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CADMOS EUROPEAN 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, 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 sixth consecutive year, de Pury Pictet Turrettini & Cie S.A. (PPT) is publishing a transparent, comprehensive report on the outstanding performance of the Cadmos - European Engagement Fund1 (the Fund). PPT is both manager and promoter of the Fund, which was launched in 2006 and has since inspired the creation of other Cadmos funds. Cadmos is a Luxembourgbased UCITS V umbrella fund applying our proprietary Buy & Care® strategy.

Through this 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 financial 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 this strategy.

Our portfolio managers’ systematic shareholder 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 first chapter of the present report provides a summary of the Fund’s financial, voting and engagement performance during the reporting cycle. The following four chapters consist of open information and are available on the website at http://www.ppt.ch. The last chapter 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 European 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. . . . . . . . . . . 31

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

Distribution of votes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

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

Main oppositions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Engagement performance

. . . .

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

10

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

Analysis of votes by topic

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

SHAREHOLDER ENGAGEMENT

. . . . . . . . .

34 39

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

Impact of the UN Global Compact engagement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

16

Impact of the financially material engagement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Founding Principles

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

Company analysis & Portfolio management. . . 18 Active ownership

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

21

FINANCIAL MANAGEMENT REPORT . . . 25 Revival of economic growth in Europe

. . . . . . . .

Improvements and main stories . . . . . . . . . . . . . . . . . 45 Long-term results

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

Engagement outlook

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

49 52

26

Evolution of the European equity market . . . . . . 27 Portfolio management review . . . . . . . . . . . . . . . . . . . 28 Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Composition of the portfolio as at 31 December 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . 30

ENGAGEMENT REPORTS

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

55


SUMMARY OF RESULTS IN 2015-2016


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SUMMARY OF RESULTS IN 2015-2016

F INANCIAL

PERFORMANCE

The Cadmos European Engagement Fund, managed and promoted by PPT, is a compartment of the Luxembourg-based Cadmos umbrella fund. Christopher Quast, head of European equity management at PPT since 1999, has managed the Fund since its inception. In 2015, classes A and B of the compartment returned 6.8 per cent and 7.7 per cent respectively, outperforming the benchmark index (the Dow Jones Stoxx 50 with net dividends reinvested), which rose 6.5 per cent.

continued to reap the benefits of their business models, focused on ophthalmic optics and dialysis services respectively. The most cyclical sectors in the portfolio, namely industrials, chemicals, energy and utilities, weighed on the compartment’s relative performance.

At December 2015 the Fund (Class B) had outperformed its index by 8.6 per cent in the period since the launch of the compartment in 2006.

Valuation and dividend yields make equities attractive in the current context of overvalued bonds. But after several years of disappointing profits, it will take substantially stronger growth, notably in the banking sector, for the markets to pick up steam. At December 2015 the Fund (Class B) had outperformed its index by 8.6 per cent in the period since the launch of the compartment in 2006. Healthcare, consumer goods, insurance and technology were the strongest contributors to the relative performance. Novo Nordisk profited from the launch of new products, particularly on the US market, while Essilor International and Fresenius Medical Care P ERFORMANCE

Plunging crude oil and natural-gas prices dealt a blow to the profits of the major integrated groups, though this was partially offset by the rising profitability of refi ning activities. Royal Dutch Shell launched a bid for BG Group that was completed in the fi rst quarter of 2016. This deal continues Shell’s transformation into a major player in natural gas, which will be the primary source of the global energy transition. As following table indicates, two companies entered the portfolio this year. Assa Abloy is the market leader in locks, while Novozymes is a leading producer of enzymes for industrial uses and enjoys strong IP-driven barriers to entry. Five companies (Diageo, Holcim, SCOR, Syngenta and Unicredit) exited the portfolio, since their weakening competitive advantage or lack of satisfactory response to the engagement process made it hard to justify their current valuations.

SINCE INCEPTION

140.00 130.00 120.00 110.00 100.00 90.00 80.00 70.00 60.00 50.00

oct. 06

STOXX 50 Net Ret. (€)

Cadmos European Engagement fund (B)

40.00 oct. 07

oct. 08

oct. 09

oct. 10

oct. 11

oct. 12

oct. 13

oct. 14

oct. 15


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SUMMARY OF RESULTS IN 2015-2016

Portfolio as at 31.12.2015

Sector

Country

Industrial Goods & Services

Switzerland

ARCELORMITTAL

Basic Resources

Luxembourg

ASSA ABLOY (New)

Construction & Materials

Sweden

Insurance

France

BBVA

Banks

Spain

BMW

Automobile & Parts

ABB

AXA SA

BG GROUP (Merger) BNP PARIBAS BP PLC COLOPLAST COMPASS GROUP CREDIT SUISSE GROUP

Oil & Gas Banks Oil & Gas Health Care Travel & Leisure Banks

Germany United Kingldom France United Kingdom Denmark United Kingdom Switzerland

DANONE

Food & Beverage

France

DIAGEO (Out)

Food & Beverage

United kingdom

ENGIE

Utilities

France

ESSILOR INTERNATIONAL

Health Care

France

FRESENIUS MEDICAL CARE

Health Care

Germany

GEBERIT HENNES & MAURITZ HOLCIM (Out) HSBC HOLDINGS LINDE

Construction & Materials Retail Construction & Materials Banks Chemicals

Switzerland Sweden Switzerland United Kingdom Germany

L’OREAL

Personal & Household Goods

NESTLE

Food & Beverage

Switzerland

NOVARTIS

Health Care

Switzerland

NOVO NORDISK

Health Care

Denmark

NOVOZYMES (New)

Health Care

Denmark

PUBLICIS GROUPE

Media

RECKITT BENCKISER GROUP ROYAL DUTCH SHELL SAINT GOBAIN SAP SCHNEIDER ELECTRIC SCOR (Out) SGS

Personal & Household Goods Oil & Gas Construction & Materials Technology

France

France United Kingdom Netherlands France Germany

Industrial Goods & Services

France

Insurance

France

Industrial Goods & Services

Switzerland

SOCIETE GENERALE

Banks

France

STANDARD CHARTERED

Banks

United Kingdom

SWISS RE

Insurance

Switzerland

SYNGENTA (Out)

Chemicals

Switzerland

TELEFONICA TOTAL

Telecommunications

Spain

Oil & Gas

France

UBS GROUP

Banks

UNICREDIT (Out)

Banks

VALLOUREC

Industrial Goods & Services

Switzerland Italy France


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SUMMARY OF RESULTS IN 2015-2016

V OTING

PERFORMANCE

During the period under review we expressed an opinion on 861 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

400

D ISTRIBUTION

of 20 per cent. The additional workload in 2015 is directly related to investors’ demands for greater transparency. Votes concerning remuneration have more than doubled in the last two years, rising from sixty-three resolutions in 2013 to 135 in 2015.

OF OPPOSING VOTES

20

350 300 0 250 200

353

150

15

266 15

100 120

50

72

0

1. Board of directors

2. Remuneration

3. Capital structure

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. In our previous activity reports we foresaw that the Minder Initiative in Switzerland and the calls for greater transparency in Europe would lead to the AGMs’ playing a more important role. This year, we opposed 11.1 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.


9/55

SUMMARY OF RESULTS IN 2015-2016

Despite all these improvements, we refused to back the board of directors in fifty of the 861 votes cast (5.8 per cent of all votes). The rate of dissent has thus declined by approximately 30 per cent 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.

2015 Name

01.01

Total

31.12 Voted

Description

Total

resolutions against

% Against

ABB

1

1

1

Voted

22

0

0.00%

ARCELORMITTAL

1

1

1

Voted

12

1

8.33%

ASSA ABLOY (New)

0

1

0

Entry after AGM

0

0

AXA SA

1

1

1

Voted

24

0

0.00%

BBVA

1

1

1

Voted

22

0

0.00%

BMW

1

1

1

Voted

8

2

25.00%

BG GROUP (Merger)

1

1

1

Voted

23

2

8.70%

BNP PARIBAS

1

1

1

Voted

20

0

0.00%

BP PLC

1

1

1

Voted

25

2

8.00%

COLOPLAST

0

1

1

Voted

13

1

7.69%

COMPASS GROUP

1

1

1

Voted

22

0

0.00%

CREDIT SUISSE GROUP

1

1

1

Voted

32

4

12.50% 0.00%

DANONE

1

1

1

Voted

29

0

DIAGEO (Out)

1

0

0

Exit before AGM

0

0

ENGIE

1

1

1

Voted

28

0

ESSILOR INTERNATIONAL

1

1

1

Voted

18

0

0.00% 0.00%

FRESENIUS MEDICAL CARE

1

1

1

Voted

8

0

0.00%

GEBERIT

1

1

1

Voted

17

0

0.00%

HENNES & MAURITZ

1

1

1

Voted

11

2

18.18%

HOLCIM (Out)

1

0

1

Exit after AGM

24

2

8.33%

HSBC HOLDINGS

1

1

1

Voted

29

1

3.45%

LINDE

1

1

1

Voted

5

0

0.00%

L’OREAL

1

1

1

Voted

13

0

0.00%

NESTLE

1

1

1

Voted

29

1

3.45%

NOVARTIS

1

1

1

Voted

26

0

0.00%

NOVO NORDISK

1

1

1

Voted

18

1

5.56%

NOVOZYMES (New)

0

1

0

Entry after AGM

0

0

PUBLICIS GROUPE

1

1

1

Voted

26

5

19.23%

RECKITT BENCKISER GROUP

1

1

1

Voted

29

3

10.34%

ROYAL DUTCH SHELL

1

1

1

Voted

21

0

0.00%

SAINT GOBAIN

1

1

1

Voted

21

1

4.76% 0.00%

SAP

1

1

1

Voted

7

0

SCHNEIDER ELECTRIC

1

1

1

Voted

24

0

0.00%

SCOR (Out)

1

0

1

Exit after AGM

31

4

12.90%

SGS

1

1

1

Voted

26

9

34.62%

SOCIETE GENERALE

1

1

1

Voted

14

2

14.29%

STANDARD CHARTERED

1

1

1

Voted

31

1

3.23%

SWISS RE

1

1

1

Voted

33

2

6.06%

SYNGENTA (Out)

1

0

1

Exit after AGM

22

0

0.00%

TELEFONICA

1

1

1

Voted

13

0

0.00%

TOTAL

1

1

1

Voted

13

0

0.00%

UBS GROUP

1

1

1

Voted

26

1

3.85%

UNICREDIT (Out)

1

0

1

Exit after AGM

19

3

15.79%

Voted

27

0

0.00%

861

50

VALLOUREC

1

1

1

41

39

41

5.81%


10/55

SUMMARY OF RESULTS IN 2015-2016

E NGAGEMENT

PERFORMANCE

As can be seen from the table opposite, we assessed thirty-eight of the companies in the Fund during this reporting cycle (January 2015 to March 2016) and engaged with thirty-six companies (95 per cent). This level of engagement is unique in the context of large capitalisations. Credit for this success must go to the dedication of the engagement team and the stability of the portfolio managed by PPT.

of those attending the meeting. We also downgraded SCOR and Syngenta, which were finally sold despite four and six discussions respectively with their managements in recent years. Regarding Syngenta, 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 took advantage of its becoming an attractive acquisition target to close the position.

we assessed thirtyeight of the companies in the Fund during this reporting cycle and engaged with thirty-six companies (95 per cent)

On the basis of the assessments carried out, we conducted an active dialogue with all the companies except Compass Group and Novozymes, through twelve on-sites visits to Basel, Geneva, Paris and Zurich (33 per cent) and twenty-four conference calls (66 per cent). 2 Face-to-face meetings were given priority, in order to increase the quality of the contact with companies with whom we have been in discussion for many years. 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, a record twenty-four companies (63 per cent) have reached level 5, that is, showed an improvement on at least one weak point that had been raised previously.

