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Cadmos Peace Investment Fund PERFORMANCE & IMPACT REPORT ON THE FUND’S PILOT PHASE 2017-2018


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 4 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, Cadmos Balanced CHF and Cadmos Peace Investment Fund and advisor to the Cadmos Emerging Markets Engagement Fund and the Cadmos Swiss Engagement Fund. PPT ensures the funds’ consistency, transparency and distribution. It is a signatory to the United Nations-supported Principles for Responsible Investment (PRI).


K EY

ENGAGEMENT IMPACTS AND PROGRESS

S INCE 2006, C ADMOS

175

INVESTMENTS

800 ESG

COMPANY ASSESSMENTS

REPRESENTS :

12’000 ITEMS VOTED

450

ENGAGEMENT MEETINGS

170

POSITIVE IMPACTS

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 4 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 Care® strategy, manager of the Cadmos European Engagement Fund, Cadmos Balanced CHF and Cadmos Peace Investment Fund and advisor to the Cadmos Emerging Markets Engagement Fund and the Cadmos Swiss Engagement Fund. PPT ensures the funds’ consistency, transparency and distribution. It is a signatory to the United Nations-supported Principles for Responsible Investment (PRI).

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F OREWORD The Cadmos Peace has Investment Fund was launched Since 2006, Cadmos succeeded in simultaneously in January 2018 in cooperation with the PeaceNexus delivering financial performance and tangible Foundation, provided the necessary capiimpact. It haswhich done so by engaging with theseed portfolio tal. It represents a milestone in responsible and companies and helping them to integrate their most impact investing. This issocial to our knowledge the first material environmental, and governance (ESG) Fund designed directly strategy. address UN Sustainable topics into theirto corporate Although many Development Goal 16, defined as “Toinvesting promote peacepeople question whether responsible makes ful andfinancially inclusive societies for sustainable development, sense or in terms of impact, this report provide access to Cadmos justice for all and effective, shows that all the Funds havebuild outperformed accountable and inclusive at all levels”. their benchmarks sinceinstitutions 2006 and that in 170 cases, companies We believe that theour private sector has a critical role to have implemented progress play in building peaceful and inclusive societies and recommendations. that the need to strengthen this role is urgent. In 2016, more countries experienced violent conflict than at any The portfolio managers’ time in nearly in 30 the years. Reported participation engagement battle-related deathswith in 2016 meetings together our sustainability who increased tenfold experts from the post– together formulate progress Cold War low of 2005. If current recommendations remains trends persist, by 2030 - the propCadmos’ horizon setunique by theselling international community for the Sustainable osition. Through this dialogue, Development Goals (SDGs) the portfolio managers obtain -a more than half of the thesustainaworld’s deeper insight into poor of will living inbusiness counbility eachbecompany’s tries affected by highadditional levels of model while creating violence (United social impactsNations/World potentially contributing 172018). UN Bank ‘Pathwaystoto the Peace’ Sustainable Development Goals Currently, investors and private (SDG’s). companies struggle to identify how first to increase The part oftheir this contrireport provides updateand of bution toa complete peacebuilding SDG 16. The Cadmos the Cadmos Funds’ Buy & Peace Care® Investment Fund is a response strategy. Our engagement goes to this challenge. It provides a solution fordialogue investors seeking both market well beyond simple or above-market performance and peacewith the company’sfinancial management. building Only companies with the most Each yearimpact. we make clearthe progress promising financial recommendations andoutlook provideare a selected by PPT on the basis of our proprietary Buy & Care® investthorough analysis of the gaps in ment strategy. The Fund promotes positive impact the reporting. through its engagement experts’ meetings with The part of this report containsSupported the 2017–2018 the second Cadmos portfolio companies. by impact and performance reportsCadmos of the three Cadmos the PeaceNexus Foundation, is an active equity funds and (Europe, Emerging Markets and Swiss). shareholder provides portfolio companies with in-depth assessments of peacebuilding Each report provides detailed informationperformance on the fund’s and recommendations on how further enhance it. financial, voting, engagement andtoimpact performance. For the first time, we report on the achievements of PeaceNexus andintroduced, PPT collaborated onsocial setting up Cadmos’s newly innovative impact and launchingstrategy. the Fund, continue to play engagement Weand areboth probably among the a key operational their different pioneer shareholdersrole, to actcombining as a matchmaker between companies and social enterprises or non-gov skills to deliver outstanding financial and peacebuild-ing performance. The PeaceNexus Foundation is an ernmental organisations so as to set up additional operational foundation that engages companies social-impact projects. These projectswith target systemic to address and social challenges impact challenges often relate toand the improve seventeensocial SDGs. They in conflict-affected contexts. proprietary are always linked toor thefragile company’s coreIts business. The Peacebuilding Index ranks the 300 SDG’s provide aBusiness framework that(PBBI) the investment world economically most impactful companies in fragile

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states based on their contribution to peacebuilding and SDG 16. The Cadmos Peace Investment Fund invests only in profitable companies that have a net positive peacebuilding impact according to this index. We believe that portfolio companies that are adapted to performing responsibly in the complex environment of conflictprone countries are more likely to be resistant to shocks and outperform their peers. bringing together key stakeholders such as multinational companies, social The portfolio managers’ participation in enterprises, the engagement meetings together with our sustainability and non-governmental organizations peacebuilding experts,and whocivil together formulate progsociety. ress recommendations, remains Cadmos’ unique selling proposition. Since 2006, Cadmos has succeeded in simultaneously delivering financial performance and tangible impacts. It has done so by engaging with the portfolio companies and helping them to integrate their most material environmental, social and governance (ESG) topics into their corporate strategy. Although many people question whether responsible investing makes sense financially or in terms of impact, this report shows that all the Cadmos Funds have outperformed their benchmarks since 2006 and that in 170 cases, the companies have implemented our progress recommendations. The first part of this report provides a complete update of the Cadmos Funds’ Buy & Care® strategy as applied to the Peace Investment Fund. The second part of this document, the 2017–2018 impact and performance reports, reveals the great interest shown by the ten pilot companies in engaging with the PeaceNexus Foundation to improve their peacebuilding practices. The last chapter presents the individual integrated performance report of a selected portfolio company, with full details of how Cadmos voted and our assessments and engagement activities. We hope that youpresents will enjoy this integrated report on The last chapter thereading individual the pilot phase of the Cadmosportfolio Peace Investment performance reports of selected companies, with details how Cadmos voted and assessFund.full We also of take this opportunity to our thank the ments board,and the engagement staff and theactivities. partners of the PeaceNexus Foundation, and all the investors in the Fund for their trust and contributed expertise.


Table of contents

PPT'S BUY & CARE ® STRATEGY

CADMOS PEACE INVESTMENT FUND

Foreword. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

PORTFOLIO MANAGEMENT REVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

PPT’S BUY & CARE ® STRATEGY. . . . . . . . . . . . . . . 4 Founding Principles for all Cadmos Funds . . . . . . . . . . . . . . 4 Company analysis and portfolio management. . . . . . . . . . 6 ESG/SDG Integration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 For the Cadmos Peace Investment Fund . . . . . . . . . . . . 7 Active ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Proxy voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 ENGAGEMENT PARTNERS. . . . . . . . . . . . . . . . . . . . . . . 10 PEACENEXUS FOUNDATION. . . . . . . . . . . . . . . . . 11 Peacebuilding Business Criteria (PBBC). . . . . . . . . . . . . . . . 12 Peacebuilding Business Index (PBBI). . . . . . . . . . . . . . . . . . . . . 13 ENGAGEMENT PROCESS. . . . . . . . . . . . . . . . . . . . . . . . . . 15 1- Company publications and data. . . . . . . . . . . . . . . . . . . . . . . . .15 2- Selection of material topics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 3- Assessment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.1- Peacebuilding embeddedness assessments . . . . . . . 19 3.2- Social impact partnerships embeddedness assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4- Assessment report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5-Shareholder dialogue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.1- Peacebuilding follow-up. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5.2- Social impact partnerships follow-up . . . . . . . . . . . . . . 21 KEY DIFFERENTIATING CHARACTERISTICS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 TESTIMONIALS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

SHAREHOLDER ENGAGEMENT AND IMPACT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Engagement review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Exposure to peacebuilding and material topics. . . . . . . 31 Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Preparedness on key topics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Peacebuilding embeddedness. . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Quality of reporting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Sustainability organization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Sustainability frameworks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Gaps. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Engagement quality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Engagement intensity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Engagement level. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Peacebuilding ambition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Engagement impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 SGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Danone. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Nestlé . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

PEACEBUILDING FOLLOW-UP. . . . . . . . . . . . . . 38 SAP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 L'Oréal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 SGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Peacebuilding summary table. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

PBBI SCORECARD AND INTEGRATED PERFORMANCE REPORTS

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

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The Cadmos Funds’ Buy & Care ® strategy FOUNDING PRINCIPLES The Cadmos Peace Investment “Imagine a world in which socially responsible and Fund is one of four Cadmos equity funds, collectively eco-friendly practices actually called Cadmos. boost a company’s bottom line.” This quote from a cover “Imagine a Week” world illustrates in which of “Business socially responsible and how, in recent years, vital eco-friendly actuissues such as practices climate change ally boost a company’s bottom and human rights have been line.” This quote from aworld cover penetrating the business of “Business illustrates and reshapingWeek” its competitive how, in recent landscape. We areyears, just atvital the issues suchofasa movement climate change and human rights have beginning that, though bound to experibeen setbacks, penetrating world the andpreconditions reshaping its ence willthe endbusiness up redefining competitive We arecash-rich just at theand beginning of a for businesslandscape. success. Being solid, with movement that, bound to experience setbacks, good growth, willthough no longer be enough to ensure success will avoid end up redefiningFitness, the preconditions for business and disruption. agility, transparency, and success. Being cash-rich and solid, with good awareness of social and ecological impact willgrowth, weigh will no longer be enough to ensure heavily in the balance. Moreover, insuccess 2025, 75and peravoid cent disruption. Fitness, agility, transparency, and cent awareof the workforce will be millennials, 87 per of ness ofclaim one'sthat social and ecological impactbe will weigh whom business success should based on heavily in the more than justbalance. profits. Moreover, in 2025, 75 per cent of the workforce will be millennials, 87 per cent of Cadmos has always thought it unwise to ignore global whom claim that business success should be based on more than just awareness and profits. the urgency of the need to tackle the world’s main challenges, which are now summarised in Cadmos has always thought it unwise to ignore global awareness and the urgency of the need to tackle the

world’s challenges, which areGoals. now summarised in the UN main Sustainable Development The portfolio the UN Sustainable Development Goals. The meetings portfolio managers’ participation in the engagement managers’ participation in the engagement meetings together with our external sustainability experts has together with our external sustainability been instrumental to understanding how experts positivehas or been instrumental understanding impacts how positive or negative social andtoenvironmental directly negative and environmental directly influence social performance or risk. In theimpacts past decade, we have learntperformance to integrate the impact into the influence or risk. In component the past decade, we have learntperformance-versus-risk to integrate the impact component into the traditional models. Adding traditional Adding third impactperformance-versus-risk dimension - 3D Finance models. - gives the portthe dimension - 3D Finance - gives foliothird evenimpact more depth and perspective. Cadmos has the portfolio depth and perspective. Cadmos history toeven provemore it, but in today’s changing landscape, integrating impact become more important. has the history to will prove it, buteven in today’s changing watch on the transition, We are keeping a close impact landscape, integrating will become evenwhich more may be more than thea financial markets expect. important. Werapid are keeping close watch on the transition, may“responsible be more rapid than the financial What iswhich considered investing” today might markets expect. What is considered simply be “professional investing”“responsible tomorrow. investing” today might simply be “professional investing” tomorrow. We have been aware of these global challenges since 2006 and continue to demonstrate that active We have been aware ofcan these challenges since portfolio management be global reinvented to reconcile 2006 and continue to demonstrate thatthe active portprofitability with responsibility. With Cadmos folio management can be reinvented Funds’ Buy & Care investment strategyto wereconcile have set profitability with responsibility. With even the Cadmos new standards in that respect, by going further Funds’ & Care investment have with theBuy fundamental research - strategy Active3 - we actively set newour standards in that respect, by the going further voting shares and engaging with companies on social with the impact. fundamental research - Acive3 - actively voting our shares and engaging with the companies on social impact.

