct training sessions for our employees also address the issue of corruption. In addition, our employees know that in case of doubt, they can contact the Compliance Manager, their superior, or the Executive Board at any time. No cases of corruption came to light during the reporting year.

Answers from
Niels H. Hansen

Niels H. Hansen has directed the fortunes of H&R GmbH & Co. KGaA since mid 2019 as the sole managing director.

As the head of the company, what do you associate with the term “balance” – including during this pandemic?

NHH For me it is uniting and managing the variety of topics and tasks that make our business so special to ensure that we stay on course. In 2020, it meant that alongside the complex topics that dominate our days, the global competitive situation and our innovation projects, we also had to deal with new, very demanding tasks. Working together digitally took a lot of effort. For example, we had to ensure that as many employees as possible were able to work from home and events such as the Annual Shareholders’ Meeting had to be virtual. At the forefront of our minds was always guaranteeing the health and safety of our employees around the world, which we managed very well over the course of the year.