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

Five new companies: Engie, Geberit, Royal Dutch Shell, Schneider Electric and SGS, reached level 5 in 2016. Together with Coloplast, which was also upgraded, they are described in greater detail in the chapter “Improvements and main stories” on pages 45. Despite an excellent discussion, Essilor was downgraded to level 4, “Approves the progress objectives clearly specified”, since it still hesitates to implement and communicate on some of our suggestions. At Standard Chartered, the downgrade was due to a disappointing decline in the seniority

2. We have held four constructive meetings with Compass Group in recent years and know the company well. Novozymes entered the portfolio too late for us to begin the dialogue, but a meeting is already planned for the next reporting cycle.

OF ENGAGEMENT LEVEL

4.19

: 2010-2016

4.50

4.44

3.86 3.52

2.38

2010-2011

2011-2012

Level 6

Level 3

Level 5

Level 2

Level 4

Level 1

2012-2013

Average

2013-2014

2014-2015

2015-2016


11/55

SUMMARY OF RESULTS IN 2015-2016

Portfolio as at 31.12.2015

Engagement type

ABB

Meeting

Score Change Summary 5

=

ARCELORMITTAL

Conference Call

5

=

ASSA ABLOY (New)

No meeting (late entry)

New

New

AXA SA

Meeting

4

=

BBVA

Conference Call

5

=

BMW

Conference Call

5

=

BG GROUP (Merger)

Exit (no report)

Exit

Exit

BNP PARIBAS

Meeting

4

=

BP PLC

Conference Call

4

=

COLOPLAST*

Conference Call

3

+1

Sound basis for long-term engagement.

COMPASS GROUP

No Meeting

1

-3

Not interested in an engagement meeting this year.

CREDIT SUISSE GROUP

Meeting

5

=

DANONE

Conference Call

4

=

DIAGEO (Out)

Exit (no report)

Exit

Exit

ENGIE*

Conference Call

5

+2

ESSILOR INTERNATIONAL*

Conference Call

4

-1

FRESENIUS MEDICAL CARE

Conference Call

4

=

GEBERIT**

Meeting

5

+1

HENNES & MAURITZ

Conference Call

5

=

HOLCIM (Out)

Exit (no report)

Exit

Exit

HSBC HOLDINGS

Conference Call

4

=

LINDE

Conference Call

5

=

L’OREAL**

Conference Call

5

=

NESTLE**

Meeting

5

=

NOVARTIS

Meeting

5

=

NOVO NORDISK

Conference Call

5

=

NOVOZYMES (New)**

No meeting (late entry)

1

New

PUBLICIS GROUPE

Conference Call

5

=

RECKITT BENCKISER GROUP** Conference Call

5

=

ROYAL DUTCH SHELL*

Conference Call

5

+1

SAINT GOBAIN

Conference Call

5

+1

SAP

Conference Call

5

=

SCHNEIDER ELECTRIC*

Conference Call

5

+1

SCOR (Out)

Conference Call

4

-1

SGS**

Meeting

5

+1

SOCIETE GENERALE

Meeting

5

=

STANDARD CHARTERED

Conference Call

3

-1

SWISS RE

Meeting

5

=

SYNGENTA (Out)

Meeting

4

-1

TELEFONICA

Conference Call

5

=

TOTAL

Conference Call

5

=

UBS GROUP

Meeting

5

=

UNICREDIT (Out)

Exit (no report)

Exit

Exit

VALLOUREC

No meeting (no report)

-

NR

Strong improvement in HR in line with FG recommandation. Yet to follow through on the previous year’s recommendations. Precise suggestions implemented.

Improvement regarding “anti-coruption” in the value chain. Significant improvements in HR and labour norms. Improvement in audits and anti-corruption training. Yet to follow through on the previous year’s recommendations.

Lower level of company representatives. Still not much new on the toxicological impact.

* Further information on these companies can be found in chapter “Improvement examples and main stories” on pages 45ff.

** Comments to these companies can be consulted at chapter “Improvement examples and main stories” on pages 45ff. In addition, these companies’ complete engagement reports can be found in chapter “Engagement reports” on pages 55ff.


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SUMMARY OF RESULTS IN 2015-2016

TESTIMONIALS

F RO 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

“…Thanks for the interesting meeting and the valuable input provided, which will be doubtlessly taken into account in next year´s reporting. …” Emilio Martín-More Coloma, Responsible Business, BBVA.

“ … Thank you for the productive discussion today. It is very helpful to receive feedback and we note a number of points that we will discuss internally to make our reporting more useful to you. James Dymond, Investor Relations, SAP.

“…Thanks a lot for your time and the Fondation Guilé assessment which is always useful for us to improve our CSR activities and reporting. … ” Eve Magnant, VP. Corporate Social Responsibility Director, Publicis Groupe

...and this extract from Novo Nordisk’s recently released 2015 report.

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


13/55

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 defi ned 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

15/55


16/55

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 cycles. 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 financial 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.


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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 European 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 Over the years, our approach has evolved steadily, steered by Christopher Quast, portfolio manager of the Fund since the latter’s inception and head of European strategy at PPT since 1999. The Investment Committee, which meets once a week, comprises

sixteen seasoned investment professionals. Among them is Paolo Bozzo, who joined Christopher’s team in 2015 with twelve years’ expertise in the financial markets as a director at Bank of America Merrill Lynch and Bank Sal. Oppenheim.

MARKET SCREENING We begin by screening the 600 largest investable European companies. From these we select only profitable businesses with organic growth of at least 5 per cent. Their profitability and debt level should enable them to finance their growth while rewarding their shareholders. Profitability must also take into account the strength and longevity of the company’s competitive advantage. At this

stage we begin to integrate the financially material ESG issues as presented on the following page. By now we are looking at about 100 companies. Before beginning to construct the portfolio, which will consist of some thirty-five positions, we apply various techniques to check that the companies that interest us are not overpriced.

Their profitability and debt level should enable them to finance their growth while rewarding their shareholders

PPT’ S

INVESTMENT PROCESS ”

Market screening >5% organic growth, ROIC/ROE>10%, Net debt/EBITDA<2.5x and sustainable FCF generation

About 600 companies

Company analysis Longevity of the competitive advantage, management quality, growth prospects, profitability and returns About 100 ompanies Valuation Integrated DDM, ROIC-WACC vs EV/ IC, EV/EBITDA, P/E and FCF yield

Portfolio construction

30-35 companies


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THE CADMOS FUNDS’ BUY & CARE® STRATEGY

COMPANY ANALYSIS – ESG INTEGRATION To calculate the life of the competitive edge, we chart the factors involved (see the ppt model - longevity of the competitive advantage). This longevity is determined by both the influence of external parameters that are difficult to control (in green) and the balance between the strengths and values of the company itself (in red). Our main source of inspiration was the updated version of the Michael Porter model, which takes up the essential points of his Five Forces model of 1979 but builds in social responsibility.3 In our analysis of the longevity of the competitive advantage, ESG factors play an important role. As the model above shows, this is where we integrate the financially material ESG issues. A recent study by Harvard University sheds new light on the correlation between businesses’ sustainability and their financial performance by differentiating between general and financially material ESG information.4 We found this study illuminating because it corresponds more closely than most to our reality. It concludes, first, that businesses that are better at managing their financially 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

L ONGEVITY

general. In other words, the financial 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. The delicate task of analysing management quality is also made easier by the integrated Buy & Care process. Our visits and discussions enhance our ability to evaluate the consistency between a company’s words and its concrete actions.

IN

OUR ANALYSIS OF

THE LONGEVITY OF THE COMPETITIVE ADVANTAGE ,

ESG

FACTORS PLAY AN

IMPORTANT ROLE .

OF THE COMPETITIVE ADVANTAGE

Competitive context • Intellectual property • Rule of law • Regulation

Access to capital • Financial (cost) • Natural or real (quality) • Human (education) Profitability + ROE and R&D + Employee loyalty + Governance

Competitiveness + Technology + Barriers to entry + Community loyalty

Margins + Cost leadership + Efficiency (energy, materials, etc.) + Supplier loyalty

Revenues + Market share + Pricing power + Products security + Client loyalty + Product mix

Industrial support • Infrastructure • Supplier network • Political incentives

Social impact of the value chain – inside out

3. Michael Porter: “The Link Between Competitive Advantage and Corporate Social Responsibility”; 2006. 4. Mozaffar Khan, George Serafeim and Aaron Yoon: “ Corporate Sustainability: First Evidence on Materiality”; 2015.

Demand conditions • Market standard • Regulation • Middle class / BOP

Social influence on competitiveness – outside in


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THE CADMOS FUNDS’ BUY & CARE® STRATEGY

VALUATION – ESG INTEGRATION Lastly, the high-quality companies thus identified must still present attractive potential for gains in the medium and long term. The model below provides a partial view of how market value is compared with intrinsic value, estimated based on expected dividend pay-outs during the period of competitive advantage. PPT

Our practical experience with applying the PPT integrated valuation model obliges us to remain modest and conscious that this is a continuous, difficult learning process. Nevertheless, our results encourage us to stay on course.

