Sustainable Solution SteeringMethodology, process and third party assurance

1. Background

Society at large and subsequently BASF’s customers have been taking a greater interest in sustainable development over the past decades. Laws and regulations related to sustainabil-ity are developing in many countries, and the demand for sus- tainable solutions is growing in all industries and markets. Su-stainability is therefore becoming increasingly important as a key factor for growth and value creation. Through its “We cre-ate chemistry” strategy, BASF is actively addressing this on-going movement and is placing an even stronger emphasis to support its customers with solutions contributing to current and future sustainability needs. To this end, BASF has embed-ded sustainability at the core of its purpose: “We create chem-istry for a sustainable future”.

2. Objective

BASF strives to balance the three pillars of sustainability – econ- omy, environment and society – at all stages of its business and corporate activities: in strategies, in decision-making, in manufacturing and in its business models. The aim of this 360° view is to provide the best possible sustainable solution for a specifi c application in the market from today’s standpoint and to take into account future needs. This leverages opportunities by providing tangible benefi ts for customers and stakeholders as well as reduces risks by mitigating sustainability issues. On the risk management side, BASF’s compliance program ensures that all our products are legally compliant in their re-spective application and region. Moreover, the program de-scribes how voluntary Responsible Care requirements have to be met in order to reduce exposure to market concerns.Since decades BASF creates and makes use of new solutions that contribute to the sustainability needs of its customers to leverage sustainability opportunities (e.g., insulation materials for buildings, lightweight plastics for cars). However, to enhance BASF’s business success and to increase its contri-bution to sustainability, it is necessary to systematically assess the sustainability performance of the entire portfolio and to actively steer our offerings towards more sustainable solutions.

Sustainable Solution Steering A methodology to monitor and actively steer a broad solution portfolio based on current and anticipated future sustainability needs in the value chain

Verbund site Ludwigshafen

BASF Sustainable Solution Steering1

BASF has embedded sustainability in its corporate purpose.

"We create chemistry for a sustainable future"

3.1 Pre-assessment

The assessment is always done from the point of view of BASF’s customer industries and the society in comparison to potential alternative solutions in the market, refl ecting the re-quirements of different regions and industries. The starting point is therefore a thorough evaluation of the industry- and region-specifi c sustainability needs performed by experts from various functions, such as marketing, sales, technology, prod- uct stewardship, R&D and sustainability. Both basic require-ments of the industry with respect to sustainability as well as possible value propositions for customers are identifi ed. The question is: What are the current and upcoming sustainability needs of our customers and the sustainability requirements of the society? For example, in the European automotive industry the reduction of greenhouse gas emissions in the use phase of the car is of utmost relevance, as the industry is facing strong regulatory pressure. Whereas the packaging industry is striving to further reduce waste, as this topic is of high relevance for end consumers.

3. Sustainable Solution Steering – a comprehensive portfolio management methodology

BASF serves different industries (e.g., transportation, construc-tion, consumer goods, health and nutrition, electronics, agricul-ture, energy and resources) with a wide range of products and solutions. Each market, industry and region has different indi-vidual sustainability requirements. A "one-size fi ts-all" approach is therefore not suitable for determining the sustainability con-tribution of such a broad portfolio with differing regional and industry-specifi c needs. The individual circumstances of each solution in each application and market have to be evaluated.

In 2012, BASF developed a process to perform this extensive analysis in a systematic and consistent manner. Since then, the company has analyzed the contribution to sustainability of more than 50,000 solutions in their respective applications in order to understand the sustainability needs and to allow the necessary strategic portfolio management conclusions. BASF calls this evaluation methodology Sustainable Solution Steer- ing, consisting of several steps.

Innovations for industries: e.g., electronics and automotive

BASF Sustainable Solution Steering 2

>>>1,5001,5001,5001,5001,500experts involved e.g.

R & D Product SafetySales MarketingSustainability

> 50,000 50,000solutions assessed

Check for basic sustainability requirements

Completely fulfilled

Sustainability value contribution

Substantial contribution

Improvement actively addressed

Accelerator Transitioner

Basic market standard met

Significant effort of improvement required

Performer Challenged

Check of improvement status

Gaps identified

3.2 Assessment of sustainability contribution

In the next step, the existing portfolio for a distinct market ap-plication is assessed solution by solution according to the cur-rent and future sustainability needs in the market, industry and society. All solutions are always evaluated in a value chain ap-proach with a cradle-to-grave view. The analysis includes raw material supply, production, use phase and recycling/disposal and takes account of all three dimensions of sustainability.