W hy C admos  ? B usiness C ase Rationale for investing in large listed equities

O ur V alues More depth and perspective in your portfolio

Highly profitable leaders who can finance their growth

G lobal C hallenges

impact-conscious, transparent companies will thrive

Performance

3D

Select, vote and engage is mutually beneficial

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Impact

F inance Risk

B uy

T he S olution

Only the fittest will design tomorrow’s disruptive models

A ctive

and

C are ®

Active Portfolio Management — Select tomorrow’s winners

3 Active Ownership — Vote shares responsability Active Impact — Engage for positive additional impact


The Cadmos Funds’ Buy & Care ®® Strategy The Cadmos Funds’ Buy & Care Strategy

The Buy & Care strategy, developed by PPT, has now matured to a point where it may be useful to restate threestrategy, founding principles. have proved particularly reliable The Buy &itsCare developed by They PPT, has now matured to a point wherein it the long term and through changing financial andfounding economic cycles. They have proved may be useful to restate its three principles. particularly reliable in the long term and through changing 1. We doand not invest in a stock but in a company. financial economic cycles. Every effort will be made to visit the companies and 1. We doour notunderstanding invest in a stock butsustainability in a company. increase of the ® of theireffort business model. Every will be made to visit the companies ® and increase our understanding of the sustain2. Theofmain aim is to create added ability their business model. value for our investors in the medium andThe long term. Weisare have 2. main aim toproud createtoadded Company analysis Active Ownership 3 advanced active management, particvalue for our investors in the medium - Quality growth companies - Voted by portfolio manager Company analysis Active Ownership - Sustained competitive advantage - Engagement on materiality ularly by working a longer and long term. Wewith are proud to time have - Quality growth companies - Voted by portfolio manager - Integrated valuation model - Social impact strategies – SDG’s 3 - Sustained competitive advantage - Engagement on materiality horizon. active management, particuadvanced - Integrated valuation model - Social impact strategies – SDG’s larly by working with a longer time 3. We build concentrated portfohorizon. lios. Our deep analysis strengthens our convictions and reduces portfolio 3. We build concentrated portfolios. turnover transaction fees, while Our deepand analysis strengthens our convictions also enablingand us toreduces deviateportfolio from the turnover and transaction fees, while benchmarks. Portfolio managament - Convictions (about 30-40 companies) also enabling us to deviate from the Portfolio managament - Long term (turnover 25%) - Convictions (about 30-40 companies) The Buy & Care investment strategy is benchmarks. - Risk Management - Long term (turnover 25%) a cyclical process built around gaining - Risk Management betterBuy understanding and progressing. The The & Care investment strategy shareholder foraround ESG integration is a cyclical engagement process built gaining that underpins the strategy is applied to all the better understanding and progressing. The ® Cadmos Funds. We are convinced continuous shareholder engagement for ESGthat integration ® “soft-power” non-indulgent dialogue withtothe that underpins the strategy is applied allcompathe nies creates value.We are convinced that continuous Cadmos Funds. “soft-power” non-indulgent dialogue with the companies The additional expert-driven engagement for peacebuilding and social impact is geared to achieving creates value. The additional expert engagement for social impact tangible impacts linked to the seventeen Sustainable Development aims at achieving tangible impacts linked to the seventeen SDGs. Goals. To thatFor endthe we Peace Investment Fund the accent is onexperts, SDG 16to contribution. To partnerships reach it, we have forces with peacebuilding join forces with other promote global that joined bring together experts tocompanies, promote global that bring together portfolio companies, social enterportfolio social partnerships enterprises, non-governmental organizations and prises, non-governmental organizations and civil society. civil society.”

Bu Byuy && CaCa re re

® ®

rere CaCa && uyuy

B B

Buy & are Buy & Care C

The Cadmos Peace Investment Fund, launched in January 2018, is managed by Christopher Quast together with Paolo Bozzo from PPT. The flagship Cadmos European Engagement Fund has The Cadmos Swiss Engagement Fund has been managed Other Cadmossince Equity Funds: in 2006 by Christopher been managed its inception since its inception in 2014 by Alexandre Stucki together Quast together with Paolo Bozzo from PPT. Christopher with Nathalie Kappeler from ASIM. ASIM was founded in The flagship Cadmos European Engagement Fund has been inan2006 Quast has managed European Equities at PPT since 1999, 200managed 6 and focusince ses exits cluinception sively on m agingby SwChristopher iss equities. Quast together the withmarkets Paolo Bozzo from PPT.years. Christopher Quast has managed Equities PPT since 1999, outperforming two out of three The Cadmos SwissEuropean Engagement Fundat has Morningstar’s outperforming the markets two out of three years. 5-star rating. The Cadmos Emerging Markets Engagement Fund has Finally, the Cadmos Investment Fund has The Markets in Engagement Fund has been managed since Peace its inception in 2009 bywhich Wojciech beenCadmos managedEmerging since its inception 2009 by Wojciech Stanislawski Juliette Alves Alvesfrom fromComgest. Comgest. Comgest has managed the flagship EmergingbyMarkets flagStanislawski together with Juliette been launched in January 2018, is managed Christopher ship fund Magellan sincethe 1994 and Wojciech joined the firm in 1999.together with Paolo Bozzo from PPT. A dedicated Comgest has managed flagship Emerging Markets Quast flagship fund Magellan since 1994 and Wojciech joined impact report will be published for the Cadmos Peace The Cadmos Swiss Engagement Fund has been managed since its inception the firm in 1999. Investment Fund.in 2014 by Alexandre Stucki together with Nathalie Kappeler from ASIM. ASIM was founded in 2006 and focuses exclusively on managing Swiss equities. The Cadmos Swiss Engagement Fund has Morningstar’s 5-star rating.

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Company Company analysis analysis and and portfolio portfolio management management

Over the the years, years,our ourapproach approachhas has evolved steadily, steered evolved steadily, steered by Over the years, our approach has evolved steadily, steered by by portfolio managers. We begin screening the largest thethe Cadmos portfolio managers. We by begin by screening the the Cadmos portfolio managers. We begin by screening the investable companies in a predefined universe. We select only largest investable companies in a predefined universe. We select largest investable companies in a predefined universe. We select profitable, organically growing, sustainable businesses exposed only profitable, organically growing, sustainable businesses only profitable, organically growing, sustainable businesses to attractive end markets or secular for this exposed to attractive end markets ortrends. secularPrimarily trends. Primarily exposed to attractive end markets or secular trends. Primarily reason, Cadmos doFunds not invest in tobacco companies for this the reason, the Funds Cadmos do not invest in tobacco for this reason, the Cadmos Funds do not invest in tobacco or arms manufacturers. We do not apply exclusions companies or arms manufacturers. We doany notfurther apply any further companies or arms manufacturers. We do not apply any further except when askedwhen to doasked so bytoour exclusions except doclients. so by our clients. exclusions except when asked to do so by our clients. We look for companies whose profitability and debt level We look for companies whose profitability and debt level should enable them to finance their growth while rewarding should enable them to finance their growth while rewarding their shareholders. shareholders.This Thisfirst first screening results a concenscreening results in a in concentrated their shareholders. This first screening results in a concentrated trated watch-list onwe which we deeper perform deeperand financial and watch-list on which perform financial qualitative watch-list on which we perform deeper financial and qualitative qualitative analysis, often accompanied company visits analysis, often accompanied by companybyvisits or external analysis, often accompanied by company visits or external reviews. These stepsThese will lead a better understanding of or external reviews. stepstowill lead to a better underreviews. These steps will lead to a better understanding of standing of thelong-term companies’ long-term growth the the companies’ growth prospects, theprospects, sustainability the companies’ long-term growth prospects, the sustainability sustainability of theiradvantage, competitivetheir advantage, their manageof their competitive management quality, of their competitive advantage, their management quality, their margins, theirmargins, balance-sheet quality and quality their cashment quality, their their balance-sheet and their margins, their balance-sheet quality and their cashtheir cash-flow generation. We are convinced thatsuccessful the most flow generation. We are convinced that the most flow generation. We are convinced that the most successful successful businessare models also inteSustainablesustainable business models thoseare thatthose alsothat integrate the Sustainable business models are those that also integrate the grate the human-rights including related human-rights challenges,challenges, including the relatedthe ESG issues,ESG and human-rights challenges, including the related ESG issues, and

provideand solutions. delicateThe task delicate of analysing issues, provideThe solutions. task management of analysing provide solutions. The delicate task of analysing management quality is made easier oureasier visitsby and discussions, which management quality is by made our visits and discusquality is made easier by our visits and discussions, which enhance our enhance ability toour evaluate consistency between a sions, which ability the to evaluate the consistency enhance our ability to evaluate the consistency between a between a company’s and its concrete By going company’s words and words its concrete actions. By actions. going beyond the company’s words and its concrete actions. By going beyond the beyond thereporting company’s reporting meeting its management company’s and meetingand its management we sharpen company’s reporting and meeting its management we sharpen oursharpen investment we our convictions. investment convictions. our investment convictions. This process processisishere here remind us never to forget thefinanbasic to to remind us never to forget the basic This process is here to remind us never to forget the basic finanfinancial beginning to construct the portfolio, cial rules. rules. BeforeBefore beginning to construct the portfolio, we apply cial rules. Before beginning to construct the portfolio, we apply we apply various techniques to check that the companies that various techniques to check that the companies that interest us various techniques to check that the companies that interest us interest are not overpriced. Indeed, the high-quality compaare not us overpriced. Indeed, the high-quality companies thus are not overpriced. Indeed, the high-quality companies thus nies thus identified must still presentpotential attractivefor potential for identified must still present attractive gains in the identified must still present attractive potential for gains in the gains in the and long term. Our practical experience medium andmedium long term. Our practical experience with applying medium and long term. Our practical experience with applying with applying integrated valuation models to remain integrated valuation models obliges us to obliges remain us modest and integrated valuation models obliges us to remain modest and conscious this is athat continuous, difficult learning process. modest andthat conscious this is a continuous, difficult learnconscious that this is a continuous, difficult learning process. ing process. Nevertheless, results encourage to course. stay on Nevertheless, our results our encourage us to stayuson Nevertheless, our results encourage us to stay on course. course. Withthe time, the markets perceive and reward uptrend With time, markets perceive and reward the the uptrend in With time, the markets perceive and reward the uptrend in in companies’ sustainablecompetitive competitiveadvantage, advantage,and and this is thethe companies’ Sustainable the companies’ Sustainable competitive advantage, and this is reflected in higher profitability and ultimately, financial gains reflected in higher profitability and ultimately, financial gains in the stock market. in the stock market.

PPT’ s generic company analysis and portfolio management process Cadmos Peace Investment Fund — Companies withPORTFOLIO high peacebuilding potential C ’ GENERIC COMPANY ANALYSIS AND MANAGEMENT PROCESS C ADMOS ADMOS ’ GENERIC COMPANY ANALYSIS AND PORTFOLIO MANAGEMENT PROCESS Benchmark Benchmark universe of universe of companies companies

Market screening Market screening Screen for companies exposed to attractive end-markets or secular trends Screen for companies exposed to attractive end-markets or secular trends

Conpany amalysis Conpany amalysis Sustainable of competitive advantage, managenent, Sustainable of competitive advantage, growth prospects, profitability andmanagenent, returns. growth prospects, profitability and returns.

Watch-list Watch-list companies companies

Valuation DDM andValuation valuation multiples DDM and valuation multiples

Portfolio construction Portfolio construction Risk management Risk management

25-40 25-40 companies companies

Constructing the portfolio involves the rigorous risks or valuation of the underlyings, together with selection of only those companies with the stronthe quality of the dialogue, will influence the portfolio manager’s view and may lead to decisions to sell. gest potential for outperformance in the medium and long term. This concentration is desirable in the case of Cadmos Peace Investment Fund an engagement fund, since it means that the cost of the shareholder dialogue can beinvolves contained. concentration is only those companies with the strongest potential for outperformance Constructing the portfolio theThat rigorous selection of Constructing the portfolio involves the rigorous selection of only those companies with the strongest potential for outperformance combined with aand lowlong turnover increases the quality in the As can seen the chart above, Cadmos Peace Investment in the medium term.rate, Thiswhich concentration is desirable casebeof an on engagement fund,the since it means that the cost 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 We do not setcan ourselves a tracking error target, Fund invests only that have high peacebuilding thedialogue. shareholder dialogue be contained. That concentration is combined withinacompanies low turnover rate, awhich increases the of the shareholder dialogue can be contained. That concentration is combined with a low turnover rate, which increases the but the of ratio usually We rather indicesashould not potential net positive peacebuilding The underquality the isdialogue. do high. not setThe ourselves tracking error target, butand the aratio is usually rather high. impact. The indices should quality of the dialogue. We do not set ourselves a tracking error target, but the ratio is usually rather high. The indices should lying Peacebuilding Business Index developed not influence the investment-decision process but serve solely tool. Moreover, themethodology, long-term performance influence the investment-decision process but serve solely as a as a risk-management not influence the investment-decision process but serve solely as a risk-management tool. Moreover, the long-term performance by PeaceNexus, which is applied throughout the engagement can be significantly increased withthe thelong-term additionalperformance support of an excellent selling discipline. Changes in the fundamentals, risks risk-management tool. Moreover, can be significantly increased with the additional support of an excellent selling discipline. Changes in the fundamentals, risks process and is further elaborated onview pagesand 12ff. or valuation of the underlyings, together with the support quality of will follow-up influence the portfolio manager’s may can be significantly increased with the additional of the dialogue, or valuation of the underlyings, together with the quality of the dialogue, will influence the portfolio manager’s view and may leadexcellent to decisions to discipline. sell. an selling Changes in the fundamentals, lead to decisions to sell.

