Sustainable corporate governance

EU taxonomy

One of the important goals of the Commission Action Plan on Financing Sustainable Growth in the context of the European Green Deal is to divert capital flows to sustainable investments. This is also the logic behind the EU taxonomy regulation (EU 2020/852) that came into force in mid- 2020. This regulation governs the establishment of a standardized and legally binding classification system that defines which economic activities in the EU are considered to be aligned with the taxonomy — and thus environmentally sustainable with regard to the six environmental objectives established by the regulation.

• Climate change mitigation
• Climate change adaptation
• Sustainable use and protection of water and marine resources
• Transition to a circular economy
• Pollution prevention and control
• Protection and restoration of biodiversity and ecosystems

Companies that are required to publish a Non-Financial Declaration must also comply with the taxonomy regulation. According to Article 8 of the taxonomy regulation, the taxonomy-aligned proportions of revenue, capital expenditure and operating expenditure accounted for by environmentally sustainable economic activities are to be reported on an annual basis.

Taxonomy eligibility

Taxonomy eligibility is assessed in an initial step. For an economic activity to be taxonomy-eligible, that activity must be mentioned and explained in further detail in the delegated acts for the taxonomy regulation. Descriptions of relevant activities and technical screening criteria are currently available as delegated act (EU 2021/2139) for the first two environmental objectives (climate change mitigation and climate change adaptation). Climate change mitigation in particular is to be regarded as the relevant environmental objective for the Mercedes-Benz Group.

On the basis of the descriptions contained in the delegated act relating to climate change mitigation, the following taxonomy-eligible economic activities have been identified for the Group:

• Economic activity 3.3: encompasses manufacture of low-carbon transport technologies in connection with the production of cars and vans
• Economic activity 6.5: encompasses leasing and financing of low-carbon cars and vans
• Economic activity 6.6: encompasses leasing and financing of low-carbon trucks

In a final Interpretation Document that the European Commission published on 6 October 2022, the Commission stated that the term “low-carbon” only relates to the assessment of taxonomy alignment within the framework of the technical screening criteria and is not relevant for reporting on taxonomy eligibility. With regard to auto-makers in particular, and as an example, the document shows that the activity “manufacture of low-carbon vehicles” also includes vehicles with combustion engines. For the Mercedes-Benz Group, this clarification by the European Commission means that the manufacture of all Group vehicles is reported as taxonomy-eligible.

Economic activity 6.5 relates to leasing and sales financing of all vehicles purchased from third parties.

Economic activity 6.6 mainly comprises the continuing Daimler Truck portfolio at Mercedes-Benz Mobility.

Economic activities in certain energy sectors as specified in the complementary delegated act to climate objectives exist at Mercedes-Benz Group only to an immaterial extent and exclusiviely serve the operation of economic activity 3.3.

Taxonomy alignment

In a further step, taxonomy alignment must be assessed for taxonomy-eligible economic activities. Only taxonomy-eligible activities can be considered as environmentally sustainable activities, or as being taxonomy-aligned, provided they meet certain technical screening criteria. Here, the fulfilment of certain technical screening criteria with regard to the relevant economic activities must make a substantial contribution to an environmental objective defined by the taxonomy regulation and, on the basis of defined “do no significant harm criteria” (DNSH criteria), also exclude the possibility of significant interference with another environmental objective. It must also be ensured that minimum standards are met with regard to issues such as upholding human rights or combating corruption (minimum safeguards).

Fulfilment of a substantial contribution to the climate change mitigation environmental objective

According to the delegated act, all vehicles complying with the limit value of 50g CO₂/km per vehicle (in accordance with the WLTP) as defined in the technical screening criteria make a substantial contribution to the climate change mitigation environmental objective. At Mercedes-Benz Group all-electric vehicles as well as the majority of plug-in hybrid vehicles are below this threshold. These vehicles are referred hereafter to as “low-carbon vehicles”.

Exclusion of the possibility of significant interference on the basis of the “do no significant harm criteria”

Compliance with DNSH criteria is used in a second step to demonstrate that the economic activities in question do not significantly interfere with other environmental objectives.

In connection with economic activity 3.3, the fulfilment of these criteria was basically assessed at the level of those consolidated production sites where low-carbon vehicles or associated components are currently being manufactured or will be manufactured in the future.

In connection with economic activity 6.5, the analysis of the criteria has to be performed on the basis of the respective low-carbon vehicles.

