Infineon ESG Highlights

Taking the right approach to improving its ESG performance

• Governance: Highly experienced board members and a clear distinction between the chairman and CEO roles.
• Environment: Rated B by CDP, Infineon has a clear target of reducing scope 1+2 GHG emissions by 70% by 2025 (vs. 2019 levels) before becoming carbon neutral (scopes 1+2 only) by 2030. However, we lack perspective in terms of reducing scope 3 emissions.
• Social: The company closely monitors injury and fatality rates and is reducing its exposure to supply chain risks related to labour abuse. An ISO45001-certified health and safety management system has been implemented in all major manufacturing sites since 2020, and the company had reached a 100% rate of audited suppliers by the end of 2023.

Board Members:

?? We believe Infineon’s board is effective, benefitting from a clear distinction between the supervisory board and the management board. Moreover, all board members have deep knowledge of both the company and the semiconductor industry.

Infineon’s governance includes a supervisory board and a management board. The role of the former is to advise, while that of the latter is to run the company.

Infineon’s supervisory board is made up of 16 members and includes an equal number of shareholder representatives and employee representatives. The shareholder representatives are all independent and delegates of the German workforce, according to German regulation. Additionally, the supervisory board does not include any management board members and 44% of its members are women. Board members have developed vast knowledge in the areas of manufacturing, sales and marketing, human resources, as well as strategic competencies in M&A and digitalisation, but lack direct experience in semi-conductors. Thanks to the latest board evaluation, Prof Ule has been appointed given his expertise in the semi-conductor industry.

As of February 2023, Dr. Wolfgang Eder and Hans Ulrich Holdenried resigned from the supervisory board with effect from the end of the AGM. Dr. Hebert Diess and Klaus Helmrich were newly elected to the supervisory board. At the AGM, the supervisory board elected Dr. Helbert Diess as its new chairman, replacing Dr. Wolfgang Eder (former chairman of the board). Note that Dr. Helbert Diess had already been a member of the board between 2015 and 2020. The supervisory board is supported by five committees:

1. The mediation committee, which did not need to convene in 2023, was chaired by Dr. Wolfgang Eder until his replacement by Dr. Herbert Diess on 16 February 2023.
2. The executive committee, which met six times in 2023 and was chaired by Dr. Wolfgang Eder until his replacement by Dr. Herbert Diess on 16 February 2023.
3. The investment, finance, and audit committee, which met five times in 2023 and is chaired by Dr. Friedrich Eichiner.
4. The strategy and technology committee, which met three times in 2023 and has been chaired by Dr. Herbert Diess since February 2023.
5. The nomination committee held six meeting in 2023 and has been chaired by Herbert Diess since February 2023.

In our view, the company benefits from a very well-balanced supervisory board in terms of expertise and diversity. In 2023, the board met nine times, not including committees, with an average attendance rate of 98%. The remuneration of the supervisory board is defined as follows:

1. Fixed compensation of EUR100,000 for each member.
2. Additional compensation for specific members as detailed in the chart below.
3. A meeting attendance fee of EUR2,000 per meeting that is reduced to EUR1,000 if the meeting is attended by telephone or video conference and no resolutions are passed.