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ESG/SDG Integration ESG/SDG Integration

have beeninwidely acknowledged as helps define the meetings. parameters strengthen weaken our The seventeen SDGs launched 2012 have been widely in the us engagement Asthat a result of theseordialogues we helpful in raisingasthe necessary 5 to 7 trillion dollars needed visibility regardsthe thelongevity companies’ acknowledged helpful in raising the necessary 5 to 7 can betterasevaluate of a long-term company’sprofitability. competitive per yeardollars for their realisation. Theyfor provide a frameworkThey that Our aim is to estimate more accurately for how many years the trillion needed per year their realisation. advantage. PPT has developed a model –illustrated below –that The seventeen SDGsthat launched in 2012 have been widely in the us engagement a result ofThe these we the investment world today as aworld de facto blueprint. company can sustain today’s As profitability. model looks at provide a framework the regards investment today regards helps define the meetings. parameters that strengthen ordialogues weaken our acknowledged as helpful raising thedevelopment necessary 5goals to is 7 can company’s competitive Wea support development goals because the structure howbetter the company isthe influenced by of theaoutside world (exposure: as de factothe blueprint. Wein support the visibility asevaluate regards thelongevity companies’ long-term profitability. trillion dollars needed year for their realisation. advantage. PPT has developed a model –illustrated –that well designed and enables to map their financial the outside-in approach) andaccurately simultaneously how itbelow influences because the structure is per wellus designed and enables us impact, toThey map Our aim is to estimate more for how many years the provide a framework that investment world today regards helps us define the(responsiveness: parameters that strengthen or weaken our as seen below. Moreover, they help us Moreover, motivate our portfothe outside world the inside-out approach). their financial impact, asthe seen below. they help company can sustain today’s profitability. The model looks at as de factoour blueprint. support the development goals visibility as regards theintegrates companies’ long-term profitability. In this the model theoutside financial and the SDG lio amotivate companies to portfolio progressWe and create more impact and sense us companies to progress andacreate how theway company is influenced by the world (exposure: because thefor structure is well enables us abusive to map Our aim isparameters to estimate more accurately how many years andoutside-in ESG for a more finelyfor tuned analysis of the of purpose theira employees. But weand oppose more impact and sense ofdesigned purpose for theirtheir employees. the approach) and simultaneously how it influences their financial as seen below. Moreover, they help company can sustain today’s profitability. The model looks at company’s financial strength and impact positioning. But we opposeimpact, their abusive use for “impact-washing”. It use for “impact-washing”. It is unfortunately fashionable the outside world (responsiveness: the inside-out approach). us motivate ourmanagers portfolio to precise progress and create how theway company is influenced by the world today for asset tocompanies publish claims of the is unfortunately fashionable todayvery for asset managers to In this the model integrates theoutside financial and(exposure: the SDG more impact and a sense of purpose for their employees. the outside-in approach) and simultaneously how it influences For the Cadmos Peace Investment Fund tonnes of carbon dioxide saved ortonnes the millions contributed publish very precise claims of the of carbon dioxide and ESG parameters for a more finely tuned analysis of the But weoroppose their abusive for It the outside financial world (responsiveness: the inside-out approach). to a development goal. In the use absence credible, validated saved the millions contributed to“impact-washing”. aofdevelopment goal. company’s strength and impact positioning. is unfortunately today that for asset managers to In this16 way the amodel integratesrole the financial and the Peace SDG impact-measurement methodology accounts for indiSDG plays predominant in the Cadmos In the absence of fashionable credible, validated impactmeasurement publish veryand precise claims of the tonnesimpacts of shall carbon dioxide and ESG parameters for a more finely tunedinAll analysis of the rect impacts avoids double counting, we resist such Investment Fund, as the table shows. the compamethodology that accounts for indirect and avoids The integrated model below isbelow also helpful analysing saved the millions contributed development goal. company’s financial and impact positioning. claimsor and help educate investors toto bea wary them. nies selected have a strength positive stabilising contribution inway the double counting, we shall resist such claims andofhelp educate companies’ positioning in relation to the transitions under In the absence credible, validated impact- measurement fragile countries they should benefit fromtask the investors to be of wary of them. in energy, nutrition andoperate healthy and living. The most difficult methodology that accounts andstrategy avoids The model below also helpful incompanies analysing the is to integrated estimateofthe pacemarkets. of theseis transitions, which concernthat all One of the main virtues of the for Buyindirect & Care impacts investment stabilisation these We believe that double counting, wecompanies shall resist such claims and help educate companies’ in relation the transitions under way is its of ability to help progress while also improving can adapt topositioning and even help improvetothe complex environments One the main virtues of the Buy & Care investment strategy sectors. They tend to be overestimated by sustainability-themed investors totobehelp wary ofthe them. in and healthy living. Themarket. most task our skills through portfolio managers’ participation of energy, conflict-prone countries will outperform theirdifficult peers while is itsown ability companies progress while also improving funds and nutrition underestimated by the general is to estimate the pace of these transitions, whichGoal concern all in the engagement meetings. As a result of these participation dialogues we becoming a valued element of the local society. 16 also our own skills through the portfolio managers’ One of the evaluate main virtues of the Buyof &aCare investment strategy sectors. They tend overestimated by sustainability-themed can better the longevity company’s competitive plays a central roletoinbe our assessment and engagement process is its abilityPPT to help companiesaprogress while alsobelow improving funds and underestimated as described on pages 15ff.by the general market. advantage. has developed model –illustrated –that our own MODEL skills through the portfolio managers’THE participation PPT FOR ANALYSING LONGEVITY OF THE COMPETITIVE ADVANTAGE Inspired by Michael Porter (2006): “The Link Between Competitive Advantage and Corporate Social Responsibility”

PPT

MODEL FOR ANALYSING THE LONGEVITY OF THE COMPETITIVE ADVANTAGE Demand conditions Competitive context Inspired by Michael Porter (2006): “The Link Between Competitive Advantage and Corporate Social Responsibility” Markets standards Intellectual property Regulation Rule of law Middle-class - BOP Regulation

Demand conditions

Markets standards Regulation Middle-class - BOP

Competitive context Revenues

Market share Pricing power Product security Client loyalty Revenues Technology Market share Productpower mix Pricing Community loyalty Product security

Intellectual property Rule of law Regulation

Client loyalty Technology Product mix Community loyalty

Profitability

Industrial support

Infrastructure Supplier network Political incentives

Industrial support

Infrastructure Supplier network Political incentives

ROE Cost leadership Efficiency (energy, etc.) Research & Development Profitability Employee ROEloyalty Governance Cost leadership Efficiency (energy, etc.) Research & Development Employee loyalty Governance

Access to capital

Financial (WACC) Natural or real (Quality) Human (Education)

Access to capital

Financial (WACC) Natural or real (Quality) Human (Education)

Exposure (Outside-In) Impact on the value chain Responsiveness (Inside-Out) Impact of the value chain Exposure (Outside-In) Impact on the value chain Responsiveness (Inside-Out) Impact of the value chain

De Pury Pictet Turrettinni s upports the SDG’

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Active ownership

The true Cadmos innovation is found in the third step: active ownership. The Cadmos Funds pursue an active-ownership strategy based on frequent company visits, exercising our voting rights and engaging with all the portfolio companies. The engagement process serves many purposes: for the company, it promotes change and progress and spurs it on to enhance those positive impacts; and for our portfolio managers –and hence our investors –it leads to better insight into how convincingly the company is addressing its material sustainability topics. Cadmos’ engagement process has three objectives. 1- Do no harm engagement As a responsible shareholder, we encourage most of the companies in our Fund fund to to give give greater consideration to the tangible financial risks of inaction, negligence or even unlawful behaviour. This is an enduring concern that we bring up in all our meetings with the companies.

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2- Engagement Engagement Integration

for

ESG

Engagement for ESG integration is the Cadmos Funds’ overarching goal and their common denominator. All our dialogues and engagement meetings are designed to motivate companies to increase the integration of the key material environmental, social and governance topics into their strategy and communication. We view this true integration of ESG factors into the heart of a company’s strategy and daily operations as the next major objective. To reach it, our engagement goes well beyond simple dialogue with the company’s management. Each year we make clear progress recommendations and provide a thorough analysis of the gaps in the reporting. The companies are often aware of their challenges or ready to consent to certain as certainadjustments, adjustments,particularly particularly as these are proposed by ainvesloyal these are proposed by a loyal investor and with comeexpert withadvice. expert tor and come advice.

3- Engagement for social impact thedialogue dialogueis is geared Finally, the geared to to achieving progress addiachieving progress and and additional tional tangible impacts. tangible socialsocial impacts. We We are are probably shareholder probably the the firstfirst shareholder to to act a matchmaker between act as aasmatchmaker between the the companies social companies and the and socialthe enterprises enterprises or non-governmenor non-governmental organizations talasorganizations so as social to setimup so to set up additional additional social impact projects. pact projects. These projects target These projects, targeting systemic systemic challenges and often relate challenges, relateSDGs. particularly to to the seventeen They are Sustainable Development Goal always linked to the company’s 16 and are always linkedtoto the core business. We prefer direct our efforts to helping realise SDG companies’ core business. Cadmos 17, is, theGoal achievement alsothat supports 17, whichofisthe to reach theother sixteen other ambitious sixteen ambitious targets targets of theAgenda. 2030 Agenda. is on the 2030 This isThis to be to be achieved by promoting global done by promoting global partnerpartnerships and in particular, ships and, in particular, bringing bringing together key stakeholders together key stakeholders such as such as multinational companies, multinational companies, social enterprises, non-governmental social enterprises, non-governorganizations and civiland society. mental organizations civil society. Our engagement forimpact social Our engagement for social aims to aims strengthen the company’s impact at strengthening the companies’competitive sustainableadvantage, competisustainable tivewhere advantage by improving their or, relevant, its “bottom of peacebuilding strategies in fragile the pyramid” strategy as well as its countries. As we explain in the peacebuilding strategy in fragile countries. we explain the second part,As companies haveinbeen very keen Cadmos to receive additional individual Fund reports, companies have very keen to deep analysis andbeen progress recommendations fromdeep the PeaceNexus receive additional analysis and Foundation in particular. from progress recommendations our social impact experts.


Proxy voting

Voting provides our portfolio managers with valuable information about the quality of a company’s governance. It is also a necessary first step before engaging with the management. Few professionals would deny denythat thatthe theskills, skills,independence independence and availaand availability of of a board ofofdirectors bility a board directorsare arecritical criticalto to aa 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. The Cadmos portfolio managers define their voting positions by studying the analyses of AGMs and the voting recommendations supplied by various proxy advisory firms. They have the right and even the duty to deviate from the proxy’s recommendations, should they find that these do not take full account of the companies’ businessmodels modelsand and particularities or companies’ business particularities or do notnot correspond to their respective internal voting voting guidedo correspond to their respective internal lines, whichwhich are available on request. For the Cadmos guidelines, are available on request. For the Peace Investment Fund, the selected proxy advisor European, Swiss and the Peace Investment Fund, the is Glass proxy Lewis.advisor This independent agency is a leading selected is Glass Lewis. This independent provider governance assessment and voting advice agency is of a leading provider of governance assessment covers advice more than 23,000more companies in more than and voting and covers than 23,000 compaa hundred countries. It can supply consistent assessnies in more than a hundred countries. It can supply ments throughout all thethroughout countries represented in the consistent assessments all the countries Fund. For reporting purposes, weCadmos apply the format represented in the Fund. For the Emerging of PPT’s voting guidelines, dividing the works items under Markets Engagement Fund, Comgest with discussion at an AGM into Services four topics: theand structure of Institutional Shareholder (ISS) benefits the board of directors; transparency and coherence from the latter’s globalthe reach: ISS has nineteen offices of the remuneration structure; structure andteam ownership worldwide and an experienced research fluent of twenty-five share capital;languages. and shareholders’ rights.purposes, we in For reporting apply the format of PPT’s voting guidelines, dividing the items under discussion at an AGM into four topics: the structure of the board of directors; the transparency and coherence of the remuneration structure; structure and ownership of share capital; and shareholders’ rights.

