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CADMOS SWISS ENGAGEMENT FUND Buy & Care ® Responsible Investment Fund Integrated Performance Report 2015-2016


In 1996 David de Pury, Guillaume Pictet, Henri Turrettini and Christian Berner joined forces to create their company. de Pury Pictet Turrettini & Cie S.A. (PPT) provides wealth management services. The firm has developed advanced skills in asset management for both private and institutional clients and currently manages around CHF 3 billion. de Pury Pictet Turrettini & Cie has always demonstrated a great capacity for innovation, notably as a pioneer of responsible investment. It is the owner of the Buy and CareŽ strategy, manager of the Cadmos - European Engagement Fund compartment and promoter of the Cadmos Fund, and ensures the funds’ consistency, transparency and distribution. PPT is a signatory to the United Nations-supported Principles for Responsible Investment (PRI).


WELCOME For the second consecutive year, de Pury Pictet Turrettini & Cie S.A. (PPT) is publishing a transparent, comprehensive report on the outstanding performance of the Cadmos - Swiss Engagement Fund (the Fund) launched in 20141. Cadmos is a Luxembourg-based UCITS V umbrella fund, promoted by PPT and applying our proprietary Buy & Care® strategy.

Through the dialogue, the portfolio managers obtain a deeper insight into the sustainability of each company’s business model and can thus incorporate its environmental, social and governance (ESG) characteristics into their fi nancial analysis. The dialogue is also highly valued by the companies, as it improves their ability to judge the impact and quality of their ESG communications. In addition, our engagement team constantly stimulates the companies to fi nd practical ways of achieving further progress and increasing their efficiency.

Our portfolio managers’ systematic shareholder engagement with the underlying companies represents a unique feature of the Buy & Care ® strategy.

Our portfolio managers’ systematic share holder engagement with the underlying companies represents a unique feature of this strategy. Our objective is far-reaching. Overall, we aim at demonstrating that profitability and responsibility can be reconciled. To that end, our investment decisions are based on sound fundamental analysis, a disciplined management process and a keen understanding of the companies’ business models, supported by our direct engagement and dialogue with the companies. In this way we make sure that we are remunerated for the specific risks that we are taking and that the companies are improving and reducing these risks as appropriate.

The fi rst chapter of the present report provides a summary of the Fund’s financial, voting and engagement performance during the reporting cycle. The last chapter, “Engagement reports”, contains the engagement reports on selected companies, with details of the assessment and dialogue conducted by the Cadmos Funds experts. The assessments of all the underlying companies are reserved for our current and prospective investors.

We hope that you will enjoy reading this Integrated Performance Report for 2015–2016. We also take this opportunity to thank our investors for their trust in us year after year.

1. Previously Cadmos Fund Management - Guilé Swiss Engagement Fund. The name of the Fund has been simplified for greater clarity.


TABLE OF CONTENTS SUMMARY OF RESULTS IN 2015-2016

5

EXERCISE OF VOTING RIGHTS. . . . . . . . . . . 29

Financial performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

Distribution of votes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Voting performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Main oppositions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Engagement performance

. . . .

. . . . . . . . . . . . . . . . . . . . . . .

10

Cadmos Institutional Event 2015 . . . . . . . . . . . . . . . 13

Analysis of votes by topic

. . . . . . . . . . . . . . . . . . . . . .

SHAREHOLDER ENGAGEMENT

. . . . . . . . .

32 37

THE CADMOS FUNDS’ BUY & CARE ® STRATEGY . . . . . . . . . . . . . . . . . . . 15

Impact of the UN Global Compact engagement . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

16

Impact of the financially material engagement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

Founding Principles

. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Company analysis & Portfolio management. . . 18 Active ownership

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

20

FINANCIAL MANAGEMENT REPORT . . . 25

Improvements and main stories . . . . . . . . . . . . . . . . . 43 Long-term results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Engagement outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Performance of the Swiss equity market . . . . . . . 26 Portfolio management review . . . . . . . . . . . . . . . . . . . 26 Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Composition of the portfolio as at 31 December 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . 28

ENGAGEMENT REPORTS

. . . . . . . . . . . . . . . . . .

53


SUMMARY OF RESULTS IN 2015-2016


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SUMMARY OF RESULTS IN 2015-2016

F INANCIAL

PERFORMANCE

The Cadmos - Swiss Engagement Fund, promoted throughout the year, with sales of Opsumit, its new by PPT, is a compartment of the Luxembourg-based treatment for pulmonary arterial hypertension, Cadmos umbrella fund. beating expectations. Alexandre Stucki has Straumann compenmanaged the Fund since sated for the currency HE UND S STRATEGY its inception. 2 In 2015, headwinds with operaclasses A and B of the tional measures. Its new PROVED ITS EFFECTIVENESS compartment returned strategy of enlarging IN THIS PERIOD OF HIGH 7.9 per cent and 10.3 per the product offer also cent respectively, outperbegan to pay off, as was VOLATILITY T ECEMBER forming the benchmark evidenced by its halfindex (the Swiss Leader yearly earnings. Roche THE UND LASS Index - SLI), which was inched higher thanks to HAD OUTPERFORMED ITS almost flat at 0.07 per its solid R&D pipeline, cent. but Novartis was penalINDEX BY PER CENT ised by poor results in its SINCE ITS LAUNCH IN The Fund’s strategy Alcon eye-care division. proved its effectiveness in Sonova felt the effects of this period of high volaa slowdown in the implants segment and some loss tility. At December 2015 the Fund (Class B) had of market shares in the United States. outperformed its index by 13.2 per cent since its launch in 2014. Food stocks were boosted by their defensive characteristics and delivered robust gains, with small Companies with small and medium capitalisacaps such as Bell and Lindt & Sprüngli to the tions outperformed the large caps, which were fore. Nestlé managed a modest rise, maintaining subject to sell-offs after a strong 2014 and mixed its objectives of growth and margin improvement. results in 2015. Exporters with a significant cost base in Swiss francs suffered from the surge in the As the next table shows, three new companies currency’s value. In a year that saw no clear sectorjoined the compartment: Credit Suisse, Lonza based trends, stocks in the same sector experienced and Swiss Life. We bought Credit Suisse followvarying fates. ing the arrival of the new chief executive and the introduction of a new group strategy. In the case In the pharmaceutical sector, Galenica’s share of Lonza, we believe that its profits will benefit price almost doubled, fuelled by a flow of posifrom the agreements signed in recent months. tive news. Actelion published healthy results Our purchase of Swiss Life was prompted by the

T

F

.A D F (C

2015

13.2

P ERFORMANCE

B)

2014.

SINCE INCEPTION

120

115

110

105

100

95

Cadmos - Swiss Engagement Fund (B)

SLI Index

SLI Index TR

90 Mar-14

May-14

Jul-14

Sep-14

2. Alexandre Stucki Investment Management - ASIM.

Nov-14

Jan-15

Mar-15

May-15

Jul-15

Sep-15

Nov-15


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SUMMARY OF RESULTS IN 2015-2016

release of a sound earnings report. The company’s life insurance business is stable in Switzerland and France and its asset-management division’s real-estate portfolio is producing attractive yields. We sold seven positions in the course of the year. These included Clariant, where we took our profits

after rumours of a takeover by Evonik; Adecco, due to fears of a slowdown in US temporary employment and to overambitious margin objectives; and Swatch Group, whose earnings may suffer from the fall-off in global watch sales, the strength of the Swiss franc and the launch of Apple Watch. We also sold Barry Callebaut, Belimo, Emmi and SFS.

Portfolio as at 31.12.2015

Sector

ACTELION

Health Care

ADECCO (Out)

Industrial Goods & Services

BARRY CALLEBAUT (Out)

Food & Beverage

BELIMO HOLDING (Out)

Construction & Materials

BELL

Food & Beverage

BOSSARD HOLDING

Construction & Materials

CLARIANT (Out)

Chemicals

COMPAGNIE FINANCIERE RICHEMONT

Personal & Household Goods

CREDIT SUISSE GROUP (New)

Banks

EMMI (Out)

Food & Beverage

FLUGHAFEN ZURICH

Industrial Goods & Services

GALENICA

Retail

GEBERIT

Construction & Materials

GIVAUDAN

Chemicals

HELVETIA HOLDING

Insurance

KUEHNE & NAGEL

Industrial Goods & Services

LINDT & SPRUENGLI

Food & Beverage

LONZA GROUP (New)

Health Care

NESTLE

Food & Beverage

NOVARTIS

Health Care

PARTNERS GROUP HOLDING

Financial Services

ROCHE HOLDING

Health Care

SFS GROUP (Out)

Industrial Goods & Services

SGS

Industrial Goods & Services

SIKA FINANZ

Construction & Materials

SONOVA HOLDING

Health Care

STRAUMANN HOLDING

Health Care

SWATCH GROUP (Out)

Personal & Household Goods

SWISS LIFE HLODING (New)

Insurance

SWISS RE

Insurance

SWISSCOM

Telecommunications

SYNGENTA

Chemicals

UBS GROUP

Banks

VZ HOLDING

Financial Services

ZURICH INSURANCE GROUP

Insurance


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SUMMARY OF RESULTS IN 2015-2016

V OTING

PERFORMANCE

During the period under review we expressed an opinion on 724 items on the agendas of annual general meetings (AGMs). This figure represents a certain stabilisation in the number of voting decisions, whereas the previous year saw an increase of nearly 100 per cent. The additional workload

D ISTRIBUTION

500

in 2015 is directly related to investors’ demands for greater transparency. Votes on remuneration have more than tripled in the last two years, rising from a low average of less than one resolution per company in 2013 to a total of 104 (3.4 per company) in 2015 and representing 14 per cent of total votes.

OF OPPOSING VOTES

450 400

61

350 300 250 200

378 378

150 100

12

0

50

92

115

2. Remuneration

3. Capital structure

11

115

92

55 55

0

1. Board of directors

For

T HE SHAREHOLDERS HAVE F ROM ROUTINE EXERCISES

4. Shareholder’s rights

Against

CLEARLY WON A ROUND . WITH LITTLE AT STAKE AND

VOTING RESULTS THAT BARELY EXCITED COMMENT DURING THE DRINKS AFTERWARDS ,

AGM S

ARE GRADUALLY TURNING

INTO METICULOUSLY ORCHESTRATED MEETINGS WITH WELL - PREPARED EXECUTIVES AND DIRECTORS .

In 2015 the AGM season was again marked by the debate on excessive executive pay. This year, we opposed 11.5 per cent of pay-related items on the agenda. High though this rate may be, it has nevertheless declined, reflecting a marked improved in the transparency and consistency of current remuneration practices. Businesses have been quick to adapt and our voting guidelines are clear: “We attach great importance to a transparent, reasonable and well-structured remuneration policy that rewards high performance demonstrated over the long term”. Although voices are still being raised against cases of excessive pay, we note that the latter have become less arbitrary and more likely to be justified by the achievement of longer-term performance targets.

Rare are the governing bodies that take their AGM lightly. The shareholders have clearly won a round. From routine exercises with little at stake and voting results that barely excited comment during the drinks afterwards, AGMs are gradually turning into meticulously orchestrated meetings with well-prepared executives and directors. Despite all these improvements, we refused to back the board of directors in 84 of the 724 votes cast (11.6 per cent of all votes). The global rate of dissent remains stable compared with last year’s level. For each vote, we evaluated the company’s situation and made a decision, according to our voting guidelines, in the compartment’s long-term interests


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SUMMARY OF RESULTS IN 2015-2016

2015 Name

01.01

Total

31.12 Voted

Description

Total

resolutions against

% Against

ACTELION

1

1

1

Voted

23

1

4.35%

ADECCO (Out)

1

0

1

Voted

22

0

0.00%

0

BARRY CALLEBAUT (Out)

1

0

0

Exit before AGM

0

BELIMO HOLDING (Out)

1

0

1

Voted

18

2

11.11%

BELL

1

1

1

Voted

16

3

18.75%

BOSSARD HOLDING

1

1

1

Voted

21

2

9.52%

CLARIANT (Out)

1

0

1

Voted

30

1

3.33% 37.50%

COMPAGNIE FINANCIERE RICHEMONT 1

1

1

Voted

24

9

CREDIT SUISSE GROUP (New)

0

1

1

Voted

32

2

6.25%

EMMI (Out)

1

0

1

Voted

22

3

13.64%

FLUGHAFEN ZURICH

1

1

1

Voted

18

6

33.33%

GALENICA

1

1

1

Voted

21

0

0.00%

GEBERIT

1

1

1

Voted

17

0

0.00%

GIVAUDAN

1

1

1

Voted

24

1

4.17%

HELVETIA HOLDING

1

1

1

Voted

27

4

14.81%

KUEHNE & NAGEL

1

1

1

Voted

25

7

28.00%

LINDT & SPRUENGLI

1

1

0

No voting rights

0

0

LONZA GROUP (New)

0

1

0

Entry after AGM

0

0

NESTLE

1

1

1

Voted

29

1

NOVARTIS

1

1

1

Voted

26

0

0.00%

PARTNERS GROUP HOLDING

1

1

1

Voted

21

9

42.86%

3.45%

ROCHE HOLDING

1

1

0

No voting rights

0

0

SFS GROUP (Out)

1

0

1

Voted

18

2

11.11%

SGS

1

1

1

Voted

26

9

34.62%

SIKA FINANZ

1

1

1

Voted

34

5

14.71%

SONOVA HOLDING

1

1

1

Voted

20

0

0.00%

STRAUMANN HOLDING

1

1

1

Voted

18

1

5.56%

SWATCH GROUP (Out)

1

0

1

Voted

22

8

36.36%

SWISS LIFE HLODING (New)

0

1

1

Voted

24

0

0.00%

SWISS RE

1

1

1

Voted

33

2

6.06%

SWISSCOM

1

1

1

Voted

22

1

4.55%

SYNGENTA

1

1

1

Voted

22

0

0.00%

UBS GROUP

1

1

1

Voted

26

1

3.85%

VZ HOLDING

1

1

1

Voted

17

2

11.76%

ZURICH INSURANCE GROUP

1

1

1

Voted

26

2

7.69%

32

28

31

724

84 11.60%


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SUMMARY OF RESULTS IN 2015-2016

E NGAGEMENT

PERFORMANCE

As can be seen from the table opposite, we assessed twenty-seven of the companies in the Fund during this reporting cycle (January 2015 to March 2016) and engaged with twenty-one companies (78 per cent)3. This level of engagement is unique in the context of medium and large capitalisations. Credit for this success must go to the dedication of the engagement team and the stability of the portfolio managed.

made in 2014 have been implemented. We also downgraded Syngenta to level 4, despite six discussions with its management in recent years. We felt that although the company had gradually grasped the importance of addressing its ESG issues it had failed to provide adequate answers, particularly concerning the toxicological impact of its products.

we assessed twentyseven of the companies in the Fund during this reporting cycle (January 2015 to March 2016) and engaged with twenty-one companies (78 per cent)

For this second year of dialogue, we again placed an especially strong emphasis on face-toface meetings. All twenty-one discussions were conducted on-site with executives at these companies’ headquarters. Our dialogues generally take place in a highly constructive atmosphere, with astonishing transparency on the part of the companies. The latter particularly appreciate the joint presence of our engagement team and the portfolio managers, a practice that is unique in the responsible-funds universe. As a result, nine companies (33 per cent) have already reached level 5, that is, showed an improvement on at least one weak point that had been raised previously. Four new companies: Geberit, Roche, SGS and Sonova, reached level 5 in 2016. Together with Flughafen Zürich, Givaudan, Lindt & Sprüngli, Partners Group and Sika, which were also upgraded, they are described in greater detail in the chapter “Improvements and main stories” on pages 43ff. Despite an excellent discussion, we downgraded Richemont to level 4, “Approves the progress objectives clearly specified”, since in the main, it has yet to follow through on the previous year’s recommendations. We also downgraded Swisscom, as the company showed no interest in attending a meeting. But remarkably, most of the recommendations

3. It was not possible to schedule a meeting this year with Bell, Bossard Holding, Straumann and Swiss Life. VZ Holding has already announced that it is looking forward to a discussion in the next reporting cycle, as it is currently implementing its new socialresponsibility policies. Swisscom, however, was not interested in meeting this year. Lonza Group entered the portfolio too late in the year for a first assessment and meeting.

For company meetings we insist on including representatives of the financial side of the business (investor relations, CFO office etc.) as well as the social-responsibility side. By thus conveying a message of ESG integration we get the attention of the former and strong support from the latter. The dialogue is always very revealing as to how well the two sides are aligned and coordinated. There is probably no better way to see whether the ESG strategy is truly integrated into the overall corporate strategy.

D ISTRIBUTION

OF ENGAGEMENT LEVEL

: 2014-2016

3.26 2.43

2014-2015

2015-2016

Level 6

Level 3

Level 5

Level 2

Level 4

Level 1

Average


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SUMMARY OF RESULTS IN 2015-2016

Portfolio as at 31.12.2015

Engagement type

ACTELION

Meeting

Level Change Summary 2

+1

ADECCO (Out)

Exit

Exit

Exit

BARRY CALLEBAUT (Out)

Exit

Exit

Exit

BELIMO HOLDING (Out)

Exit

Exit

Exit

BELL

No meeting

1

=

Not possible to schedule a meeting this year

BOSSARD HOLDING

No meeting

1

=

Not possible to schedule a meeting this year

CLARIANT (Out)

Exit

Exit

Exit

COMPAGNIE FINANCIERE

First discussion with the company

Recommandations from last year yet to

RICHEMONT

Meeting

4

-1

CREDIT SUISSE GROUP (New)

Meeting

5

=

EMMI (Out)

Exit

Exit

Exit

FLUGHAFEN ZURICH*

Meeting

3

+1

Regular dialogue based on mutual trust

GALENICA

Meeting

2

+1

First discussion with the company

be followed through

GEBERIT**

Meeting

5

+1

Suggestions implemented

GIVAUDAN*

Meeting

4

+2

Suggestions regarding the improvements

HELVETIA HOLDING*

Meeting

2

New

to policy documents well received KUEHNE & NAGEL*

Meeting

2

+1

First discussion with the company

LINDT & SPRUENGLI*

Meeting

4

+2

Suggestions regarding challenges in the

LONZA GROUP (New)

No meeting

verified cocoa programme well received (late entry)

New

New =

NESTLE**

Meeting

5

NOVARTIS

Meeting

5

=

PARTNERS GROUP HOLDING** Meeting

4

+2

Multiple suggestions well received

ROCHE HOLDING**

Meeting

5

+3

Ongoing improvements

SFS GROUP (Out)

Exit

Exit

Exit

SGS**

Meeting

5

+1

SIKA FINANZ*

Meeting

4

+2

Multiple suggestions well received

SONOVA HOLDING*

Meeting

5

+3

Significant improvements in labour norm

STRAUMANN HOLDING

No meeting

1

=

Not possible to schedule a meeting this year

SWATCH GROUP (Out)

Exit

Exit

Exit

SWISS LIFE HLODING (New)

No meeting

1

New

SWISS RE

Meeting

5

=

SWISSCOM

No meeting

1

-1

No interest for engagement meeting this year

SYNGENTA

Meeting

4

-1

Still not so much new on the

UBS GROUP

Meeting

5

=

VZ HOLDING

No meeting

1

=

Suggestion to publish historical performance data is implemented

Not possible to schedule a meeting this year

toxicological impact Dialogue expected next year as the CSR policies are about to be implemented ZURICH INSURANCE GROUP** Meeting

2

New

very constructive first meeting and ready to discuss progress achieved over time

* Fur ther information on these companies can be found in chapter “Improvement examples and main stories” on pages 43ff.