VALUATION MODEL INTEGRATING

ESG

FACTORS

- D0 to D2 = consensus expectations - D3 to Dn-1 = f(g* ; ROE) = PPT - n = longevity of competitive advantage - Dn to D∞ = fade to long-term econ. growth

- K = WACC (Risk Free + Premium) - Risk premium inferred from consensus

PORTFOLIO CONSTRUCTION Constructing the portfolio involves the selection of thirty to thirty-five companies with strong potential for outperformance in the medium and long term. 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. We do not set ourselves a tracking error target, but the ratio is usually between 4 per cent and 6 per cent. The indices should not influence the investment-decision process but serve solely as a risk-management tool.

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.

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. Christopher Quast 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 memebers 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 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, 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. LABOR STANDARDS 3. Businesses should uphold the freedom of association and recognise the right to collective bargaining; 4. eliminate all forms of forced and compulsory labor; 5. abolish child labor; 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 in the opposite page. 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.


23/55

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 financial 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 defines 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.


FINANCIAL MANAGEMENT REPORT


26/55

FINANCIAL MANAGEMENT REPORT 2015

R EVIVAL

OF ECONOMIC GROWTH IN

The launch of the European Central Bank’s quantitative easing programme in early 2015 injected new life into the eurozone economy, with GDP growth gathering speed and reaching an estimated 1.5 per cent. Countries outside the euro area saw even higher growth rates, with the exception of Switzerland, which was hard hit by the Swiss franc’s strong revaluation.

E UROPE

The purchasing managers’ index clearly indicates a stabilising macroecomic situation, which also helped to lower the unemployment rate in most of the eurozone countries. Not in France, however, as the country continues to suffer from the lack of labour reforms.

E UROZONE : U NEMPLOYMENT

E UROZONE PMI – P URCHASING M ANAGER I NDICES

RATE

(%)

13

60

12

55

11

50

10 45

9

40

Manufacturing Services 50 (above = growth)

35

8 7 6

30 Jan. 07

Jan. 09

Jan. 11

Jan. 13

Jan. 15

Source : Markit

Worries about the slowing pace of China’s economic growth and its impact on commodities put increasing pressure on the markets as from August 2015. The country’s transition from a manufacturing- and export-led economy to one powered primarily by domestic consumption and services is a major event and affects the performance of the big European companies present in this market.

oct. 99

Eurozone Germany France oct. 03

oct. 07

oct. 11

oct. 15

Source : Eurostat, Deutsche Bundesbank

Nevertheless, the slump in the price of commodities, particularly oil, has more to do with overproduction than with any collapse in demand in the wake of an economic slowdown.

The purchasing managers’ index clearly indicates a stabilising macroecomic situation, which also helped to lower the unemployment rate in most of the eurozone countries.


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FINANCIAL MANAGEMENT REPORT 2015

EVOLUTION

OF THE

EUROPEAN

European equities headed higher for the fourth year in a row and ended 2015 up 6.52 per cent (DJ Europe Stoxx 50, with net dividends reinvested).

by tumbling profits at companies active in the energy sectors. Lower interest rates and increasing regulatory pressure also hampered earnings growth in the banking sector, a key component of the European economy.

The year began with a surge of 20 per cent through to mid-April, during which time investors tried to reckon with the impact of the substantial quantitative easing programme announced by the ECB.

In summer, equities consolidated in a broad trading band until the crash of the Chinese stock market in August and September. The meltdown sparked a debate about how the transformation of the Chinese economy would impact global economic growth. The European index corrected almost 17 per cent before stabilising in the closing months of the year.

In the following weeks, the release of quarterly earningsâ&#x20AC;&#x2122; reports hinted at another stagnation in profits, with the growth in some sectors (such as consumption, thanks to the positive effect of the euroâ&#x20AC;&#x2122;s fall against the US dollar) offset E UROPEAN

EQUITY INDEX

EQUITY MARKET

(DJ S TOXX 50) 12

MONTHS IN

2015

3680 3580

3480 3380 3280

3180

3080 2980

2880 Jan.

Feb.

Mar.

Apr.

May

Jun.

Jul.

Aug.

Sep.

Oct.

Nov.

Dec.

2015 Source: Bloomberg

European equities headed higher for the fourth year in a row and ended 2015 up 6.52 per cent (DJ Europe Stoxx 50, with net dividends reinvested).


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FINANCIAL MANAGEMENT REPORT 2015

P ORTFOLIO

MANAGEMENT REVIEW

Classes A and B of the compartment delivered returns of 6.8 per cent and 7.7 per cent respectively in 2015, beating the benchmark index (Dow Jones Stoxx 50, net dividends reinvested), which rose 6.5 per cent. Since the launch of the compartment P ERFORMANCE

in 2006, we have outperformed our benchmark, the DJ Stoxx 50 NR (Net Return). At the end of December 2015, the compartment (Class B) was up 23.4 per cent, whereas the benchmark had gained only 14.8 per cent. SINCE INCEPTION

140.00 130.00 120.00 110.00 100.00 90.00 80.00 70.00 60.00 50.00

oct. 06

STOXX 50 Net Ret. (€)

Cadmos European Engagement fund (B)

40.00 oct. 07

oct. 08

oct. 09

oct. 10

More than 75 per cent of the companies selected as from 2009 are still present in the fund, and we have remained a shareholder of the majority of the companies for at least five 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 funds. 5 The Fund’s long-term outperformance is partly explained by its calm and considered management style. Healthcare, consumer goods, insurance and technology were the strongest contributors to the relative performance. Novo Nordisk profited from the launch of new products, particularly on the US market, while Essilor

oct. 11

oct. 12

oct. 13

oct. 14

oct. 15

International and Fresenius Medical Care continued to reap the benefits of their business models focused on ophthalmic optics and dialysis services respectively. L’Oréal finally saw a slight acceleration in growth in its European domestic markets, and Reckitt Benckiser is successfully applying its expansion strategy in the area of non-prescription products and emerging-market countries. AXA demonstrated the positive impact of its strategy for return to growth, based on new-product launches. Swiss Re produced remarkable results in a context of surplus capital that remains tough for reinsurers and prompted us to take profits on its competitor, SCOR, during the year.

Classes A and B of the compartment delivered returns of 6.8 per cent and 7.7 per cent respectively in 2015, beating the benchmark index (Dow Jones Stoxx 50, net dividends reinvested), which rose 6.5 per cent. 5. Mercer LLC: “Investment horizons - Do managers do what they say?”; 2010.


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FINANCIAL MANAGEMENT REPORT 2015

SAP was busy transforming its business model, which is now centred on the cloud. This new strategy is already proving successful. The most cyclical sectors in the portfolio, namely industrials, chemicals, energy and utilities, weighed on the compartment’s relative performance. ABB and Schneider Electric have to adjust to lower potential in China. Vallourec and ArcelorMittal are suffering from falling demand, the former in relation to oil and gas, and the latter, owing to overproduction by Chinese players, who have appeared en masse in the export markets. Linde is seeing a fall off in orders for new projects in Asia. Plunging crude oil and natural-gas prices dealt a blow to the profits of the major integrated groups, though this was partially offset by the rising profitability of refi ning activities. Royal Dutch Shell launched a takeover bid for BG Group and completed the deal in the first quarter of 2016. This operation continues Shell’s transformation into a major player in natural gas, which will be the primary source of the global energy transition. Although earnings rose in 2015, the European banks suffered a new wave of devaluation. This was triggered by fears of the impact of the ECB’s

negative-rate policy on their net interest margins and by the sector’s lack of growth despite the revival in credit demand. These key players in the European economy must continue to adapt their cost base in order to reach their goal of an acceptable return on equity. Two banks with a strong presence in the Asian markets, HSBC and Standard Chartered, felt the effects of the current economic slowdown. In 2015, five companies, Diageo, Holcim, SCOR, Syngenta and Unicredit, exited the portfolio. The reasons were the weakening of their competitive advantage, the lack of a satisfactory response to the engagement process and thus, the difficulty of justifying their valuations. We are often asked for examples of companies that we have sold because of lackluster engagement. It is never quite that simple, since in most cases an exit results from a combination of factors. Nevertheless, the decision to sell Syngenta was closely linked to the insights gained during our engagement. As mentioned earlier, we had conducted six discussions with its management in previous years. We felt that the company had grasped the importance of addressing the ESG issues but had failed to provide adequate answers to the one that was most financially material, that is, product risk.

At the end of December 2015, the compartment (Class B) was up 23.4 per cent, whereas the benchmark had gained only 14.8 per cent. As can be seen in the following table, two companies entered the portfolio this year. Assa Abloy is the market leader in locks, while Novozymes is a

leading producer of enzymes for industrial uses and enjoys strong IP-driven barriers to entry.

O UTLOOK The European markets’ fundamentals are particularly positive in 2016, with improving macroeconomic data, strong monetary stimulus from the ECB and robust global growth that looks set to continue. Concerns about developments in China and the impact of the plunging oil price on entire sectors of the US economy could

increase the volatility seen since the start of 2016. Valuations and dividend yields make the equity markets attractive in the current context of overvalued bonds. But after several years of disappointing earnings, it will take a return to more vigorous profit growth, notably in the banking sector, to justify an uptrend in the markets.