The management board is made up of four members, the majority of which are men aged 50+, along with one woman. Regarding the qualifications of the board members, Jochen Hanebeck was appointed CEO in April 2022, replacing Dr. Reinhard Ploss, who retired after more than 35 years at Infineon (he has been a member of the board since 2007 and had been CEO since 2012). Over the course of his career, he has held different positions: 1994 - Development Engineer in DRAM development (Siemens in a joint venture with IBM and Toshiba) in East Fishkill (US). 1997 - Head of DRAM Technology Development at Siemens Microelectronics Centre (SIMEC) in Dresden (Germany). 1999 - Assistant to the Chief Operating Officer. 2001 - Head of Operations within the Chip Card & Security Division. 2003 - Head of the Infineon Centre of Excellence. 2004 - Head of Operations within the Automotive, Industrial, and Multimarket Group. 2007 - Head of the Microcontrollers Business Unit within the Automotive, Industrial, and Multimarket Group. 2008 - Division President Automotive. 2016 - Member of the Management Board and Chief Operations Officer, responsible for Operations, including Manufacturing, Logistics, Quality, Customs, and Procurement. 2022 - Chief Executive Officer, responsible for Divisions, Group Strategy, Mergers & Acquisitions, Organisation and Strategy enablement/ implementation of Region Americas, Communications & Public Policy; Human Resources (Labour Director), Legal & Patents, Research & Development (CTO). Thus, Jochen Hanebeck is very familiar with the company and has a strong understanding of all the operating levels, from the bottom to top management. He has deep knowledge of the semis industry and specifically the automotive market (which is critical for Infineon, representing c. 45% of the group’s revenue). CFO Dr. Sven Schneider boasts strong experience in corporate finance thanks to holding different positions at Linde AG, from Head of Corporate Finance in 2005 to Spokesman of the Executive Board, Chief Financial Officer, and Labour Director in 2019. COO Dr. Rutger Wijburg was appointed Chief Operations Officer (COO) in April 2022. Before joining Infineon in 2018, he held various leading positions at Philips, NXP, and GlobalFoundries (from 1992 to 2018). CMO Dr. Andreas Urschitz has held different positions at Infineon since 1995. He also started from production planning and strategy before holding several different management roles in the areas of production, marketing, development, and sales, and more recently Division President Power & Sensor Systems over 2012-22. Chief Digital Transformation Officer (CDTO) Elke Reichart was appointed in 2023. She received her diploma in Romance Languages and Economics as well as a postgraduate degree in Applied Computer Science from the University of Gie?en and started her career at Hewlett Packard Inc. in 1991.

In our view, the management board is made up of highly experienced professionals with deep industry and company knowledge, as most of them have worked at the company for many years.

Remuneration policy:

?? In our view, the remuneration policy for the CEO and top management team is aligned with shareholders’ interests, as there is a significant variable compensation component that relies on several short- and long-term objectives. It is worth pointing out that the weight of the ESG target criterion has increased to 30% since 2021.

The remuneration policy for the CEO and management board is defined by the remuneration committee and was updated in 2020 and accepted at the 2020 AGM. This remuneration system is still effective. Except from some light changes, that was approved in 2021. These changes include:

1. Higher pay limits for long-serving members: Board members who have been with Infineon for more than four years can now receive higher maximum pay. For regular board members, the cap was increased from EUR4.2m to EUR5.3m. For the CEO, the cap rose from EUR7.2m to EUR9.2m.
2. ESG criterion: The supervisory board created the option of increasing the weighting of the ESG targets as part of the LTI from 20% to 30%.
3. Variable pay adjustment: The portion of pay that varies based on performance was updated to better match market trends and be more closely tied to the company's success.

The short-term incentive (STI) is based on financial targets for ROCE, FCF, and, since 2020, the segment result margin. Targets are defined at the beginning of each fiscal year. The performance share plan (PSP) is based on the total shareholder return (TSR), which is defined as Infineon’s share price performance over four years, as compared to a predefined peer group consisting of major peers. If all targets are 100% achieved, the PSP accounts for about 35% of the total compensation. The TSR target accounts for 70-80% of the PSP, while the remaining 20-30% is related to ESG targets. The 2019 tranche was settled in 2023. This tranche was still subject to the old rules that applied until the adoption of the 2020 remuneration system. Regarding the MTI, it was abolished with the introduction of the 2020 remuneration system for the management board.

Fixed compensation represented c. 36% of the total compensation in 2023 (fixed + variable parts) and the LTI represented c. 35%. Therefore, in 2023 the CEO received total fixed remuneration of EUR1.45m, representing a YOY increase of 19.5%, in addition to variable remuneration of EUR2.3m, with a YOY increase of 19.6%.

In our view, the updated remuneration policy is fair and is now current best practice. This should contribute to the company’s long-term success. The inclusion of ESG targets since 2020 is worth mentioning, and the increase in the weight of said target to 30% in 2021 reflects the company’s commitment to creating sustainable impact and value.