** Comments to these companies can be consulted at chapter “Improvement examples and main stories” on pages 43ff. In addition, these companies’ complete engagement reports can be found in chapter “Engagement reports” on pages 53ff.


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SUMMARY OF RESULTS IN 2015-2016

TESTIMONIALS

F R O M S O M E O F T H E C O M PA N I E S W I T H W H O M W E A R E E N G AG E D I N D I A L O G U E

“… M ANY THANKS FROM OUR END THAT YOU TOOK THE TIME TO COME TO B ASEL AND WALK US THROUGH YOUR FINDINGS ! W E VERY MUCH APPRECIATE YOUR INPUT AND VALUABLE FEEDBACK . T HIS IS HOW WE CAN CONTINUOUSLY IMPROVE OUR SUSTAINABILITY REPORTING …” D R . U RSULA F ISCHLER -S TRASAK , B RAND M ANAGEMENT , F. H OFFMANN -L A R OCHE L TD .

“… T HANK YOU FOR YOUR VALUABLE INPUT DURING YOUR VISIT LAST T HURSDAY . I T WAS HELPFUL TO BETTER UNDERSTAND YOUR RESEARCH APPROACH AND TO GET AN EXTERNAL VIEW ON OUR CSR REPORTING AND STRATEGY .” R OLAND H ÖGGER , H EAD

“… T HANK

OF

E NVIRONMENT

AND

S USTAINABILITY , G EBERIT I NTERNATINAL AG.

YOU VERY MUCH AS WELL FROM MY SIDE FOR YOUR VISIT AND THE

ANALYSIS OF OUR

UNGC C OMMUNICATION

RECOMMENDATIONS WERE VERY USEFUL AND FOR OUR NEXT YEARS ’ REPORT …”

ON

I

P ROGRESS R EPORTING . Y OUR

HOPE WE CAN IMPLEMENT SOME

D R . P ERA W AIBEL , S USTAINABILITY M ANAGER , L INDT & S PRÜNGLI (I NTERNATIONAL ) AG.

We greatly appreciate these testimonials, which bear witness to the results that can be obtained by maintaining an influential dialogue conducted professionally and courteously.


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SUMMARY OF RESULTS IN 2015-2016

C ADMOS I NSTITUTIONAL E VENT 2015 TRANSFORMING SOCIAL AND ENVIRONMENTAL CHALLENGES INTO A COMPETITIVE ADVANTAGE – THE EXAMPLE OF GEBERIT Albert Baehny, president of Geberit, travelled from Jona to Geneva to attend the Cadmos Swiss Engagement Fund’s first-anniversary celebrations. Geberit has also been part of the Cadmos - European Engagement Fund since the latter’s inception on 19 October 2006. Mr Baehny has participated personally in the shareholder dialogue that we strive to maintain with all the underlying companies. In recent years, he and the head of Environment and Sustainability at Geberit, have joined Alexandre Stucki, manager of the Cadmos Swiss Engagement Fund, and Thomas

Streiff, head of the Guilé engagement team, to discuss the impact of environmental, social and governmental factors on the company’s business model. But why should Geberit take the time to talk to Cadmos Engagement Funds or make the trip to Geneva for the anniversary? Mr Baehny was keen to answer that question: “Investors should give companies the time needed to apply a sustainable growth strategy. I therefore welcome the Cadmos Engagement Funds’ commitment to treating businesses with respect, through a shareholder dialogue that allows for more pragmatic discussions.”

Addressing an audience of more than eighty investors, Albert Baehny, president of Geberit, explained how the company integrated sustainability and ESG factors into its strategy.

Speaking at the anniversary event, Mr Baehny stressed that for Geberit there was no confl ict between long-term value creation and social responsibility; though of course it remained a challenge for a listed company that was scrutinised quarterly for every basis point of change. Geberit began drafting an environmental strategy back in 1990. In 2005 sustainability was already one of the six initiatives defined by the company as a means of improving its productivity.

This strategy soon began to bear fruit, thanks in part to clear objectives. Between 2006 and 2014, Geberit steadily increased its productivity while reducing its carbon emissions by 42 per cent and its water consumption by 56 per cent and, perhaps more surprising, while creating 11 per cent more jobs. The objective is to return to shareholders all the generated cash that is not needed to meet the strategic goals. That is exactly what we are looking for in the Cadmos Funds.

Finally, Mr Baehny emphasised the importance of a strong corporate culture. Staff must own the sustainability strategy if the latter is to be successful. With transformational changes and the appropriate investments the employees gradually integrate Geberit’s key values into their own thinking and decision-making.


SUMMARY OF RESULTS IN 2015-2016

THE CADMOS FUNDS’ BUY & CARE® STRATEGY

15/53


16/53

THE CADMOS FUNDS’ BUY & CARE® STRATEGY

FOUNDING PRINCIPLES For nine years now we have been demonstrating that active management can be reinvented to reconcile profitability with responsibility. Active portfolio management based on thorough fundamental analysis is the keystone of the Buy & Care investment strategy. The strategy, developed by PPT, has now matured to a point where it may be useful to restate its three founding principles. They have proved particularly reliable in the long term and through changing financial and economic. 1. We do not invest in a stock but in a company. Every effort will be made to visit the companies and increase our understanding of their business model and their senior managements’ ability to ensure its longevity. 2. The main aim is to create added value for our investors in the medium and long term. We are proud to have advanced active management as a whole, particularly by working with a longer time horizon that requires strict discipline in the fundamental analysis. 3. We build concentrated portfolios. Our deep analysis strengthens our convictions and reduces portfolio turnover and transaction fees, while also enabling us to deviate from the benchmarks.

The shareholder engagement that underpins the Buy & Care strategy is applied to all the Cadmos Funds. We are convinced that continuous, non-indulgent dialogue with the companies creates value for all the stakeholders. It also enables the portfolio managers to integrate the ESG risks and opportunities into their investment decisions. Through this approach we strengthen our understanding and fundamental analysis of the companies. Our managers’ assessments of the risks and sustainability of the companies’ business models are sharpened, and their investment convictions are more solidly based. With time, the markets perceive and reward the uptrend in the companies’ quality and this is reflected in the value of our investments. This work calls for a portfolio management team with the skills required to integrate the ESG factors and link them to the classic fi nancial valuation models. The Cadmos Funds managers all benefit from extensive experience and considerable freedom in their capacity as owner-partners of their company. They have been in place since the launch of each compartment and apply the Buy & Care strategy together with deep fundamental analysis, a low turnover rate and shareholder engagement as conducted by the engagement team.

For nine years now we have been demonstrating that active management can be reinvented to reconcile profitability with responsibility. Active portfolio management based on thorough fundamental analysis is the keystone of the Buy & Care investment strategy.

Compared with the usual SRI methods, based on exclusions and best in class, the Cadmos Funds’ innovative combination of integration and engagement strategies presents a number of advantages. First, our managers are not subject to dogmatic rules and possibly arbitrary ESG ratings. Free of these external constraints, they are fully responsible for the fund’s performance. We believe that in all but a few exceptional cases, dialogue is

preferable to exclusion. Sometimes the Cadmos Funds remain the only responsible investor still maintaining the dialogue and suggesting areas with potential for progress on the ESG issues. Either the companies refuse to converse with shareholders that adopt an overly inflexible stance, removed from the economic realities; or the shareholders themselves decide to exclude certain companies from the dialogue.


17/53

THE CADMOS FUNDS’ BUY & CARE® STRATEGY

S TRATEGIC

POSITIONING OF THE

C ADMOS F UNDS Cadmos Funds

Social performance

Integration Engagement Best in class Exclusion Financial performance

In addition, the Cadmos Funds stand out from the best-in-class strategy, where investment decisions often depend on highly qualitative ESG ratings. These ratings, which rarely integrate the financial parameters or take the trouble to understand the companies’ business models, lead to sub-optimal investment decisions. This strategy has difficulty convincing traditional investors, whose scepticism increases when they consult a list of best-in-class businesses, whose social and environmental vocation is not always apparent. By taking care not to ostracise profitable businesses that will probably continue to grow, and by concentrating on their

progress, so as to ensure that they learn from their mistakes and from our dialogue, the Cadmos Funds play a complementary and perhaps significant role in the responsible investment universe. The Buy & Care strategy is a virtual, cyclical process built around listening to investors’ concerns. Applied to the Cadmos Funds, it pushes back the frontiers not only of responsible investment but of active management. The following diagram provides a simplified view of the three-step Buy & Care process as it applies to the Cadmos Swiss Engagement Fund.

T HE C ADMOS F UNDS ’ B UY & C ARE S TRATEGY

B

®

®

Company analysis - Leaders and trendsetters - Competitve advantage (SDG’s) - Integrated valuation model

re

Buy

Ca

&

&

Ca re

uy

Active Ownership - Voted by portfolio manager - UNGC Engagement - Financial Materiality Focus

Portfolio managament - Convictions (about 30-40 companies) - Long term (turnover 25%) - Risk management & selling discipline

Buy & are ® C The Buy & Care strategy is not a one-size-fits-all approach. It is designed to adapt to the selected geographical coverage and the particularities of each portfolio manager. But the following features are common to all the Cadmos Funds: deep fundamental analysis; a focus on the longevity of the companies’ competitive advantages and

therefore their ESG characteristics; use of valuation models to avoid overpaying for companies; concentrated, low-turnover portfolios; professional risk management; systematic voting at companies’ AGMs; and shareholder engagement with the UN Global Compact principles and the fi nancially material issues.


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THE CADMOS FUNDS’ BUY & CARE® STRATEGY

COMPANY ANALYSIS & PORTFOLIO MANAGEMENT The team responsible for portfolio management and fundamental analysis is the keystone of the Fund and largely explains its success. Alexandre Stucki and Nathalie Kappeler each possesses more than twenty years’ investment experience, including over ten years dedicated to the Swiss market. This advantage, combined with sound fundamental analysis, a disciplined management process and a keen understanding of corporate business models has enabled the team, Alexandre Stucki Investment Management (ASIM), to build an efficient portfolio in a short space of time. ASIM follows the precepts of Benjamin Graham and Warren Buffet, fathers of the methods and techniques of the “value investing” approach. The investment objective is to obtain steady, sustained capital growth over the long term. ASIM selects high-quality businesses that reply to a set of

quantitative and qualitative criteria. In general, the companies must present steady, stable earnings growth, a sound balance sheet, a high return on invested capital and strong free cash flow generation. High-quality management, a stable, transparent long-term strategy, concentration on the target activities, and potential for product innovation are other key criteria when selecting the securities. To compile the information needed for its analysis, ASIM also studies the companies’ publications, meets their management regularly and talks to their competitors. The discussions held with the companies in partnership with the Engagement Team on the sustainability issues can then be used to fi ne-tune the analysis. They also provide a longer-term vision of the company’s strategy and the challenges that it may face, for example when procuring natural resources.

The team responsible for portfolio management and fundamental analysis is the keystone of the Fund and largely explains its success. Alexandre Stucki and Nathalie Kappeler each possesses more than twenty years’ investment experience, including over ten years dedicated to the Swiss market. INVESTMENT PROCESS For each of the companies followed, the primary research is conducted in-house. The portfolio managers construct a model (profit and loss, balance sheet and cash flow) with a five-year historical track record and five-year projections. They then calculate a fair value for each stock in the portfolio. The fair value is derived from five-year projections. The estimated earnings per share is calculated for the year 2021 and assigned a valuation multiple. To this figure is added the cumulative dividends over the five years to 2021. This amount is discounted to the present value using the weighted average cost of capital specific to each company as a denominator. This gives the current fair value. The management decisions are made by comparing the fair value with the current market price of the security. The models are regularly updated and the fair values are compared daily with the current market prices. In our qualitative analysis, ESG factors play an important role. As the model above shows (Management, Strategy, Focus on strengths,

Innovative ability), this is where we integrate the fi nancially material ESG issues. A recent study by Harvard University sheds new light on the correlation between businesses’ sustainability and their fi nancial performance by differentiating between general and fi nancially material ESG information.4 We found this study illuminating because it corresponds more closely than most to our reality. It concludes, fi rst, that businesses that are better at managing their fi nancially material ESG issues also outperform. Furthermore, according to the same data, the positive correlation does not exist if one considers only the ESG issues in general. In other words, the fi nancial materiality of the ESG issues can be used to generate alpha, while the general ESG issues do not destroy it. This academic study, although newly published, reaches the same conclusions as the Cadmos Funds. 4. Mozaffar Khan, George Serafeim and Aaron Yoon: “Corporate Sustainability: First Evidence on Materiality”; 2015.


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THE CADMOS FUNDS’ BUY & CARE® STRATEGY

T HE

PORTFOLIO MANAGEMENT PROCESS

Quantitative analysis

Research

• Primary research by the portfolio managers • Research provided by brokers

Quantitative analysis

Portfolio management

Risk management

• Earnings growth

• Management

• Turnover

• Stock volatility

• Free cash flow generation

• Strategy

• Valuation model

• Portfolio VAR

• Focus on strengths

• Positive performance management

• Balance sheet quality

• Consensus Conclusions

• Innovative ability

PORTFOLIO CONSTRUCTION The investment universe is the Swiss Performance Index (SPI) of 250 stocks. Between twenty and forty stocks are selected from slightly more than a hundred with sufficient liquidity. The fund does not seek to replicate its benchmark, the SLI (Swiss Leader Index of the thirty most liquid SPI stocks). This concentration is desirable in the case of an engagement fund, since it means that the cost of the shareholder dialogue can be contained. That concentration is combined with an extremely low turnover rate, which increases the quality of the dialogue. The SLI, which contains the thirty most liquid companies on the Swiss market, was selected for several reasons. First, it is line with our manager’s investment style, which favours large- and mid-cap companies. Similarly to the SLI, Alexandre Stucki’s portfolios focus on a limited number of stocks. Second, it also presents the advantage of capping the weightings of the largest Swiss companies by capitalisation at 9 per cent each. The better diversification that results enables the active manager to

B ETWEEN

TWENTY

AND FORTY STOCKS ARE SELECTED FROM SLIGHTLY MORE THAN A HUNDRED WITH SUFFICIENT LIQUIDITY .

limit the impacts of Nestlé, Novartis and Roche. Lastly, the SLI is the only index to comply with Swiss, European and US regulations. The Cadmos Funds, which are governed by European law, also stipulate the use of this index. As these funds do not allow for refunding of the withholding tax on dividends and there is no SLI Net Return, the SLI Price Return net of dividends was selected. For comparison, we insert the perform mance of the SLI Total Return with dividends in our charts. The investment strategy is based solely on stock-picking. Its investment horizon is typically eighteen to thirty-six months and the portfolio turnover is low, which facilitates relations with the companies’ management. A stock cannot exceed 10 per cent of the portfolio and the fund’s five largest holdings must not represent more than 40 per cent of the portfolio value (UCITS regulation). The fund is actively managed, based on alpha generation and valuation so that the portfolio is best positioned to cope with the different market phases. There are two classes: Class A for private investors and Class B for institutional investors. In both classes a significant proportion of the management fees is handed on to the Fondation Guilé to finance the activities of the engagement team, which initiates and conducts the shareholder engagement. The long-term performance can be significantly increased with the additional support of an excellent selling discipline. Changes in the fundamentals, risks or valuation of the underlyings, together with the quality of the dialogue, will influence the portfolio manager’s view and may lead to decisions to sell.


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THE CADMOS FUNDS’ BUY & CARE® STRATEGY

A CTIVE

OWNERSHIP

In the past, company visits and participation in the annual general meeting (AGM) were standard practice for investors. Today, electronic trading and information systems, while useful and efficient, have unfortunately also made some primary sources of information obsolete. In our opinion, voting and shareholder engagement should once again be closely linked to the portfolio manager’s

investment decision and therefore be part and parcel of his responsibilities. The Fund pursues an active-ownership strategy based on three pillars: exercising our voting rights; engaging with the companies to improve their quality in relation to the UN Global Compact principles; and engaging with them on their most financially material issues.

PROXY VOTING The real long-term financial impact of the decisions made at an AGM is well documented. Few professionals would deny that the skills, independence and availability of a board of directors are critical to a company’s future. The effects of a capital increase, for example, will be felt immediately. For PPT, exercising the right to vote is first and foremost a financial responsibility. Alexandre Stucki defines his voting positions by studying the analyses of AGMs and the voting recommendations supplied by Glass Lewis. This independent agency is a leading provider of governance assessment and voting advice and covers more than 23,000 companies in more than a hundred countries. Its assessments are used by institutional investors managing total assets in excess of USD

20,000 billion. It can supply consistent assessments throughout all the countries represented in the Fund. Nevertheless, our portfolio manager has the right to deviate from those recommendations should he find that the companies’ business models and particularities are not fully taken into account and the recommendations do not correspond to our internal voting guidelines. In those guidelines, we divide the items under discussion at an AGM into four topics: the structure of the board of directors; the transparency and coherency of the remuneration policy; capital structure and distribution; and respect for the rights of long-term shareholders. Our analysis of voting in the 2015 AGM season, presented in the chapter “Exercise of voting rights in 2015”, is broken down according to that classification.