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FINANCIAL MANAGEMENT REPORT 2015

C OMPOSITION OF THE 31 D ECEMBER 2015 Portfolio as at 31.12.2015

PORTFOLIO AS AT

Sector

Country

Industrial Goods & Services

Switzerland

ARCELORMITTAL

Basic Resources

Luxembourg

ASSA ABLOY (New)

Construction & Materials

Sweden

Insurance

France

ABB

AXA SA BBVA

Banks

BMW

Automobile & Parts

BG GROUP (Merger) BNP PARIBAS BP PLC COLOPLAST COMPASS GROUP CREDIT SUISSE GROUP

Oil & Gas Banks Oil & Gas Health Care Travel & Leisure Banks

Spain Germany United Kingldom France United Kingdom Denmark United Kingdom Switzerland

DANONE

Food & Beverage

France

DIAGEO (Out)

Food & Beverage

United kingdom

Utilities

France

ESSILOR INTERNATIONAL

Health Care

France

FRESENIUS MEDICAL CARE

Health Care

Germany

ENGIE

GEBERIT HENNES & MAURITZ HOLCIM (Out) HSBC HOLDINGS LINDE

Construction & Materials Retail Construction & Materials Banks Chemicals

Switzerland Sweden Switzerland United Kingdom Germany

Lâ&#x20AC;&#x2122;OREAL

Personal & Household Goods

NESTLE

Food & Beverage

Switzerland

NOVARTIS

Health Care

Switzerland

NOVO NORDISK

Health Care

Denmark

NOVOZYMES (New)

Health Care

Denmark

PUBLICIS GROUPE RECKITT BENCKISER GROUP ROYAL DUTCH SHELL SAINT GOBAIN SAP SCHNEIDER ELECTRIC SCOR (Out) SGS SOCIETE GENERALE STANDARD CHARTERED

Media Personal & Household Goods Oil & Gas Construction & Materials Technology

France

France United Kingdom Netherlands France Germany

Industrial Goods & Services

France

Insurance

France

Industrial Goods & Services

Switzerland

Banks

France

Banks

United Kingdom

SWISS RE

Insurance

Switzerland

SYNGENTA (Out)

Chemicals

Switzerland

TELEFONICA TOTAL

Telecommunications

Spain

Oil & Gas

France

UBS GROUP

Banks

UNICREDIT (Out)

Banks

VALLOUREC

Industrial Goods & Services

Switzerland Italy France


EXERCISE OF VOTING RIGHTS


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D ISTRIBUTION

OF VOTES

At the end of December 2015, the portfolio of the Cadmos - European Engagement Fund comprised thirty-nine 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 forty-one companies. The reason is that we voted on four companies that exited the portfolio after their AGMs, and that two companies entered the portfolio after their AGMs (see Summary of results in 2015–2016).

During the period under review we expressed an opinion on 861 items on AGM agendas, representing an increase of more than 20 per cent in the voting decisions to be made in the last two years. This additional workload is directly related to the greater transparency demanded by investors. The majority of the resolutions submitted to the vote, i.e. almost 75 per cent, concerned the structure of the board of directors and the capital structure.

D ISTRIBUTION

OF VOTES

Shareholder’s rights 10% Board of directors 43%

Capital structure 31%

Remuneration 16%

Votes on remuneration have more than doubled in the last two years, rising from 63 resolutions in 2013 to 135 in 2015 and representing 16 per cent of total votes. Votes on remuneration have more than doubled in the last two years, rising from 63 resolutions in 2013 to 135 in 2015 and representing 16 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. The subject of executive pay is losing some of its media appeal. 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. 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 longterm 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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M AIN

OPPOSITIONS

Of the 861 votes cast, we voted against the boards of directors’ recommendations 50 times, i.e. in 5.8 per cent of cases. The chart below shows that remuneration still represents a major point of

contention (11.1 per cent of votes against management recommendations) but was not the only item that caused concern.

The chart below shows that remuneration still represents a major point of contention (11.1 per cent of votes against management recommendations) but was not the only item that caused concern.

400

D ISTRIBUTION

OF OPPOSING VOTES

20

350 300

0 250 200

353

150

15

266 15

100

120

50

72

0

1. Board of directors

2. Remuneration For

Themes

3. Capital structure Against

4. Shareholder’s rights

Nb. Vote

Against

%

1- Board of directors

373

20

5.4%

2- Remuneration

135

15

11.1%

3- Capital structure

266

0

0.0%

4- Shareholders’ rights

87

15

17.2%

Total

861

50

5.8%

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 (17.2 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. After the AGM, the board is the highest organ of management, defi ning the strategy to follow, appointing the senior management that will apply that strategy, and rewarding or sanctioning it according as the objectives are reached. V OTE Name

Vote

CONCERNING :

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 eleven companies where we challenged at least one item on the agenda concerning the board structure. B OARD

# Dissent % Dissent

OF DIRECTORS

Description

ARCELORMITTAL

5

1

20%

VII) Elect Wilbur L. Ross, Jr.

BMW

5

1

20%

6.3) Elect Norbert Reithofer

COLOPLAST

8

1

13%

5.A) Elect Michael Pram Rasmussen

HENNES & MAURITZ

4

1

25%

13) Nomination Committee

HOLCIM

15

1

7%

2) Ratification of Board and Management Acts

SCOR

9

1

11%

4.) Ratification of Supervisory Board Acts

SGS

15

8

53%

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 for Nominating and Remuneration Committee 4.3.2) Elect Ian Gallienne in Nominating and Remuneration Committee

SOCIETE GENERALE

6

2

33%

4) Related Party Transactions

SOCIETE GENERALE SA

6

1

17%

12) Elect Gérard Mestrallet

SWISS RE

18

1

6%

6.1.3) Elect Raymond K. F. Ch’ien

UBS GROUP

16

1

6%

3) Ratification of Board and Management Acts

UNICREDIT

7

3

43%

O43.2) List Presented by Group of Shareholders O.5) Authorization of Competing Activities

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

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.


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EXERCISE OF VOTING RIGHTS IN 2015

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.

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. V OTE

CONCERNING :

B OARD

OF DIRECTORS

Agree Name

Description

ARCELORMITTAL

VII) Elect Wilbur L. Ross, Jr.

90.8%

%

Too many mandates

Our objections

BMW

6.3) Elect Norbert Reithofer

84.5%

Other governance issue

COLOPLAST

5.A) Elect Michael Pram Rasmussen

Accepted!

HENNES & MAURITZ

13) Nomination Committee

Accepted!

Board’s lack of independence Committee chairman is the chairman of the board

HOLCIM

2) Ratification of Board and Management Acts

97.8%

Ongoing investigations

SCOR

4.) Ratification of Supervisory Board Acts

91.1%

Lack of transparency

SGS

4.1.1) Elect Sergio Marchionne

73.1%

Lack of transparency

4.1.2) Elect Paul Desmarais, Jr.

71.4%

Too many mandates

4.1.3) Elect August von Finck

69.4%

Board’s lack of independence

4.1.5) Elect Ian Gallienne

72.1%

Board’s lack of independence

4.1.9) Elect Gérard Lamarche

68.1%

Board’s lack of independence

4.2) Elect Sergio Marchionne as chairman

73.0%

Board’s lack of independence

67.0%

Board’s lack of independence

4.3.1) Elect August von Finck for Nominating and Remuneration Committee 4.3.2) Elect Ian Gallienne in Nominating and Remuneration Committee SOCIETE GENERALE

4) Related Party Transactions

70.7%

Board’s lack of independence

89.8%

Board’s lack of independence

SOCIETE GENERALE SA

12) Elect Gérard Mestrallet

76.0%

Too many mandates

SWISS RE

6.1.3) Elect Raymond K. F. Ch’ien

69.6%

Too many mandates

UBS GROUP

3) Ratification of Board and Management Acts 88.9%

UNICREDIT

O43.2) List Presented by Group of Shareholders 43.1%

Ongoing investigations Vote in favor of this list - more independent board

O.5) Authorization of Competing Activities

93.1%

Potential conflict of interest

REMUNERATION We have already mentioned executive pay, an issue that led us to oppose at least one recommendation of nine AGMs. This represents an improvement compared with 2014, when we challenged the remuneration proposals of one third of the companies

in the portfolio. That improvement was expected, owing to the increased transparency, and was foreseen in our previous report. Below we present the nine companies where we were unable to back all the pay resolutions in 2015.


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EXERCISE OF VOTING RIGHTS IN 2015

V OTES Name

Vote

CONCERNING :

# Dissent % Dissent

R EMUNERATION Description

BG GROUP

1

1

100%

2) Remuneration Report (Advisory)

BP

2

1

50%

2) Remuneration Report (Advisory)

CREDIT SUISSE GROUP

3

1

33%

4.1) Board Compensation

HENNES & MAURITZ

2

1

50%

14) Remuneration Guidelines

PUBLICIS GROUPE

10

4

40%

O.7) Severance Agreement for Kevin Roberts O.8) Severance Agreement for Jean-Michel Etienne O.9) Severance Agreement for Anne-Gabrielle Heilbronner O.12) Remuneration of Kevin Roberts, Executive

RECKITT BENCKISER GROUP 5

2

40%

2) Remuneration Report (Advisory)

SCOR

3

75%

O.5) Remuneration of Denis Kessler, CEO

26) Long Term Incentive Plan 4

E.24) Authority to Grant Stock Options E.25) Authority to Issue Restricted Shares SWISS RE

4

1

25%

7.1) Board Compensation

UNICREDIT

1

1

100%

O.10) Severance-related Group Policy

Now let us focus on the compa nies where we opposed at least half the resolutions submitted to the vote or whose resolutions were challenged most strongly by the shareholders. This concerns five of the nine companies listed above (BG Group, BP, Hennes & Mauritz, Publicis and SCOR). They had

V OTES

CONCERNING :

already come to our attention through remuneration controversies in the previous year. Our main objection in each case is that a large portion of the pay package is discretionary and overly focused on the short term.

R EMUNERATION

Agree Name

Item

BG GROUP

2)

% 82.1%

Our objections Pay performance disconnect; Fixed salary significantly exceeds peers

BP

2)

88.8%

Pay performance disconnect; Concerns regarding payout stucture, targets & disclosure

CREDIT SUISSE GROUP

4.1)

97.8%

HENNES & MAURITZ

14)

Accepted!

Insufficient overall disclosure; Poor overall design

PUBLICIS GROUPE

O.7)

61.8%

Allows payouts for sub-target bonus performance

RECKITT BENCKISER GROUP

Excessive compensation

O.8)

61.8%

Allows payouts for sub-target bonus performance

O.9)

61.9%

Allows payouts for sub-target bonus performance

O.12)

85.9%

Poor disclosure of extraordinary pension payments

2)

82.8%

Excessive compensation; Poor compensation structure/ performance conditions

26)

81.7%

Poor compensation structure/performance conditions; Excessive award opportunity

SCOR

O.5)

73.7%

Excessive compensation; Poor compensation structure/

E.24)

72.3%

Excessive compensation; Poor compensation structure/

E.25)

70.9%

Excessive compensation; Poor compensation structure/

SWISS RE

7.1)

86.7%

Excessive compensation

UNICREDIT

O.10)

93.3%

performance conditions performance conditions performance conditions Seeks authority to exceed established limits; Potentially excessive severance agreement


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EXERCISE OF VOTING RIGHTS IN 2015

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 longterm 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.