Shareholders Structure:

In 2024, Infineon’s free float represented 100% of the capital. The largest shareholders are BlackRock (with 6.5% of the shares), Vanguard Group (with 4.3% of the shares), Amundi (with 3.1% of the shares), Deutsche Bank (with 3% of the shares), Alianz (with 3% of the shares), Norges Bank (with 2.7% of the shares), and Pictet (with 1.8% of the shares). Each share carries the right to one vote. Such a balanced shareholding structure is positive for the company, as it prevents any abuse of power during shareholder meetings.

Infineon pays a sustainable dividend that has been growing year after year over the past decade (except for FY 2020, due to the pandemic), and the group continued to increase its dividend year after year post pandemic. The dividend climbed to EUR0.35 in FY 2023, up by 9%, and the total amount of dividend to be paid out of 2023 profit was EUR456m. This led to a payout ratio of 15% in FY 2023 (vs. 19% in FY 2022).

Quality of Reporting:

Infineon has completed significant acquisitions, including International Rectifiers in 2015 and Cypress Semiconductor in 2020, which led to sizeable exceptional items and initially unpredictable earnings. Despite these M&A activities, Infineon maintains a relatively clean business model with few exceptional items. The company has announced a "Set-UP" cost savings plan aiming for high triple-digit million-euro annual savings by H2 2027, with an expected EUR400m one-off cost spread between Q4 FY 2023 and FY 2026E. Infineon's market is expanding, supported by secular growth drivers, although it remains exposed to the semiconductor cycle.

The gap between adjusted and reported operating results is expected to narrow post-FY 2026 due to a decline in purchase price allocations and restructuring charges. Infineon’s capex levels have been high, around 16% of sales over the past five years, with limited cash conversion. Unlike many tech companies, Infineon has minimally used share-based payments, impacting only about 30 basis points annually, which increased slightly after the Cypress acquisition.

The company benefits from a limited tax rate (approximately 22% over FY 2024-26E) due to large tax loss carryforwards. Infineon pays a growing dividend, which reached EUR0.35 in FY 2023, a 9% increase. Despite the Cypress acquisition, Infineon’s pension and lease liabilities remain low. Goodwill increased to EUR9.5bn in FY 2023, and the EUR1.2bn hybrid bond issued during the Cypress acquisition is consolidated into equity, somewhat distorting the financial picture. Kepler Cheuvreux includes this bond in net debt calculations, estimating it at EUR2.3bn at the end of FY 2023.

Infineon is in litigation with Qimonda’s insolvency administrator, who sued for EUR3.35bn. Infineon holds EUR212m of provisions related to this litigation, with no guarantee of sufficiency. The company reports detailed quarterly financial results and provides regular guidance. Infineon targets over 10% annual sales growth, a 25% adjusted operating margin, and a 10-15% adjusted free cash flow margin. The company provides annual updates on its four divisions and detailed strategic updates at its capital markets day, the last of which was in October 2021. Infineon is known for high-quality earnings and strong financial communication, with a track record of exceeding expectations. KPMG will be replaced by Deloitte as the auditor, pending shareholder approval at the 2024 AGM.

Business Ethics:

According to RepRisk, the company has been graded “BBB”, which means that it is low-risk. In 2020, the General European Court lowered the fine imposed by the European Commission on Infineon Technologies in 2014 from EUR82.78m to EUR76.87m. This fine stemmed from the company’s involvement in a cartel including Philips, Samsung Electronics, and Renesas. A cumulative fine of EUR138m was levied on the companies. In 2021, semiconductor companies including Infineon and GigaDevice Semiconductor were linked to a market manipulation controversy by the Chinese regulator. In 2022 and 2023, with the exception of some criticism of Infineon’s environmental and product impact, the company was not subject to any misgovernance or unethical behaviour.

Environmental Footprint:

?? Infineon was graded “B” by the CDP in 2023 (based on 2022 figures). The company aims to reduce its scope 1+2 GHG emissions by 70% by 2025 (vs. 2019 levels) before becoming carbon neutral (scope 1+2) by 2030. However, we note that it does not have a clear SBTi netzero target.

Infineon has implemented an environmental management system to ensure its operations are in line with its GHG emission reduction targets. This system is ISO 14001 certified. Additionally, the company has deployed an energy management system that is ISO 50001 certified.