The Fund pursues an active-ownership strategy based on three pillars: exercising our voting rights; engaging with the companies to improve their quality in relation to the UN Global Compact principles; and engaging with them on their most financially material issues. VOTING GUIDELINES STURCTURE OF THE BOARD OF DIRECTORS 1. Election of individual board members 2. Functioning and independence of the various committees 3. Separation of CEO function and president of the board of directors 4. Granting of the discharge TRANSPARENCY AND COHERENCE OF THE REMUNERATION STRUCTURE 5. Appropriate structure of the remuneration system for the executive committee 6. Appropriate structure of the remuneration system for the board members STRUCTURE AND OWERSHIP OF SHARE CAPITAL 7. Approval of accounts and allocation of profits/dividends 8. Appropriate capital structure 9. Appointment of the auditors SHAREHOLDERS’ RIGHTS 10. Amendments to article of association, equal treatment or shareolders and anti-takeovermeasures


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THE CADMOS FUNDS’ BUY & CARE® STRATEGY

THE GLOBAL COMPACT ENGAGEMENT PROCESS The continuous dialogue that we seek as a shareholder is another distinguishing feature of our investment strategy. The engagement process is similar to that for voting: we outsource the primary research and the process management but always have the final word on buying or selling decisions. Fondation Guilé is engagement advisor to the Fund. In that capacity, it gives mandates to an experienced multi-disciplinary engagement team of independent consultants led by Thomas Streiff. The team assesses the companies’ performance in relation to the principles of the UN Global Compact. That assessment provides the basis for a constructive dialogue between the engagement team, the portfolio manager and the company’s key representatives.

At meetings with the companies we insist on including representatives of the fi nancial side of the business (investor relations, CFO office etc.) as well as the social-responsibility side. By thus conveying a message of ESG integration we get the attention of the former and strong support from the latter, which is often poorly integrated into the company’s global strategy. Meetings configured like this are often new to both sides, and can tell the portfolio managers a great deal about how well they are coordinated. There is probably no better way to see whether the ESG strategy is truly integrated into the company’s overall strategy.

The Cadmos Funds’ shareholder engagement is based on the four themes and ten principles of the UN Global Compact. THE UN GLOBAL COMPACT’S 10 PRINCIPLES HUMAN RIGHTS 1. Businesses should support and respect the protection of internationally proclaimed human rights; and 2. make sure that they are not complicit in human rights abuses. LABOUR STANDARDS 3. Businesses should uphold the freedom of association and recognise the right to collective bargaining; 4. eliminate all forms of forced and compulsory labour; 5. abolish child labour; and 6. eliminated discrimination in respect of employment and occupation. ENVIRONMENT 7. Businesses should support a precautionary approach to environmental challenges; 8. undertake initiatives to promote greater environmental responsability; and 9. encourage the development and diffusion of environmental friendly technologies. ANTI-CORRUPTION 10. Businesses should work against corruption in all forms, including extortion and bribery.

The Global Compact is a unique self-regulatory initiative signed by more than eight thousand companies who strive to align their current operations with ten universally accepted principles in the areas of human rights, international labour standards, environmental standards and the fight against corruption. The signatory company’s sole obligation is to communicate the progress achieved, so that stakeholders are better informed about its challenges. The dialogue is established and maintained by means of a four-step process illustrated below. The engagement team begins by assessing the comprehensiveness and quality of all the information

published on the ten Global Compact principles (company data and publications). It forwards its assessments to the fund management team, to have the latter validate, first, the improvements and shortcomings noted, and second, the financially material issues that will be addressed with the company. Once the assessment is validated (COP - Communication On Progress - Analysis) and completed by the portfolio manager, a summarised version (Assessment Results) is sent to the companies’ highest executive and operational bodies. This document focuses their attention on their company’s strengths and weaknesses and not on occasionally abstract ESG ratings.


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THE CADMOS FUNDS’ BUY & CARE® STRATEGY

E NGAGEMENT P ROCESS Company data and publications

Shareholder dialogue

COP analysis

Assessment results

The assessment opens the way to a constructive on-going dialogue in which our experts may suggest concrete improvements and monitor their implementation. The discussion begins with a commentary on the assessment results and then goes on to explore the most realistic and financially material paths to progress. For key decision-makers (CEO, CFO, and chairman) and the senior managers in charge of social responsibility, getting together with the engagement team and the portfolio managers offers the rare opportunity for an integrated dialogue in which the ESG issues confront the financial reality.

The COP-Analysis conducted by the engagement team distinguishes between the comprehensiveness and the quality of the companies’ extra-financial reporting. The comprehensiveness analysis is carried out for each of the ten Global Compact principles according to the following eight criteria.

COMPREHENSIVENESS ANALYSIS: EIGHT CRITERIA TO ANALYSE THE IMPLEMENTATION OF EACH OF THE TEN PRINCIPLES

1. How does the company describe the importance of the principle the impact of this principle on its activities and performance throughout its value chain 2. To what extent does the company express commitment to the principle explicit and practical undertaking to treat the principle as a responsibility and priority 3. How does the company integrate the principle into its strategy its practical integration into the company’s strategy and processes 4. Are the objectives clearly defi ned how does the company transform its engagement into tangible objectives 5. Are the necessary measures properly described are the actions ensuring proper integration into the company’s day-to day- activities 6. What performance-measurement indicators has the company identified relevant, reliable, ascertainable, comparable 7. Is the control system in place Surveillance and audit procedures as well as corrective actions 8. What is the impact of the measures taken results, performance, successes or failures


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THE CADMOS FUNDS’ BUY & CARE® STRATEGY

QUALITY ANALYSIS: SIX CRITERIA TO ASSESS THE QUALITY OF THE REPORTING 1. 2. 3. 4. 5. 6.

Accessibility (information easy to fi nd ) Clarity (information precise and easy to understand) Comparability (year-on-year comparison with competitors) Accuracy (relevance of the collected information) Reliability (confidence in the accuracy of information) Rapidity (consistent frequency)

By contrast, the analysis of information quality covers all ten principles and seeks rather to determine whether the information published is sufficiently credible and accessible and is likely to be taken into account by the financial markets. This formal distinction between the comprehensiveness and the quality of the information enables us to focus the company’s attention on the questions of materiality and content when one of the key Global Compact principles has not been properly addressed. On the other hand, when the ESG

risks and opportunities appear to have been well managed but the information seems poorly communicated or inaccessible to investors, the experts from the engagement team focus the dialogue on the quality and transparency of the reporting. Companies that publish convincing, comprehensive, high-quality information will probably be able to reduce their risk premium and boost their share price. Successful shareholder engagements should therefore be of direct benefit to the Cadmos Funds’ investors.

FINANCIAL MATERIALITY FOCUS Since 2013, we have done more every year to integrate the financial materiality of ESG issues into the engagement process and thus the investment process. At first, each company received specific financially material questions from the portfolio managers prior to our meetings. In 2015 we went a step further by introducing the Financial Materiality Focus or FMF, a table that sets out our main long-term ESG concerns. By discussing these points openly with the company, our portfolio managers gain valuable insights. In this way we make sure that we are remunerated for the risks that we are taking and that the companies are improving and reducing these risks. Of course, since the areas that we pinpoint should be of major concern to any portfolio manager they are also those on which the company should concentrate its communication to shareholders. When our portfolio managers bring up these fi nancially material ESG factors and express their desire to see the company give them more thought and communicate them more clearly, senior management listens closely. Presented as a means of creating value, the adjustments that we

deem necessary appear more modest. Businesses are prepared to consent, particularly since the request comes from a loyal investor. Testimonials from companies in favour of this approach of integrated dialogue motivate us to continue on the fi nancial materiality path. Early in the process, the portfolio managers, together with the engagement team, determine the topics that will form the common thread of our shareholder dialogue. We address both the risks and the potential business opportunities related to the ESG issues. While all ten principles of the Global Compact are systematically analysed and discussed, the FMF has enabled us to highlight those that seem the most critical. The engagement team defi nes the areas with potential for progress, if possible based on the FMF, and these will be monitored continuously from year to year until the targets are reached or a new FMF changes the engagement priorities. This approach ensures that we remain leaders in terms of methods of integrating the ESG factors.


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THE CADMOS FUNDS’ BUY & CARE® STRATEGY


FINANCIAL MANAGEMENT REPORT


26/53

FINANCIAL MANAGEMENT REPORT 2015

P ERFORMANCE

S WISS

OF THE

For Swiss equities, 2015 was a volatile year. Decisions by central banks and developments in the global economy affected the stock markets worldwide. In January, the Swiss National Bank’s decision to abandon its minimum exchange rate of 1.20 Swiss francs per euro triggered a surge in the currency’s value against the euro and the dollar. The Swiss stock market collapsed, shedding 14 per cent in two days. The market then rebounded, as the dollar strengthened against the Swiss franc and the euro recovered slightly. Investors’ confidence returned, boosted by the release of largely positive full-year results for 2014 and healthy US macroeconomic figures, together with the central banks’ loose monetary policies. Summer saw Greece taking centre stage. In June, fears that the country would default on a payment to the IMF had the markets plunging back into the red. But investors’ hopes revived when the European Union

EQUITY MARKET

accorded Greece a bridging loan of 7 billion euros. The upturn had just got off the ground when it was stopped in its tracks by the devaluation of the renminbi and the spectre of a slowdown in China and the emerging-market countries. Once again the Federal Reserve and the European Central Bank stepped in to shore up the markets. The ECB cut its interest rates and launched a quantitative easing programme. In December the Fed raised its key rate by 25 basis points in its first hike for seven years, citing the improvement in the US economy. Small and medium capitalisations outperformed the large caps, which were subject to sell-offs after a strong 2014 and mixed results in 2015. Exporters with a significant cost base in Swiss francs suffered from the surge in the currency’s value. In a year that saw no clear sector-based trends, stocks in the same sector experienced varying fates.

Small and medium capitalisations outperformed the large caps, which were subject to sell-offs after a strong 2014 and mixed results in 2015.

P ORTFOLIO

MANAGEMENT REVIEW

The Fund’s strategy proved its effectiveness in a highly volatile year. In 2015, classes A and B of the compartment returned 7.9 per cent and 10.3 per cent respectively. Its benchmark, the Swiss Leader Index, remained stable at 0.1 per cent.

The Fund does not replicate the index. Its objective is to deliver steady growth of the invested capital. It is actively managed, with the accent on stock picking and value creation, so that the portfolio is best positioned to cope with the different market phases. It invests in companies that present steady earnings growth, a sound balance sheet, a high return on investment and strong free cash flow generation.

Since inception, classes A and B of the compartment were up 12 per cent and 15.7 per cent respectively, whereas the benchmark had gained only 2.5 per cent. Thus, they had outperformed the benchmark by 9.5 per cent and 13.2 per cent respectively. P ERFORMANCE

120

SINCE INCEPTION

115

110

105

100

95

Cadmos - Swiss Engagement Fund (B) 90 Mar-14

May-14

Jul-14

Sep-14

Nov-14

SLI Index Jan-15

Mar-15

May-15

SLI Index TR Jul-15

Sep-15

Nov-15


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FINANCIAL MANAGEMENT REPORT 2015

I N 2015,

CLASSES

RETURNED

I TS

7.9

A

AND

B

OF THE COMPARTMENT

PER CENT AND

BENCHMARK , THE

REMAINED STABLE AT

10.3

PER CENT RESPECTIVELY .

S WISS L EADER I NDEX , 0.1 PER CENT .

Since inception, the Fund’s turnover is less than 30 per cent, which represents a holding period of three to four years. By comparison, Mercer estimates in its 2010 study that on average a company remains in a portfolio scarcely more than eighteen months, and slightly less than two years in the case of responsible investment funds5. In the pharmaceutical sector, Galenica’s share price almost doubled, fuelled by a flow of good news. The company has secured an exclusive licensing agreement with Roche to commercialise the latter’s prescription drug Mircera in the United States. Its solid fi rst-half results highlighted a strong increase in operating profit on the back of cost-cutting measures. Galenica is preparing to split into two entities, Vifor Pharma and Galenica Santé, by the fourth quarter of 2016. Actelion reported healthy results throughout the year, with sales of Opsumit, its new treatment for pulmonary arterial hypertension, beating expectations. Straumann compensated for the currency headwinds with operational measures. Its new strategy of enlarging the product offer also began to pay off, as was evidenced by its half-yearly earnings. Roche inched higher thanks to its solid R&D pipeline, but Novartis was penalised by poor results in its Alcon eye-care division. Sonova felt the effects of a slowdown in the implants segment and some loss of market shares in the United States. Food stocks profited from their defensive characteristics and delivered robust gains, with small caps such as Bell and Lindt & Sprüngli to the fore. Nestlé managed a modest rise while maintaining its objectives of growth and margin improvement. The banking sector was bolstered by the central banks’ monetary policies, as evidenced by UBS. Once again, the smaller groups were the best performers. VZ Holding’s business model delivered double-digit profit growth. Partners Group should see a sharp rise in earnings in 2016 and 2017 as it begins to receive substantial performance fees. Credit Suisse failed to convince investors despite a new chief executive and a new strategy. 5. Mercer LLC: “Investment horizons - Do managers do what they say?”; 2010.

Insurance stocks found favour early in the year, owing to their high dividend yield. Later, they were subject to profit-taking. Swiss Re and Swiss Life performed well nevertheless, buoyed up by positive earnings reports. But results at Zurich Insurance disappointed investors. Luxury-goods companies suffered from the surge in the Swiss franc and the slump in watch sales, particularly in the all-important Hong Kong market. Richemont and Swatch reported weakening profit margins. It was a good year for the portfolio’s chemical companies. The results published throughout the period were largely positive, notably at Clariant, Givaudan and Sika. Syngenta’s stock held up despite disappointing earnings, thanks to the takeover attempts by Monsanto. In the course of 2015, we made some changes to the portfolio’s composition. We reduced the number of positions from thirty-two stocks at the end of 2014 to twenty-eight at the end of December 2015. The four largest positions are Novartis, Nestlé, Roche and Givaudan, the same as the year before. As the next table shows, three new companies joined the compartment: Credit Suisse, Lonza and Swiss Life. We bought Credit Suisse following the arrival of the new chief executive and the introduction of a new group strategy. In the case of Lonza, we believe that the agreements signed in recent month will boost its profits. Our purchase of Swiss Life was prompted by a solid earnings report. The company’s life insurance business is stable in Switzerland and France and its asset-management division’s real-estate portfolio is producing attractive yields. We sold seven positions in the course of the year. These included Clariant, where we took our profits after rumours of a takeover by Evonik ; Adecco, due to fears of a slowdown in the US temporary employment market and overambitious margin objectives; and Swatch Group, whose earnings may suffer from the fall-off in global watch sales, the strength of the Swiss franc an d the launch of Apple Watch. We also sold Barry Callebaut, Belimo, Emmi and SFS.


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FINANCIAL MANAGEMENT REPORT 2015

O UTLOOK Many uncertainties cloud the outlook in 2016. The macroeconomic context presents a mixed picture. The United States has returned to growth and Europe is seeing a timid recovery, aided by the European Central Bank’s expansionary monetary stance, the less restrictive fiscal policies, a weaker euro and a low oil price. In contrast, some of the emerging-market economies are losing steam and may suffer a reversal of capital flows following the

Federal Reserve’s rate hike. The Chinese economy is in transition, with services and consumption destined to replace manufacturing and construction as its main drivers. Its GDP growth is set to be lower than in the past. Russia and Brazil have been hit by the fall in commodity prices. In Switzerland, household consumption and public spending should continue to offset the decline in exports. But the construction industry is showing signs of weakness.

C OMPOSITION OF THE 31 D ECEMBER 2015

PORTFOLIO AS AT

Portfolio as at 31.12.2015

Sector

ACTELION

Health Care

ADECCO (Out)

Industrial Goods & Services

BARRY CALLEBAUT (Out)

Food & Beverage

BELIMO HOLDING (Out)

Construction & Materials

BELL

Food & Beverage

BOSSARD HOLDING

Construction & Materials

CLARIANT (Out)

Chemicals

COMPAGNIE FINANCIERE RICHEMONT

Personal & Household Goods

CREDIT SUISSE GROUP (New)

Banks

EMMI (Out)

Food & Beverage

FLUGHAFEN ZURICH

Industrial Goods & Services

GALENICA

Retail

GEBERIT

Construction & Materials

GIVAUDAN

Chemicals

HELVETIA HOLDING

Insurance

KUEHNE & NAGEL

Industrial Goods & Services

LINDT & SPRUENGLI

Food & Beverage

LONZA GROUP (New)

Health Care

NESTLE

Food & Beverage

NOVARTIS

Health Care

PARTNERS GROUP HOLDING

Financial Services

ROCHE HOLDING

Health Care

SFS GROUP (Out)

Industrial Goods & Services

SGS

Industrial Goods & Services

SIKA FINANZ

Construction & Materials

SONOVA HOLDING

Health Care

STRAUMANN HOLDING

Health Care

SWATCH GROUP (Out)

Personal & Household Goods

SWISS LIFE HLODING (New)

Insurance

SWISS RE

Insurance

SWISSCOM

Telecommunications

SYNGENTA

Chemicals

UBS GROUP

Banks

VZ HOLDING

Financial Services

ZURICH INSURANCE GROUP

Insurance


EXERCISE OF VOTING RIGHTS


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EXERCISE OF VOTING RIGHTS IN 2015

D ISTRIBUTION

OF VOTES

At the end of December 2015, the portfolio of the Cadmos - Swiss Engagement Fund comprised twenty- eight companies. We systematically exercised our voting rights, as we had done in 2014. The introduction of a new electronic voting platform ensured that we were able to vote on 100 per cent of the Fund’s companies. We actually exercised our voting rights on thirty-one companies. The reason is that we voted on four companies that exited the portfolio after their AGMs, while one new company entered the portfolio after its AGM, and our shares in two other companies do not carry voting rights (see Summary of results in 2015–2016). D ISTRIBUTION

During the period under review we expressed an opinion on 724 items on AGM agendas, representing an average of slightly more than twenty-three items per company. This is almost twice as much as in 2013, when the average was twelve items for the Swiss companies in which we were invested. This additional workload is directly related to the greater transparency demanded by investors, and particularly the adoption of the Minder Initiative. The majority of the resolutions submitted to the vote, that is, almost 77 per cent, concerned the structure of the board of directors and the capital structure. OF VOTES

Shareholder’s rights 9% Capital structure 16%

Board of directors 61%

Remuneration 14%

Votes on remunerat ion have more than tripled in the last two years, rising from a low average of less than one resolution per company in 2013 to a total of 104 (3.4 per company) in 2015 and representing 14 per cent of total votes. Votes on remuneration have more than tripled in the last two years, rising from a low average of less than one resolution per company in 2013 to a total of 104 (3.4 per company) in 2015 and representing 14 per cent of total votes. Even though we had foreseen that development in our 2013 Activity Report, we were surprised by its magnitude and the speed of adjustment shown by the companies in the portfolio. There are fewer flagrant excesses and most of the outbidding tactics have been curbed. But the issue is still newsworthy and will remain controversial as long as these pay packages are not truly aligned with the shareholders’ interests and understood by the public. The vast majority of the resolutions are still accepted but shareholders’ approval rates are

diminishing every year. Fortunately, the increased transparency that we enjoy today greatly improves our ability to assess the correspondence between the company’s performance and the remuneration proposed. This positive development means that our portfolio manager is better equipped to judge whether senior managements’ interests are aligned with our own. We encourage the companies to work with two types of capped variable pay. The annual bonus rewards individual performance during the year but must also depend on the company’s results. However, we prefer long-term remuneration plans, paid in shares or options, based on demanding performance targets tied to the company’s results in the following three years.