Climate change adaptation

A climate risk assessment was conducted for relevant production sites in order to analyse physical climate risks on the basis of significant climate-related hazards. Adaptation measures were then evaluated on the basis of the identified risk exposure. The analysis took into account recognized scenarios from the Intergovernmental Panel on Climate Change (IPCC), including one scenario that depicts the biggest physical impacts. Various time horizons (e.g. 2040) and a trend analysis were examined.The verification of the DNSH criteria for economic activity 6.5 is essentially based on the consideration of relevant conditions of use and the environment, such as heat and cold requirements in the context of vehicle development and testing.

Sustainable use and protection of water and maritime resources

With regard to the production of low-carbon vehicles, the Mercedes-Benz Group ensures fulfilment of the DNSH criteria mainly through the use of established environmental management systems and internal environmental risk assessments (environmental due diligence process). The company has established environmental management systems at its production sites around the world in accordance with EMAS or ISO 14001. These environmental management systems are certified at regular intervals. As part of the internal environmental risk assessments, consolidated production sites are evaluated according to a number of factors, including those relating to water quality. Recommendations for minimizing risks are then drawn up and the progress is appropriately monitored. The Group also uses external data sources to identify sites that are subject to risks regarding water scarcity.

Transition to a circular economy

With regard to economic activity 3.3, the EU taxonomy regulation requires an assessment and, if possible, the appplication of measures that promote the transition to a circular economy, including the use of secondary materials, high durability of products and waste management in production. When developing products, the Mercedes-Benz Group considers the concept of circular economy from the very start and has set itself the overarching goal of increasing its use of secondary materials. In line with the relevant provisions, and in accordance with ISO 22628, 85% of the materials used in Mercedes-Benz cars and light commercial vehicles can be recycled and 95% can be reused or recovered. Among other things, this complies with the requirements of economic activity 6.5.

The Mercedes-Benz Group is intensifying its efforts to use lower volumes of raw materials and other materials at its production sites as well. In accordance with the waste hierarchy, the company’s primary goal is to avoid waste. For its production sites worldwide, the Mercedes-Benz Group has set reduction targets for factors such as total waste volume and waste volume for disposal per vehicle. Waste management is also a component of the Group’s internal environmental risk assessments.

Pollution prevention and control

With regard to the DNSH criteria, the EU taxonomy for economic activity 3.3 under Annex C of the delegated act relating to climate change mitigation refers to the concept of avoiding the manufacturing, placing on the market or use of restricted substances subject to current European legislation on chemicals, as well as of other groups of substances that go beyond that (defined under sections f) and g) in the mentioned annex). However these requirements contain an exemption rule which is applied by Mercedes-Benz Group. With regard to the regulation of chemicals, the Group has established internal guidelines and approval and monitoring procedures for production-related and product-related activities. The Mercedes-Benz Group has also defined specifications for substitution analyses, and thus for the use of less critical hazardous substances.

For economic activity 6.5, the DNSH criteria refer to compliance with various product-related European regulations and directives on, among other things, emission limits and rolling resistance coefficients — as well as rolling noise requirements for tyres. Only all-electric vehicles in the area of application of those EU laws are currently considered in the taxonomy-aligned scope of economic activity 6.5.

In due consideration of a further FAQ document of the EU Commission (published as a Draft Commission Notice on December 19, 2022) only tyres corresponding to the two highest classes for rolling resistance coefficients available on the market and at the same time the highest class for external rolling noise available on the market fulfill DNSH requirements for the respective vehicles.

For the analysis the time of market placement was used. For the assessment of the respective classes available on the market, the data of the European Product Database for Energy Labelling (EPREL) shall be used. For vans, such an assessment of tyre classes available on the market for the respective vehicles according to EPREL database has been performed. For passenger cars, the theoretical two highest fuel efficiency classes and the highest external rolling noise class were analyzed without considering EPREL data. On this basis, the entire vehicle portfolio of all-electric vehicles without differentiating between economic activities and therefore without differentiating between sales and leasing vehicles has been analysed and assessed. Thus a proportionate share of passenger cars with the respective highest tyre classes has been determined.

Protection and restoration of biodiversity and ecosystems

To demonstrate the requirements for economic activity 3.3 with regard to the environmental objective of biodiversity and ecosystems, ecologically sensitive or protected areas in the neighbourhood are documented and taken into account as part of the internal environmental risk assessments. Furthermore, examination of the surrounding areas is part of the location planning process.