The table on previous page 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 nearly 40 per cent of the dissenting votes. Although voices are still being raised against the continuing 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 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.

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.

SHAREHOLDERS’ RIGHTS 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.

and discriminating against shareholders that vote remotely. In addition, we systematically reject the special resolution, put forward by practically all the English companies, proposing that the period of notice for AGMs be reduced from twenty-one to fourteen days. This reduction imposes constraints on shareholders that wish to be well prepared for the AGM, that seek information beforehand and that cast their vote remotely using electronic tools.

In two cases, we opposed the item “Transaction of Other Business”, which would authorise the vote on a new resolution proposed during the AGM. We thus avoid giving the board a blank cheque V OTE

CONCENING :

S HAREHOLDERS ’

# Dissent % Dissent

RIGHTS

Name

Vote

BMW

1

1

100%

Description 7.) Amendments to Articles

BG GROUP

2

1

50%

23) Authority to Set General Meeting Notice Period at 14 Days

BP

4

1

25%

24) Authority to Set General Meeting Notice Period at 14 Days

CREDIT SUISSE GROUP

4

3

75%

III.a) Authorize Proxy to Vote on Additional Shareholder Proposals III.b) Authorize Proxy to Vote on Additional Board Proposals III) Transaction of Other Business

HOLCIM

2

1

50%

HSBC HOLDINGS

1

1

100%

4) Amendments to Articles Relating to VegüV 13) Authority to Set General Meeting Notice Period at 14 Days

NESTLE

2

1

50%

7) Additional or Miscellaneous Proposals

NOVO NORDISK

1

1

100%

8) Transaction of Other Business

PUBLICIS GROUPE

E.24) Amendments to Articles to Create the Office of Censor

4

1

25%

RECKITT BENCKISER GROUP 2

1

50%

29) Authority to Set General Meeting Notice Period at 14 Days

SAINT GOBAIN

2

1

50%

22) Authority to Set General Meeting Notice Period at 14 Days

SGS

2

1

50%

5) Amendments to Articles Relating to VegüV

STANDARD CHARTERED

2

1

50%

31) Authority to Set General Meeting Notice Period at 14 Days


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EXERCISE OF VOTING RIGHTS IN 2015

A large number of Swiss firms have been challenged in the last two years on the subject of shareholders’ rights. Indeed the ordinance against excessive remuneration in Swiss listed 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 two companies (Holcim and SGS) we decided not to back the statutory changes proposed. In our view the changes ran counter to the shareholders’ interests. They also provided for a second vote

V OTE

CONCENING :

to be held during the same AGM in the event of a negative vote on remuneration. This provision does not allow shareholders voting by correspondence or electronic means to take part in the second vote. The shareholders’ rights are therefore too severely limited. 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.

S HAREHOLDERS ’

RIGHTS

Agree Name

Item

BMW

7.)

97.9%

Limits shareholder rights

BG GROUP

23)

89.7%

Shortened notice period could disenfranchise shareholders

BP

24)

87.3%

Shortened notice period could disenfranchise shareholders

CREDIT SUISSE GROUP

III.a)

94.3%

Insufficient information

III.b)

99.1%

Insufficient information provided by the Company

III) HOLCIM

4)

%

Accepted!

Our objections

Granting unfettered discretion is unwise

95.9%

Amendment is not in best interests of shareholders Shortened notice period could disenfranchise shareholders

HSBC HOLDINGS

13)

88.6%

NESTLE

7)

Accepted!

Insufficient information provided by the Company

NOVO NORDISK

8)

Accepted!

Granting unfettered discretion is unwise

PUBLICIS GROUPE

E.24)

Accepted!

Amendment is not in best interests of shareholders

RECKITT BENCKISER GROUP

29)

87.9%

Shortened notice period could disenfranchise shareholders

SAINT GOBAIN

22)

87.1%

Shortened notice period could disenfranchise shareholders

SGS

5)

72.3%

Amendment is not in best interests of shareholders

STANDARD CHARTERED

31)

93.0%

Shortened notice period could disenfranchise 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 thirty-six of the thirty-eight assessed companies in the portfolio, representing a record engagement rate of more than 95 per cent. We did so by means of twelve on-site visits to Basel, Geneva, Paris and Zurich (33 per cent) and twenty-four conference calls (66 per cent), so that the only exceptions were Compass Group and Novozymes.6 This outstanding result was achieved despite the fact that three of the companies in the compartment are not signatories to the Global C ONTACT

Compact.7 It is gratifying to see that this success rate exceeds those of other investors who conduct a dialogue based mainly on intimidation. In 2014 we substantially increased the proportion of face-to-face meetings relative to conference calls. This has helped us to 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 European companies.

WITH THE COMPANIES IN THE COMPARTMENT

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

Meetings

Conference calls 2011-2012

2012-2013

2013-2014

No dialogue during timeframe 2014-2015

2015-2016

The Cadmos Funds’ “soft power” engagement is clearly conducive to a dialogue that is both influential and constantly constructive Many companies emphasise the value of this exchange of ideas with the portfolio manager and a member of the engagement team. At L’Oréal, for example, we were able to meet the same representatives for the third successive year. They welcome the opportunity to explore new ways of improving the company’s reporting or of 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’

6. We have held four constructive meetings with Compass Group in recent years and know the company well. Novozymes entered the portfolio too late for us to begin the dialogue, but a meeting is already planned for the next reporting cycle. 7. Fresenius Medical Care, Reckitt Benckiser and SGS

discussion. They are speaking out publicly about their 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.


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SHAREHOLDER ENGAGEMENT 2015 â&#x20AC;&#x201C; 2016

of the UN Global Compact engagement with the companies. The table at the bottom of the page provides an overview and shows the evolution between the engagement cycle 2014-2015 and 2015-2016.

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-fi nancial impact

E NGAGEMENT

2014-2015

2015-2106

Level

LEVEL OF COMPANIES

(#)

Description

0

0

(6)

24

24

5

(Recommendations publicized) Shows improvements on at least one weak point raised

16

10

4

Approves the progress objectives clearly specified

1

2

3

Displays awareness and accepts the principle of an annual dialogue

1

0

2

Agrees to a detailed discussion about our assessment

0

2

1

Acknowledges receipt of our assessment

The effectiveness targets set for the Cadmos Funds are ambitious. Our first goal is to create a continuing dialogue with all the companies, represented by level 3. We have reached that goal with all except Compass Group and Novozymes. The remaining thirty-six companies have responded regularly to the engagement teamâ&#x20AC;&#x2122;s approaches.

that have reached level 5. In this reporting period a record twenty-four companies (63 per cent) reached that level, meaning that they had improved on at least one weak point that had been raised. As the graph below shows, only three companies had reached level 5 in 2010. This evolution can be quantified by tracking the average level of engagement over time. Today the average stands at 4.44, whereas it was only 2.38 five years ago.

The second goal is to demonstrate that year on year we are increasing the proportion of companies

D ISTRIBUTION

OF ENGAGEMENT LEVEL

4.19

: 2010-2016

4.50

4.44

3.86

Level 6 Level 5

3.52

Level 4 Level 3 Level 2

2.38

Level 1 Average

2010-2011

2011-2012

2012-2013

2013-2014

2014-2015

2015-2016

In this reporting period a record twenty-four companies (63 per cent) reached that level, meaning that they had improved on at least one weak point that had been raised.


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SHAREHOLDER ENGAGEMENT 2015 – 2016

As regards upgrades, Engie, Geberit, Royal Dutch Shell, Schneider Electric and SGS are the five new companies reaching level 5 this year. Coloplast has advanced to level 3. The following chapter provides details of these improvements, while a chart of our engagement activities may be found in the introduction, under “Engagement performance 2015-2016”.

Compass Group was returned to level 1, since a visit had proved impossible. But we have had four good meetings with the company in previous years and trust that we shall manage to engage with it again in 2016. SCOR was downgraded to level 4, as it had not acted on the recommendations made during the dialogue in 2014. We subsequently took our profits, but not for that reason.

Five companies were downgraded. Among them was Essilor, which was lowered to level 4 as it had yet to follow through on our recommendations. But after an excellent seventh discussion, we hope that the appointment of a new chief sustainability officer signals the board’s willingness to provide a better operational framework for social responsibility. At least the new manager seems to agree with our recommendation that Essilor introduce a groupwide code of business conduct to ensure integrity throughout this rather decentralised organisation.

Standard Chartered’s downgrade was due to the lower level of seniority of its representatives. We also downgraded Syngenta, which was eventually sold despite six discussions with its management in previous years. We felt 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. We took advantage of the fact that the company has become an attractive acquisition target to close the position.

As regards upgrades, Engie, Geberit, Royal Dutch Shell, Schneider Electric and SGS are the five new companies reaching level 5 this year. Coloplast has advanced to level 3


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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 40 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 and media industries are particularly vulnerable and are directly penalised by reputational issues. In the case of the chemical, oil 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 in the portfolio that are active in distribution, travel and leisure (fewer than 10 per cent) the four principles related to international labour standards constitute a financially material threat. 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 Portfolio as at 31.12.2015 ABB ARCELORMITTAL ASSA ABLOY (New) AXA SA BBVA BMW BG GROUP (Merger) BNP PARIBAS BP PLC COLOPLAST

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.8 The following table presents a selection of the FMFs of the Fund’s underlying companies as discussed with them.