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EXERCISE OF VOTING RIGHTS IN 2015

M AIN

OPPOSITIONS

Of the 724 votes cast, we voted against the boards of directors’ recommendations 84 times, that is, in 11.6 per cent of cases. The chart below shows that remuneration still represents a major point of

contention (11.5 per cent of votes against management recommendations) but was not the only item that caused concern, nor the most important.

The chart below shows that remuneration still represents a major point of contention (11.5 per cent of votes against management recommendations) but was not the only item that caused concern. D ISTRIBUTION

500

OF OPPOSING VOTES

450 400

61

350 300 250 200

378 378

150 100

12

0

50

92

115

2. Remuneration

3. Capital structure

11

115

92

55 55

0

1. Board of directors

For

Themes

4. Shareholder’s rights

Against

Nb. Vote

Against

%

1- Board of directors

439

61

13.9%

2- Remuneration

104

12

11.5%

3- Capital structure

115

0

0.0%

4- Shareholders’ rights

66

11

16.7%

Total

724

84

11.6%

Although this rate of opposition is high, it has declined significantly in the last two years, reflecting a substantial improvement in the transparency and consistency of current remuneration policies. Companies have been quick to adapt and our voting guidelines are clear: “We attach great importance to a transparent, reasonable and well-structured remuneration policy that rewards high performance achieved over the long term”. In each case, we studied that company’s particular situation and decided in accordance with our voting guidelines, in the compartment’s long-term interests.

In 2015 our main oppositions (16.7 per cent of our votes against management) concerned non-respect for shareholders’ rights. We group under this theme, which will be addressed in detail in the next chapter, all the resolutions related to equal treatment of shareholders, anti-takeover measures, and statutory changes, particularly those linked to multiple or limited voting rights.


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EXERCISE OF VOTING RIGHTS IN 2015

A NALYSIS

OF VOTES BY TOPIC

BOARD OF DIRETORS The first topic addressed in our voting guidelines – the structure of the board of directors – is of fundamental importance to a company’s development and was the most controversial in the 2015 voting season. After the AGM, the board is the highest organ of management, defining the strategy to follow, appointing the senior management that will apply that strategy, and rewarding or sanctioning it according V OTE Name BELIMO HOLDING

Vote 11

# Dissent % Dissent 2 18.2%

BELL

10

3

30.0%

BOSSARD HOLDING COMPAGNIE FINANCIERE RICHEMONT

12 14

1 8

8.3% 57.1%

EMMI

13

2

15.4%

FLUGHAFEN ZURICH

11

6

54.5%

HELVETIA HOLDING

19

3

15.8%

KUEHNE & NAGEL

16

5

31.3%

PARTNERS GROUP HOLDING

13

5

38.5%

SFS GROUP

10

2

20.0%

SGS

15

8

53.3%

SIKA FINANZ

14

5

35.7%

STRAUMANN HOLDING 11 SWATCH GROUP 12

1 5

9.1% 41.7%

SWISS RE UBS GROUP VZ HOLDING ZURICH INSURANCE GROUP

1 1 1 2

5.6% 6.3% 11.1% 11.8%

18 16 9 17

CONCERNING :

as the objectives are reached. A board of directors must be a cohesive and competent team, available to attend the meetings and able to discuss and evaluate management’s performance freely and openly. The table below lists the eighteen companies where we challenged at least one item on the agenda concerning the board structure. B OARD

OF DIRECTORS

Description 5.1.3) Elect Hans Peter Wehrli 5.2.1) Elect Hans Peter Wehrli as Chairman 5.6) Elect Hansueli Loosli 6) Elect Hansueli Loosli as Chairman 7.1) Elect Leo Ebneter as Compensation Committee Member 4.1.2) Elect Anton Lauber 4.2) Elect Jean-Blaise Eckert 4.4) Elect Yves-André Istel 4.6) Elect Ruggero Magnoni 4.9) Elect Alain Dominique Perrin 4.11) Elect Norbert Platt 4.18) Elect The Duke of Wellington 5.2) Elect Yves-André Istel as Compensation Committee Member 5.3) Elect the Duke of Wellington as Compensation Committee Member 6.1.4) Elect Stephan Baer 6.2.2) Elect Stephan Baer as Nominating and Compensation Committee Member 8.A.2) Elect Corine Mauch 8.A.4) Elect Andreas Schmid 8.A.5) Elect Ulrik Svensson 8.B) Elect Andreas Schmid as Chairman 8.C.2) Elect Andreas Schmid as non-voting Nominating and Compensation Committee Member 8.C.4) Elect Vincent Albers as Nominating and Compensation Committee Member 4.1.1) Elect Doris Russi Schurter 4.113) Elect Herbert J Scheidt 4.2.4) Elect Doris Russi Schurter as Nominating and Compensation Committee Member 4.1.C) Elect Karl Gernandt 4.1.I) Elect Bernd Wrede 4.2) Elect Karl Gernandt as Chairman 4.3.A) Elect Karl Gernandt as Compensation Committee Member 4.3.E) Elect Bernd Wrede as Compensation Committee Member 7.1.1) Elect Peter Wuffli as Chairman 7.1.3) Elect Alfred Gantner 7.1.7) Elect Steffen Meister 7.2.2) Elect Steffen Meister as Nominating and Compensation Committee Member 7.2.3) Elect Peter Wuffli as Nominating and Compensation Committee Member 5.1.D) Elect Karl Stadler 5.3.B) Elect Karl Stadler as Nominating and Compensation Committee Member 4.1.1) Elect Sergio Marchionne 4.1.2) Elect Paul Desmarais, Jr. 4.1.3) Elect August von Finck 4.1.5) Elect Ian Gallienne 4.1.9) Elect Gérard Lamarche 4.2) Elect Sergio Marchionne as chairman 4.3.1) Elect August von Finck as Nominating and Remuneration Committee Member 4.3.2) Elect Ian Gallienne as Nominating and Remuneration Committee Member 3) Ratification of Board Acts 4.1.2) Elect Urs F. Burkard 4.1.4) Elect Willi K. Leimer 4.1.8) Elect Jürgen Tinggren 4.4.2) Elect Urs F. Burkard as Compensation and Nominating Committee Member 6.1) Elect Gilbert Achermann as Chairman 5.1) Elect Nayla Hayek 5.3) Elect Georges Nicolas Hayek 5.6) Elect Nayla Hayek as Chairwoman 6.1) Elect Nayla Hayek as Compensation Committee Member 6.3) Elect Georges N. Hayek as Compensation Committee Member 6.1.3) Elect Raymond K. F. Ch’ien 3) Ratification of Board and Management Acts 4.1.3) Elect Albrecht Langhart 4.1.5) Elect Thomas K. Escher 4.2.4) Elect Thomas Escher as Remuneration Committee Member


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EXERCISE OF VOTING RIGHTS IN 2015

This table and the next show that despite some improvements we remain unconvinced of the independence of some companies’ boards. Those board members not considered independent are executive members or those that were executive members in recent years, and directors representing a significant shareholder, or engaged in substantial business dealings with the company, or related to a member of senior management or having cross-directorship links with another director. Yet at SGS, to take one example, Groupe Bruxelles Lambert and the von Finck family, which together hold some 30 per cent of SGS capital, are represented by five of the ten V OTE Name BELIMO HOLDING

Vote 11

BELL

10

BOSSARD HOLDING COMPAGNIE FINANCIERE RICHEMONT

12 14

EMMI

13

FLUGHAFEN ZURICH

11

HELVETIA HOLDING

19

KUEHNE & NAGEL

16

PARTNERS GROUP HOLDING

13

SFS GROUP

10

SGS

15

SIKA FINANZ

14

STRAUMANN HOLDING SWATCH GROUP

11 12

SWISS RE UBS GROUP VZ HOLDING ZURICH INSURANCE GROUP

18 16 9 17

CONCERNING :

# Dissent Agree % 2 86.5% 91.6% 3 98.8% 98.8% 97.6% 1 99.5% 8 Accepted! Accepted! Accepted! Accepted! Accepted! Accepted! Accepted! Accepted! 2 Accepted! Accepted! 6 84.6% 82.2% 79.2% 85.4% 79.6% 81.6% 3 86.5% 84.8% 95.7% 5 Accepted! Accepted! Accepted! Accepted! Accepted! 5 89.9% 82.0% 80.1% 65.9% 87.7% 2 98.9% 98.0% 8 73.1% 71.4% 69.4% 72.1% 68.1% 73.0% 67.0% 70.7% 5 Accepted! 82.5% 83.5% 83.6% 79.3% 1 98.4% 5 Accepted! Accepted! Accepted! Accepted! Accepted! 1 69.6% 1 88.9% 1 99.9% 2 98.8% 99.3%

directors (previously three of the nine) proposed for election to the board. We still find that disproportionate and prejudicial to the interests of the remaining shareholders. Many investors protested against this state of affairs. In fact, while the major shareholders hold almost a third of the share capital, nearly 30 per cent of the remaining 70 per cent of shareholders also signalled their opposition to the election of certain directors. We believe that this substantial opposition relates primarily to the independence issues listed in the table below. B OARD

OF DIRECTORS

Our objections Board’s lack of independence Board’s lack of independence Lack of board committees Lack of board committees Lack of board committees Board’s lack of independence Board’s lack of independence Board’s lack of independence Board’s lack of independence Board’s lack of independence Board’s lack of independence Board’s lack of independence Board’s lack of independence Board’s lack of independence Board’s lack of independence Board’s lack of independence Board’s lack of independence Board’s lack of independence Serves on too many boards Board’s lack of independence Board’s lack of independence Board’s lack of independence Board’s lack of independence Board’s lack of independence Board’s lack of independence Board’s lack of independence Board’s lack of independence Board’s lack of independence Board’s lack of independence Board’s lack of independence Board’s lack of independence Board’s lack of independence Board’s lack of independence Board’s lack of independence Board’s lack of independence Board’s lack of independence Board’s lack of independence Board’s lack of independence Serves on too many boards Board’s lack of independence Board’s lack of independence Board’s lack of independence Board’s lack of independence Board’s lack of independence Board’s lack of independence Specific issues linked to takeover (Saint-Gobain) Specific issues linked to takeover (Saint-Gobain) Specific issues linked to takeover (Saint-Gobain) Specific issues linked to takeover (Saint-Gobain) Specific issues linked to takeover (Saint-Gobain) Related party transactions Board’s lack of independence Board’s lack of independence Board’s lack of independence Board’s lack of independence Board’s lack of independence Serves on too many boards Ongoing investigations Related party transactions Board’s lack of independence Board’s lack of independence


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EXERCISE OF VOTING RIGHTS IN 2015

The Audit Committee, which has convened only three times, now at least has one independent member. This is an improvement compared with the previous year. Given that the company did not publish quarterly financial reports during the past financial year, we refrained from voting against Audit Committee members. Nevertheless, we urge the committee to meet more frequently, in view of the scope and importance of its tasks.

We are also concerned about the number of external mandates that may be held by directors. Although we are less strict than many proxy advisors, we still believe that a person serving on five boards, as well as having executive duties, may not be able to devote the necessary time to each company’s business. Three nominees at SGS combine their chief executive or co-chief executive role with directorships of at least five companies.

REMUNERATION We have already mentioned executive pay, an issue that led us to oppose at least one recommendation of nine AGMs. We note that in a Europe-wide comparison, Swiss remuneration tends to be positioned above the average. In addition, and undoubtedly owing to the transparency introduced V OTES Name

Vote

CONCERNING :

by the Minder Initiative, a large portion of that pay package is discretionary and overly focused on the short term. Below we present the nine companies where we were unable to back all the pay resolutions in 2015.

R EMUNERATION

# Dissent % Dissent

Description

BOSSARD HOLDING

3

1

33.3%

5.1) Board Compensation

COMPAGNIE FINANCIERE

3

1

33.3%

9.2) Fixed Executive Compensation

RICHEMONT GIVAUDAN SA

4

1

25.0%

7.1) Board Compensation

HELVETIA HOLDING

4

1

25.0%

5.3) Variable Board Remuneration

KUEHNE & NAGEL

3

1

33.3%

7) Remuneration Report

PARTNERS GROUP

3

3

100.0%

3) Compensation Report

HOLDING

6.1) Board Compensation 6.2) Executive Compensation

SWATCH GROUP

5

2

40.0%

4.3) Variable Compensation (Executive Directors)

SWISS RE

4

1

25.0%

7.1) Board Compensation

SWISSCOM

3

1

33.3%

1.2) Remuneration Report

4.4) Variable Compensation (Executive Management)

Now let us focus on Partners Group, which received the most shareholder opposition in this area, and where we opposed every pay-related resolution put to the vote. Although awards are linked to the company’s performance, ultimately they are granted at the discretion of the board of directors. In particular, there appears to be no limit to an executive’s individual award under the incentive plans. We are also concerned that non-executive directors are eligible to receive awards under both the Employee Participation Plan and the

Management Carry Programme, including those directors responsible for administering the plan. In accordance with best practice recommendations, non-executive directors should not receive equity-linked awards, particularly if the awards are granted on the same terms as to executives. Furthermore, we believe that grants that vest subject to continuous service could deter directors from expressing dissenting views at board meetings and, in extreme cases, using the ultimate sanction of resigning.


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EXERCISE OF VOTING RIGHTS IN 2015

V OTES Name

CONCERNING :

Vote

# Dissent

% Agree

BOSSARD HOLDING

3

1

98.3%

COMPAGNIE FINANCIERE

3

1

Accepted!

RICHEMONT

R EMUNERATION Our objections NEDs receive performance-related compensation Fixed pay significantly exceeds peers; disclosure concerns

GIVAUDAN SA

4

1

96.1%

NEDs receive deferred awards

HELVETIA HOLDING

4

1

91.5%

NEDs may participate in executive plan

KUEHNE & NAGEL

3

1

Accepted!

PARTNERS GROUP HOLDING 3

3

66.9%

Poor overall design

72.7%

NEDs may participate in executive plan

72.2% Accepted!

No disclosed incentive limits and LTI performance metrics

Excessive amount; discretionary awards

SWATCH GROUP

5

2

SWISS RE

4

1

86.7%

Excessive compensation

SWISSCOM

3

1

96.7%

Lacks long-term incentive plan; poor overall design

Accepted!

The table above presents the approval rate for each disputed point and the voting result. Most of the resolutions that we opposed were also the most controversial, sometimes mobilising one third of dissenting votes, as in the case of Partners Group. Although voices are still being raised against the continuing cases of excessive pay, we note that overall the latter have become less arbitrary and more likely to be justified by the achievement of longer-term targets. Rare are the governing bodies that take their AGM lightly. The shareholders have clearly won a round. From routine exercises with little at stake and voting results that barely excited comment during the drinks afterwards, the AGMs are developing into meticulously orchestrated meetings where executives and directors are well prepared to face their shareholders.

Lack of performance-related remuneration Lack of performance-related remuneration

The application of quantitative and often simplistic golden rules seems to us ill-suited to the diversity and complexity of the companies. Our voting guidelines cite principles of which we either approve or disapprove. Our results show that we punish excesses and grant more flexibility to companies that pay a “sustainable dividend”. The latter is a dividend that rewards the long-term investors that we defend through the visibility that it provides as regards the valuation of the underlying security. A company of this type is distinguished by its policy of creating value for, and distributing it to, its shareholders. This added value must also benefit salaried employees, the company (equity) and the community (taxes), to avoid an imbalance that would ultimately penalise the shareholders

Most of the resolutions that we opposed were also the most controversial, sometimes mobilising one third of dissenting votes, as in the case of Partners Group. CAPITAL STRUCTURE Our third topic relates to all the AGM resolutions regarding capital distribution or structure. We also include in this category the approval of the accounts and election of the auditor. These two

subjects are closely linked to the required financial and accounting consistency. This is usually the least controversial topic and this year we did not oppose any of the boards’ proposals.


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EXERCISE OF VOTING RIGHTS IN 2015

SHAREHOLDERS’ RIGHTS companies (ORAB), which entered into force on 1 January 2014, calls for significant statutory amendments. To their credit, the Swiss companies have made every effort to comply rapidly with the requirements. In the case of seven companies (Credit Suisse, Emmi, Kühne & Nagel, Partners Group, SGS, Swatch and VZ Holding) we decided not to back the statutory changes proposed.

In the fourth topic, on shareholders’ rights, we have grouped all the items related to equal treatment of shareholders, anti-takeover measures and statutory changes. A large number of Swiss fi rms have been challenged in the last two years on the subject of shareholders’ rights. Indeed the ordinance against excessive remuneration in Swiss listed V OTE Name

CONCENING :

S HAREHOLDERS ’

RIGHTS

Vote

# Dissent

% Dissent

ACTELION

2

1

50.0%

Description 8) Additional or Miscellaneous Proposals

CLARIANT

2

1

50.0%

III.1) Transaction of Other Business

CREDIT SUISSE GROUP

4

2

50.0%

III.a) Authorize Proxy to Vote on Additional Shareholder Proposals

EMMI

2

1

50.0%

4) Amendments to Articles Relating to VegüV

III.b) Authorize Proxy to Vote on Additional Board Proposals KUEHNE & NAGEL

2

1

50.0%

5.2) Amendments to Articles relating to VegüV

NESTLE

2

1

50.0%

7) Additional or Miscellaneous Proposals

PARTNERS GROUP HOLDING 2

1

50.0%

5) Amendments to Articles Relating to Vegüv

SGS

2

1

50.0%

5) Amendments to Articles Relating to VegüV

SWATCH GROUP

2

1

50.0%

9) Amendments to Articles Relating to VegüV

VZ HOLDING

2

1

50.0%

7) Amendments to Articles Relating to VegüV

shareholders. As the shareholders’ rights are therefore too severely limited, we decided to reject these amendments, even though most of the other changes proposed are rather positive. Except in the case of UBS in 2014, this vote has received relatively little opposition. Subsequently several provisions, some of them controversial, that would restrict the companies’ room for manoeuvre have been inserted into the draft amendment to Swiss law on limited companies.