VOTING GUIDELINES STRUCTURE 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 chairman of the board of directors 4. Granting of the discharge TRANSPARENCY AND COHERENCE OF THE REMUNERATION STRUCTURE 5. Appropriate structure of the remuneration system for the executive committee 6. Appropriate structure of the remuneration system for the board members STRUCTURE AND OWNERSHIP 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 articles of association, equal treatment of shareholders and anti-takeover measures

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Engagement partners

Engagement Engagement partnerspartners Several external partners are instrumental in implementing our engagement strategy: the Cadmos Peace Investment Fund would not exist without the tangible contributions from the PeaceNexus Foundation, presented in the following pages.

backbone and ensures that our assessments and and feedback since the Cadmos Funds’ inception in 2006. PPT BHP cover all the closely most financially material ESG topics, including collaborated on developing the assessment and engagepeacebuilding. ment process. This last represents many years of combined engagement expertise and is designed to generate faster, more material ESG integration and impact forespecially the companies. companies value BHP’s assessment, for its critsince the CadmosThe Funds’ in 2006. PPT and BHP The table below since theinception Cadmos Funds’ inception in 2006. PPT and BHP collaborated onanalysis developing engageEngagement Fu The Cadmos assessment and engagement for ESG integra- closely ical of the assessment quality of and their communication about ESG collaborated closely on developing the assessment and engagepartnerships wi ment process. last represents many years of combined tion process, however, was modelled by BHP – Brugger and This integration. Prior to any assessment or engagement BHP’s analysts conduct the company assessments,meeting, and its mentand process. This generate last represents many years of combined is designed faster, more added a special BHP theto data from RepRisk, a research to Partners, who have headed the engagement teamengagement since the expertise seniorconsults consultants organise, coordinate and lead theprovider, engagement engagement expertise and is designed to generate faster, more material ESG integration and impact for the companies. contribute to th Cadmos Funds’ and inception in 2006. PPTthe andassessment BHP collabostay abreast of new or consultants continuing ESG controversies that may BHP – Brugger Partners modelled and meetings. The senior all have extensive expertise material ESG integration and impact for the companies. in advising companies on sustainability issues. rated closelyapproach on developing the Cadmos engagement process, affect the companies. engagement and have headed the engagement team BHP’s analysts conduct the company assessments, and its which represents many years of combined ESG expertise and senior consultants organise,analysts coordinateconduct and lead the BHP’s theengagement companyassessments, assessments,and anditsits is designed to generate faster, more material integration and BHP’s analysts the company BHP – Brugger and Partners modelled the assessment and meetings. The senior consultants all conduct have extensive expertise senior consultants organise, coordinate and lead the engagement SENIOR CONSULTANTS – ENGAGEMENT TEAM senior organise, coordinate and lead the first impact by the The isin the Fund’scompanies advising on consultants sustainability issues. engagement approach andcompanies. have headed theengagement engagement process team BHP – Brugger and Partners modelled the assessment and meetings. The senior consultants engagement all have extensive expertise meetings. THOMAS STREIFF (Head Engagement Team) ANDREA GÄUMANN RAHEL MEYER in advising sustainability issues. engagement approach and headed the engagement team Ph.D.have in Technical Sciences, Lic. phil. in Sociology & Businesscompanies on M.A. in International TheAffairs senior consultants all M. Sc. – Agricultural Sciences ETH SENIOR CONSULTANTS ENGAGEMENT TEAM

University of Zurich Consultant, BHP

Partner, BHP

University of St. Gall have Consultant, BHP.

extensive expertise in advising companies on sustainability issues.

THOMAS STREIFF (Head Engagement Team) ANDREA GÄUMANN RAHEL MEYER 21 years of CSR experience 9 years of CSR experience 3 year of CSR experience Ph.D. in Technical Sciences, Lic. phil. in Sociology & Business M.A. in International Affairs SENIOR CONSULTANTS – ENGAGEMENT TEAM M. Sc. Agricultural Sciences ETH University of Zurich University of St. Gall Partner, BHP Consultant, BHP Consultant, BHP. PASCAL LÜTHI KATHRIN BRUGGER TOBIAS MEYER FEHR-BOSSHARD THOMAS STREIFF (Head Engagement Team) ANDREA GÄUMANN RAHEL 21 years of CSR experience 9 years of CSR experience 3 year of CSR experience Lic. phil. in Int. Relations & Media MBA / Sustainability Management M.A. in International Affairs

Ph.D. in Technical Sciences, BHPSciences ETH M. Consultant, Sc. Agricultural 12 years of CSR experience PASCAL LÜTHI Partner, BHP

KATHRIN BRUGGER MBA / Sustainability Management 21 years of CSR experience Consultant, BHP 12 years of CSR experience

Lic. phil. in Sociology & Business UniversityofofZurich Zurich University CAS in Crisis Communication TOBIAS FEHR-BOSSHARD Consultant, BHP Lic. phil. in Int. RelationsConsultant, & Media M.A. in International Affairs BHP. 9 years of CSR experienceUniversity of St. Gall, University of Zurich 13 years of CSR experience CAS in Crisis Communication Consultant, BHP.

M.A. in International For Affairs the Cadmos University UniversityofofSt. St.Gall, Gall M.Sc. in Intl. Management , CEMS Fund Investment Consultant, BHP. Consultant, BHP 3 year of CSR experience 5 Years of CSR experience

M.Sc. in Intl. Management , CEMS Consultant, BHP

Peace

BHP conducts an addi-

LÜTHI KATHRIN BRUGGER TOBIAS FEHR-BOSSHARD tional assessment of 13 yearsPASCAL of CSR experience 5 Years of CSR experience ANALYSTS ENGAGEMENT Lic. phil. in Int. Relations & Media MBA / – Sustainability ManagementTEAM M.A. in International Affairs peacebuilding embedUniversity of Zurich Consultant, BHP University of St. Gall, JANKA RUŽICKÁ BRANCO MARTIN DOLINSKÝ dedness,, CEMS on behalf of the ANALYSTS MARIANA – ENGAGEMENT TEAM CAS in Crisis Communication 12 years of CSR experience M.Sc. in Intl. Management M.A. Marketing and Communication, BA, Economics, MA, International Ph.D., M.A. International Consultant, BHP. BHP PeaceNexus Foundation as TUConsultant, Wien and Comenius University JANKA Cooperation University of DOLINSKÝ Porto Management, TURUŽICKÁ Graz and MARIANA BRANCO MARTIN 13 years of CSR experience 5 Years of CSR experience in Bratislava M.A. Marketing and Communication, BA, Economics, MA, International Ph.D., M.A. InternationalUniversity of Bratislava Consultant, World Bank, Washington DC described on page 19. This TU Wien and Comenius UniversityCEO, EKOrast Cooperation University of of Porto Management, TU Graz and 6 years experience Consultant, EKOrast in Bratislava 15 years of CSR experience important module provides Consultant, World Bank, Washington DC University of Bratislava 8 years of CSR experience CEO, EKOrast 6 years of experience – ENGAGEMENT TEAM Consultant, EKOrast ANALYSTS

15 years of CSR experience

8 years of SILVIA CSR experience ZAMBOROVA VANESSA SEGER (Engagement coordinator) MARIANA BRANCO MARTIN DOLINSKÝ BSccoordinator) UZH in Geography, Master’s degree in Economics, SILVIAEnvironmental ZAMBOROVA VANESSA SEGER (Engagement BA,Sciences Economics, MA, International Ph.D., M.A. of International and Management & Economics University Bratislava BSc UZH in Geography, Environmental Master’s degree in Economics, Cooperation University of PortoUniversity of BratislavaManagement, Graz and Bank 1 year&of CSR experience Banker, SlovakTU Development Sciences and Management Economics 15 years 1 year of CSR experience Banker, Bank ofofexperience Consultant, World Bank, Washington DC Slovak Development University Bratislava 15 years of experience 6 years of experience Consultant, EKOrast 8 years of CSR experience

a basis for discussion with

the companies about their JANKA RUŽICKÁ M.A. Marketing and Communication, current approach to inteTU Wien and Comenius University grating peacebuilding in Bratislava CEO, EKOrast into their strategy and 15 years of CSR experience The

VANESSA SEGER (Engagement coordinator) SILVIA ZAMBOROVA BSc UZH in Geography, Environmental Master’s degree in Economics,

1- COMPA

communication.

first step c well as media p use the RepRis

For our social impact engagement, KiKLab the Moreover, in January 2018, Cadmos launched the Peace Investment For our social impact engagement, is advising the is advising Moreover, in January 2018, Cadmos launched the Peace Investment SciencesKiKLab and Management & Economics University of Bratislava KOIS Brussels andFoundation. Kite the Global AdvisorsFoundation. in London.Through Selected onpartnerships setting upofpartnerships with social enterprises Fund collaboration with PeaceNexus Cadmos goes one stepexperience further by engaging with theSlovak Development companiescompanies on settingclearly up with social enterprises Fund in collaboration withinin the PeaceNexus Through 1 year CSR Banker, Bank 15 yearsexpertise of experience thesocial subject of peacebuilding and social impact. partnerships between listedthe multinational companies or NGOs toon create additional social impact. Companies, social itsand unique expertise andlarge, guidance, the or NGOs companies to create additional impact. Companies, social its unique guidance, the foundation enables thefoundation enables enterprises and government agencies can achieve farcan more companies withinnovative the greatest financial and We present our to this in the following pages. But and social prove very effective. enterprises and approach government agencies achieveportfolio far more portfolio companies withenterprises thepeacebuilding greatestcan financial and peacebuilding together than separately inseparately termsabout of systemic, tangible results. potential to contribute more to effectively. first, a few words engagement with some of the Companies, social enterprises and government agencies can together than inour terms of systemic, tangible results. potential contribute more effectively.

European companies on the subject of social impact partachieve far more together than separately in terms of systemic, Fornerships. our social engagement, KiKLab the Moreover, in January Cadmos launched the Peace Investment We impact are helping these companies setisupadvising partnerships tangible results. For 2018, our social impact partnership engagement, S PECIALIZED SOCIAL IMPACT PARTNERS companies on setting up partnerships with social enterprises in collaboration with the PeaceNexus Foundation. Through SOCIAL Fund IMPACT PARTNERS that address the challenges posedS byPECIALIZED the seventeen Sustainable KiKLab is advising some European companies on setting up or NGOs to create additional social impact. Companies, social its unique expertise and guidance, the foundation enables the partnerships with social enterprises or NGOs to create addiDevelopment Goals. This more opportunity-driven type of KOIS enterprises and government agencies can achieve far more portfolio companies with the greatest financial and peacebuilding tional social impact. engagement benefits from the additional specialised support of Firm specialized KOIS in impact investing together thanFirm separately in terms of systemic, results. potential to contribute more effectively. our engagement partners at KiKLab, joint tangible venture between Charles-Antoine Janssen (Managing Director) & François deaBorchgrave (Managing Director) specialized in impact investing Strong expertise Charles-Antoine in bridging businessJanssen and social projects Director) & François de Borchgrave (Managing Director) (Managing

Strong expertise in bridging business and social projects KITE GLOBAL ADVISORS

S PECIALIZED

SOCIAL IMPACT PARTNERS

Unique capacity to build fruitful collaborations and though leadership in sustainability KITE GLOBAL ADVISORS Sophie Lambin (Managing Director) & Larry Yu (Managing Director) build collaborations and though leadership in sustainability Based in London,Unique Boston capacity and New to York withfruitful extensive network of experts & corporate contacts

KOIS Sophie Lambin (Managing Director) & Larry Yu (Managing Director) Based in London, Boston and New York with extensive network of experts & corporate contacts Charles-Antoine Janssen (Managing Director) & François de Borchgrave (Managing Director) Recognize pioneer in connecting businesses and peacebuilding Strong expertiseBusiness in bridging business and social projects Developed the peacebuilding Criteria (PBBC Methodology) PEACENEXUS FOUNDATION FirmFOUNDATION specialized in impact investing PEACENEXUS

Network of expertise to analyse and engage companies to improve their contribution to peacebuilding

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Recognize pioneer in connecting businesses and peacebuilding Developed theADVISORS peacebuilding Business Criteria (PBBC Methodology) KITE GLOBAL Network of expertise to analyse and engage companies to improve their contribution to peacebuilding Unique capacity to build fruitful collaborations and though leadership in sustainability Sophie Lambin (Managing Director) & Larry Yu (Managing Director) Based in London, Boston and New York with extensive network of experts & corporate contacts

PEACENEXUS FOUNDATION Recognize pioneer in connecting businesses and peacebuilding


PeaceNexus Foundation

Engagement process Through the Fund PeaceNexus aims to: PeaceNexus is a Swiss foundation established in 2009. It provides capacity building services to organizations to increase their effectiveness and contribution to building more inclusive Strengthen international dialogue and investor practices around and peaceful societies. PeaceNexus is Cadmos’ peacebuilding business contribution to SDG 16. expert providing support throughout the Fund’s value chain The table below provides an overview of the Cadmos engagement process. For all companies within the Cadmos European but particularly for the peacebuilding engagement. Bring SDG 16 and peacebuilding more broadly, to the attention Engagement Fund, we have added a social impact partnership module designed to create more tangible social impact through of company executives and enable them to identify concrete partnerships with innovative social entrepreneurs or other key stakeholders. For the Cadmos Peace Investment Fund, we have PeaceNexus initiated the idea of the Peace Investment Fund ways in which their operations can have a more positive impact added a special “SDG 16” peacebuilding module, designed to stimulate the companies that are active in fragile countries to and seeded the Fund with its capital. on conflict-affected societies. contribute to those areas’ stabilization with additional peacebuilding initiatives. For the Fund, PeaceNexus: Ranks the 300 companies that have the greatest economic impact in 76 fragile countries, according to their proprietary Peacebuilding Business Criteria (PBBC) and Peacebuilding Business Index (PBBI). Supports engagement with portfolio companies, with an initial peacebuilding embeddedness assessment. Provides companies with follow-up support related to their SDG 16 peacebuilding contribution.