Financial Materiality Focus – Addressed by Portfolio managers Bribery and corruption risk on large contracts. Opportunities in environmental innovations and eca-efficiency New technologies linked to automotive industry New The fairness and the safety of the products Impact of climate change on asset management Large business in Latin America – access to retails customers Money laundering / KYC + exposure to corruption Life-cycle impact and gas emissions New technologies Exit Product-selling issues (retail) and data privacy Money laundering / KYC Environmental impacts and climate change risks – stranded assets Managing the energy transition (natural gas, renewable energy) Transparency in devices and product pricing Access to healthcare and safe products

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


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SHAREHOLDER ENGAGEMENT 2015 – 2016

COMPASS GROUP CREDIT SUISSE GROUP DANONE DIAGEO (Out) ENGIE ESSILOR INTERNATIONAL FRESENIUS MEDICAL CARE GEBERIT HENNES & MAURITZ HOLCIM (Out) HSBC HOLDINGS LINDE L’OREAL NESTLE NOVARTIS NOVO NORDISK NOVOZYMES (New) PUBLICIS GROUPE RECKITT BENCKISER GROUP ROYAL DUTCH SHELL SAINT GOBAIN SAP SCHNEIDER ELECTRIC SCOR (Out) SGS SOCIETE GENERALE STANDARD CHARTERED SWISS RE SYNGENTA (Out) TELEFONICA TOTAL UBS GROUP UNICREDIT (Out) VALLOUREC

Food safety Working conditions of the staff Human rights track record of corporate clients in emerging markets ESG issues taken into consideration in project finance The provision of healthy, nutrient-rich and safe food Responsibel sourcing Exit Risks related to its own nuclear plants Gas distribution in France, LNG and electricity infrastructure Access to vision care - bottom of the pyramid Presence in emerging markets could raise corruption issues Transparent pricing of devices and services Access to quality healthcare services Human rights risks in the supply chain Corruption risk Sourcing (excessive working hours, health and safety etc.) Labour norms Exit Opportunities in microfinance and microcredits Money laundering / KYC Health and safety of the workers and users Risks of corruption and bribery in some markets Product safety Environmental technology (better efficiency and substitution) The provision of safe, healthy, nutrient-rich food. Responsible sourcing Access to healthcare Responsible procurement Access to healthcare (opportunity and risk) and differential pricing Presence in emerging markets could raise corruption issues Product innovation (energy, water, climate change, agriculture) Product safety and public acceptance og GMO Responsible marketing Product safety Environmental technology (better efficiency and substitution) Environmental impacts and climate change risks – stranded assets Managing the energy transition (natural gas, renewable energy) Environmental impact (risk & opportunity from innovation) Data privacy Driving environmentally friendly technology (software) Bribery and corruption risk in large contracts Opportunities in environmental innovations and eco-efficiency Exit Business integrity Traceability and compliances (inspection of critical sites) Product-selling issues (retail) and data privacy Money laundering / KYC process Risks of financing projects with damaging effects Risk of money laundering (KYC process) Reliability and integrity of (re)insurance solutions and services Growing impact of climate change on asset management Product risks and impact on the environment Corruption risk when dealing with private or public clients Data privacy Corruption exposure in emerging markets Environmental impacts and climate change risks – stranded assets Managing the energy transition (natural gas, renewable energy) Human rights track record of corporate clients in emerging markets PRI principles taken into consideration in Wealth Managament Exit No Assessment


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SHAREHOLDER ENGAGEMENT 2015 – 2016

I MPROVEMENTS

AND MAIN STORIES

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

COLOPLAST We begin with Coloplast, the leading manufacturer of ostomy- and continence-care products. The company is also a leading maker of products for advanced wound care, skincare and surgical urology. Its high operating margins and above-average return on capital should be sustained, thanks to continued sales growth based on significant potential for additional penetration of its quality products in emerging countries and the United States. As a healthcare company, Coloplast deals with sensitive applications that may entail risks and with a potentially vulnerable customer base. Ensuring the safety and correct use of its products is therefore highly

material to its business. In terms of opportunities the company needs to ensure access to its products on a global scale and particularly in the emerging-market countries. Coloplast entered the portfolio in 2014 and we have already met for two very constructive discussions. Our experts have laid the foundations for a reliable exchange about the progress achieved and the potential for further improvement. On this last point, we have noticed that Coloplast takes it for granted that human rights and the labour norms are respected throughout its own operations. We would advise the company to report more explicitly and comprehensively on its activities in this context.

ENGIE Engie is the new name of GDG Suez. The company is Europe’s number one producer of energy from natural gas and manages Europe’s biggest natural-gas distribution network. It also has a significant presence in other areas of energy distribution and a 35 per cent stake in Europe’s leading supplier of environmental services. Engie’s challenges are those typical of the energy sector: meeting energy needs, safeguarding supplies, fighting climate change and optimising the use of resources, while also playing an active role in the energy transition. In addition, as a provider of services to cities, the company has to maintain very high ethical standards to avoid corruption.

We have upgraded Engie from level 3 to level 5, as it has surpassed the previous year’s recommendation. We had suggested that it mention more specific measures related to its targets and objectives in the area of human rights, and the reporting has indeed improved, with the release of the Reference Document on Human Rights in 2014. This document addresses the commitments and business relevance, together with a strategy and measures to comply with the regulations. Safety management and responsible investment and supplier policies are also tackled thoroughly. This was our third discussion with Engie since its entry into the portfolio.

ESSILOR Essilor is the world leader in corrective lenses, with 25 per cent of the market and a strong advantage in terms of technology and innovation. A strategy of integrating the value chain (laboratories, machines etc.) enables it to seize market share or, in some cases, control the market. Essilor shows significant growth potential in the emerging-market countries. Providing affordable solutions to 2.5 billion people living in poverty and without access to visual correction represents a huge opportunity. As mentioned earlier, we downgraded the company to level 4, as we are frustrated by the lack of progress on an issue that we had raised for the seventh time this year. But we nevertheless want to highlight its “Vision For Life™” programme. Backed by a €30 million initial investment, this aims at accelerating initiatives that target less privileged

visually impaired people in the developing countries. Through these transversal initiatives Essilor demonstrates its commitment to funding, monitoring and measuring the impact of projects that can be scaled up for the benefit of millions of people with poor eyesight. The programme comprises measures such as raising awareness, building capacity and creating basic vision-care infrastructure. In order to ensure systematic implementation of the group’s mission of improving lives by improving sight, Essilor has created a global division charged with addressing the growing challenge of uncorrected poor vision. Since the launch of this mission in 2013, half a million first-time wearers in developing countries have been equipped with corrective lenses. By the end of 2015 at least one million additional people with poor vision should have had benefited from the initiative.


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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 follows through on our earlier proposal that the company prove the reliability of its non-financial reporting.

L’ORÉAL L’Oréal was one of the Fund’s first holdings and remains a key asset. We have just held our fifth discussion with the company, which was already at level 5 in the previous cycle. For the third year in a row, we were able to get together with exactly the same representatives, a situation that is ideal for building the mutual trust and appreciation that characterise this dialogue. L’Oréal’s sustainability disclosure is of high quality and comprises several documents providing different levels of detail. At the previous meeting in Paris, we had suggested that the company share

more information about its approach to reducing packaging and substituting recyclable material. However, the objectives in this area remain qualitative and rather vague; a point that was made in the discussion and was well received, along with all the other observations. Both the participants from L’Oréal emphasised the value of this dialogue and seized the opportunity to seek advice on manageable ways of making the human rights reporting equally representative of the local sites and the national entities. We suggested providing a short best-practice benchmark of Cadmos Funds companies with similar exposures.

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.

NOVOZYMES Novozymes is one of the two new companies entering the Fund this year. For reasons of timing we have not yet begun the dialogue, but a meeting is already planned for the next reporting cycle. Novozymes is the world leader

in bio-innovation (industrial enzymes and microorganisms) and therefore helps to address resource scarcity. Its solutions improve the efficiency of industrial processes by saving energy, water and other raw materials, while reducing waste. In


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its role as a manufacturer and supplier to other industrial companies, it places great importance on respect for human rights; and since it works with genetically modified organisms, it must also address issues of safety and public acceptance. So it came as no surprise to us that Novozymes’s sustainability reporting was of an Advancing or Outstanding level in three of the four categories of UN Global Compact principles. In the category of

human rights, the aspects most comprehensively covered were product responsibility, employee and workplace development, and occupational health and safety. As regards the environment, we still see potential for more detailed reporting of measures and achievements, with a link to targets and key performance indicators. A stronger focus on the non-achievements and challenges would also improve the balance of this sustainability report.

RECKITT BENCKISER Reckitt Benckiser is the world leader in cleaning products. It has major market shares in niche products, with strong brands, while facing significant product-safety issues. The latter are particularly well addressed in the sustainability reporting. The information on human rights is very detailed and features clear commitments, management approaches and goals. The environmental impacts of the products are modelled with the Sustainable Innovation Calculator, a streamlined life-cycle assessment tool. The company is now looking into ways of incorporating social impact into the calculator. However, it prefers not to communicate this to the outside world until it has come up with a robust methodology. Reckitt Benckiser has proved very successful at integrating

sustainability into its activities. The board has overall responsibility for sustainability and corporate responsibility and undertakes a formal review of environmental, social and governance matters at least once a year. In addition, the chief executive is responsible for the sustainability policies and performance. The reporting is condensed into a single document based on the Global Reporting Initiative guidelines. It is detailed, clear and well structured. In our quality assessment, it achieved a score of 100 per cent. As to why the company has not yet signed the UN Global Compact, Reckitt Benckiser reiterated that it did not see the advantage of joining this initiative, even though its reporting is in line with the principles.

ROYAL DUTCH SHELL Shell is among the companies that have always been in the portfolio –just as oil has been the lifeblood of the global economy for over a hundred years. While oil and gas still account for half of humanity’s primary energy supply, this ratio will gradually diminish. An energy transition is under way and we have discussed it in our last seven meetings with the company. Shell has developed a method of scenario analysis that provides valuable insights into the pace of that transition and the alternative energy sources. It sees the energy system as doubling in size by the end of the century, with the global population nudging ten billion people. Shell does not expect this to be a world without fossil energy; rather it will be one with net-zero carbon dioxide emissions. Carbon capture and storage therefore play a significant role in that scenario. Even for mobility, Shell has interesting data. On the basis of fleet growth and existing production, Shell expects the stock of internal combustion engines to continue rising well into the 2020s, topping out at about 1.2 billion vehicles, compared with 900 million today. ICE numbers should return to current levels in the mid-2030s, and gradually decline to very low levels by the 2060s. Legal and technological changes

may challenge this scenario, but at least the data illustrate that excluding oil and gas from a portfolio is not going to eliminate them from our daily lives for some years to come. For a portfolio manager, the key question is how will the price of carbon move in the coming decades. We believe that the energy transition will happen faster than expected. The prospect of carbon pricing and the pressure on the oil price from alternatives and oversupply have already caused Shell to abandon some major tar sands projects. Nevertheless, in our opinion the company is well placed to benefit from the energy transition in both the short and the long term, mainly because of its leading position in gas, following its acquisition of BG Group. For the medium to long term it is building its portfolio around carbon capture, low-carbon biofuels and hydrogen, and exploring investments in solar and wind energy. Despite the strategic focus on gas, Shell’s negative environmental and climate impact still represents its most financially material risk. And the upgrading of the engagement level this year is linked to another financially material issue – anti-corruption. As we had recommended, Shell’s reporting now features clear commitments to fighting corruption, particularly along the


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SHAREHOLDER ENGAGEMENT 2015 – 2016

supply chain. Where the representatives disagreed with our call for more detailed information, they were open about the reasons why. In terms of the reporting on efforts and achievements in

anti-corruption, we have provided Shell with examples of best practice in the sector, and trust that this will inspire further improvements.