In our view the changes ran counter to the shareholders’ interests. The proposed amendment would allow remuneration proposals rejected by the annual meeting to be approved at the same meeting under a new proposal from the board. Since shareholders voting by proxy would not have access to such information in advance, and may in fact instruct the independent proxy to vote in management’s favour on new proposals submitted during the meeting, we believe such a procedure may seriously infringe on the rights of institutional V OTE Name

CONCENING :

S HAREHOLDERS ’

RIGHTS

Vote

# Dissent

% Agree

Our objections

ACTELION

2

1

Accepted!

Insufficient information provided by the company

CLARIANT

2

1

Accepted!

Granting unfettered discretion is unwise

CREDIT SUISSE GROUP

4

2

94.3% 99.1%

Insufficient information provided by the company Insufficient information provided by the company

EMMI

2

1

Accepted!

Amendment is not in best interests of shareholders

KUEHNE & NAGEL

2

1

Accepted!

Amendment is not in best interests of shareholders

NESTLE

Insufficient information provided by the company

2

1

Accepted!

PARTNERS GROUP HOLDING 2

1

92.7%

Amendment is not in best interests of shareholders

SGS

2

1

72.3%

Amendment is not in best interests of shareholders

SWATCH GROUP

2

1

Accepted!

Amendment is not in best interests of shareholders

VZ HOLDING

2

1

93.1%

Amendment is not in best interests of shareholders


SHAREHOLDER ENGAGEMENT


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SHAREHOLDER ENGAGEMENT 2015 – 2016

IMPACT OF THE UN GLOBAL COMPACT ENGAGEMENT As outlined in the introduction, during this reporting cycle we were able to hold discussions with twenty-one of the twenty-seven assessed companies in the portfolio, representing a record engagement rate of more than 78 per cent 6.This level of engagement is unique in the context of medium and large capitalisations. Credit for this success must go to the dedication of the engagement team and the stability of the portfolio managed.

despite the fact that the majority (15) of the companies in the compartment are not signatories to the Global Compact.7 In 2015 all the meetings were face-to-face as opposed to conference calls. This has helped us reach new milestones with companies with whom we have been in discussion for many years. These remarkable and stable results, shown in the following chart, testify to the credibility that the Cadmos Funds have acquired in the eyes of the Swiss companies.

All twenty-one active dialogues were on-site meetings with executives at these companies’ headquarters. This outstanding result was achieved C ONTACT

WITH THE COMPANIES IN THE COMPARTMENT

80% 70% 60% 50% 40% 30% 20% 10% 0%

Meetings

Conference calls 2014-2015

AS

No dialogue during timeframe

2015-2016

OUTLINED IN THE INTRODUCTION , DURING THIS

REPORTING CYCLE WE WERE ABLE TO HOLD DISCUSSIONS WITH TWENTY - ONE OF THE TWENTY - SEVEN ASSESSED COMPANIES IN

THE PORTFOLIO , REPRESENTING A RECORD ENGAGEMENT RATE OF MORE THAN

78

PER CENT .

Many companies emphasise the value of this exchange of ideas with the portfolio manager and a member of the engagement team. At Roche, for example, we were able to get together with four management representatives in the first year and six in 2015. They welcome the opportunity to explore new ways of improving the company’s reporting

6. It was not possible to schedule a meeting this year with Bell, Bossard Holding, Straumann and Swiss Life. VZ Holding has already announced that it is looking forward to a discussion in the next reporting cycle, as it is currently implementing its new socialresponsibility policies. Swisscom, however, was not interested in meeting this year. Lonza Group entered the portfolio too late in the year for a first assessment and meeting.

or conveying to mainstream investors that sustainability management strengthens a company’s business model. More and more companies now contact us on their own initiative to pursue the previous years’ discussion. They are speaking out publicly about their

7. Actelion, Bell, Bossard, Flughafen Zürich, Galenica, Givaudan, Helvetia, Partners Group, Roche, SGS, Sonova, Straumann, Swiss Life, Swisscom and VZ Holding.


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SHAREHOLDER ENGAGEMENT 2015 – 2016

desire for a healthy dialogue with their stakeholders. But they are also increasingly critical of over-simplified exclusion criteria, ratings and other ESG classifications that are often compiled once a year based on laborious questionnaires. The Cadmos Funds’ “soft power” engagement is clearly conducive to a dialogue that is both influential and constantly constructive. E NGAGEMENT

Although the dialogue must maintain a certain rate of engagement to be influential, that ratio does not suffice to judge its effect. With that in mind, we use a scale of six levels, designed to provide a transparent measure of the extra-financial impact of the UN Global Compact engagement with the companies. The following table shows the evolution over the last two reporting cycles.

LEVEL OF COMPANIES

(#)

2014-2015

2015-2106

Level

Description

0

0

(6)

6

9

5

Shows improvements on at least one weak point raised

2

6

4

Approves the progress objectives clearly specified

0

1

3

Displays awareness and accepts the principle of an annual dialogue

13

5

2

Agrees to a detailed discussion about our assessment

9

6

1

Acknowledges receipt of our assessment

(Recommendations publicized)

The Cadmos Funds’ “soft power” engagement is clearly conducive to a dialogue that is both influential and constantly constructive. record nine companies (one third) reached that level, meaning that they had improved on at least one weak point that had been raised.

The effectiveness targets set for the Cadmos Funds are ambitious. Our first goal is to create a continuing dialogue with all the companies within four to five years, represented by level 3. We have reached that level with sixteen of the twenty-nine assessed companies in only two years and seem to be on track to meet our goal.

As the table shows, only six companies had reached level 5 in our previous engagement round. The evolution can be quantified by tracking the average level of engagement over time. Today the average stands at 3.26, whereas it was only 2.43 in the previous year.

The second goal is to demonstrate that year on year we are increasing the proportion of companies that have reached level 5. In this reporting period a

D ISTRIBUTION

OF ENGAGEMENT LEVEL

: 2014-2016

3.26 2.43

2014-2015

2015-2016

Level 6

Level 3

Level 5

Level 2

Level 4

Level 1

Average


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SHAREHOLDER ENGAGEMENT 2015 – 2016

As regards upgrades, Geberit, Roche, SGS and Sonova are the four new companies reaching level 5 this year.8 Flughafen Zürich has risen to level 3 while Givaudan, Lindt & Sprüngli, Partners Group and Sika have all advanced to level 4. The following chapter provides details of these improvements, and a chart of our engagement activities may be found in the introduction, under “Engagement performance 2015–2016”.

Swisscom was returned to level 1, as a visit had proved impossible. But we had had a good meeting with the company in the previous year and trust that we shall manage to engage with it again in 2016–2017. Swisscom is fairly advanced in terms of implementing its social-responsibility strategy. We had mainly recommended that it improve its existing Code of Conduct, which is rather superficial, by being more explicit about the corruption issues.

Three companies were downgraded. Among them was Richemont, which was lowered despite an excellent discussion. Richemont was downgraded to level 4, “Approves the progress objectives clearly specified”, since in the main, it has yet to follow through on the previous year’s recommendations.

We also downgraded Syngenta, despite six discussions with its management in previous years. We felt that the company had gradually understood the importance of addressing the ESG issues but had failed to provide adequate answers, particularly relating to the toxicological impact of its products.

A S REGARDS UPGRADES , G EBERIT , R OCHE , SGS AND S ONOVA ARE THE FOUR NEW COMPANIES REACHING LEVEL 5 THIS YEAR .

8. Richemont was downgraded from level 5 to level 4.


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SHAREHOLDER ENGAGEMENT 2015 – 2016

IMPACT OF THE FINANCIALLY MATERIAL ENGAGEMENT The preliminary identification of the Financial Materiality Focus confirms our projections: the principles relating to human rights and complicity in human rights abuses in the value chain cover the issues that we consider the most financially material (for some 50 per cent of our companies). They embrace broad concepts that deal with the physical integrity (health, safety etc.) and moral integrity (human dignity, right to personal image and honour, respect for the private sphere etc.) of consumers and communities. Businesses in the food, healthcare, telecommunications, fi nance and media industries are particularly vulnerable and are directly penalised by reputational issues.

In the case of the chemical and construction-materials industries, together with insurers and public electricity suppliers, (about 30 per cent of the companies) we are more concerned about the three environmental principles. For industry and services in particular (about 20 per cent of the companies) the anti-corruption principle is a major risk factor. Lastly, and primarily for the rare companies that we follow that are active in distribution, travel and leisure the four principles related to international labour standards constitute a fi nancially material threat.

T HE PRELIMINARY IDENTIFICATION OF THE F INANCIAL M ATERIALITY F OCUS CONFIRMS OUR PROJECTIONS : THE PRINCIPLES RELATING TO HUMAN RIGHTS AND COMPLICITY IN HUMAN RIGHTS ABUSES IN THE VALUE CHAIN COVER THE ISSUES THAT WE CONSIDER THE MOST FINANCIALLY MATERIAL

Nevertheless, we remain convinced that the application of the UN Guiding Principles on Business and Human Rights, known as the “Ruggie Principles”, continues to represent the main challenge for large multinational companies. These principles, endorsed unanimously by the UN Human Rights Council in June 2011 and supported by the OECD, the European Union and some leading businesses, require that states and companies take new measures to avoid direct or indirect human rights abuses in their cross-border activities. In Switzerland and Europe the debate around institutionalising the Ruggie Principles has intensified, though apparently the process could take several years. The greatest challenge may consist of enabling victims of human-rights abuses and breaches of the environmental standards of Swiss companies to lodge a complaint in Switzerland and receive compensation. In April 2015, a broad coalition of organisations launched the Responsible Business Initiative in Switzerland. This initiative calls for the introduction of stringent

rules obliging businesses to respect human rights and the environment in particular in their activities abroad. By demanding that the duty of due diligence prescribed by the Ruggie Principles be written into Swiss law, it aims at establishing a common base of the minimum human rights standards that every company must respect. This initiative has recently collected 140,000 signatures. It will soon foster a healthy and necessary debate that we have already begun. To help businesses grasp the issues at stake and incite them to play a leading role, we organised a conference in January 2014 at the Graduate Institute in Geneva, addressed by Professor John Ruggie and attended by more than five hundred people.9 The following table presents a selection of the FMFs of the Fund’s underlying companies as discussed with them.

9. Institut de Hautes Études Internationales et du Développement – IHEID.


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SHAREHOLDER ENGAGEMENT 2015 – 2016

Portfolio as at 31.12.2015 ACTELION ADECCO (Out) BARRY CALLEBAUT (Out) BELIMO HOLDING (Out) BELL BOSSARD HOLDING CLARIANT (Out) COMPAGNIE FINANCIERE RICHEMONT CREDIT SUISSE GROUP (New) EMMI (Out) FLUGHAFEN ZURICH GALENICA GEBERIT GIVAUDAN HELVETIA HOLDING KUEHNE & NAGEL LINDT & SPRUENGLI LONZA GROUP (New) NESTLE NOVARTIS PARTNERS GROUP HOLDING ROCHE HOLDING SFS GROUP (Out) SGS SIKA FINANZ SONOVA HOLDING STRAUMANN HOLDING SWATCH GROUP (Out) SWISS LIFE HLODING (New) SWISS RE SWISSCOM SYNGENTA UBS GROUP VZ HOLDING ZURICH INSURANCE GROUP

Financial Materiality Focus – Addressed by Portfolio managers Access to health care Responsible procurement Exit Exit Exit TBC Complicity – supply chain (supply from Asia) ; product liability Life-cycle issues Exit Risks of complicity in human rights abuses (sourcing of raw materials) Occupational health and safety (gold and gemstone mises, leather tanning) Human rights track-record of corporate clients in emerging markets ESG issues taken into consideration in project finance Exit Stakeholder dialogue on environmental and health issues Environmental impacts (risks regarding climate change) Access to health care Ethical business practices Human rights risks in supply chain Corruption risk Sourcing of raw materials – extraction from delicate environments Opportunities for sustainable sourcing and innovative sourcing Use of sustainable investment when investing its capital Impact of climate change on insurance portfolio and on asset management Broker, no ownership on the shipping mean ; risk of corruption Complicity in human rights abuses Sourcing of raw materials : Human rights risks in Ghana and Turkey (hazelnuts) Opportunities of sourcing sustainably – innovation in sourcing TBC The provision of safe, healthy, nutrient-rich food Responsible sourcing Access to health care Responsible procurement Importance of ESG criteria when allocating client’s funds. Impact of principles of responsible investment (PRI) on the investment process Access to healthcare Lify cycle of products Exit Business integrity Traceability and compliance (inspection of critical sites) Environmental impact and innovation (risk/opportunity) Impact of the new sustainability evaluation process on product development Product safety and access to hearing aids Presence in China could raise corruption issues Product safety Access to products Exit Product safety Fairness Reliability and integrity of (re)insurance solutions and services Growing impact of climate change on asset management Data privacy Driving environmentally friendly technology (software) Data privacy Corruption Human rights track-record of corporate clients in emerging markets PRI principles taken into consideration in wealth management Data privacy Ethical marketing The suitability and adequacy of the insurance policies CSR issues in asset management


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I MPROVEMENTS

AND MAIN STORIES

Here we provide examples of companies that have acted on our recommendations or have an interesting story to tell.

FLUGHAFEN ZÜRICH We begin with Flughafen Zürich, whose revenues derive from aviation operations and the commercial infrastructure at Zurich Airport. The airport is enjoying an increase in local-passenger traffic, and a large real-estate project, The Circle, is under way just a few steps from the terminals. One of Zurich Airport’s main concerns is the environmental impact of its operations, including carbon and noise emissions. This also affects its reputation and relations with the public. In addition, with its increasing involvement in airport development projects abroad, issues such as anti-corruption in emerging countries come into play. The company takes its impact on the environment very seriously and responds with concrete strategies, measures and achievements. At our

second discussion with the heads of environmental protection and investor relations we recommended integrating issues such as anti-corruption, employee satisfaction, safety and security into the reporting. In particular, the information on the fight against corruption should include the consulting projects with foreign airports mentioned above. Flughafen Zürich’s representatives were eager to learn more about our methodology, and in their turn they shared valuable background information. There was an open and interactive discussion of our recommendations and a willingness to pursue the conversation in the coming years. The company has not formally approved our progress objectives, but it seems keen to improve its approach to social Responsibility.

GEBERIT As mentioned in the chapter “Cadmos Institutional Event 2015”, we invited over eighty investors to a conference on the Cadmos Funds and Geberit’s integrated ESG strategy. We have also had four meetings with all the members of top management (the chief executive, the chief fi nancial officer, and the chairman) and are pleased to say that the company has acted on two suggestions

made at the 2014 discussion. First, it has released a new Code of Conduct reflecting its main ethical and legal challenges. Second, it has convened its first external stakeholder panel, comprising experts from different fields, and will repeat this event every other year. This measure responds to our earlier proposal that the company prove the reliability of its non-financial reporting.

GIVAUDAN Givaudan is the leader in the fragrance and flavour industry and expects to outgrow the market, thanks to market share gains, increasing exposure to emerging markets, and new segments such as Health and Wellness. In terms of social responsibility, its sourcing of raw materials that are extracted from fragile environments is a major financially material risk. However, sustainable and innovative approaches to sourcing present opportunities. The ratio of natural to synthetic fragrances and flavours is fiftyfifty. Eighty per cent of materials are sourced direct and the demand for natural ingredients is increasing. As supplies are scarce, prices are on the rise. It is essential for Givaudan to employ responsible methods of procuring key ingredients such as vanilla, citrus and patchouli. The company is an active member of SEDEX, which is one of the largest collaborative platforms for sharing ethical supplychain data and is accessible to suppliers and clients. However, a sizeable number of Givaudan’s suppliers,

providing around three hundred botanical species for natural fragrances, are still an inherent reputational risk. We suggest building formal partnerships with these suppliers and with eligible third parties, aimed at ensuring sustainable sourcing practices, including fair and transparent pricing. Again this year, the spirit of the conversation was open and constructive. The weaknesses identified were positively received and discussed, notably by the new global sustainability manager, who was participating for the first time. At certain moments in the discussion, when the head of investor relations tended to trivialise a particular issue, his two colleagues from sustainability management intervened by taking up the point more reflectively and self-critically. In contrast to the previous year’s recommendations, which have not yet been taken further, this year’s suggestions seem to have sparked a more positive reaction, worthy of the upgrade to engagement level 4.


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HELVETIA HOLDING Helvetia entered the Fund in late 2015, so this was our first assessment of and meeting with the company. For this medium-sized insurer, active in the life and non-life businesses, mainly in Switzerland, the main social-responsibility risks concern the impact of climate change on its insurance portfolio and its asset management. This fi rst meeting took place with the head of corporate responsibility and the head of investor relations at Helvetia’s branch office in Zurich.

Helvetia’s reporting on the relevance of climate change proved to be outstanding, thanks to well-developed risk and opportunity analyses. We recommended setting specific quantitative goals for the environmental issues as a whole to underline Helvetia’s commitment to this area. The exchange with the company representatives was very constructive and prepared the ground for future meetings, where we hope to be able to discuss the progress achieved over time. We therefore awarded Helvetia engagement level 2.

KUEHNE & NAGEL Kuehne & Nagel was among the companies that we had not managed to meet prior to the 2015– 2016 reporting period. The head of corporate controlling and the head of quality, safety, health and the environment, who is also in charge of security and dangerous goods, gave us details of their responsibilities. As one of the world’s leading logistics providers, active in sea- and air-freight services and contract logistics, the company is exposed to compliance issues in cross-border transactions and depends on the integrity of its business partners. As regards its environmental impact, it could reduce its footprint by providing its customers with environmentally friendly solutions. This would add value to Kuehne & Nagel’s services. In view of the company’s strong commitment to promoting environmental responsibility within its

own operations and among its customers, we also recommend that it systematically highlight and explain the materiality of its efforts. The absence of meaningful information on core labour norms such as freedom of association, child labour and forced labour is striking in a company with a global reach. We urge Kuehne & Nagel to address those issues in its policy documents and sustainability reporting. While it provides very comprehensive coverage of health and safety and sound documentation of its philanthropic activities, we should like to see more details on subjects such as the minimum wage, overtime and access to healthcare. The meeting with the company representatives was very constructive. They made it clear that they were open to discussing further improvements, thereby justifying an engagement level of 2.