By the end of 2023, Infineon’s scope 1 and 2 emissions were 57% below the emissions in the base year 2019. According to the company and data reported to the CDP, Infineon’s total GHG emissions increased by 12% in absolute terms in FY 2023 versus FY 2022. Looking solely at scope 1+2 GHG emissions, they were down by 44% in FY 2023, mainly due to the expansion of smart abatement concepts and the implementation of energy efficiency programmes, as well as the switch to green electricity in Europe, America, and Malaysia, taking the rate of renewable electricity up from 57% in 2022 to 82% in 2023. By the end of 2023, Infineon’s scope 1 and 2 emissions were 56.8% below the emissions level in the base year 2019. However, the company has not set any targets for scope 3 emissions. That said, the company has set several targets aiming to reduce its GHG emissions of CO2eq. One such target is to reduce its scope 1+2 GHG emissions by 70% by FY 2025 compared to FY 2019 levels. Note that Infineon’s targets are not SBTi-approved. At the end of 2023, the company committed to setting a science-based target, though it did not specify a timeline for this. It also said that it would extend action to scope 3 emissions. In addition to CO2, perfluorochemicals (PFCs) are potent greenhouse gases that contribute significantly to global warming. In the semiconductor industry, PFCs account for 81% of scope 1 emissions, which are direct emissions from owned or controlled sources. PFCs include perfluorinated and polyfluorinated carbon compounds, sulfuric hexafluoride (SF6), and nitrogen trifluoride (NF3) and are mainly used in wafer etching processes and cleaning production equipment. In 2023, the World Semiconductor Council (WSC) set a voluntary target of reducing PFC emissions by 85% by the end of 2030. The reduction rate is calculated based on the difference between potential emissions arising from the production process with no PFC abatement and emissions after the application of PFC abatement systems.

It is worth noting that Infineon is leading the sector in this matter and has already achieved a reduction in potential PFC emissions of more than 82% in 2023.

Nevertheless, the company has taken several actions to increase its water-recycling rate. For example, cooling water can be used afterwards to produce ultrapure water for manufacturing that can again be used for other purposes like washing processes. Such actions allow the company to consume less water than its peers. Energy consumption in kWh per EUR of revenue has remained relatively stable over the last three years. To achieve its target on scope 2 emissions, we believe Infineon is making great efforts to reduce its GHG emissions, particularly through increasing renewable energy use (82% in 2023).

The semiconductor industry produces a large amount of waste, ranging from hazardous to nonhazardous waste. Hazardous waste has properties that make it dangerous or capable of harming human health or the environment. Infineon has reduced the amount of hazardous waste relative to revenue by 59% compared to 2020 levels. The company recycles 70% of this waste. The amount of non-hazardous waste has not significantly declined over the past few years, and it even rebounded in 2023. Nevertheless, the company has a high recycling rate of 70% for this type of waste.

Climate Change Impact:

According to Infineon: “Semiconductors from Infineon help generate electricity from renewable energy sources. They also offer increased efficiency at all stages of the value chain in the energy sector.” Thanks to the use of its products, Infineon claims to compensate its own emissions 35 times over. Note that Infineon does not include scope 3 GHG emissions generated by the use of its products. Although the company helps to save millions of tonnes of CO2e thanks to its products in many industries (from EVs to renewable energies and data centres), it probably also generates millions of tonnes of CO2e in other industries. While STMicroelectronics struggles a bit to extrapolate which of its sales could be classified as responsible products (it can be tough to know where a specific chip ends up when a company sells its products through distributors), Infineon is already providing a precise split by market segment. Broadly speaking, one could argue that the power semiconductor business (c. 55% of Infineon’s sales) contributes to a reduction in energy consumption by making more efficient semiconductors, which thus could be considered to be responsible products. More specifically, we estimate that Infineon’s pure responsible products sales could account for close to 40% of group sales (including the ATV division, the GIP division as a whole, and the computing, communication, and industrial businesses within the PSS division). Note that STMicroelectronics reported slightly more than 23% of sales coming from responsible products (largely targeting EVs, ADAS, IoT, etc.) in 2023, while it targets 33% by 2027.