P eacebuilding

Support portfolio companies to have a greater peacebuilding impact by increasing the conflict sensitivity of their core business and partnering in dialogue processes. PeaceNexus collaborates closely with BHP – Brugger and Partners, Covalence and NexusVesting. As mentioned earlier, BHP conducts the peacebuilding embeddedness assessment. Covalence, a specialist in ESG ratings, identifies the economically most impactful companies active in fragile states and scores their contributions to peacebuilding resulting in a Peacebuilding Business Index (PBBI). NexusVesting follows-up with the portfolio companies interested in deeper engagement by conducting an in-depth analysis of their peacebuilding potential and providing recommendations for further action.

expertise lead by the

P eace N exus F oundation

PeaceNexus Foundation Recognized pioneer and expert in connecting businesses with traditional peacebuilders Developed and maintains the Peacebuilding Business Criteria (PBBC) Catriona Gourlay (Managing Director) Endowment granted by Swiss Philanthropist Hansjörg Wyss.

1- COMPANY PUBLICATIONS AND DATA

The first step consists of collecting each company’s sustainability data. BHP’s analysts study all the company disclosures, as well as media publications and specific databases (CDP, PRI, Bloomberg, SASB etc.). For media controversies and stories, they use the RepRisk database. NexusVesting Engagement and peacebuilding expertise Supports companies to improve their SDG 16 and peacebuilding contribution Anne Gloor (Founder and Managing Director & Founder of the PeaceNexus Foundation)

Covalence Developed and implements the Peacebuilding Business Index (PBBI) methodology Strong expertise in ESG data analysis Antoine Mach and Marc Rochat (Co-Founder and Partners)

BHP Brugger and Partners Co-developed and conducts the peacebuilding embeddedness assessment Operational engagement coordination and ensures companies' sustained interest Strong expertise in ESG/SDG's and shareholder engagement

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Peacebuilding Business Criteria (PBBC) 1

PeaceNexus defines the Peacebuilding Business Criteria (PBBC). As illustrated on page 19, the PBBC Labour integrates into the engagement process and in particular into the specific peacebuilding Sourcing embeddedness assessment as a first step in assessing companies’ contributions to Community building peace in fragile enviRelations ronments. These business indicators help companies Governance specify their response to Sustainable Development Goal 16, which captures key Security elements of peacebuilding. Although the Goal 16 address consenting governments, business plays a vital role in their Products achievement. Companies can have significant peacebuilding effects in conflict-prone counSource: tries. They create employment, generate tax revenues, support good governance and foster contact and social inclusion. These elements are essential for building social resilience and stability. The PBBC are divided into six categories: labor, sourcing, community relations, governance, product, and

security. Each category has key objectives, such as “inclusive hiring” (labour category) or “creating space for dialogue” (community relations). Indicators under each objective measure the ambitions of companies conscious of their peacebuilding impact. At first glance the criteria may look similar to existing sustainability-reporting guidelines, such as the Global Reporting Initiative framework and the ESG assessment methodologies. The general categories are comparable. However, the two approaches differ considerably, mainly owing to the geographical, social and political context for which their metrics were developed. The PBBC look at whether the companies conduct thorough due diligence to check the role of their suppliers in a conflict or post-conflict context, in addition to their baseline ESG practices. They seek out opportunities for companies to contribute to stability, for instance by collaborating with other businesses to improve state accountability and public services.

P eacebuilding B usiness C riteria E xamples Cicsco Palestinian territories: Developing the IT sector and building the middle class

Philips DRC: requiring to source conflict-free minerals and support artisanal mining

Google India-Pakistan: Easing relations through advertising promoting family reunion

Total Myanmar: Fostering a dialogue with local/private security forces and NGO's

Nestlé Colombia: supporting local business partners during and after armed conflict

Source:

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1.  For further information about the Peacebuilding Business Criteria: https://peacenexus.org/wp-content/uploads/2017/03/PBBC-finalJanuary-18.pdf


Peacebuilding Business Index (PBBI) 2

As illustrated on page 6, the PBBI is instrumental for the pre-selection of potential companies for the Fund. We believe peacebuilding is a financially material topic for all companies highly involved in fragile markets and are convinced that companies that are adapted to performing responsibly in the complex environment of conflict-prone countries are more likely to be resistant to shocks and outperform their peers. The PeaceNexus Foundation developed the PBBI in collaboration with the ESG-rating agency Covalence. The index identifies companies that display conflict-sensitivity and peacebuilding potential. This pre-investment selection has two objectives. First, we only invest in large global companies that are active in fragile economies. Second, we identify companies with a net positive contribution to peacebuilding and SDG 16 in these fragile countries, according to the PBBI.

U niverse 3 Malawi East Timor Bangladesh Marshall Islands Tuvalu Tanzania Burkina Faso Zambia Kiribati Micronesia Cambodia Mozambique Lesotho Guatemala Colombia Ukraine Nepal Sri Lanka Algeria Turkmenistan Cuba Belarus Vietnam

of

4 Liberia Sierra Leone Madagascar Venezuela Lebanon Papua New Guinea Kenya Mauritania Niger Rwanda Djibouti Togo Uzbekistan Equatorial Guinea Azerbaijan

76

Economic impact in fragile states Companies’ contributions to stability and peace are particularly relevant in fragile environments in countries that are in crisis or at risk of violent conflict. We use a consensus approach to identify the states that can be considered fragile. To do so, we aggregate nine existing lists that select or rank countries based on criteria such as the risk of armed conflict, the level of development and the respect for human rights. We also consider credit ratings. Through this approach, we identified seventy-six fragile states in 2017. This list will continue to evolve in the coming years.

countries and levels of fragility

5 Palestinian territories Solomon Islands Guinea-Bissau Haiti Gambia Cameroon Republic of the Congo Tajikistan Angola Iran Swaziland Laos Russia

6 Comoros Myanmar Uganda Zimbabwe Ivory Coast North Korea Guinea Egypt

7 South Sudan Mali Pakistan Nigeria Ethiopia

8 Somalia Central African Republic Iraq Burundi Chad Eritrea Libya

9 Afghanistan Yemen Sudan Syria DRC

Source:

300

companies with the greatest

economic impact in fragile states The PBBI ranks the 300 companies with the biggest economic impact in these 76 identified fragile states. Its main source of data for economic impact in fragile states is the Financial Times fDi Markets database. The fDi Markets provides information per company and country on investment projects, foreign direct investment and the number of jobs created. We also consider companies with a strong presence on the ground either through business partnerships in fragile states via their supply chain or through the sale of products and services.

80'000 organizations within the fDi Markets database (FT) 5'693 organizations with FDI projects in fragile countries 1'934 Investable companies 648 Large and mid caps 300 Most impactful in fragile countries 150-250 PBBI Screening 30-40 Port

Source:

2.  For further information about the Peacebuilding Business Index: https://peacenexus.org/wp-content/uploads/2018/06/PBBI-methodology-finalJan-2018.pdf

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Sensitivity to peacebuilding issues

The PBBI is based on three levels of analysis: global peacebuilding related ESG policies (25% of final score), local ESG practices (25%), and local peacebuilding practices (50%). The analysis takes into account both self-reported ESG data from the companies and the data obtained from semi-automated screening and

classification of narrative content. This information is gathered from various sources, including companies’ global and local communication, global and local media, and reporting by stakeholders such as trade unions and non-governmental organizations.

PBBI METHODOLOGY OVERVIEW

Level of Analysis

Type of Analysis

Sources

Weight

Global ESG

Analysis of ESG data discolsed by companies

Corporate

25%

Semi-automated analysis of narrative content

Corporate, Media, Stakeholders

Local ESG

25%

Local Peacebuilding

50% Source:

The first score is based on the analysis of global ESG indicators disclosed by companies and selected for their relevance to peacebuilding. The second score, for local ESG practices, reflects the positive and negative impacts of companies in fragile countries in relation to ESG issues such as labour conditions, human rights, corruption and environmental protection. Finally, the local peacebuilding score reflects the positive and negative impacts of companies in fragile countries according to the PBBC as defined by the PeaceNexus Foundation. For the last two scores, the percentage is derived from the ratio of positive mentions to total mentions.

Companies with a PBBI score of more than 50 per cent are eligible for inclusion in the Cadmos Peace Investment Fund. But since peacebuilding data are mainly qualitative, and new information can emerge at any time, an advisory committee comprising PPT and PeaceNexus representatives may nevertheless decide to qualify any of the remaining companies. At present, all the companies in the Fund score above 50% in the PBBI index.

P eacebuilding B usiness I ndex ( samples ) Company

Final (PBBC*2 + ESG + GLOBAL) /4)

Local peacebuilding practices, 50%

Local ESG practices, 25%

Global ESG policies, 25%

Unilever NV

85%

86%

92%

78%

Nestlé S.A.

81%

83%

78%

82%

Telenor ASA

79%

84%

79%

71%

L'Oréal SA

79%

77%

81%

83%

Microsoft Corporation

78%

78%

71%

86%

Koninklijke Philips

78%

77%

78%

78% Source:

For all the selected companies, Covalence issues PBBI scorecards and stories, which provide a basis for the engagement meeting. For a complete overview of all our engagement activities for any portfolio company, please contact us at

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cadmos@ppt.ch. We would be happy to send you some PBBI scorecards, which provide details of Covalence’s assessments. A sample scorecard and a company integrated performance reports can be found on pages 44ff.


Engagement process

Thebelow table provides below provides an overview the Cadmos in fragile countries to prompt them to further contribThe table an overview of the of Cadmos engagement process. For all companies within the Cadmos European engagement the peacebuilding speci- module ute with additional peacebuilding initiatives. somethrough Engagement Fund, process, we haveincluding added a social impact partnership designed to create more tangible socialFor impact partnerships innovative social entrepreneurs or other key stakeholders. For the Cadmos Peace Investment ficitieswith tailored to the Cadmos Peace Investment Fund. European companies, we also conduct a specificFund, socialwe have the Cadmos Peace Investment Fund, we have added to stimulate impact engagement, helping increase their impact added aFor special “SDG 16” peacebuilding module, designed the companies that them are active in fragile countries to a “SDG 16” and peacebuilding designed to through effective partnerships with social enterprises contribute to those areas’ stabilizationdimension, with additional peacebuilding initiatives. or non-governmental organizations. stimulate engagement with companies that are active

Peacebuilding follow-up by PeaceNexus In-depth assessment and gap analysis Progress recommendations

Peacebuilding Business Index - PBBI Exposure & sensitivity to peacebuilding 300companies Sustainability ESG and financial reports Media and database Company publications and data

Shareholder dialogue Presentations of findings Suggestions for progress Selection of material topics Company specific Portfolio manager decision

Assessment report Assessment results Gap analysis Assessment Preparedness on material topics Quality of reporting

1- Company publications and data 1- COMPANY PUBLICATIONS AND DATA The step of consists of collecting each compais used. For thestudy specific The first stepfirst consists collecting each company’s sustainabilitydatabase data. BHP’s analysts all peacebuilding the company embeddisclosures, as ny’s sustainability BHP’s databases analysts study the Bloomberg, dednessSASB assessment, we media rely also on Covalence’s data they well as media publications data. and specific (CDP,allPRI, etc.). For controversies and stories, collected for the purposes of the PBBI assessment and use the company RepRisk database. disclosures, as well as media publications scorecards. and specific databases (CDP, PRI, Bloomberg, SASB etc.). For media controversies and stories, the RepRisk

COMPANY DISCLOSURE

EXTERNAL PUBLICATIONS

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Engagement process

2- SELECTION OF MATERIAL TOPICS The selection material topics represents the backbone of the Engagement for ESG Integration page 8) applied to PPT and BHPofhave condensed all the material issues affecting the companies into nine topics. (see Together these topics all underlying the various Cadmos Funds. PPT and BHP have condensed theUN material issues affecting encompass allcompanies the issuesfrom identified by traditional sustainability frameworks such asallthe Global Compact, into nineInitiative, topics. Together these topics Principles encompassand all the identified by traditionalGoals. sustainability the companies Global Reporting the UN Guiding theissues Sustainable Development Unlike frameworks such aswe thehave UN Global Initiative, UNmutually Guiding exclusive, Principles so andasthe those frameworks, allowedCompact, the topicsthe toGlobal overlapReporting rather than makingthe them to Sustainable Development Goals. Unlike those frameworks, wecategories. have allowed the topics to overlap than target the companies’ most material issues instead of generic Human rights do notrather appear as amaking single them mutually so as companies’ most material issues instead ofRights, genericthey categories. Human topic. Instead, exclusive, particularly in to thetarget lightthe of the UN Guiding Principles on Human are considered rights do not appear a single topic. in the light of the UN Guiding Principles Human overarching, and areasintegrated intoInstead, all nineparticularly topics. We believe that application of the UN Guidingon Principles Rights, they and are considered overarching, and are integrated into all nine We believe that application the “Ruggie Principles”, willtopics. represent the main challenge forof large on Business Human Rights, known as the UN Guiding Principles on Business and Human Rights, known as thechange “Ruggie will represent the main multinationals. Moreover, these principles rightfully regard climate as Principles”, a human-rights issue. challenge for large multinationals. Moreover, these principles rightfully regard climate change as a human-rights issue.