LINDT & SPRÜNGLI This was our second meeting with senior representatives of Lindt & Sprüngli at their headquarters in Kilchberg. As the world’s leading producer of premium chocolate, the company faces major sourcing challenges in fragile countries such as Ghana (cocoa beans) and Turkey (hazelnuts). Other issues are climate change, the increasing conversion from cocoa farming to the more profitable high-yielding crops, the cocoa farmers’ poor skills, and the pressure to provide comprehensive product information and fair-trade labelling. Lindt & Sprüngli’s social-responsibility reporting is still in the development stages and slightly below average. The reporting on human rights has improved somewhat from the year before and remains the strongest area, with a focus on traceability.

For example, the company has further reduced the risks related to its sourcing of cocoa and hazelnuts through farmer training and verification. We mentioned its efforts in this area in our previous report. However, the information on critical ingredients (including semi-finished products) is still not sufficiently comprehensive. We suggest adhering to common reporting practices, in particular the GRI framework, and disclosing more robust and, where possible, quantitative information, including a reference to a base line. This would increase critical stakeholders’ trust in Lindt & Sprüngli. At present, one could get the impression that the company relied too much on the strength of its brand’s association with high-quality chocolate products. That brand image could be eroded by newly acquired entities or less exclusive product lines, or the positioning of competitors that are working hard at sustainability.


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SHAREHOLDER ENGAGEMENT 2015 – 2016 The results of UNGC assessments and the questions and feedback from the portfolio manager and the Guilé engagement team were well received, and openly and competently discussed. The representatives welcomed our suggestions, first, that the reporting explain more clearly the challenges inherent in introducing the company’s verified cocoa programme in Ghana; and second, that the company develop scientifically sound case studies documenting the impact of its efforts (e.g. the training for hazelnut farmers in Turkey). They also spoke frankly about the challenges to the company’s sourcing policies and delivery

practices in Ghana which are fully controlled and misused by the national cocoa board and its staff. Lindt & Sprüngli sources all its bulk beans in Ghana which represents a serious cluster risk, given the fluctuations in harvested production. It has now mandated an intermediary to ensure that the procured cocoa beans are stored in official warehouses and inspected continuously. This action is designed to prevent seizure by the cocoa board if the board misses its production targets; or unwanted blending of the beans; or attempted briberies. Consequently, we have raised the company to engagement level 4.

NESTLÉ Nestlé is one of the first adopters of a new and demanding reporting framework destined for companies that make an official commitment to adhere to the United Nations Guiding Principles on Business and Human Rights. The core element of this outstanding commitment is the human rights impact assessment, an evaluation of the positive and negative impacts that a company’s business activities may have on the people with whom it works, does business and interacts along the entire value chain –that is, the rights holders –in a specific country. The assessments provide Nestlé with feedback and input from its own employees and from trade union representatives, suppliers, farmers, local communities and other stakeholders in high-risk countries. In this way, the company can create and implement action plans that address any gaps between international human rights standards and current practice in the countries in which it operates. To ensure qualified input, more than thirty thousand Nestlé employees

have already received training in human rights, using the company’s online tool. In principle the training focuses on high- risk countries, but it also takes in the relevant corporate departments at Nestlé headquarters. Furthermore, the company’s Integrity Reporting System enables employees to report anonymously by phone or the web on any illegal or non-compliant behaviour observed, as well as seek advice or information on company practice. Nestlé will integrate this additional non-financial performance information into its annual Creating Shared Value report. It has also published details of the assessment methodology in a white paper, “Talking the Human Rights Walk”, produced in collaboration with the Danish Institute for Human Rights, one of the most renowned organisations in this field. Through this additional voluntary commitment, Nestlé is again proving itself a leader in promoting the Sustainable Development Goals on a global scale.

PARTNERS GROUP Partners Group is a financial company specialised in private markets: private equity, private debt, private real estate and private infrastructure. With more than 30 billion euros under management, it is one of the largest independent players in the private-market arena. It is benefiting from the uptrend in capital allocated to private investments by pension funds and investment companies. A carbon footprint of close to three hundred direct investments could negatively affect the portfolio’s performance. Violations of human rights and labour norms by the portfolio companies and private-market investment partners would be likely to trigger disinvestment by socially conscious institutional investors. Integrity and ethical business practices on the part of management and staff are of the utmost relevance to firms in this industry. The company seems well aware of these issues, as the chief executive, the responsible-investment

manager and the vice-president of business development were eager to discuss them with us for the second year in a row. The comprehensiveness of Partners Group’s reporting has improved slightly. Nevertheless it remains at the narrative level. While the reader does get some information, still rather generic, on the integration of ESG criteria into the investment process, the company discloses hardly any details on how it handles social responsibility issues within its organisation. It has neither a formal structure in this area nor clearly defined responsibilities and processes for integrating sustainability and social responsibility into its business and support activities. Its commitment to the Principles of Responsible Investment is not convincingly reflected

in its communications, though the company is active in one of the working groups and submitted a report on progress for which it received a Top-A rating. We suggested that it do more to tell external stakeholders about its engagement.


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SHAREHOLDER ENGAGEMENT 2015 – 2016

The meeting took place in an atmosphere of openness and mutual trust. All three of the firm’s participants were keen to discuss the findings of the assessment and routes to further improvement with the portfolio manager of the Cadmos - Swiss Engagement Fund and the Guilé engagement team. Most of the suggestions were well received. Following up on

one the previous year’s recommendations, the chief executive announced that a new Code of Conduct would be introduced and that employees would undergo special training. This action, together with the continuing interest shown in some other propos-

als from 2014, justifies the company’s upgrade to level 4 of our engagement scale.

ROCHE HOLDING Six representatives were present at the meeting, from areas including investor relations; group safety, security, health and environmental protection; sustainability communications; and compliance. This testifies to how seriously the company takes our shareholder engagement. The chief compliance officer and head of sustainability and the head of investor relations were the two most active company participants, responding to specific questions and explaining issues such as pricing models in Europe and the emerging economies. Roche has different prices in the emerging-market countries, to enable systematic access to medication. In Europe it is currently

testing a pay-for-performance pricing policy. The main challenge is to obtain the data from physicians. Roche justifies its above-average margins by the innovative nature of its products. It seems that a number of teams and functions across the organisation consider the ESG issues an important part of Roche’s business. The engagement level was raised from 2 to 5, as action had been taken on our previous year’s recommendation to publish the relevant policy documents (Code of Conduct, directive on integrity etc.), demonstrating Roche’s readiness to listen to and learn from legitimate stakeholders.

SGS SGS is among the four companies upgraded to level 5 this year. For the fourth consecutive year we visited the senior vice-president in charge of corporate development, communications and investor relations at the head office in Geneva. SGS’s challenges include maintaining the highest standards of business integrity and ensuring safe working conditions, and this is well understood. The sustainability information published has progressed over the years, even though there is

still ample room for improvement. Action has been taken on the previous year’s recommendation to provide performance data over a period of three to five years instead of only one year. In addition, specific aspects of the labour norms are now more comprehensively covered, as proposed in the previous meeting. For SGS, attracting and retaining skilled, trustworthy staff is the most important challenge of all and is of particular relevance to the quality assurance and verification business.

SIKA FINANZ Sika is a well-managed leader in speciality chemicals for construction and industry, particularly the automotive industry. It enjoys robust growth, thanks to innovation, but is currently struggling against a hostile takeover from rival Saint-Gobain. Its founders, the Burkard family, want to sell their 16 per cent stake and majority voting rights at a premium to Saint-Gobain, without involving the other shareholders. Despite this difficult situation, Sika was available for the second year in a row in 2015 to discuss its main social responsibility issues. Sourcing of raw materials is a key challenge, but other equally relevant issues include the resource efficiency of building materials during design and use; the sustainability of the systems and solutions provided; occupational health and safety; waste and energy management; anti-corruption; and anti-competitive bidding practices.

As regards human rights, the environment and anti-corruption, the company makes it clear that its commitments also apply to the entire value chain. The reporting on these issues is at an advanced level and has even improved slightly with the publication of more details on achievements. Following the previous year’s discussion, we again suggested launching a formal dialogue with internal and external stakeholders. The main aim would be to identify issue areas where Sika could reduce its exposure or develop new sustainable solutions, or both. Prior to that, it should revise the materiality matrix, by aggregating some of the issues and eliminating those related to a specific measure, such as compliance in the case of sponsoring or donations. The qualification process for new and existing suppliers could be further improved. We suggest looking at how this


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SHAREHOLDER ENGAGEMENT 2015 – 2016

is handled by Geberit and Holcim, who have introduced a pragmatic classification and filter system based on country- and product-specific exposures. Sika has shown a keen interest in learning from other portfolio companies’ good practices, particularly in the area of supply-chain and stakeholder management. The investor relations manager said

that the stakeholder engagement process would be reviewed that year, in response to our recommendation. Later in the year, the company contacted us with a view to further meetings on the subject of the financial materiality of its ESG issues. As the suggested whistle-blowing system is also likely to be introduced, we had no hesitation in upgrading Sika to level 4 of the engagement scale.

SONOVA HOLDING Sonova is the leading manufacturer of hearing instruments and the owner of the Phonak and Unitron brands. Since 2010 and its acquisition of Advanced Bionics, its products have included cochlear implants. Sonova uses innovation to outgrow the market and gain market shares. An aging population and the company’s expansion into emerging markets, especially China, should keep its growth rate in the mid single digits. For Sonova, as a medical technology company, the main sustainability issues are product safety and access to its products. The privacy and security of patient data, employee satisfaction and the fight against corruption are also important challenges. Other relevant issues include diversity programmes, occupational health and safety and material and waste management. This was the second year of assessment and our second meeting with the company’s

representatives. The progress made since 2014 and the drive shown by the new people on the sustainability team demonstrate the high level of Sonova‘s engagement and justified the upgrade to level 5. Indeed, Sonova has made remarkable progress in its social-responsibility reporting since the previous year, and covers all the Global Compact principles in its communication. It can now continue to progress by shifting from qualitative information and general statements to more precise, quantified and verifiable content. The company has taken decisive action in several ways, such as opening a hotline where employees can raise compliance concerns anonymously, and offering clients a battery-collection system. We would welcome feedback on the performance of these initiatives as well as an analysis of the ways in which it will keep improving.

ZURICH INSURANCE GROUP As with Helvetia, so with Zurich Insurance this was our first assessment and meeting, seeing that the company entered the portfolio in 2015. But unlike the former, this Swiss direct insurer conducts most of its activities outside Switzerland. In terms of social responsibility, its issues are similar to those of other insurers. Zurich Insurance is a signatory to the Principles of Responsible Investment and publishes a comprehensive RI Transparency Report. Asset-liability management is the cornerstone of its investment process. The ESG issues are incorporated into its investment decisions, raised with the companies with whom it does business, and considered when selecting an external manager.

The environmental reporting is also outstanding, thanks to a detailed description of the environmental management system, systematic presentation of key performance indicators, and the traceability of its progress over time. The company could strengthen its reporting on the materiality of some issues by providing more information on how it defines the material aspects and presenting the results in a materiality matrix. In the meantime, the engagement score was set at level 2 for this constructive and well-prepared first meeting.

CONCLUSION As a responsible shareholder, we encourage most of the companies in our fund to give greater consideration to the tangible financial risks of inaction, negligence or even unlawful behaviour. The

companies are often aware of their challenges or ready to consent to certain adjustments, particularly as these are proposed by a loyal investor.


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L ONG - TERM

RESULTS

A number of recent studies and surveys indicate that engagement and integration are the strategies that institutional investors interested in socially responsible investing fi nd promising 9. Today, major international institutional investors are already implementing investment strategies that integrate environmental, social and governance criteria. Indeed, some of them have opted for our Buy & Care® strategy. We are confident that shareholder engagement and ESG integration will take a stronger hold in Switzerland and give rise to a new generation 2.0 of responsible investors that

T REND

IN THE QUALITY OF THE

have never really been satisfied with the exclusion criteria or the best-in-class funds. This confidence is underpinned by the positive developments in the portfolio companies in relation to the ten principles of the Global Compact, which can be seen in the graph below. The stable track record since 2006 enables us to select seventeen companies –three from the Fund (Credit Suisse, Nestlé and Novartis) and the others from the European and Emerging Markets compartments –and follow their evolution over a period of nine years10.

10 G LOBAL C OMPACT

PRINCIPLES

Corruption Env. friendly technology Environmental responsibility Precautionary approach Discrimination Child labour Forced labour Freedom of association Complicity 2006

2007

2008

2009

2010

2011

We observe continuous overall progress of around 7 per cent a year in relation to all ten principles of the Global Compact. The improvement in ESG performance indicates, first, that the company is generating more value for all its stakeholders and therefore for society. But it also signals that the portfolio is exposed to fewer non-financial risks. In principle, when the markets become aware of this progression, a corresponding contraction in the risk premium will register directly in the share price, to the benefit of existing shareholders. Implementation of the “Complicity” and “Freedom of association” principles has advanced more than 100 per cent since 2006. Businesses have realised that reputation pays little heed to legal distinctions and national borders. The progress seen, particularly on the “Complicity” principle, is therefore

9. O’Sullivan and Gond, “Engagement: Unlocking the Black Box of Value Creation”, Sustainalytics & Cass Business School, 2016.wngraded from level 5 to level 4. 10. ABB, AXA, BP, Credit Suisse, Essilor, Engie, Danone, Heineken, H&M, HSBC, Nestlé, Novartis, Royal Dutch Shell, Société Générale, Standard Chartered, Total and UBS.

2012

2013

2014

Human rights

related to the integration of suppliers and other members of the value chain into the companies’ social responsibility policies. Performance on the “Human rights”, and “Corruption” principles has also made great strides of between 80 per cent and 100 per cent during the same period. The average improvement on all ten principles now stands at 77 per cent.

The stable track record since 2006 enables us to select seventeen companies –almost half the companies in the Fund –and follow their evolution over a period of nine years.


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SHAREHOLDER ENGAGEMENT 2015 – 2016

This trend cannot be credited solely to the influence of the Cadmos Funds but rather to all the participants everywhere that are working to create a more sustainable world. In addition, businesses have understood that managing opacity has become more difficult. The increased transparency that we enjoy today, aided by the Internet, rarely leaves abuses unpunished. The figures presented here reflect in concrete terms a clear increase in awareness of the need to provide quality information on the ESG issues.

T REND

While we cannot formally prove that this uptrend translates into better performance that is what we are observing. Responsible companies are more successful at protecting their competitive edge, tend to gain more market share and find it easier to access new markets. Some studies also show that high ESG quality reduces their risk and their cost of capital. By winning the loyalty of their customers and most talented employees these companies can compensate for the capital invested and even increase their margin. They seem to be better equipped to meet their shareholders’ expectations, while also responding to society’s increasing demands.

IN THE COMPREHENSIVENESS OF

ESG

INFORMATION

Achievements Monitoring Indicators Measures Objectives Strategy Commitment 2006

2007

2008

2009

2010

2011

The chapter “Active Ownership” explained that we systematically analyse the implementation of each principle throughout the management cycle according to eight criteria. Not surprisingly, the overall progress is the same as for the ten principles, that is, 7 per cent a year. As discussed several times in recent years, we note an increasing professionalism in the way the companies are implementing their social responsibility. The most striking improvements appear in the first and three last steps of the eight-step management process. To begin with the first step, companies are now far more adept at describing the importance and materiality of each principle in relation to their business model (+93 per cent). This was often neglected in the early days of ESG reporting, when the information tended

2012

2013

2014

Materiality

to centre on individual case studies or new internal developments rather than the priorities from a business perspective. The next four criteria on the chart: publication of explicit commitments from senior management, and definition of consistent strategies and tangible objectives, followed by the appropriate measures, were already becoming established practice in 2006 and even then obtained high scores. The last three steps are where we observed the greatest improvements, with the relevance of the companies’ performance indicators improving most of all (+102 per cent). These performance indicators are now monitored far more effectively, for instance

The stable track record since 2006 enables us to select seventeen companies –three from the Fund (Credit Suisse, Nestlé and Novartis) and the others from the European and Emerging Markets compartments –and follow their evolution over a period of nine years.


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SHAREHOLDER ENGAGEMENT 2015 – 2016

through audits and corrective measures (+92 per cent). Finally, the companies have made considerable progress in reporting their achievements and relating these to the objectives and indicators. They also report their non-achievements and provide a commentary on these (+75%). T REND

IN THE QUALITY OF

We also observe a gratifying uptrend in the quality of the ESG information (see the chart below). Particular progress is noted in the clarity, comparability and reliability of the data published. In those three areas, and since 2006, the improvements range between 46 per cent and 86 per cent. ESG

INFORMATION

Timeliness Reliability Accuracy Comparability Clarity

2006

2007

2008

2009

2010

2011

The increased reliability is explained primarily by the growing number of companies that appoint authorised independent third parties to validate or certify their ESG reports. The difference in quality between the ESG reports and the financial reports is narrowing every year. More often than not we recommend that the companies reduce the amount of ESG information and incorporate it into an integrated financial report.

2012

2013

2014

Accessibility

We encourage businesses that are well positioned and take good decisions in these areas to demonstrate the links to tangible improvements in their competitive advantages and their financial results, including their risk management. In addition we have a direct interest in fostering broad awareness of the fundamental qualities of the companies in which we invest. This awareness is conducive to an increase in the share price and the Cadmos Funds’ investors are the primary beneficiaries.

As discussed several times in recent years, we note an increasing professionalism in the way the companies are implementing their social responsibility. The most striking improvements appear in the first and three last steps of the eight-step management process.