Fulfilment of minimum safeguards

An economic activity can only be classified as environmentally sustainable within the meaning of the taxonomy if it is also conducted in accordance with certain minimum standards that are based on international frameworks. Here, Article 18 of the taxonomy regulation references the OECD Guidelines for Multinational Enterprises, the United Nations Guiding Principles on Business and Human Rights (including the basic principles and rights from the eight core conventions defined in the International Labour Organisation’s Declaration on Fundamental Principles and Rights at Work), and the International Bill of Human Rights. The taxonomy regulation itself does not further specify the standards.

The report published by the Platform on Sustainable Finance in October 2022 (Final Report on Minimum Safeguards) assists companies with the interpretation of the scope and application of the minimum standards. This report forms the foundation for the application of minimum standards and the associated reporting at Mercedes-Benz Group. Key issue areas here are human rights and labour rights, the prevention of corruption and the promotion of fair competition, and responsible tax practices. The verification of compliance here basically involves demonstrating the existence of suitable due diligence processes on Group Level and the fact that no judicial rulings in the final instance have been made due to serious violations in the aforementioned areas.

Reporting on the taxonomy-aligned proportions of environmentally sustainable economic activities

The sections below present information on the proportion of revenue, capital expenditure and operating expenditure accounted for by environmentally sustainable economic activities at the Mercedes-Benz Group.

The individual figures for revenue, capital expenditure and operating expenditure are precisely allocated to a specific economic activity and environmental objective. This prevents double counting.

The calculations for the key figures are based on the Consolidated Financial Statements in accordance with IFRS. Due to an exemption granted by the EU, only the proportions of taxonomy-eligible economic activities were obliged to be reported in the previous year. The provision of comparative information is not yet legally required in the reporting year.

Revenue

Taxonomy eligibility of revenue

For the share of taxonomy-eligible revenue (under A in the table Revenue), the taxonomy-eligible revenue is considered in relation to the total revenue of the Group.

In this process, the denominator takes into account all the revenue generated at the consolidated companies that are to be included in the calculations. The revenue, as disclosed in the consolidated statement of income, amounted to €150,017 million in the reporting year.

The numerator was calculated by examining this revenue to determine how much of it was generated in connection with manufacturing or the leasing or financing of vehicles. This applies to almost all of the revenue generated by the Mercedes-Benz Group. Excluded from this are in particular revenues from the sale of used vehicles, which Mercedes-Benz group has purchased from third parties.

Taxonomy alignment of revenue

In order to calculate the taxonomy-aligned proportion of economic activities (under A1 in the table Revenue), revenues were examined to determine the extent to which they were generated with low-carbon vehicles in order to assess whether a substantial contribution had been made to climate change mitigation. Compliance with DNSH criteria was also assessed. 

For the major proportion of the revenue, in particular from the new and used vehicle business and leasing and sales financing activities, a direct attribution was made of the revenue accounted for by low-carbon vehicles. With regard to other revenue components, especially revenue from the spare parts business and service and maintenance contracts, or attribution of discounts granted for large procurement volumes, it is not possible to directly assign revenue to low-carbon vehicles. In these cases, suitable allocations were therefore used for the various revenue components. These classifications are based on current or historical vehicle sales data for the fleet that is currently on the market and data on production volumes.

By the end of this decade, the Mercedes-Benz Group intends to be all-electric wherever market conditions allow. The strategic step to “Electric only” will accelerate the transformation of the company to an all-electric and software-driven future. In line with this strategy and the associated planned sales figures for low-emission vehicles, the Mercedes-Benz Group expects the share of the revenue generated by low-carbon vehicles to rise significantly in the years ahead.

Capital Expenditure

Taxonomy eligibility of capital expenditure

For the share of taxonomy-eligible capital expenditure (under A in the table Capital Expenditure), the taxonomy-eligible capital expenditure is considered in relation to the total relevant capital expenditure of the Group.

Here, the denominator of the key figure for capital expenditure is calculated by taking into account all additions to intangible assets, property, plant and equipment, equipment on operating leases and additions to rights-of-use assets as defined in IFRS 16, including the additions to the named assets within the framework of corporate acquisitions. Equipment on operating leases only takes into account vehicles acquired by a dealer from outside the Group. Goodwill acquired is not taken into account here. If a divestment is planned, capital expenditure on non-current assets is only taken into account until the point in time at which they were first classified as available for sale or disbursement in accordance with IFRS 5. The relevant additions to the assets to be taken into account amounted to €18,369 million in the 2022 reporting year.

