Our Steering Concept
For us, creating long-term value as a company means generating earnings that consistently exceed the cost of capital employed. We encourage and support all employees in thinking and acting entrepreneurially. Both financial and nonfinancial aspects are an integral part of our value-based management. That is why we have established most important key performance indicators that cover both areas: return on capital employed (ROCE) and CO2 emissions.
Our financial targets follow a steering concept that is aligned with our values. The return on capital employed (ROCE) is used as the key target and management indicator for the BASF Group. In line with our strategic targets, we aim to achieve a ROCE considerably above the cost of capital percentage every year. With ROCE, the same data is used for our value-based management, external communication with the capital markets and variable compensation. This means we use the same yardstick for internal management, employee incentivization and our shareholders’ expectations.
As part of our corporate strategy, our target is to reduce our absolute greenhouse gas emissions by 25% by 2030. We aim to achieve net zero emissions (Scope 1 and Scope 2) by 2050. Consequently, CO2 emissions are defined as a steering-relevant indicator, and we report on them as the most important nonfinancial key performance indicator.
Calculating ROCE and cost of capital
ROCE is calculated as the EBIT of the segments as a percentage of the average cost of capital basis.
To calculate the EBIT of the segments, we take the BASF Group’s EBIT and deduct the EBIT of activities recognized under Other, which are not allocated to the divisions.
The cost of capital basis is calculated using the month-end figures and consists of the operating assets of the segments. These comprise the current and noncurrent asset items of the segments, including tangible and intangible fixed assets, integral investments accounted for using the equity method, inventories, trade accounts receivable, other receivables and other assets generated by core business activities and, where appropriate, the assets of disposal groups. The cost of capital basis also includes customer and supplier financing.
We have integrated the cost of capital percentage into our ROCE target as a comparative figure. This is determined using the 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 based on the financing costs of the BASF Group. The cost of capital percentage for 2023 is 9% (2022: 9%).
Calculation of CO2 emissions
We calculate the BASF Group’s absolute CO2 emissions on the basis of greenhouse gas emissions, which are the sum of direct emissions from production processes and the generation of steam and electricity (Scope 1), as well as indirect emissions from the purchase of energy (Scope 2). Direct emissions from the generation of energy for third parties are not considered here. Relevant emissions include other greenhouse gases according to the Greenhouse Gas Protocol, which are converted into CO2 equivalents.
Value-based management throughout the company
The target agreement process is an important part of our value-based management. It aligns individual employee targets with BASF’s targets. The most important financial indicator in the operating business is ROCE. The other units’ contribution to value is also assessed according to effectiveness and efficiency on the basis of quality and cost targets. To assess this, we use metrics such as BASF’s internal service score in the service units.
For the BASF Group, we use EBIT before special items and capex (capital expenditure) as key performance indicators that have a direct impact on ROCE and as such, support its management.
- EBIT before special items is used to steer profitability at Group and segment level. This is calculated by adjusting the EBIT reported in the Consolidated Financial Statements for special items, making it especially suitable for assessing economic development over time. Special items arise from the integration of acquired businesses, from restructuring measures, certain impairments, gains or losses resulting from divestitures and sales of shareholdings, and other expenses and income that arise outside of ordinary business activities.
- Capital expenditures (capex) are used to manage capital employed in the BASF Group. These comprise additions to property, plant and equipment excluding additions from acquisitions, IT investments, restoration obligations and right-of-use assets arising from leases. Capex is not just relevant to ROCE management but also supports our long-term goal of increasing our dividend each year based on a strong free cash flow.
Furthermore, we comment on and forecast sales at Group and segment level in our financial reporting as a significant driver for EBIT before special items and thus ROCE.