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SHAREHOLDER ENGAGEMENT 2015 – 2016

E NGAGEMENT

OUTLOOK

The impact of our dialogue –a reflection of how closely the companies are listening –has grown steadily since 2006, the year of our first shareholder engagement. Looking beyond the expressions of thanks from senior managements, we are proud of the tangible results that we publish every year, which tend to show that the Cadmos Funds are exerting an influence on businesses’ social responsibility. Furthermore, the shareholder dialogue has enabled our portfolio managers to assess the financial impact of the environmental, social and governance issues and thus to develop unique expertise. Take, for example, the tripartite meetings between the portfolio managers, the engagement team and the company’s representatives. Through this innovative practice the Cadmos Funds are ideally positioned to achieve the delicate but necessary integration of the financially material ESG factors into the investment processes. As promoter of the Cadmos Funds, PPT works each year to consolidate and strengthen that acquisition. We consider it our fiduciary responsibility to integrate the companies’ ESG situation into our models, especially when the impact on revenue, margins, capital structure or cost of capital (risks) is substantial and therefore financially material. Transparency in relation to human rights will be one of our priorities. We have mandated Fondation Guilé to intensify its analysis of this topic, to which we have always paid close attention. Both environmental and human-rights issues will have an increasing influence on a company’s performance. The UN Guiding Principles on Business and Human Rights will eventually apply to any business with significant international operations. These developments are the subject of growing debate in Switzerland, as a broad coalition of organisations has launched an initiative calling for the duty of due diligence prescribed by the Ruggie Principles to be written into Swiss law. Proponents emphasise that Swiss companies, admired for their

T RANSPARENCY

quality and strong brands, cannot afford to make headlines in connection with human rights abuses and environmental damage in their global activities. The companies argue that they are already managing these risks and that regulation could make them less competitive. We prefer to see companies act on their own initiative and introduce measures that fit their situation rather than those required by law. Indeed, the shareholder engagement makes one realise that each of the companies –even within the same sector –has its own culture and constraints that make standardised solutions difficult to apply. On the other hand, we also recognise that companies that are slow to act are exposing their shareholders and society at large to a risk that could have dramatic consequences. As stated elsewhere in this report, we would not invest in a company with significant unmanaged risks. As regards the companies in our portfolio, we will always be at their side, helping them to anticipate social movements and take the appropriate steps to reconcile responsibility and profitability. Since we expect to see an increased focus on human rights, along with further improvements in transparency, as from 2016 we shall include the UN Global Principles in all our human rights assessments. Companies such as Nestlé are starting to use the UNGP Reporting Framework –the first comprehensive guide to reporting on human rights issues. The increased emphasis on this area also enlarges the scope of our discussions with the portfolio companies; this will be of particular value to the companies at an advanced engagement level. In addition, we plan to introduce a new qualitative rating, evaluating the quality of each assessed company’s reporting on the UN Global Principles. We have also paid close attention to how businesses introduce and adapt to integrated reporting. Since 2009, the International Integrated Reporting Council or IIRC has been working to

IN RELATION TO HUMAN RIGHTS WILL BE ONE

OF OUR PRIORITIES .

WE

F ONDATION G UILÉ TO INTENSIFY ITS ANALYSIS OF THIS TOPIC , TO WHICH WE HAVE ALWAYS PAID CLOSE ATTENTION . HAVE MANDATED


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We also believe that the time is right for another form of engagement: helping businesses focus on new opportunities produce a globally accepted integrated-reporting framework. To cite the council: “Integrated reporting is an evolution of corporate reporting, with a focus on conciseness, strategic relevance and future orientation. As well as improving the quality of information contained in the final report, <IR> makes the reporting process itself more productive, resulting in tangible benefits”. We welcome this tool and encourage companies to adopt it in their reports, at least from a content point of view. By focusing on the links between ESG and financial materiality, we are better able to understand how a company is managing its risk. We also believe that the time is right for another form of engagement: helping businesses focus on new opportunities. We have initiated such projects occasionally throughout the history of the Fund. For instance, we collaborated with an insurance company to develop microinsurance products. Our plan now is to stimulate partnerships between our underlying companies and social entrepreneurs, with the aim of finding solutions to environmental and social challenges. Some of the companies we engage with for the Cadmos Funds are already becoming experts at collaborating with a variety of social entrepreneurs. In 2005, Danone established the Danone

TO

Communities Fund, a social incubator designed to encourage social business initiatives around the world, in keeping with the company’s mission. For example, Danone took a minority stake in La Laiterie du Berger, a Senegalese business selling products made of locally produced milk. It has been supporting this social enterprise’s production, marketing and sales efforts ever since, thus helping build a stronger local dairy industry. At Essilor, a programme called “Vision for Life™ – Eye Mitra” has been successfully launched in India. It aims at empowering local entrepreneurs to become providers of basic vision care, so that people in their community can enjoy a better quality of life. All the initiatives described above are examples of social impact investment. Our ambition is to foster such mutually rewarding partnerships whenever possible. To remain at the forefront of innovation, gain deeper insight into the companies and create even more of a tangible impact, we shall progressively deploy what we have called our new Profit-Purpose Partnership strategy in the next engagement cycle. We have already begun work on this with additional advisors and expect to be able to report on our achievements in the coming financial year.

REMAIN AT THE FOREFRONT OF INNOVATION , GAIN DEEPER

INSIGHT INTO THE COMPANIES AND CREATE EVEN MORE OF A TANGIBLE IMPACT , WE SHALL PROGRESSIVELY DEPLOY WHAT

P ROFIT -P URPOSE P ARTNERSHIP ENGAGEMENT CYCLE . W E HAVE

WE HAVE CALLED OUR NEW STRATEGY IN THE NEXT

ALREADY BEGUN WORK ON THIS WITH ADDITIONAL ADVISORS AND EXPECT TO BE ABLE TO REPORT ON OUR ACHIEVEMENTS IN THE COMING FINANCIAL YEAR .


ENGAGEMENT REPORTS

The content of the following engagement reports was produced by the Guilé engagement team and the portfolio managers. It provides an account of the dialogue conducted on behalf of the Cadmos Funds with selected companies in the portfolio as at 31 March 2016. The complete set of engagement reports for all the companies in the Fund is available on request. The six companies presented here (Geberit, Nestlé, Partners Group Holding, Roche Holding, SGS and Zurich Insurance Group) are representative of our portfolio. They are all at level 5 except Zurich Insurance Group, a new entrant whose fi rst engagement report is included and Partners Group whose meeting was quite interesting and justified an upgrade from level 2 to level 4. A commentary on these companies and all the others that have made significant changes is found in the chapter “Improvements and main stories”, pages 43 ff. A summary table listing all the companies with their engagement level is provided in the introductory chapter “Engagement performance” on page 11.


GEBERIT

SIGNATORY TO THE

GLOBAL COMPACT SINCE 2008

INVESTMENT CASE

CORPORATE RESPONSIBILITY ISSUES

Market leader in sanitary technology, the company offers sanitary systems and piping systems. It operates mainly in Europe. It has a strong capacity for innovation through R&D. The group enjoys high margins and generates strong cash flow. With its recent acquisition of Sanitec, it has extended its offer from behind the wall into the bathroom and will have more direct contact with final customers.

Geberit is the market leader in sanitary technology in Europe. With employees in 67 countries the company is exposed to different specific labor laws, policies and rules with exposures in the area of employee rights, health and safety. Product liability, antibribery/–trust and environmentally friendly/green technologies are other relevant issues.

ENGAGEMENT REVIEW — 6th CSR reporting assessment — 4th discussion with the company since its entry into the portfolio

2015: meeting at the headquarters of Geberit in Jona, Switzerland Participants: the CEO and the Head of Environment & Sustainability

COMPREHENSIVENESS OF THE COMPANY’S CSR REPORTING — Geberit maintains highly comprehensive reporting on sustainability issues. — Excellent coverage of human rights issues, focusing on the area of employee health and safety as well as education and training. — Information on labor norms is solid, but not very detailed. Compared to last year, the company’s materiality score has moderately increased due to placing greater emphasis on its materiality analysis. — Continued high-level coverage of environmental issues with particularly strong information on environmental friendly products and technologies. — Reporting on the anti-corruption principle has improved compared to last year, mainly due to the revised Code of Conduct which aims to ensure that employees behave ethically and in accordance with the law. The updated materiality matrix lists anticompetitive behavior as the “most material” issue and adds anti-corruption and compliance as “material” issues which is in line with last year’s conclusion at the briefing.

R ESULT

OF COMPREHENSIVENESS ASSESSMENT PER PRINCIPLE FOR

G EBERIT

human right {1} anti-corruption {10}

complicity {2}

Outstanding Advancing

env. friendly technologies {9}

freedom of association {3}

Emerging Basic

forced labor {4}

environmental responsability {8}

env. precautionary approach {7}

child labor {5}

discrimination {6} 2014

2013

2012

QUALITY OF THE COMPANY’S CSR REPORTING R ESULT

OF QUALITY ASSESSMENT FOR

G EBERIT 2014

Average last twelve months for companies from industrialized economies

Geberit 0

20 Accessibility

40 Clarity

Comparability

60 Accuracy

80 Reliability

100 Timeliness

— The quality of Geberit´s reporting on non-financial issues is advanced. — Information is very detailed and presented in a structured manner. Data gathering and management techniques are adequately described. The website containing the annual report is user-friendly and provides information in a clear and well-organised manner. — Geberit organised an external stakeholder panel for the first time and published the experts’ recommendation together with its response. For this reason Geberit gets maximum scoring for the “reliability” criteria.


GEBERIT SIGNATORY TO THE

GLOBAL COMPACT SINCE 2008

CSR ORGANISATION — Both the Group Executive Board and the Board of Directors examine and approve Geberit’s sustainability strategy. Accordingly, achievements of objectives are submitted to both bodies for review and verification at least once a year. — The Head of the Environment and Sustainability Department directly reports to the CEO and both participated in the briefing.

SUGGESTED AREAS WITH POTENTIAL FOR PROGRESS 1. Although the layout of the new Code of Conduct (CoC) is quite comprehensive, it is not very appealing. The Guilé Engagement Team suggests revisiting the codes of peers which contain both a clear definition of compliance rules and norms and also practical dilemmas as well as guidance to overcome these. Information on how the Geberit CoC is internally distributed and on how employees’ adherence is monitored could also be improved. 2. The wording of the CoC is occasionally non-binding. Formulation such as “we try to adhere” should be prevented because this will confuse rather than help employees in dealing appropriately with certain challenges. 3. In its reports, Geberit refers to “Green Procurement” which is misleading because the Code of Suppliers Conduct (2008) addresses health and safety as well as human rights norms. The Guilé Engagement Team suggests using “responsible procurement” or a similar term.

LEVEL OF ENGAGEMENT This was the first briefing with the new CEO who took over in early 2015. Similar to last year’s discussion, the spirit of this meeting was very open and constructive. Our observations were positively received and challenges in the area of preventing corruption were transparently shared. Two suggestions made at the 2014 briefing were taken up. Firstly, Geberit has released a new Code of Conduct which is aligned with its main ethical and legal challenges. Secondly, the company has organised for the first time a stakeholder panel with external experts which shall be repeated every other year. This measure fully meets earlier proposal to prove the reliability of the company’s non-financial reporting. With the selected approach, Geberit demonstrates leadership. (6)

(Recommendations publicized)

5

Shows improvement on at least one weak point raised

4

Approves the progress objectives clearly specified

3

Displays awareness and accepts the principle of an annual dialogue

2

Agrees to a detailed discussion about our assessment

1

Acknowledges receipt of our assessment


NESTLÉ

SIGNATORY TO THE

GLOBAL COMPACT SINCE 2001

INVESTMENT CASE

CORPORATE RESPONSIBILITY ISSUES

Global leader in its sector, diversified geographically and in terms of product categories. Its strategy of adapting to local markets enables it to react faster and more flexibly than its competitors (e.g. Unilever). Scale is a key factor in success, particularly at the retail level (Wal-Mart, Carrefour, Tesco, etc.).

Main issues are the provision of healthy, nutrient-rich and safe food, accessibility to drinking and irrigation water. Responsible sourcing comprising human rights, labor standards, environmental sustainability and rural development are similarly important as well as the growing number of people affected by diabetes or obesity due to unhealthy dietary habits.

ENGAGEMENT REVIEW — 9th CSR reporting assessment — 8th discussion with the company since its entry into the portfolio

2015: meeting in the headquarters of Nestlé in Vevey Participants: the Vice President & Global Head of Public Affairs, the Head of Investor Relations, the Deputy Head & Global Public Affairs Manager and the Senior Manager for Public Affairs

COMPREHENSIVENESS OF THE COMPANY’S CSR REPORTING — Nestlé’s 2014 Creating Shared Value (CSV) report and the Annual Report address the 10 principles and related commitments very comprehensively and convincingly. — The disclosure on human rights is very exhaustive and credible, nevertheless, the related objectives could be more specific. With the exception of food security the published objectives are hardly measurable and/or there is no timeframe. — Nestlé’s information on actions to prevent child labor is now meeting best practice due to its systematic human rights impact assessment procedures described in the “Talking the — Human Rights Walk” report. Yet, the objectives and measures taken could be described more precisely for the other 3 labor principles. — Nestlé further improved its reporting on the environmental responsibility principle by providing detailed information on all of our eight assessment criteria. — Information on the corruption principle remains outstanding. However, Nestlé’s specific objectives and achievements in exposed markets are still presented in a rather general way.

R ESULT

OF COMPREHENSIVENESS ASSESSMENT PER PRINCIPLE FOR

N ESTLÉ

human right {1} anti-corruption {10}

complicity {2}

Outstanding Advancing

env. friendly technologies {9}

freedom of association {3}

Emerging Basic

forced labor {4}

environmental responsability {8}

env. precautionary approach {7}

child labor {5}

discrimination {6} 2014

2013

2012

QUALITY OF THE COMPANY’S CSR REPORTING R ESULT

OF QUALITY ASSESSMENT FOR

N ESTLÉ 2014

Average last twelve months for companies from industrialized economies

Nestlé 0

20 Accessibility

40 Clarity

Comparability

60 Accuracy

80 Reliability

100 Timeliness

— The quality of Nestlé’s reporting is again outstanding. — The clear structure of the short and full version of the CSV report as well as the navigation aid is very helpful for different stakeholders to find the information of interest. — The extensive report has also become significantly leaner and more user-friendly: the number of pages has been reduced from 400 to 300. — Timewise, the CSV report is now released with the AR which led to a higher rating.


NESTLÉ SIGNATORY TO THE

GLOBAL COMPACT SINCE 2001

CSR ORGANISATION — The Global Head of Public Affairs (GHPA), who participated in the briefing meeting, is responsible for the coordination and communication of Nestlé’s Creating Shared Value (CSV) report. She reports to the Senior Vice President and Global Head Corporate Communications who is not a member of the Executive Board but who directly reports to the CEO. He is in charge for the “Nestlé in Society Board”, chaired by the CEO, which is the “highest” operation body related to the strategic implementation of CSV across the company’s businesses. GHPA is also a member of this board. — Furthermore, Nestlé receives advice from external advisory groups, in particular through the CSV Council and Nestlé Nutrition Council.

SUGGESTED AREAS WITH POTENTIAL FOR PROGRESS 1. Present reporting on achievements in particular related to sourcing issues is still very much output oriented. The engagement team suggested providing in the future more material information on outcomes and impacts of the measures taken, which was also one of the main conclusions of a formal stakeholder consultation in 2014 initiated by Nestlé. Considering the complexity of impact reporting, we suggest conducting examples of scientifically sound case studies explaining for a specific issue area the achieved benefits from different stakeholders’ perspective. The “tangible” results of these studies should/ could be published for specific target groups. 2. Policy documents should be frequently overhauled. For instance the Nestlé Sourcing Guidelines does not provide any or only very general recommendations related to hazelnut and vanilla production or procurement which are both rather sensitive products due to the humanitarian situation in the sourcing countries. 3. In its CSV summary report, Nestlé describes its different specific commitments (e.g. in the area of nutrition, rural development and water) examples aimed at demonstrating in a tangible way how measures are being implemented. In the case of nutrition, Nestlé discloses absolute figures on reductions in the use of sensitive ingredients (e.g. sugar) however, in future, we think that Nestlé should disclose relative reduction figures, with reference to an “official” target and baseline. 4. With regards to achieving nutritional best practices, the company mentions its own “Nutritional Profiling System” as the main reference for product evaluation, which is only generally explained. Nestlé should provide more information on the applied profiling system, particularly on how targets, baselines and criteria are defined in order to increase credibility.

LEVEL OF ENGAGEMENT The seniority and number of the participating representatives of Nestlé is a strong signal that the company is interested in learning from its stakeholders. As in the previous year, the discussion was very open, detailed and constructive in terms of exploring weaknesses and potential improvements. Last year’s recommendation to reduce the volume of the full CSV report and to release a “digestible” short version was followed and it was confirmed by the Senior Manager Public Affairs in charge of CSV reporting that our input had significantly influenced this improvement. The Senior Manager and the Deputy Head of Global Public Affairs Manager expressed an interest in obtaining more details on why and how Nestlé could improve the formulation of objectives related to the 10 principles of the UNGC and its CSV vision. (6)

(Recommendations publicized)

5

Shows improvement on at least one weak point raised

4

Approves the progress objectives clearly specified

3

Displays awareness and accepts the principle of an annual dialogue

2

Agrees to a detailed discussion about our assessment

1

Acknowledges receipt of our assessment


PARTNERS GROUP

NON SIGNATORY TO THE GLOBAL COMPACT

INVESTMENT CASE

CORPORATE RESPONSIBILITY ISSUES

Financial company specialized in private markets: private equity, private debt, private real estate and private infrastructure. With more than EUR 30bn under management it has become one of the largest independent players in the private markets arena. It benefits from the increased capital allocation for private investments by pension funds and insurance companies.

The CO2-footprint of close to 300 direct investments could negatively affect the portfolio performance. Human rights and labor norm violations of the portfolio companies and the > 630 private market investment partners could trigger disinvestment of socially conscious institutional investors. Integrity and ethical business practices of management and staff are of utmost relevance.

ENGAGEMENT REVIEW — 2nd CSR reporting assessment — 2nd discussion with the company since its entry into the portfolio

2015: meeting in in the offices of Partners Group in Baar Participants: the CFO, the Responsible Investment Manager and the VP of Business Development

COMPREHENSIVENESS OF THE COMPANY’S CSR REPORTING — The comprehensiveness of Partners Group (PG) reporting slightly improved. Nevertheless it remains at a very narrative level. While the reader gets some still rather generic information on the integration of ESG criteria in the investment process, PG discloses hardly any details on how it handles CSR issues within its organization. — Reporting on human rights is the most detailed section, however it continues to be only partial as hardly any information is provided on the materiality, commitment, strategy and achievements. — Labor norms are partly addressed. Apart from non-discrimination the reader is not provided with details on how these aspects are managed by PG. — With the exception of the company’s participation in the CDP Climate Change program, information on PG’s approach to tackle environmental issues remains sketchy. — Disclosure of PG‘s approach regarding anti-corruption is the least detailed of the four issue areas. This is mainly due to the fact that there is no information on achievements.