Health & Safety:

Infineon has implemented a health and safety management system at all manufacturing sites, as well at the corporate headquarters. This system is ISO45001 certified and is designed to ensure that the required measures are taken to minimise risks in the working environment. The company also carries out regular fire prevention and safety training. Moreover, the company tracks its injury rate and reported a 0.36 rate in FY 2023, down from 0.38 in FY 2022. The second safety metric monitored is the lost-day rate (number of lost days/total hours worked x 200,000), corresponding to the severity of accidents. This rate was at 5.46 in FY 2023, up 3% from FY 2022.

Workplace risk assessments are carried out worldwide and ensure that workplace-related risks that may result in danger for employees are identified, and that protective measures are implemented to minimise them.

Working Conditions:

In FY 2023, Infineon invested c. EUR21.3m (i.e. 1.5% of net profit) in employee training and development. Additionally, Infineon encourages diversity. The proportion of women in management positions increased from 16.5% in FY 2022 to 17.1% in FY 2023. The long-term goal is to reach 20%. Training hours per employee reached 15.4 hours in FY 2023, up from 12.9 hours per employee in 2022 and ten hours in 2021, reflecting better engagement from Infineon in terms of developing its employees’ skills. However, this is far below the level seen at STMicroelectronics, which provided 49 training hours per employee in 2023. However, the company is making some progress, as reflected by its training expenses, which increased sharply in FY 2022 and FY 2023 (to EUR17.5m and EUR21.3m, respectively) due to the return of normal activity post pandemic. Worldwide, Infineon’s employee attrition rate came in at 6.8% in FY 2023, down from 9% in FY 2022.

The company has also increased the number of women in middle and senior management over the last two years, from 16% in FY 2021 to 17.5% in FY 2023. It aims to take this number to 20% by 2030. Of the non-management staff, 43.4% of employees are female.

Product Responsability:

In 2020, a benchmarking survey conducted by Know The Chain NGO, which focuses on forced labour risks within the global supply chain, ranked a group solely consisting of ICT companies from best (Hewlett Packard Enterprise scoring 70/100) to worst (Xiaomi Corp scoring 0/100). Infineon scored only 9/100, significantly below the companies’ average at c. 30/100. This study shows that even the stronger-performing companies in the sector can do much more, especially in terms of closing the gap between policy and practice. This argument is also valid for Infineon. Moreover, in 2022, Infineon, Altera, and other firms came under scrutiny after the discovery of their names on the electronic components inside Russian missiles that hit Ukraine. However, given the complexity of the semiconductor supply chain, it is very hard to know for which purpose these components would be used. As a result, we cannot simply assume that Infineon had a direct link and role in these accusations.

Supply Chain:

Infineon has a portal to gather information about suppliers on key principles of procurement such as human rights, health and safety, environmental protection, labour standards, conflicts of interest, fair business practices, business gifts, security, business continuity planning, and occupational safety and health. According to the company, its main suppliers are contractually obliged to uphold their Corporate Social Responsibility (CSR) commitments. More than 100 new suppliers and new subsidiaries of existing suppliers are categorised each quarter and then receive questionnaires in order to evaluate and approve them. However, over the last decade, Infineon’s name (among those of other ICT companies) has come up several times with regard to labour issues in its factories in many regions. A documentary published by DanWatch in 2019 called “Forced Labour Behind Your Screen” accuses Infineon and other semis players of slave-like working conditions and debt bondage in Malaysia. These companies have shown a continuous failure by the industry to address forced labour issues in their supply chains. Nevertheless, around 360 of Infineon’s strategic suppliers representing 70% of the total procurement volume were re-evaluated in FY 2023. As Infineon uses minerals, which sometimes come from the Democratic Republic of the Congo, the company performs an even more drastic audit process in this region to make sure that none of its suppliers are involved in any of the conflicts afflicting the country. In 2023, 100% of Infineon’s suppliers went through the auditing process. In our view, Infineon is “auditing” its suppliers on a declaration basis but is not investigating and monitoring them well enough to resolve its labour controversies.