In the evaluation of the economic dimension, the solution’s profitability as well as the potential cost savings that custom- ers and end-consumers can achieve in the use phase is acknowledged.

In the environmental evaluation, a check is performed to ensure that the actual basic standards that apply to the spe-cific industry are met. The solution’s contribution to the envi-ronmental performance of our customers and their products/offerings is then evaluated for the whole value chain using different types of data (e.g., LCA, market or regulatory data).

With regard to social aspects it is assessed, for instance, whether the solution contributes to the UN Millennium Devel-opment Goals. And it is investigated whether the solution can be handled safely and how it is perceived by the broader public.

BASF Sustainable Solution Steering3

Accelerator solutions contribute in at least one of the following areas:

Cost savings downstream

Climate change

Energy

Resource efficiency

Health and safety

Biodiversity

Renewables

Emission reduction

Water

UN Millennium Development Goals

A product or solution is investigated individually in each appli-cation it is being used in – with potentially different results. Specifi c analyses are made for different regions if the market standards or the legislative frameworks differ. Finally, the as-sessed solution is directly compared with the alternative solu-tions in the market – or, if such solutions do not exist, with the "non-use" of the product.

BASF Sustainable Solution Steering 4

all 4

3.3. Categorization of each solution

On the basis of the outcome of the analysis phase, solutions are clustered into sustainability categories. In order to do so, the following questions are raised: Does the solution meet the current and future basic sustainability requirements of the in-dustry? and: Does the solution make a signifi cant contribution to the sustainability needs of BASF’s customers or end-users? According to the answers to these questions, each solution is assigned to one of the following categories:

regions covered

Europe, Africa and Middle East

Asia Pacific

North America

South America

Innovations for consumer goods industry

BASF Sustainable Solution Steering5

3.4. Follow-up steps

The Sustainable Solution Steering gives a clear picture of the sustainability strengths and weaknesses in terms of market and societal needs. Based on the result of the assessment, measures and milestones are defined. To enhance sustainabil-ity market opportunities additional marketing measures may be generated for the Accelerators. An action plan is developed for each Challenged solution with the aim of reducing sales risks due to sustainability issues.

4. Process setup

This Sustainable Solution Steering evaluation process is performed in all strategic business units and central research units. The assessment is made in a workshop format with participants from all relevant functions, for example marketing, sales, technology, product stewardship, R&D and sustainability.The final results of the Sustainable Solution Steering present the share of Accelerators, Performers, Transitioners and Chal-lenged solutions in terms of sales according to the International Financial Reporting Standards (IFRS) 10 and 11. Sales from non-core business (e.g., “miscellaneous businesses”) or busi-nesses that are under divestment are not taken into account.

The results will be reviewed once a year and further monitored. If necessary, the classification of a solution is adjusted to re-flect, for example, improvements, changing legislation or cus- tomer needs. This ensures that the results are always up to date. To ensure corporate alignment, the adjustment is done jointly by the business unit together with the corporate sustain- ability experts.

The complete methodology is comprehensively documented in internal reference documents (internal guideline, Q&A, data templates) and training material is used to ensure that the as-sessment is consistent.

>1,000 action plans in place

Third party assurance

Innovations for construction industry

BASF Sustainable Solution Steering 6

5. Third party assurance

There is currently no general standard for assessing the sustain- ability contribution of a broad product portfolio. BASF has de-veloped the Sustainable Solution Steering methodology and set forth evaluation criteria and process steps, including roles and responsibilities to be involved, in an internal guideline. Following the Reporting Principles issued by the Global Report- ing Initiative, quality criteria have been defi ned to be met by Sustainable Solution Steering. These quality criteria are materi-ality, completeness, balance, comparability, accuracy, timeli-ness, clarity, and reliability.

BASF has commissioned the independent audit fi rm PricewaterhouseCoopers AG Germany (PwC) with a limited assurance engagement regarding the design and presentation of the Sustainable Solution Steering concept. The review has been conducted in accordance with the International Standard on Assurance Engagements (ISAE) 3000 (Assurance Engage-ments Other than Audits or Reviews of Historical Financial Information). Nothing came to the independent auditor’s atten-tion that would cause them to believe that the description of the Sustainable Solution Steering concept has not been pre- pared, in all material respects, in accordance with the quality criteria mentioned above. As a result PwC has expressed a limited assurance conclusion on the process (please see the attached assurance report for details).