R ESULT

OF COMPREHENSIVENESS ASSESSMENT PER

ISSUE AREA FOR

P ARTNERS G ROUP 2014

Human rights

Labor norms

Environment

Corruption

basic

emerging

advancing

outstanding

QUALITY OF THE COMPANY’S CSR REPORTING R ESULT

OF QUALITY ASSESSMENT FOR

P ARTNERS G ROUP 2014

Average last twelve months for companies from industrialized economies

Partners Group 0

20 Accessibility

40 Clarity

Comparability

60 Accuracy

80 Reliability

100 Timeliness

— The quality of the reporting did not improve compared to last year. — The Corporate Responsibility section in the Annual Report is well structured and clearly formulated. — However, with the exception of the community development projects the reporting remains rather generic. — As no quantitative data is provided, it is hard to compare PG’s ESG performance on a year-to-year basis. — Furthermore, the non-financial information is not verified by a third party and there are no references related to how this information is compiled.


PARTNERS GROUP

NON SIGNATORY TO THE GLOBAL COMPACT

CSR ORGANISATION — Partners Group has neither a formal corporate responsibility organisation nor defined responsibilities nor clearly defined processes for integrating sustainability/social responsibility considerations in its business and support processes. Nevertheless, the company has created the position of an investment officer in charge of company relevant applied ESG research, knowledge management, networking and in particular, to participate in formal meetings of the investment committee. At executive level, the CFO is in charge of CSR related activities. 1.

SUGGESTED AREAS WITH POTENTIAL FOR PROGRESS 1. The PRI commitment is not convincingly reflected in the company’s pubic communication though PG is active in one of the working groups and has submitted a report on progress for which it has received a Top-A rating. The Guilé Engagement Team suggests sharing this engagement more actively with external stakeholders. 2. To further strengthen the credibility of its CSR commitment, more substantive information on the ESG integration in the investment process would be required. The company should look at the information provided by other investors such as Zurich and Credit Suisse which is much more advanced. 3. We recommends revising the Code of Conduct in such a way that it will serve as a useful guideline for employees when dealing with clients and other relevant stakeholder. Presently, it is a rather shallow declaration which has been met with scepticism. 4. In order to improve its reporting on the materiality of the different issue areas, The Guilé Engagement Team suggests consulting its stakeholders to get a clear understanding of which aspects are material and therefore of high priority. 5. The disclosure of detailed information on how PG avoids corruption would further improve its trustworthiness. In particular, details on anti-money laundering and the handling of gifts would be of major relevance. 6. In general, the content of the website is scarce. If the company decides to keep it lean, it should at least consider providing a sort of overview on material issues and related measures which could be a first step to towards GRI reporting. 7. Once again, we suggests that the company considers signing the UN Global Compact.

LEVEL OF ENGAGEMENT The atmosphere at the meeting was very open and trust-based. All three participants were eager to discuss with the portfolio manager of Cadmos Swiss Engagement Fund and the Guilé Engagement Team the findings of the assessment and also potential approaches for further improvement. Most of the suggestions we made were well received by the participants of Partners Group. The CFO announced that a new Code of Conduct will be introduced and that employees will have to undergo specific training. Furthermore, Partners Group will establish a 360° review of employees’ individual performances which shall also improve adherence to good practice and governance rules. (6)

(Recommendations publicized)

5

Shows improvement on at least one weak point raised

4

Approves the progress objectives clearly specified

3

Displays awareness and accepts the principle of an annual dialogue

2

Agrees to a detailed discussion about our assessment

1

Acknowledges receipt of our assessment


ROCHE

NON SIGNATORY TO THE GLOBAL COMPACT

INVESTMENT CASE

CORPORATE RESPONSIBILITY ISSUES

A leader in personalized healthcare and diagnostics, Roche is the largest biotech company, with a dominant position in oncology. The company also develops drugs in the area of neuroscience, infectious diseases, immunology, cardiovascular and metabolism. Its current pipeline is rich and promising. The launch of new products could drive profitability higher.

The following issues are of utmost relevance: access to health care, including diagnostics; lifecycle of products; drug efficacy, safety & counterfeiting; biosimilarity; data transparency on clinical trials; disease awareness and education on treatment, employee engagement and talent retention; executive compensation; and corruption in emerging markets.

ENGAGEMENT REVIEW — 2nd CSR reporting assessment — 2nd discussion with the company since its entry into the portfolio

2015: meeting at the headquarters of Roche in Basel Participants: the Brand Strategy, the Head of Investor Relations, the Chief Compliance Officer & Head of the Sustainability Committee, the ad interim Head of Corporate Reporting, the Editor in Chief of the Annual Report, the Senior Sustainability Controller, the Head of Sustainability Communications, the SHE manager, the Investor Relations – SRI and the HR on Reporting

COMPREHENSIVENESS OF THE COMPANY’S CSR REPORTING — The comprehensiveness of Roche’s non-financial reporting generally remains at an advanced level. — In addition to the Code of Conduct a comprehensive Supplier Code of Conduct has recently been published, which addresses Roche’s commitment to human rights more explicitly than its commitment to to labor norms. — While the strategic aspects of labor norm principles are covered well, specific information on indicators, monitoring and achievements is scarce, especially for forced and child labor. — Coverage of environmental issues is at a good level similar to during the previous year’s assessment. In particular, information on emissions and energy consumption is well reported. — Though the company has updated its Code of Conduct, disclosure on business ethics and compliance just meets good industry practice. The related rating was lower compared to the previous year mainly due to the lack of concrete objectives and indicators.

R ESULT

OF COMPREHENSIVENESS ASSESSMENT PER PRINCIPLE FOR human right {1}

anti-corruption {10}

Outstanding

R OCHE

complicity {2}

Advancing env. friendly technologies {9}

freedom of association {3}

Emerging Basic

forced labor {4}

environmental responsability {8}

env. precautionary approach {7}

discrimination {6} 2014

child labor {5}

2013

QUALITY OF THE COMPANY’S CSR REPORTING R ESULT

OF QUALITY ASSESSMENT FOR

R OCHE 2014

Average last twelve months for companies from industrialized economies

Roche 0

20 Accessibility

40 Clarity

Comparability

60 Accuracy

80 Reliability

100 Timeliness

— The quality of Roche’s non-financial reporting is clearly above average. — Following the Guilé Engagement Team’s recommendation, more policy documents and guidelines are now available. It is easy for specialised readers to find additional information on specific issues. The Code of Conduct has been updated and a Supplier Code of Conduct has also been published. — Regarding accuracy, more information on non-financial data compilation is available which led to significantly higher scoring compared to the previous year’s assessment.


ROCHE

NON SIGNATORY TO THE GLOBAL COMPACT

CSR ORGANISATION — The Corporate Sustainability Committee (CSC) is responsible for developing the Group’s sustainability strategy and guidelines, and reports on related activities and progress. It is also responsible for assessing social, environmental and ethical risks which are incorporated into the Group Risk Report. CSC is headed by the Chief Compliance Officer who participated in the briefing. The Head of Investor Relations, who also joined the meeting, is a member of the CSR Core Team besides the Patent Officer and delegates from the CEO Office, Group Human Resources, Communications, Strategic Planning & Special Projects, Group Safety, Security, Health and Environment as well as the Pharma and the Diagnostic Leadership Team, to mention the most prominent. — The CSC submits regular activity reports to the Corporate Executive Committee and the Board of Directors’ (BoD) Corporate Governance and Sustainability Committee (CGSC). The CGSC assists the BoD in matters relating to corporate governance, compliance and in promoting the sustainable management of the company’s activities. Roche’s CSR organizational set-up is worthy of being described as best practice.

SUGGESTED AREAS WITH POTENTIAL FOR PROGRESS 1. In 2014, Roche conducted a materiality analysis amongst key stakeholders. While this is a step in the right direction, the outcome is not yet convincing. The materiality matrix is rather confusing. Regrouping and clustering material issues would improve reader friendliness. Further, the explanations about “Why this it material” are inconsistent: while there is a good explanation for some of the relevant issues (e.g. “drug efficacy, safety & counterfeiting” and “patent policies”), the materiality is not explained at all for others (e.g. for “biosimilarity”, “data transparency on clinical trials” and “disease awareness & education on treatment”). The company should reassess and reformulate the way in which they describe why specific issues are of relevance. 2. The materiality matrix should be updated by checking it with critical yet legitimate internal and external stakeholders. This process should be transparently explained in the company’s reporting. 3. Implementation targets are only generally explained. More specific objectives should be set, ideally giving quantitative ambitions, realistic timeframes and comparable baseline data. This is also valid for the Code of Conduct which remains rather vague in many parts .

LEVEL OF ENGAGEMENT Representatives from different areas such as Investor Relations, Group Safety, Security, Health and Environmental Protection (SHE), Sustainability Communications, and Compliance were present at the briefing which is a strong indication of the Company’s serious interest in our assessment results. The Chief Compliance Officer and Head of Sustainability and the Head of Investor Relations were the most active during the meeting, responding to specific questions and explaining issues such as pricing models in Europe and in emerging economies. It seems that non-financial issues are considered an important part of Roche’s business across various teams and functions. The Guilé Engagement Team’s recommendation from the previous year to publish relevant policy papers was embraced which demonstrates the company’s readiness to listen and to learn from legitimate stakeholders. (6)

(Recommendations publicized)

5

Shows improvement on at least one weak point raised

4

Approves the progress objectives clearly specified

3

Displays awareness and accepts the principle of an annual dialogue

2

Agrees to a detailed discussion about our assessment

1

Acknowledges receipt of our assessment


SGS

NON SIGNATORY TO THE GLOBAL COMPACT

INVESTMENT CASE

CORPORATE RESPONSIBILITY ISSUES

World leader in inspection services. This market, while still highly fragmented, is growing fast, fuelled by mega trends: globalisation, increased reliability, product traceability and a booming environmental sector. SGS’s size and know-how give it a major competitive edge, enabling it to grow organically or through acquisitions.

Maintaining highest business integrity standards and assuring safe working conditions are main challenges for SGS in its verification, impact assessment and quality control services. The majority of its employees are “white collars” therefore retaining and attracting a talented, highly educated and trained workforce is crucial for SGS’ business success.

ENGAGEMENT REVIEW — 6st CSR reporting assessment — 5th discussion with the company since its entry into the portfolio

2015: meeting in the offices of SGS in Geneva Participants: the Senior Vice President, Corporate Development, Communications & IR

COMPREHENSIVENESS OF THE COMPANY’S CSR REPORTING — Content-wise, the sustainability disclosure has slightly improved and is at an advancing level, however it is not yet outstanding. Reporting on human rights significantly improved to a good level but is less advanced when compared with its peers. In particular, information on the complicity principle is still rather fractional. — While anti-discrimination is exhaustive, the other labor norm principles are only superficially covered. In particular, the related strategies, objectives and measures are presented in a cursory way. — Coverage of environmental issues has improved. SGS’ approach to tackling climate change challenges is convincingly presented with sound explanations on its materiality, management approach and targets. Reporting on environmentally friendly technologies remains the least detailed of the 3 environmental principles but has slightly improved. — SGS’s course of action in preventing corruption is authentically described, in particular its relevance. Yet, considering its related exposure, the depth of the disclosure could be further improved.

R ESULT

OF COMPREHENSIVENESS ASSESSMENT PER PRINCIPLE FOR

SGS

human right {1} anti-corruption {10}

complicity {2}

Outstanding Advancing

env. friendly technologies {9}

freedom of association {3}

Emerging Basic

forced labor {4}

environmental responsability {8}

env. precautionary approach {7}

child labor {5}

discrimination {6} 2014

2013

2012

QUALITY OF THE COMPANY’S CSR REPORTING R ESULT

OF QUALITY ASSESSMENT FOR

SGS 2014

Average last twelve months for companies from industrialized economies

SGS 0

20 Accessibility

40 Clarity

Comparability

60 Accuracy

80 Reliability

100 Timeliness

— The quality of SGS’s reporting improved significantly compared to last year. — The “reports & policies” section provides useful and understandable background information. — A comprehensive, publicly available data bank allows customizable data analysis including multi-annual comparisons. — The report is now verified by a third party and submitted together with the annual report. — Nevertheless, there are still only a few references explaining internal data collection, compilation and analysis which would further strengthen credibility.


SGS

NON SIGNATORY TO THE GLOBAL COMPACT

CSR ORGANISATION — Since 2008, SGS runs and continuously adjusts a formal group-wide sustainability strategy across its business units and geographical regions. The system is built around four pillars: professional excellence, people, environment and community. The heads of business functions are in charge of the strategy implementation with the support of the Vice President of Corporate Sustainability who also coordinates sustainability matters at group level and who directly reports to the CEO. Together they design, pilot and implement the core programs that address SGS’ key sustainability impacts. In addition, there is a Corporate Sustainability Steering Committee, chaired by the CEO and coordinated by the Senior Vice President, Corporate Development, Communications & IR . All its programs are aligned to The Plan (“our corporate business plan”).

SUGGESTED AREAS WITH POTENTIAL FOR PROGRESS 1. The Sustainability Review often refers to the Sustainability Greenbook which is the internal guidance for senior managers. The Guilé Engagement Team suggests providing a sort of summary of this document which would strengthen SGS’ credibility. The company should look at Swiss Re‘s reporting, as they publish sector specific policies related to sensitive insurance risks. 2. Some of the published targets such as for internal training are not very meaningful. Instead of defining output related indicators (e.g. ratio training costs/employment costs) SGS should think about introducing outcome or even impact targets which would be more convincing for longer term oriented investors. 3. Volume-wise, the Sustainability Review is at the upper limit with 100 pages. We suggest reducing the size of the document to less than 50 pages which would make it much more attractive and reader-friendly. Comprehensive disclosure will still be assured through the on-line report. 4. Due to its core business which is quality control, auditing and verification, environmental and social impact assessment, due diligence services, SGS should be a “role model” concerning compliance and prevention of corruption. With 42 reported breaches of the code of integrity in 2014 the company seems not to be there yet. We strongly recommend further strengthening its compliance framework and processes.

LEVEL OF ENGAGEMENT Last year, we suggested that the company provide performance data covering 3- 5 years instead of only a year-to-year comparison. This recommendation has been fully taken up as confirmed by the Senior Vice President of Corporate Development, Communications & Investor Relations who participated for the 5th consecutive year in a briefing with the Cadmos Fund: SGS now provides sustainability performance data for five consecutive years! Further, specific aspects related to labor norms are more comprehensively covered as proposed in the last briefing. The main motivation for extending related disclosure was the insight that this type of company information positively influences talented people in their employer’s selection. In the meeting the challenges of introducing integrated reporting were openly discussed. Though IRRC has not yet defined a convincing framework SGS decided to move towards integrated reporting. (6)

(Recommendations publicized)

5

Shows improvement on at least one weak point raised

4

Approves the progress objectives clearly specified

3

Displays awareness and accepts the principle of an annual dialogue

2

Agrees to a detailed discussion about our assessment

1

Acknowledges receipt of our assessment


ZURICH INSURANCE SIGNATORY TO THE

GLOBAL COMPACT SINCE 2011

INVESTMENT CASE

CORPORATE RESPONSIBILITY ISSUES

This Swiss direct insurer conducts the majority of its activities outside Switzerland. Indemnity insurance is its main business. Zurich is also active in life insurance. Zurich insurance offers an attractive dividend yield of more than 5%. The group is growing its operating earnings by reducing costs throughout its business, increasing operational efficiency, improving processes, and enhancing investment returns.

Zurich Insurance Group needs to ensure that it has a sound responsible investment strategy with clear goals. It also needs to keep an eye on the impacts of climate change on its asset management. At the same time, the group has an opportunity to enhance its reputation by providing fair and sustainable products to a wide range of customers.

ENGAGEMENT REVIEW — 1st CSR reporting assessment — 1st discussion with the company since its entry into the portfolio

2015: meeting in the offices of Zurich Insurance in Zurich Participants: the Investor Relations Officer, the Senior Investor Relations Officer & Group Rating Agency Manager and the Sustainability Manager (via phone)

COMPREHENSIVENESS OF THE COMPANY’S CSR REPORTING — Zurich’s reporting on human rights is quite sound, in particular in terms of health and safety, and it explicitly extends this across the value chain. — Labor norms are the least comprehensive area within Zurich’s reporting. Despite a clear commitment to all labor norms, the details of implementing this commitment in practice, such as monitoring mechanisms, are largely missing from Zurich’s publicly available documentation. — Reporting on environmental issues is outstanding, in particular thanks to the company’s in-depth description of its corresponding management system, the systematic presentation of key performance indicators, and the traceability of progress over time. — Zurich is committed to fighting corruption and bribery and presents sound information on the management processes designed to support this endeavor. However, there is a lack of information on objectives, on indicators used to measure performance, and on achievements in this field.

R ESULT

OF COMPREHENSIVENESS ASSESSMENT

PER PRINCIPLE FOR

Z URICH I NSURANCE

human right {1} anti-corruption {10}

Outstanding

complicity {2}

Advancing env. friendly technologies {9}

freedom of association {3}

Emerging Basic

forced labor {4}

environmental responsability {8}

env. precautionary approach {7}

discrimination {6}

child labor {5}

2014

QUALITY OF THE COMPANY’S CSR REPORTING R ESULT

OF QUALITY ASSESSMENT FOR

Z URICH I NSURANCE 2014

Average last twelve months for companies from industrialized economies

Zurich Insurance 0

20 Accessibility

40 Clarity

Comparability

60 Accuracy

80 Reliability

100 Timeliness

— The quality of Zurich’s sustainability reporting is not very satisfying. The fact that information is spread across a significant number of different documents, makes it challenging for stakeholders to gather all the relevant information. The rather disintegrated way of reporting creates a considerable amount of redundant information. — Moreover, the scarcity of quantitative data means that that stakeholder struggles to evaluate the accuracy of the methods used to gather, compile and analyze the information.


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Should you have any questions about this report, please contact : Dominique Habegger Head of Cadmos Funds habegger@ppt.ch

Cadmos Swiss Engagement Fund 2015-2016  

Buy & Care Responsible Investment Fund Integrated Performance Report