E

PRODUCT ENVIRONMENTAL IMPACT

Companies are expected to promote practices such as environmental responsibility, resource efficiency and pollution prevention across the full life cycle of their products and services.

CLIMATE CHANGE

Companies are expected to cut GHG emissions in their own operations and value chains, foster low-carbon solutions, and mitigate and/or adapt to the impacts of climate change.

IMPACT

SUPPLIER ENVIRONMENTAL IMPACT

Companies are expected to apply due diligence in their relationship with suppliers to prevent and mitigate negative environmental impacts and to engage with them to promote and foster positive environmental impacts.

PRODUCT SOCIAL

Companies are expected to exercise due care and foresight in their management of products and services to systematically prevent potential negative social impacts or foster positive impacts along the full life cycle.

IMPACT

IMPACT ON COMMUNITIES

S

SUPPLIER SOCIAL IMPACT

CORE LABOR STANDARDS COMPLIANCE

DIVERSITY AND EMPLOYEE LOYALTY

G

BUSINESS INTEGRITY

Companies are expected to assess the rights and interests of communities, identify potential positive and negative impacts, avoid or mitigate negative impacts, foster positive impacts and establish engagement procedures.

Companies are expected to apply due diligence in their relationship with suppliers to prevent and mitigate negative social impacts and to engage with them to promote and foster positive social impacts.

Companies are expected to exceed core labor standards (freedom of association, collective bargaining, forced or child labor, discrimination, health and safety, etc.) and not contribute to violations through their business relationships.

Companies are expected to foster a loyal and diverse workforce by acknowledging, understanding and proactively using differences among people to strike a balance that benefits the business.

Companies are expected to maintain compliance and demonstrate their adherence to integrity, governance, and responsible business practices (bribery, money laundering, collusion, tax evasion, fraud, insider trading, etc.).

Human rights do not appear as a single topic. Instead, particularly in the light of the UN Guiding Principles on Human Rights, they are considered overarching, and are integrated into all nine topics.

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Engagement process

ninematerial materialtopics, topics,we weselect selectthe themost mostmaterial materialtopics topics each company, depending that compaFrom these nine forfor each company, depending onon that company’s ny’s characteristics and industry sector. Our initial selection will be guided the company’s materiality characteristics and industry sector. Our initial selection will be guided by thebycompany’s materiality matrixmatrix or its or itsdefinition own definition of its priorities. BHP will challenge the company’s view by analysing the nature any own of its priorities. Next, Next, BHP will challenge the company’s view by analysing the nature of any of recent recent or recurring controversies. thestep, thirdwe step, we consider the priorities by specific frameor recurring media media controversies. In the In third consider the priorities set byset specific sectorsector frameworks worksassuch as the Materiality SASB Materiality is an interactive tool that identifies and compares disclosure such the SASB Map™.Map™. This is This an interactive tool that identifies and compares disclosure topics topics across different industries and sectors. The final decision to the maximum three most material topics across different industries and sectors. The final decision as toasthe maximum three most material topics is is made the portfolio manager, considering the company’s business model and development strategy. made byby the portfolio manager, considering the company’s business model and itsits development strategy.

E

PRODUCT ENVIRONMENTAL IMPACT

PRODUCT ENVIRONMENTAL IMPACT

CLIMATE CHANGE

CLIMATE CHANGE

IMPACT

IMPACT

SUPPLIER ENVIRONMENTAL IMPACT

SUPPLIER ENVIRONMENTAL IMPACT

PRODUCT SOCIAL IMPACT

IMPACT ON COMMUNITIES

S

MATERIALITY MATRIX

BUSINESS MODEL

MEDIA

CONTROVERSIES

SECTOR FRAMEWORKS

PRODUCT SOCIAL IMPACT

IMPACT ON COMMUNITIES

SUPPLIER SOCIAL

SUPPLIER SOCIAL

IMPACT

IMPACT

CORE LABOR

CORE LABOR

STANDARDS COMPLIANCE

STANDARDS COMPLIANCE

DIVERSITY AND EMPLOYEE LOYALTY

• Rigorous and transparent process • Select the most material topics

DIVERSITY AND EMPLOYEE LOYALTY

• Decision by portfolio manager

G

BUSINESS INTEGRITY

BUSINESS INTEGRITY

The final decision as to the maximum three most material topics is made by the portfolio manager, considering the company’s business model and its development strategy.

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Engagement process

3- ASSESSMENT All companies within the Cadmos Funds are first assessed for our robust and comprehensive Engagement for ESG Integration methodology. We start by benchmarking a company's preparedness to address its most material sustainability topics (see previous pages). We also evaluate the overall reporting quality, the extent to which sustainability is integrated within the organization and finally a company's overall adherence to recognized ESG or sustainability frameworks. Contrary to best-in-class investments, these assessments are not primarily used to select the best ESG companies but essentially to make them progress on their identified gaps toofbest practices. The assessment reporting quality comprises six criteria: accessibility, clarity, comparability, accuracy, reliability and Preparedness assessed how according tocompany’s five criteria that draw integration, tois determine well the publications heavily UNmaterial Guiding topics. Principles, thesure operaaddresson thethe most We particularly want to make in tional principles of policy commitment and data human-rights particular that the reported sustainability are linkeddue to diligence. The five materiality; and financial reports orcriteria metricsare: (essentially top commitment line, bottom line strategy; and risks).objectives and actions; indicators and monitoring; and achievements. These criteria are used to identify gaps in the to address its most material issues. We company’s also assesspreparedness each company’s sustainability organization and governance. Four criteria measure the extent to which The assessment of reporting quality comprises six criteria: accessibility, clarity, comparability, accuracy, reliability and integration, to determine how well the company’s publications address the most material topics. We want to make sure

sustainability is integrated into the company’s overall strategy, in particular that the reported sustainability data are linked to reports or metrics (essentially top line, bottom thefinancial level in the organization with ultimate responsibility for sustainability line and risks).management, the extent to which the company involves and engages its employees and the extent to which it engages shareholders and other stakeholders.organization We also its assess each company’s sustainability and governance. Four criteria measure the extent to which sustainability is integrated into the company’s overall strategy, Finally, we assess quantitatively how closely companies adhere the level insustainability the organization with ultimate for to specific frameworks, such asresponsibility the UN Guiding sustainability extent to theReporting company Principles, themanagement, UN Global the Compact, thewhich Global involves its employees and theGoals. extentIntothe which it Initiativeand and engages the Sustainable Development case of engages its shareholders other stakeholders. the UNGPs for instance, and a company would receive the highest score if it had adopted the reporting framework, established a Finally, we assess quantitatively howdiligence closely companies adhere human rights policy, performed due and implemented to specific sustainability a remediation process. frameworks, such as the UN Guiding Principles, the UN Global Compact, the Global Reporting The assessments of all these Development individual criteria are onofa Initiative and the Sustainable Goals. Inbased the case simple four-grade scoringa company system. Every comes with a the UNGPs for instance, wouldscore receive the highest commentary the analysts and is quality-checked by BHP’sa score if it hadby adopted the reporting framework, established senior consultants. human rights policy, performed due diligence and implemented a remediation process. The assessments of all these individual criteria are based on a simple four-grade scoring system. Every score comes with a commentary by the analysts and is quality-checked by BHP’s senior consultants.

PRODUCT ENVIRONMENTAL IMPACT 3 topics

SUPPLIER SOCIAL IMPACT

BUSINESS INTEGRITY

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PREPAREDNESS

REPORTING QUALITY

ORGANIZATION

FRAMEWORKS

Materiality Commitment & Strategy Objectives & Actions Indicators & Monitoring Achievements

Accessibility Clarity Comparability Accuracy Reliability Integration

Strategy Responsability Employee inclusiveness Stakeholder inclusiveness

UN Global Compact UN SDG’s UN Guiding Principles Global Reporting Initiative


Engagement process

3.1- P 3-eacebuilding ASSESSMENT embeddedness assessment All the companies in the Cadmos Peace Investment Fund were selected for their large economic footprint in fragile countries, above-average sensitivity to peacebuilding and, above all, attractiveness as an investment opportunity. As preparation for our engagement meetings, BHP assesses how the companies embed peacebuilding in their operations and organization.

companies. Therefore, focus isinto notthe to perform a complete sustainability is the integrated company’s overall strategy, assessment all aspects, but on settingwith the basis for aresponsibility constructhe of level in the organization ultimate for sustainability management, the extent to which the company tive discussion with portfolio companies. involves and engages its employees and the extent to which it its shareholders andwas other stakeholders. For theengages pilot phase, the assessment inspired from the six peacebuilding business criteria developed by the PeaceNexus Foundation: labour, sourcing, community relations, gover- adhere Finally, we assess quantitatively how closely companies With this specific assessment, we want essentially to trigger a nance, products security. Companies receive to specificand sustainability frameworks, such astop thescores UN Guiding constructive dialogue, emphasizing what companies are doing on the different criteria if they report on their Principles, the UN Global Compact, thepolicies Globaland Reporting to improve or stabilize the situation in fragile countries where concreteInitiative achievements fragile countries. Communication and thein Sustainable Development Goals. In the case of they operate. It is a comprehensible methodology to identify about peace building still immature, since it isreceive not intethe UNGPs forisinstance, a company would the highest gaps and in assessment particular opportunities which shall lay a valugrated into existing as the Global score if it hadreporting adopted frameworks the reportingsuch framework, established a The of reporting quality comprises six criteria: Reporting Initiative. able foundation for a clarity, follow-up interaction with the portfolio human rights policy, performed due diligence and implemented accessibility, comparability, accuracy, reliability and a remediation process. integration, to determine how well the company’s publications address the most material topics. We want to make sure in P eacebuilding assessment The assessments of all these individual criteria are based on a particular that the reported sustainability dataembeddedness are linked to simple four-grade scoring system. Every score comes with a financial reports or metrics (essentially top line, bottom line Labor commentary by the analysts and is quality-checked by BHP’s and risks). senior consultants. Decent working conditions Sourcing Security We also assess each company’s sustainability organization Diversity/non-discrimination and governance. Four criteria measure the extent to which Due diligence process Capacity building Local engagement products

Community relations

Global/sectorial engagement 0

Governance

1 2017

2

3

2016

For the coming engagement cycle, we have fine-tuned the methodology based on the companies’ feedback and reporting practices. As a result, we shall concentrate on three criteria: labour, sourcing and community relations. In particular we will assess and discuss six dimensions of companies’ peacebuilding embeddedness: decent working conditions, diversity and non-discrimination, due diligence in the sourcing process, capacity building for local suppliers, local stakeholder engagement, and global or sectoral multi-stakeholder engagement. Companies will receive top scores only if they explicitly connect the respective policies and initiatives to fragile economies.

3.2- Social impact partnerships embeddedness assessment As mentioned earlier, we also encourage some of the large European companies to generate positive social impact by building effective partnerships with social enterprises or other key stakeholders. We start by assessing the extent to which they have embedded social impact in their global strategy, particularly through partnerships. Here too we use a simple cumulative fourgrade scoring system, as shown below. The top score signifies that the company has made a commitment in terms of social impact or social investments, has allocated dedicated resources and is reporting on social impact partnerships and their effects. At first, the companies struggled to understand the new notion of impact, but the UN’s Development Goals have boosted their communication on the topic. Through our specific social impact engagement we have witnessed the companies’ desire to progress on the topic, especially when the aim is to generate systemic impact, working with strategic local partners.

S ocial I mpact E mbeddedness assessment

3

Reporting on social impact partnerships including impact

2

Allocation of dedicated resources for SE/SI

1

Commitment to SE/SI

0

No information on company's engagement in social entrepreneurship or social investment (SE/SI)

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Engagement process

4- ASSESSMENT REPORT In the engagement process, we we compile a summarised version of our the fourth fourthstep stepofofthe the engagement process, compile a summarised version of our assessment theand quality depth ourassessment work. This assessment assessment showingshowing the quality depth and of our work.ofThis report is sent to report is sent to the company’s highest executive and operational Its aim the company’s highest executive and operational bodies. Its aim is to bodies. concentrate their attention on theirtheir company’s strengths and weaknesses and notand on weaknesses abstract scores is to concentrate attention on their company’s strengths andor ratings. We focusscores on the sustainability and peacebuilding gaps andgaps improvenot on abstract ormain ratings. We focus on the main sustainability and ment suggestions that we want address with the company. Thecompany. assessment improvement suggestions thattowe want direct to address direct with the report thus stimulates participate intoa participate constructive The assessment report key thuscompany stimulatesrepresentatives key company to representatives dialogue with the engagement team the portfolio manager. in a constructive dialogue with theand engagement team and the portfolio manager.