SCHNEIDER ELECTRIC Schneider Electric products and services contribute to sustainability by promoting more efficient use of energy and the development of alternative energy sources. By tracking its research and development investment and the revenues of its Green Premium the company signals its ability to focus on financial materiality and the connection with core business. Schneider Electric is number one or two worldwide across all its products, while showing robust growth in the emerging-market countries. We identified bribery and corruption as the key financially material issue and addressed it at our discussion last year. We welcomed the company’s cooperation with Transparency International but asked for more tangible performance indicators and achievements. As regards quality, we also recommended some improvements to the structure and content of the reporting. In 2015, the

company updated its Principles of Responsibility, launched a new Business Agents Policy (addressing its due-diligence work on intermediaries and downstream-sales business partners), improved its Anti-Fraud Policy (overseen by the Fraud Committee) and updated its whistle-blowing system. Its Planet & Society Barometer includes two new performance indicators related to ethics, one of which concerns the number of entities passing its internal Ethics & Responsibility Assessment. The questions posed by the engagement team have clearly made an impact. The company also took note of the suggested ways of improving its reporting quality and acknowledged possible shortcomings in the comprehensiveness of its disclosure on the performance of the value chain (suppliers and business intermediaries worldwide).

SGS SGS is among the six 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 last 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 last 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.

CONCLUSION As a responsible shareholder, we encourage most of the companies in our fund to give greater

consideration to the tangible fi nancial 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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SHAREHOLDER ENGAGEMENT 2015 – 2016

L ONG - TERM

RESULTS new generation 2.0 of responsible investors that have never really been satisfied with the exclusion criteria or the best-in-class funds.

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 T REND

IN THE QUALITY OF THE

This confidence is underpinned by the positive developments in the portfolio’s companies in relation to the ten principles of the Global Compact, as can be seen in the graph below. 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.10 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 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 9. O’Sullivan and Gond, “Engagement: Unlocking the Black Box of Value Creation”, Sustainalytics & Cass Business School, 2016. 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

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. 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 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

The figures presented here reflect in concrete terms a clear increase in awareness of the need to provide quality information on the ESG issues. 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. 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 T REND

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 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 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%).

IN THE COMPREHENSIVENESS OF

ESG

INFORMATION

Achievements Monitoring Indicators Measures Objectives Strategy Commitment 2006

2007

2008

2009

2010

2011

2012

2013

2014

Materiality

As discussed several times in recent y ears, 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 â&#x20AC;&#x201C; 2016

We also observe a gratifying uptrend in the quality of the ESG information (see the chart below). Particular progress is noted in the clarity, T REND

IN THE QUALITY OF

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 pr imarily 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 Fundsâ&#x20AC;&#x2122; investors are the primary beneficiaries.

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 Fundsâ&#x20AC;&#x2122; investors are the primary beneficiaries.


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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 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 also believe that the time is right for another form of engagement: helping businesses focus on new opportunities 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 fi rst 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.


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SUMMARY OF RESULTS IN 2015-2016

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 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 in the Fund are already becoming experts at collaborating with a variety of social entrepreneurs. In 2005, Danone established the Danone 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. Novo Nordisk’s Base of the Pyramid project is facilitating access to diabetes care for the working poor in low- and middle-income countries. The company has joined forces with the public sector, with faith-based organizations and with local social entrepreneurs in Kenya, Nigeria, Ghana and India. 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 systematically.

To remain at the forefront of innovation, gain deeper insight into the companies and create even more of a tangible impact, we shall 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.


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 companies presented here (Geberit, L’Oréal, Nestlé, Novozymes, Reckitt Benckiser and SGS) are representative

of our portfolio. They are all at level 5 except Novozymes, a new entrant whose fi rst engagement report is included. A commentary on these companies and on all the others that have made significant changes is found in the chapter “Improvements and main stories”, pages 45 ff. A summary table listing all the companies with their engagement level is provided in the introductory chapter, “Engagement performance”, 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


L’ORÉAL

SIGNATORY TO THE

GLOBAL COMPACT SINCE 2003

INVESTMENT CASE

CORPORATE RESPONSIBILITY ISSUES

The world’s largest cosmetics company (approx. 20% market share) with a portfolio of leading brands. Robust organic growth through structural market expansion and gains in market share. Brands and size (marketing clout) are the company’s two main competitive strengths.

The Group commits to reaching “one billion new customers” by producing more with less impact and by offering sustainable and aspirational products. In that respect, the main issues are sourcing of raw materials from socially and/or ecologically sensitive areas and the environmental and social footprint of production (including packaging), transportation and consumption.

ENGAGEMENT REVIEW — 8th CSR reporting assessment — 5th discussion with the company since its entry into the portfolio

2015: conference call meeting Participants: the Head of Corporate Responsibility Reporting & Environmental Innovation and the Ethics Programs Manager

COMPREHENSIVENESS OF THE COMPANY’S CSR REPORTING — L’Oréal’s sustainability disclosure is again at a high level, covered in several documents with different levels of detail. — There has been a significant improvement in the two monitoring and achievement criteria for the human rights principle which deserves to be classified as “outstanding”. The depth of information regarding the complicity principles remains at an advancing level as in the previous year. — In the area of labor practices, L’Oréal explains in detail how it is implementing the four underlying principles. However, the related objectives are vague which makes it difficult to measure progress. There is a slight improvement regarding the coverage of the discrimination principle: the description is now very convincing of measures taken for its adherence. — L’Oréal provides meaningful information on its environmental practices and there is a measureable improvement in the environmentally friendly technology principle because its materiality is better explained and the strategy is clearer. — Information on the corruption principle is of a high quality. However, L’Oréal’s specific objectives and achievements are still presented in a rather general way.

R ESULT

OF COMPREHENSIVENESS ASSESSMENT PER PRINCIPLE FOR

L’O RÉAL

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

L’O RÉAL 2014

Average last twelve months for companies from industrialized economies

L’Oréal 0

20 Accessibility

40 Clarity

Comparability

60 Accuracy

80 Reliability

100 Timeliness

— The quality of L’Oréal’s sustainability reporting remains at a high level and is above industry average. — Information on its sustainability performance is submitted as an integrated part of the Registration Document and is also covered in the Progress Report. — Non-financial reporting is verified by an external auditor. — Nevertheless, the accessibility and clarity of the CSR disclosure could be improved, as some documents are hard to find or are not available.


L’ORÉAL SIGNATORY TO THE

GLOBAL COMPACT SINCE 2003

CSR ORGANISATION — The Strategy and Sustainable Development Committee at Board of Directors level, headed by the Chairman and CEO, supervises the group’s sustainability commitments. The operational organization for CSR is with the Executive Vice President of Communications, Sustainability and Public Affairs, which reports to the Head of Corporate Responsibility Reporting and Environmental Innovation reports, who was our dialogue partner. In addition, L’Oréal has appointed a Chief Ethics Officer directly under the CEO. The Ethics Programs Manager who also participated in the meeting, directly reports to the Chief Ethics Officer.

SUGGESTED AREAS WITH POTENTIAL FOR PROGRESS 1. Generally speaking, more specific and verifiable objectives, information on measures and achievements would enhance both the relevance of the related principle as well as the credibility of the company’s related implementation activities. L’Oréal’s representatives confirmed that they will take this up although it is not always easy to convince executive and line managers to formulate quantitative targets. They were referring to alternative product ingredients for which it is difficult to formulate clear objectives, mainly because it is not foreseeable when the R&D team will be successful and a new product will be approved. 2. There is a certain redundancy in the information published in the Registration Document and the Performance Report. The engagement team suggests eliminating these overlaps by restructuring the content and chapters in the respective documents, in order to prevent inconsistencies in the disclosed information. 3. The different policy documents and codes of conduct are becoming outdated. We strongly recommend reviewing them. 4. In its 2014 Progress Report, L’Oréal highlighted its sustainable sourcing practices by referring to the example of babaçu oil procurement from Brazil. In the related story there is only a brief reference to the fact that several hundred families have benefited from the company’s enhanced partnership with a local agricultural cooperative, which employs women as babaçu-nut gatherers. Nor does the report explain how the target group has benefited from the agreement or to what extent it has been involved in defining their specific needs. The Guilé Engagement Team recommends disclosing further information about other such tangible and authentic stories in future, and making the information less catchy but more evidence-based.This can be achieved by describing outcomes and impact with reference to a baseline, set and monitored by the target group. This proposal was well received by the participants from L’Oréal.

LEVEL OF ENGAGEMENT At the previous briefing in Paris, we suggested that L’Oréal shares more information about their approach and measures in reducing packaging and its substitution for recyclable material. This recommendation was confirmed as having been received by the Head of Corporate Responsibility Reporting and Environmental Innovation. However, the related objectives are of a rather qualitative and vague nature, which was addressed in the discussion and which was well received along with all the other observations we shared. Both participants from L’Oréal stressed the value of this exchange and used the opportunity to gain some insights on how the company could report representatively and manageably on its adherence to human rights principles at the country and site-specific level. We suggested providing a short best practice benchmark of Cadmos Funds companies with similar exposures. Furthermore, we discussed how L’Oréal, as an active member of the Roundtable for Product Social Impact Metrics, could translate the findings and recommendations of this initiative to the customers of its products with the purpose of promoting responsible consumer behavior. This is the third briefing with the same representatives from L’Oréal which is an ideal situation to build-up an atmosphere of trust and recognition, which is definitely the case in this engagement. (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


NOVOZYMES

SIGNATORY TO THE

GLOBAL COMPACT SINCE 2001

INVESTMENT CASE

CORPORATE RESPONSIBILITY ISSUES

Leading producer of enzymes for industrial uses, the group is divided into 5 divisions: household care, bioenergy, food & beverage, agriculture & feed and technical & pharma. Novozymes enjoys strong IP-driven barriers-to-entry which is reflected in 25% RoE and 48% global market share in enzymes.