Review in accordance with International Standard on Assurance Engagements

(ISAE) 3000

BASF Sustainable Solution Steering7

6. Independent Assurance Report

To BASF SE, LudwigshafenWe have been engaged to perform a limited assurance engagement on the process of classifying the entire product portfolio of BASF SE, Ludwigshafen, (the company) and its subsidiaries as described in the accompanying conception “Sustainable Solution Steering – Methodology, process and third party assurance” as of August 22, 2014.

Management’s responsibilityManagement of BASF SE, Ludwigshafen, is responsible for the proper design and development of a process for classifying the entire product portfolio of the company as of August 22, 2014, according to the quality criteria as set forth on page 6 of the accompanying conception, for designing, implementing and maintaining internal control and organizational safeguard measures relevant to the determination of this classification and for documenting the organizational processes.

Practitioner’s responsibilityOur responsibility is to express a conclusion based on our work performed as to whether anything has come to our atten-tion that causes us to believe that

the company’s organizational measures – especially the internal control and the organizational safeguard measures – as set forth in the conception are generally not appropriate to ensure a classification of the company’s product portfolio in accordance with the quality criteria set forth on page 6 of the accompanying conception as of August 22, 2014, provided that the organizational measures are respected and complied with, or

the company’s organizational measures are not, in all material respects, presented correctly and implemented as of August 22, 2014.

We conducted our work in accordance with the International standard on Assurance Engagements (ISAE) 3000. This Stan-dard requires that we comply with ethical requirements and plan and perform the assurance engagement, under consider-ation of materiality, to provide our conclusion with limited assur- ance.In a limited assurance engagement the evidence-gathering procedures are more limited than for a reasonable assurance engagement, and therefore less assurance is obtained than in a reasonable assurance engagement. The procedures selected depend on the practitioner’s judgment. Within the scope of our work we performed amongst others the following procedures:

inspection of documentation and process description, including the internal guideline and reference documents.

interviews of key personnel responsible for the methodology and processes in scope. walk-through of the process steps from pre-assessment to the final categorization of products, including inspection of the methodology’s application during a workshop. inspection of the methodology’s application for selected strategic business units based on the process documentation.

BASF Sustainable Solution Steering

ConclusionBased on our limited assurance engagement, nothing has come to our attention that causes us to believe that

the company’s organizational measures – especially the internal control and the organizational safeguard measures – as set forth in the conception are generally not appropriate to ensure a classification of the company’s product portfolio in accordance with the quality criteria as set forth on page 6 of the accompanying conception as of August 22, 2014, and provided that the organizational measures are respected complied with, or

the company’s organizational measures are not, in all material respects, presented correctly and implemented as of August 22, 2014.

Emphasis of matterWithout qualifying our conclusion, we draw attention to the fact, that the accompanying company’s conception was prepared as of August 22, 2014. The projection of any of the information contained in the conception is subject to the risk that changes will be made making this conception superseded. The effective-ness of individual controls and organizational measures are subject to constraints inherent to the system making it possible that not all errors or omissions may be detected. Also, the pro-jection of any conclusion to future periods is subject to the risk that due to changes in organizational measures – including the internal control and the organizational safeguard measures – the substance of this conclusion may be negatively affected.

Munich, August 22, 2014

PricewaterhouseCoopersAktiengesellschaftWirtschaftsprüfungsgesellschaft

Hendrik Fink ppa. Robert PrengelWirtschaftsprüfer(German Public Auditor)

8

BASF SESustainability Strategy

67056 Ludwigshafen, Germanysustainability-strategy@basf.comwww.basf.com

The data contained in this publication are based on our current knowledge and experience. They do not constitute the agreed contractual quality of the product and, in view of the many factors that may affect processing and application of our products, do not relieve processors from carrying out their own investigations and tests. The agreed contractual quality of the product at the time of transfer of risk is based solely on the data in the specifi cation data sheet. Any descriptions, drawings, photographs, data, proportions, weights, ect. given in this publication may change without prior information. It is the responsibility of the recipient of our product to ensure that any proprietary rights and existing laws ans legislation are observed (7/2009).