According to the aforementioned interpretation document issued by the European Commission, which was finally published on 6 October 2022, the definition of an economic activity is characterized by the achievement of an output. In line with the Mercedes-Benz Group’s business model, the numerator was therefore determined by examining whether capital expenditure is made in connection with the manufacturing of vehicles or the implementation of transport solutions for people and goods. This applies to nearly all of our investments.

Taxonomy alignment of capital expenditure

In order to calculate the taxonomy-aligned proportion of economic activities (under A1 in the table Capital Expenditure), capital expenditure was examined to determine the extent to which it was associated with low-carbon vehicles in order to assess whether a substantial contribution had been made to climate change mitigation. Compliance with DNSH criteria was also assessed.

The capital expenditure items shown below are included as an aggregation across the various economic activities:

The size of the share of taxonomy-aligned expenditure of total capital expenditure is mainly impacted by the additions to the leased objects. As a result, this share only partially reflects our investments in sustainable products for the future.

A separate additional review of the taxonomy-aligned investments in intangible assets (mainly in capitalized research and development expenditure) and property, plant and equipment of the Mercedes-Benz Group shows much higher shares of taxonomy-eligible investments. 

On the basis of our “electric only” strategy, the Mercedes-Benz Group intends to further increase these investments in the coming years.

All of the capital expenditure at the Mercedes-Benz Group included in the numerator relates to assets or processes in the context of already existing technologies and in connection with already existing taxonomy-aligned economic activities. For most of the capital expenditure relating to the industrial business, a direct attribution was made to all-electric or low-carbon hybrid vehicle projects. In the case of capital expenditure in assets that are used to produce both vehicles with combustion engines and low-carbon vehicles, suitable allocations based on planned vehicle sales figures for the respective model series or vehicle platforms were used. Capital expenditure that is not directly related to the manufacturing process was allocated on the basis of the planned sales figures for low-carbon vehicles. With regard to financial services, it is possible to match the additions to the leased products directly to low-carbon vehicles.

Operating expenditure

Taxonomy eligibility of operating expenditure

For the share of taxonomy-eligible operating expenditure (under A in the table Operating Expenditure), the taxonomy-eligible operating expenditure is considered in relation to the relevant operating expenditure of the Group.

The operating expenditure to be taken into account in the denominator corresponds to a figure that was exclusively calculated within the framework of taxonomy reporting. These operating expenditure include non-capitalized research and development expenditure and expenses from short-term leasing agreements. In addition, expenditure from building renovation measures and certain maintenance and repair expenses (basically labour and material costs as well as purchased services) relating to property, plant and equipment in accordance with the delegated act specifying Article 8 of the taxonomy regulation are included. These components of the relevant operating expenditure were collated exclusively from our manufacturing companies on the basis of materiality considerations. The operating expenditure at the Group companies that is to be taken into account is included, with the exception of companies that have been separately disclosed as discontinued operations in the statement of income.

In a manner similar to the approach taken for capital expenditure, the relevant operating expenditure was also examined here for the determination of the numerator on the basis of the materiality considerations mentioned above to determine whether they are related to the manufacture of vehicles. This applies to nearly all operating expenditure.

Taxonomy alignment of operating expenditure

In order to calculate the taxonomy-aligned proportion of economic activities (under A1 in the table Operating Expenditure), operating expenditure was examined to determine the extent to which it was associated with low-carbon vehicles in order to assess whether a substantial contribution had been made to climate change mitigation. Compliance with DNSH criteria was assessed.

The non-capitalized research and development expenditure can mostly be directly incorporated into the calculation of the numerator on the basis of its allocation to all-electric or low-carbon hybrid vehicle projects. Appropriate allocations based on anticipated future sales figures of the low-carbon share of the model series or the vehicle platform were used for research and development expenditure that cannot be directly allocated (model series or vehicle platforms that include plug-in hybrids as well as purely combustion engine vehicles). It was also not possible to directly match the other components of relevant operating expenses to low-carbon vehicles. The inclusion in the numerator is based on suitable allocations of current production volumes.