5-SHAREHOLDER DIALOGUE The four preceding steps pave the way for a shareholder dialogue with our portfolio companies. The companies applaud our commitment to performing a thorough annual assessment, followed up by an on-site meeting or conference call. According to their feedback, we are the only asset manager to conduct meetings that bring together the financial expertise of the portfolio manager and the sustainability and peacebuilding offeredsustainability by BHP’s and PeaceNexus’s senior consultants. expertise offered byexpertise BHP’s senior consultants. At meetings with the companies, we insist on including representatives of both the investor relations and corporate social responsibility departments. By thus conveying a message of sustainability integration we get the attention of the former and strong support from the latter, which is often insufficiently considered in the company’s organization. organisation.

Shareholder dialogue • • • •

Led by PPT’s advisor: BHP - Brugger & Partners Participation of Cadmos portfolio managers On-site visits or conference calls Company C-level, CSR or board member participation

Objectives Peacebuilding Objective

• • • •

Focus on financial materiality — Push for full CSR Integration Gap analysis — Increase awareness to progress Progress recommendations — Stimulate best-practices Peacebuilding — Provide support for additional impact

We focus on enabling progress. Our thorough gap analysis gives credibility to our recommendations and objectives, which are specific, easily Our implemented. pragmatic help and advice and emphasisingand theobjectives, business case for We focus on tangible enablingand progress. thorough By gapproviding analysis gives credibility to our recommendations which ESG integration we encourage companies toBy better integrate their most topics their strategy and operations. are specific, tangible and easilythe implemented. providing pragmatic helpmaterial and advice andinto emphasising the business case for ESG integration we encourage the companies integrate most material topics into and theirconvey strategythe andmessage operations. During our engagement meetings we discuss to thebetter assessment of their peacebuilding embeddedness that During our engagement meetings weofalso motivate to setaimed up social-impact projects tangible peacebuilding initiatives peacebuilding is not a new category ESG but an them extension, at strengthening the or practices that contribute to conflict wherever relevant. At that stage we propose a follow-up meeting with our partners, whoensure are among the best specialists in their prevention and stabilisation in fragile countries. For example, sourcing policies should that suppliers also take steps to respective areas. avoid procurement of conflict-related resources; and labour practices should include affirmative-action programmes whereby populations at risk, such as minorities, women and, ex-combatants, are included in the workforce.

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Engagement process

POLLOW eacebuilding -up 5.1- F -UP ON follow SOCIAL IMPACT AND PEACEBUILDING Peacebuilding is penetrating a new and often quite complex for Social impact is discussions at boardsubject level; and companies and their social-responsibility teams. So at the end some companies have begun to make it a core element of their business for exploring opportunities of every strategy engagement meeting,new wemarket urge them to followand up with an exclusive meeting with the PeaceNexus Foundation. addressing millennials’ expectations. But major SDG’s are too We propose advantage PeaceNexus’s experlarge for anythat onethey partytake to tackle alone.ofAs a growing body of evidence shows, social enterprises and corporates are able to tise by accepting a thorough peacebuilding assessment based on the foundation’s PBBC impact methodology. achieve positive socialproprietary and environmental in a wayThis that also enables us to discuss their PBBI scorecardthe with them, and drives value for both parties, while benefiting communities particularly theiron position thepossible PBBI ranking. This ranking that they serve a scaleinnot when acting alone. also stimulatesthese the companies to progress, by appealing direct Furthermore, partnerships benefit social entrepreneurs, whose is to scalespirit. their And activities, and the multinationals alike. to theiraim competitive here too, insights obtained give latter us a clearer view of their the gaps in thebetter companies’ The can strengthen purpose, addressstrategies the needs or the communication. can them furtherachieving tangible of bottom of theWe pyramid, andformulate work towards project recommendations. the Sustainable Development Goals. The business case for partnerships is clear. Recommended next steps may include executive training, capacity building, strategic expertise support to SDG 16 our and With KiKLab’s recognised inintegrate impact investing peacebuilding company’s strategy and of courseto providing aim is to assessinto theaportfolio companies’ readiness partner technical local or peacebuilding assistance in specific with a specifically designed Heart, Head and Handsmarkets. – HHH The implementation of these initiatives will be managed and framework. Successful and failing partnerships have been studied extensively in order to understand the key determining

financedfactors. outsideThe theHead scope–the of our mandate, but ourcase aimfor is success intellectual business to follow after year in order to to our invesaction andup theyear supporting governance andreport systems – together tors more tangible impacts from our portfolio As with the Heart – the conviction, passion andcompanies. commitment a long-term investor we–and value increased of underpinning the action thethe Hands – the resilience capabilities, companiesand whose actions helping to stabilise the fragile resources systems thatare enable implementation – need to countries whichtothey operate, even as they contribute be aligned in order deliver positive, scalable outcomes. to realising SDG 16. Recommended next steps can include executive training, capacity building, partnership design, set-up of social impact bonds and of course matchmaking with social enterprises. P eacebuilding recommendations The implementation of these initiatives will be managed and financed outside the scope of our mandate, but our aim is to follow up year after year infor order to report to our investors Strategic support peacebuilding integration more tangible impacts from our portfolio companies. As a Capacity building and best practices long-term investor, we value positive impact partnerships as a potential means oflocal further strengthening our portfolio Technical peacebuilding assistance companies’ competitive advantage while creating social Knowledge sharing impact and contributing to the Sustainable Development Goals. Etc.

S OCIALfollow IMPACT-up FOLLOW - UP 5.2 - Social impact partnerships For some European companies held in various other Cadmos with the Heart – the conviction, passion and commitment Funds, we also follow up together with KiKLab to generate underpinning the action – and the Hands – the capabilities, resources and systems that enable implementation – need to additional social impact, by helping them set up effective partnerships with social enterprises or non-governmental organizations. be aligned in order to deliver positive, scalable outcomes. Here Social impact and to some extent peacebuilding is penetrating again, recommended next steps can include executive training, discussions at board level; and some companies have begun to capacity building, partnership design, set-up of social impact make it a core element of their business strategy for exploring bonds and of course matchmaking with social enterprises. new market opportunities and addressing millennials’ expectations. But major SDG’s are too large for any one party to tackle As a long-term investor, we value positive impact partnerships alone. As a growing body of evidence shows, NGO’s, social as a potential means of further strengthening our portfolio enterprises and corporates are able to achieve positive peacecompanies’ competitive advantage while creating social impact building, social and environmental impact in a way that drives and contributing to the Sustainable Development Goals. value for both parties, while benefiting thethe communities that they We apply similar techniques to motivate portfolio companies Business Criteria - PBBC. Here too, the insights obtained allow serve a scale Peace not possible whenFund actingtoalone. Furthermore, in theon Cadmos Investment follow up with the us to make tangible project recommendations. As a long-term Swe ocial mpactresilience F ollow -U p whose these partnerships benefitWe NGO’s entrepreneurs, PeaceNexus Foundation. suggestand thatsocial they benefit from the investor value theIincreased of companies whose aim is expertise to scale their activities,aand multinationals alike. foundation’s by accepting thorough peacebuilding actions are helping to stabilise the fragile countries in which assessment based on PeaceNexus’s proprietary Peacebuilding The latter can strengthen their purpose, better address the needs they operate, even as they contribute to realising SDG 16. HHH - ALIGNMENTS of the bottom of the pyramid, and work towards achieving the Sustainable Development Goals. The business case for peaceP EACEBUILDING FOLLOW - UP building and social impact partnerships is clear. With KiKLab’s recognised expertise in impact investing our aim is to assess the portfolio companies’ readiness to partner with a specifically designed Heart, Head and Hands – HHH framework. Successful and failing partnerships have been studied extensively in order to understand the key determining success factors. The Head – the intellectual business case for action and the supporting governance and systems – together

Finance & resources Willingness Metrics & to innovate, incentives learn & Objectives share & outcomes Time horizon Culture & values

Communication Governance with stakeholders & legal issues Leadership commitment

21/52


K EY

DIFFERENTIATING CHARACTERISTICS

Shareholder engagement and ESG integration are the main distinguishing features of the Buy & Care investment strategy, whose aim is to generate above-market financial performance and additional, tangible social impacts. The Cadmos Funds’ innovative combination of integration and engagement strategies presents a number of advantages: First, our managers are not subject to dogmatic exclusion rules or possibly arbitrary ESG ratings. Ratings tend to be backward looking, often take insufficient account of the companies’ business models and are rarely factored into the share price;

as a result, they can lead to sub-optimal investment decisions. The Cadmos Funds portfolio managers are free of external constraints and fully responsible for the Fund’s financial and impact performance. This approach calls for a team with the skills required to integrate the sustainability factors and link them to the classic financial-valuation models. The Buy & Care strategy makes responsible investment attractive to mainstream or institutional investors, who are mainly pursuing financial returns. We have achieved our aim of outperformance with the Cadmos Funds in most market circumstances.

Depth of research and active ownership

Impact Investing

ESG Integration

CADMOS

Engagement

Best in Class SRI Exclusions

Our second advantage: 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 sustainability issues. We choose soft power and expertise to open the companies’ doors. Over the years, our experts at BPH, PeaceNexus and KiKLab have won the companies’ respect and trust as competent, demanding but pragmatic sparring partners. One has only to read the testimonials on the following page. By taking care not to ostracise profitable businesses that will probably continue to grow, and by motivating them to progress and generate additional social impacts, the Cadmos Funds are often cited among the top investments in liquid equity markets in terms of performance and impact.

ESG I ntegration engagement L evel

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5

Shows improvments on recommendations

4

Acknowledge recommendations

3

Accepts the principle of regular dialog

2

Agrees to discuss assessment results

1

Acknowledges receipt of assessment

0

no meeting conducted

For our third advantage, we could point to this report, which provides a transparent account of Cadmos’s processes, performances and impacts. Unfortunately, only a minority of the funds claiming to engage with companies actually report on the non-achievements as well as the successes. For the Cadmos Funds we systematically measure the engagement level of each company, in order to evaluate our engagement progress. For the ESG Integration engagement, only when the company reaches level 5, signifying that it has acted on one of our recommendations or that a suggested social impact or peacebuilding project has become reality do we consider that we have achieved the desired impact. For the Peacebuilding engagement, we currently apply a simplified engagement scale and will strive to reach level 3 with a majority of companies in the coming years.

P eacebuilding

ambitions

3

Company is willing to have an in-depth peacebuilding assessment with PeaceNexus

2

Company intends to follow-up with PeaceNexus

1

Company signalizes basic interest in further exploring their role in peacebuilding

0

Company declares that peacebuilding is not an issue for them


Testimonials Testimonials related to Cadmos Funds Cadmos received testimonials companies. Onpage this we page list aexamples few examples Over the years, we received manymany testimonials from from companies. On this listwe a few from from the 2017–2018 engagement the 2017–2018 engagement cycle. cycle. “…The readiness assessment for partnerships sounds really interesting and insightful, thanks for the sharing the details below. We are currently reviewing our partnerships strategy and will be in touch as this evolves…”Sonia Thimmiah, Global Sustainability Director, Reckitt Benckiser (United Kingdom)

“ … Thank you for the materials and availability, we had a great conversation with Cadmos, that was very productive for us. This feedback is very important to us to continuously improve the sustainability management. …” Rafael Mahfud da Silva, Sustentabilidade, Weg (Brazil).

“…Many thanks for the recent meeting. In my view, the active discussion very well showed the mutual interest and we would like to thank you for openly sharing your views with us. We will continue our efforts to remain a leading player also with regards to sustainability matters. We look forward to keeping the direct contact with you...”. Jutta Bopp, Investor Relations, Swiss Re (Switzerland) …and this extract from Taiwan Semiconductor - TSMC’s 2017 Corporate Social Responsibility Report which does to some extent testify to the quality of our relationship as a long-term loyal shareholder on their side.