As the world leader in bioinnovation (industrial enzymes/microorganisms) Novozymes helps to address resource scarcity. Its solutions improve the efficiency of industrial processes by saving energy, water and other raw materials, while reducing waste. In its role as a manufacturer and supplier (B2B) human rights issues also play an important role.

ENGAGEMENT REVIEW

2015: Novozymes was added to the portfolio during the assessment cycle and this assessment represents the baseline for future engagements. Our report on major findings has been sent to the CEO and as well as to members of the Corporate Social Responsibility (CSR) team.

— 1st CSR reporting assessment — There has been no briefing so far

COMPREHENSIVENESS OF THE COMPANY’S CSR REPORTING — Novozymes’ sustainability disclosure is at an advancing to outstanding level in three out of the four UN Global Compact issue areas. — Least developed is the reporting about labor norms, particularly forced and child labor. As far as human rights are concerned, the sections regarding product responsibility, employee and workplace development as well as occupational health & safety are the most comprehesively covered. Information about the inclusion of specific human rights aspects in the supplier management system is of a generic nature. The description of labor norms issues is the most detailed section in terms of non-discrimination and diversity. — Novozymes’ reporting about environmental issues, on the other hand, is outstanding: strong commitments, clear management approaches and tangible targets. — The management of business integrity (including anti-corruption) is portrayed comprehensively. However, the reporting lacks detailed information about the fight against corruption.

R ESULT

OF COMPREHENSIVENESS ASSESSMENT

PER PRINCIPLE FOR

N OVOZYMES

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

N OVOZYMES 2014

Average last twelve months for companies from industrialized economies

Novozymes 0

20 Accessibility

40 Clarity

Comparability

60 Accuracy

80 Reliability

100 Timeliness

— Novozymes presents very high quality sustainability reporting. — Both the corporate website and the integrated annual report feature accessible, clear and well-structured information and comparable and reliable data. — Tangible data (GRI and own KPIs) is presented, data governance is explained and the report content is externally assured. — The reporting leaves room for more background information (complementing the company’s life cycle assessments) and the inclusion of external benchmarks.


NOVOZYMES SIGNATORY TO THE

GLOBAL COMPACT SINCE 2001

CSR ORGANISATION — Novozymes’ sustainability governance structure is considered to be an example of UN Global Compact LEAD best practice. — Sustainability practices are anchored, organized and integrated across the company through a Sustainability Board and a Corporate Sustainability department. The Sustainability Board is a crossfunctional senior management group that is responsible for the development and implemenation of Novozymes’ sustainability strategy and targets. The Sustainability Board also plays a significant role in ensuring adherence to the UN Global Compact principles. Appointed by the Chairman of the Board of Directors, and approved by the Executive Leadership Team, the members of the Sustainability Board hail from corporate functions of particular importance in a sustainability context, including R&D, supply operations, marketing and finance.

SUGGESTED AREAS WITH POTENTIAL FOR PROGRESS 1. There is a potential to report in more detail on environmental issues (and with a link to targets and KPIs) in terms of measures and achievements. In the latter case, a stronger focus on non-achievements and challenges would help make the sustainability report more balanced. 2. With regards to human rights, the Guilé Engagement Team suggests further explaining the implementation of the Ruggie Principles (due diligence etc.). Also a more in-depth description of the company’s supplier management system would add value, alongside tangible measures and (non-)achievements. 3. In the case of forced and child labor, more specific information about targets, actions and achievements would be desirable, beyond the mere explanation of the supplier management system. 4. As the current reporting mostly addresses business integrity at a generic level, the engagement team suggests sharing more details about the fight against corruption, especially with regards to a description of relevance and tangible targets. 5. From a quality point of view we recommend including more background information (complementing the company’s life cycle assessments) and comparisons with external benchmarks (where applicable).

LEVEL OF ENGAGEMENT Novozymes was added to the portfolio during the assessment cycle and this assessment represents the baseline for future engagements. Our report on major findings has been sent to the CEO and as well as to members of the Corporate Social Responsibility (CSR) team. We will approach the company to schedule a briefing during the next cycle. (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


RECKITT BENCKISER

NON SIGNATORY TO THE GLOBAL COMPACT

INVESTMENT CASE

CORPORATE RESPONSIBILITY ISSUES

World leader in cleaning products, and strong presence in non-reimbursed care products. Major market shares in niche products, with strong brands. Innovative drive, and more efficient cost management than its competitors.

Reckitt Benckiser’s sustainability priorities are as follows: environmental technology; mitigating climate change; improve resource use efficiency; reducing, re-using and recycling water discharge, waste and packaging; ensuring product safety; protecting health & safety of employees; enforcing ethical standards in the supply chain; maintaining good relations with local and global communities.

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

2015: conference call meeting Participants: the Category Group Director Global R&D - Sustainability, Consumer & Sensorial Sciences, Sourcing (SCS) and the Head of Investor Relations

COMPREHENSIVENESS OF THE COMPANY’S CSR REPORTING — Reckitt Benckiser continues to provide advanced sustainability reporting that has even slightly improved compared to last year. — Reporting on human rights is very detailed and features clear commitments, management approaches and goals. Principles along the value chain could profit from more detailed information on their materiality, objectives and achievements. — From a labor point of view, reporting remains at a good level. Commitments are also strong along the value chain. — Environmental reporting remains at a very detailed level as sustainability is embedded across the life cycle of products. Reporting towards environmentally friendly technologies has improved as the company is strengthening its culture of innovation. — The fight against corruption is described in a comprehensive manner. The materiality of the principle is particularly well addressed as the company is exposed to corruption due to its international operations.

R ESULT

OF COMPREHENSIVENESS ASSESSMENT

PER PRINCIPLE FOR

R ECKITT B ENCKISER

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

R ECKITT B ENCKISER 2014

Average last twelve months for companies from industrialized economies

Reckitt Benckiser 0

20 Accessibility

40 Clarity

Comparability

60 Accuracy

80 Reliability

100 Timeliness

— Quality of reporting is excellent. — Information is very detailed and presented in a clear and structured manner. — Sustainability information is streamlined into one document integrating GRI guidelines. — However, some information is redundant throughout the report and could be regrouped. — Principles and methodologies used in reporting sustainability are well explained and independent assurance is provided. — The company is reporting for the first time in line with the GRI G4.


RECKITT BENCKISER

NON SIGNATORY TO THE GLOBAL COMPACT

CSR ORGANISATION — Sustainability at Reckitt Benckiser is governed by a corporate responsibility framework, which comprises the Vision and Values, the Code of Conduct, core Group policies, control arrangements and reporting. — The Board has overall responsibility for sustainability and corporate responsibility and undertakes a formal review of environmental, social and governance matters at least annually. The Chief Executive Officer has specific responsibility for sustainability policies and performance. The Category Group Director - Innovation & Sustainability, with whom we spoke, coordinates the sustainability program on a day-to-day basis.

SUGGESTED AREAS WITH POTENTIAL FOR PROGRESS 1. Environmental impacts of products are modelled with the Sustainable Innovation Calculator, streamlining Life Cycle Assessments. It would be very interesting to learn more about how the social impact of products or initiatives is managed and measured. We would appreciate knowing more about current activities and approaches regarding the challenge to measuring social impact. 2. Materiality of forced labor could be explained in more detail. 3. While reporting on anti-corruption activities has improved compared to last year, it is still slightly lagging behind the reporting levels achieved by the company’s peers. The Guilé Engagement Team identified room for improvement especially regarding the formulation of tangible objectives and the reporting of concrete measures. 4. Quality of reporting is excellent and has even further improved compared to last year. Regarding comparability, however, the team made one further suggestion on ways in which the reporting could be further advanced: It would be interesting to see region-specific data to know whether Reckitt Benckiser differentiates its reporting along various regions of operations. 5. Once again, the engagement team encourages Reckitt Benckiser to sign the UN Global Compact (UNGC), especially as the reporting is in line with the UNGC principles and requirements and other peers are signatories of the initiative.

LEVEL OF ENGAGEMENT The two participants from Reckitt Benckiser showed interest in the analysis, answered questions in an open and competent way, and asked for some further details regarding specific assessment results and best practices. Regarding the question of why they have not yet signed the UNGC, they again explained their view that they do not see the benefit of this initiative for Reckitt Benckiser, even though their reporting is fully in line with the UNGC principles. (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


NOTICE This document is published for information purposes only. The content of this document does not constitute an offer for sale or a solicitation of an offer to purchase nor does it constitute an incentive to invest or to engage in arbitrage transactions. It may not be construed as a contract under any circumstances. The information contained in this document has not been analyzed with regard to your personal profile. If you have questions regarding any investment or if you have doubts as to whether an investment decision is appropriate, please contact your particular client representative or, if applicable, seek financial, legal, or tax advice from your customary advisors. de Pury Pictet Turrettini S.A. makes every effort to verify the information provided but cannot give any guarantee as to its accuracy. Past performance that might be indicated in the information transmitted by de Pury Pictet Turrettini S.A. in no way determines future returns. Any decision to invest or divest that may be made by the reader of the information appearing herein is made at the sole initiative of the investor who is familiar with the mechanisms governing the financial markets. This marketing material is not intended to be a substitute for the fundâ&#x20AC;&#x2122;s full documentation or for any information which investors should obtain from their financial intermediaries acting in relation to their investment in the fund mentioned in this document. For Swiss investors, the paying agent is Banque Pictet & Cie S.A. and the representative agent is Fund Partner Solutions (Suisse) S.A., Route des Acacias 60, Ch-1211 Genève 73 , Switzerland. The relevant legal documentation may be obtained free of charge from the representative agent, from de Pury Pictet Turrettini & Cie S.A. or online at www.ppt.ch/en/reporting-and-documents. Cadmos Fund Management, 15A, avenue J.F. Kennedy, L-1855 Luxembourg. This document is the intellectual property of de Pury Pictet Turrettini S.A. Any reproduction or transmission of this document in whole or in part to a third party without the prior written authorization of de Pury Pictet Turrettini S.A. is strictly prohibited. Š 2016, de Pury Pictet Turrettini & Cie S.A. All rights reserved.


De Pury Pictet Turrettini & Cie S.A. 12, rue de la Corraterie P.O- Box 5335 CH-1211 Geneva 11 Tel. +41 22 317 00 30 Fax +41 22 317 00 33 www.ppt.ch

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

Cadmos European Engagement Fund 2015-2016  

Integrated Performance Report Buy & Care Responsible Investment Fund

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