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

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Cadmos Peace Investment Fund


Portfolio management review

PORTFOLIO MANAGEMENT Portfolio as at 30.06.2018

Sector

Country

Industrial Goods & Services

USA

ABB

Industrial Goods & Services

Switzerland

ACCENTURE

Industrial Goods & Services

Ireland

Consumer Discretionary

Germany

3M

ADIDAS ALLIANZ

Insurance Germany

ALPHABET ANHEUSER-BUSH INBEV APPLE ATLAS COPCO AXA SA

Technology

USA

Food & Beverage

Belgium

Technology

USA

Industrial Goods & Services

Sweden

Insurance France

BBVA

Banks Spain

BMW

Automobiles & Parts

COLGATE-PALMOLIVE

Germany

Personal & Household Goods

USA

Food & Beverage

France

Health Care

France

Food & Beverage

Mexico

Health Care

USA

DANONE ESSILOR INTERNATIONAL FOMENTO ECONOMICO MEXICANO JOHNSON & JOHNSON LINDE

Chemicals Germany

L’OREAL

Personal & Household Goods

France

MASTERCARD

Financial Services

USA

NESTLE

Food & Beverage

Switzerland

PEPSICO

Food & Beverage

USA

Health Care

Netherlands

ROYAL PHILIPS SAP

Technology Germany

SCHNEIDER ELECTRIC

Industrial Goods & Services

France

SGS

Industrial Goods & Services

Switzerland

SIKA

Construction & Materials

Switzerland

Banks

United Kingdom

STANDARD CHARTERED TOTAL UNILEVER

Oil & Gas

France

Personal & Household Goods

Netherlands

Oil & Gas

Denmark

VESTAS WIND SYSTEMS Companies marked in red were included in the 2017-2018 pilot phase

S ectors

R egions

Others 6% Chemicals 3% Financial Services 4%

Industrial Goods & Services 18%

Banks 4%

Switzerland 13%

Insurance 6% Food & Beverage 17%

Oil & Gas 7% Health Care 10% Technology 11%

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Emerging Markets 4% Great Britain 6%

Personal & Household Goods 14%

United States 24%

European Union (ex-UK) 53%


Portfolio management review

The Cadmos Peace Investment Fund (A) was launched on 26th of January 2018 and the cash was rapidly invested during the first few days of the launch period. The Fund benefits from the expertise that we have® built since 2006 in applying the underlying Buy & Care strategy.

The portfolio managers assume all the investment and voting decisions concerning the underlying companies and participate actively in the shareholder dialogue with those companies. They are neither bound by nor reliant on restrictions, analyses or ratings determined elsewhere, but form their opinion during their frequent visits to the companies’ governing bodies. Companies that refuse to dialogue with Cadmos or PeaceNexus as regards peacebuilding, or are facing a significant ESG controversy or lack any mid- to long-term commitment to progress, will be put on a watch-list. 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.

The Cadmos Funds’ Buy & Care Strategy The Fund provides global equity exposure and comprises thirty-one stocks. It does not replicate an index. It is well diversified across many sectors and slightly overweight in European equities. This bias mainly reflects European companies’ tendency to have higher economic exposures to fragile countries and higher sensitivity to peacebuilding issues. As a long-term investor we value the increased resilience of companies that contribute to achiev® ing SDG 16 and whose actions are helping to stabilise the fragile countries in Active Ownership - Voted by portfolio manager which they - Engagement on materiality - Social impact strategies – SDG’s operate.

&

Ca

re

®

Buy &

B

uy

Ca re

To our knowledge, this direct involvement of the portfolio managers throughout the investment and engagement process is unique. When Company analysis - Quality growth companies voting, the - Sustained competitive advantage - Integrated valuation model managers are supported in The Fund’s their deciobjective is to sions by governance deliver steady consultant growth of the invested capiGlass Lewis, tal. It is actively who analPortfolio managament managed, with yse the annual - Convictions (about 30-40 companies) - Long term (turnover 25%) the accent on general meet- Risk Management stock picking and ings and make voting recomvalue creation, so that the portfolio is mendations. Owing best positioned to cope to the Fund’s having ® with the different market been launched during the phases. It invests in compaAGM season, we will begin nies that present steady earnings reporting our voting activities in growth, a sound balance sheet, a high the 2018–2019 engagement report. The return on investment and strong free cash flow information obtained from this year’s engagement work continues to enrich the investment process and generation. sharpen our insight into the sustainability of each After the first few months, it is still too early to draw company’s business model. many conclusions regarding financial performance. But the Fund seems to be performing in line with global equity indices.

Buy & are C

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Shareholder engagement and impact

ENGAGEMENT FOR ESG INTEGRATION

PBBI  PEACEBUILDING EMBEDDEDNESS ASSESSMENT AND FOLLOW-UP MEETINGS

Portfolio as at 30.06.2018

Score Score Ambition Interested In-depth Impact summary

3M ABB ACCENTURE

Type

Level

Change

Not assessed (pilot) N/R N/R 61% N/R N/R N/R N/R N/R Conference Call

4

=

58%

N/R

N/R

N/R

N/R

N/R

Not assessed (pilot) N/R N/R 72% N/R N/R N/R N/R N/R

ADIDAS

Not assessed (pilot) N/R N/R 54% N/R N/R N/R N/R N/R

ALLIANZ

Not assessed (pilot) N/R N/R 62% N/R N/R N/R N/R N/R

ALPHABET

Not assessed (pilot) N/R N/R 55% N/R N/R N/R N/R N/R

ANHEUSER-BUSH INBEV

Conference Call

4

+4

70%

N/R

N/R

N/R

N/R

N/R

APPLE

Not assessed (pilot) N/R N/R 59% N/R N/R N/R N/R N/R

ATLAS COPCO

Not assessed (pilot) N/R N/R 58% N/R N/R N/R N/R N/R

AXA SA BBVA BMW COLGATE- PALMOLIVE DANONE

Conference Call

4

=

57%

N/R

N/R

N/R

N/R

N/R

Not assessed (pilot) N/R N/R 59% N/R N/R N/R N/R N/R Conference Call

3

-2

52%

N/R

N/R

N/R

N/R

N/R

Not assessed (pilot) N/R N/R 56% N/R N/R N/R N/R N/R Conference Call

5

=

70%

39%

2

Yes

No Follow-up meeting held and willingness to continue

ESSILOR Conference Call 4 = 56% 28% 0 Yes No Follow-up meeting held and INTERNATIONAL willingness to continue FOMENTO ECONOMICO MEXICANO JOHNSON & JOHNSON

Not assessed

(4 in 2015) N/R

77%

N/R

N/R

N/R

N/R

N/R

Not assessed (pilot) N/R N/R 75% N/R N/R N/R N/R N/R

LINDE

Conference Call

4

-1

58%

N/R

N/R

N/R

N/R

L'OREAL

Conference Call

4

=

79%

28%

2

Yes

Yes Follow-up meetings & In-depth peacebuilding assessment underway

MASTERCARD NESTLE PEPSICO

N/R

Not assessed (pilot) N/R N/R 71% N/R N/R N/R N/R N/R On-Site Meeting

5

+1

81%

44%

1

Yes

No Follow-up meeting held and willingness to continue

Not assessed (pilot) N/R N/R 72% N/R N/R N/R N/R N/R

ROYAL PHILIPS

Conference Call

4

+4

78%

39%

2

Yes

No Follow-up meeting held and willingness to continue

SAP

Conference Call

4

-1

67%

33%

2

Yes

Yes Follow-up meetings & In-depth peacebuilding assessment underway

SCHNEIDER Conference Call 4 -1 68% 33% 1 Yes No Follow-up meeting held and ELECTRIC willingness to continue SGS

On-Site Meeting

4

=

56%

33%

1

Yes

No Follow-up meeting held and willingness to continue

SIKA

On-Site Meeting

4

-1

67%

17%

1

Yes

No Follow-up meeting held and willingness to continue

STANDARD CHARTERED

Conference Call

4

=

54%

N/R

N/R

N/R

N/R

N/R

TOTAL

Conference Call

4

-1

61%

N/R

N/R

N/R

N/R

N/R

1 (2 in 2016) -1

85%

33%

0

N/R

N/R

N/R

55%

N/R

N/R

N/R

N/R

N/R

UNILEVER VESTAS WIND SYSTEMS

No meeting Not assessed (pilot)

N/R

N

The ten companies marked in red have been selected for the pilot phase of the Cadmos Peace Investment Fund. Seven other companies now in the Cadmos Peace Investment Fund also underwent our standard engagement on ESG integration applied to all Cadmos Funds.

28/52


Engagement review

Before launching the Fund, we at PPT wanted to make sure that we could achieve positive additional peacebuilding impacts through the Cadmos Funds’ Buy & Care Strategy. We decided to conduct a pilot phase with selected companies during the 2017–2018 engagement cycle. The pilot phase was designed to test whether companies were ready and willing to discuss peacebuilding. We knew that communication on the subject was still in its infancy and not integrated in existing reporting frameworks such as the Global Reporting Initiative. Based on Cadmos’ previous experience, we also recognised the importance of engaging each company on the integration of other material ESG topics In addition, the pilot gave us a general idea of the companies’ willingness to explore how to improve their peacebuilding impact in collaboration with our engagement partners, particularly our experts at the PeaceNexus Foundation. We began to construct the virtual pilot portfolio in 2017, choosing from the other Cadmos Funds the companies that were most likely to be included in the launch of the Cadmos Peace Investment Fund in January 2018. We selected ten companies that we knew well and from whom we could expect honest feedback.3 They are marked in red in the table opposite and were assessed according to the engagement process. In this pilot

phase, we could engage with nine of them from June 2017 to June 2018.4 They all reacted positively to the peacebuilding topic and some were eager to progress and create additional positive impacts. Moreover, seven other companies now in the Cadmos Peace Investment Fund also underwent our standard engagement on ESG integration, but without the peacebuilding assessment, as components of other Cadmos Funds. Altogether, we engaged with sixteen companies in the Fund in this reporting cycle from June 2017 to June 2018, through three on-site visits and thirteen conference calls. From an ESG Integration perspective, during the period under review, three companies implemented our recommendations and improved on at least one weak point raised the previous year.5 This includes SGS, which also showed progress on social impact partnerships initiated by Cadmos. For more on this subject, see the “Engagement impact” section of this report on pages 36ff. For a complete overview of all our engagement activities for any relevant portfolio company, please contact us at cadmos@ppt.ch. We would be happy to send you our integrated performance report for the company concerned by this pilot phase, which provides full details of our assessments and engagement activities, together with the impacts achieved.

In this pilot phase, we could engage with nine of them from June 2017 to June 2018. They all reacted positively to the peacebuilding topic and some were eager to progress and create additional positive impacts.

3.  Danone, Essilor, L’Oréal, Nestlé, Royal Philips, SAP, Schneider Electric, SGS and Sika.  —  4.  Unilever was the only companies with whom we did not engage this year.  —  5.  Danone, Nestlé and SGS.

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Exposure to peacebuilding and key topics

% of companies

P eacebuilding B usiness I ndex - R anking

50% 40% 30% 20% 10% 0%

0-50

E ngagement

E ngagement

51-100

101-150

151-200

201-250

251-300

with companies on key material topics

intensity by key material topic

Product environmental impact

25%

Climate change impact

4%

Supplier environmental impact

4%

Product social impact

25%

Impact on communities

2%

Supplier social impact

6%

Core labor standards compliance

6%

Diversity and employee loyalty

6%

Business integrity and compliance

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Ranking

22%


Exposure to peacebuilding and key topics Peacebuilding Business Index - Ranking As described on pages 12ff, the Fund invests only in companies that demonstrate peacebuilding potential. The Peacebuilding Business Index takes the 300 companies with the biggest economic footprint (capital investment and job creation) in fragile countries and ranks them according to their sensitivity to peacebuilding issues as described on page 14. Company scores range from 85 per cent for the company with the highest sensitivity to peacebuilding, to 31 per cent for the company with

the lowest score according to the PBBI. As the table opposite shows, 75 per cent of the companies in the Fund rank in the top 100 and none of the Fund’s companies ranks among the bottom 100. The Fund’s portfolio company with the highest score is Unilever (with 85 per cent) and the portfolio company with the lowest score is BMW with a score of 52 per cent. All companies with a score higher than 50% have a net positive peacebuilding impact.

Selection of key topics As argued above, we consider peacebuilding a material topic for all companies selected for the Cadmos Peace Investment Fund. Besides peacebuilding, three key topics stand out as financially material to the universe of companies in the Fund. The first two are “product environmental impact” and “product social impact” which each concern 25 per cent of the companies. Companies concerned with “Product environmental impact” must adopt a precautionary approach to local or global environmental challenges and promote environmental responsibility, resource efficiency and pollution prevention throughout the life cycle of their products and services. For “Product social impact”, the companies must exercise due care and foresight in managing their products and services throughout their life cycle, to prevent negative social impact and foster positive impact. A company’s products and services can positively or negatively affect its customers as individuals, with regard to their physical, mental and spiritual well-being, or as a group, in relation to their integrity, dignity or heritage.

Finally, “Business integrity and compliance”, which is important for any firm, is the third most financially material topic, affecting 22 per cent of companies in the Fund. Companies must comply with a variety of external rules at national, regional and global levels, as well as their own internal systems of control. Compliance concerns the company’s ability to act according to these rules and prevent employees from crossing the line to reach business targets, on purpose or through negligence. Dishonest or illegal practices such as bribery, money laundering, collusion, tax evasion, fraud and insider trading can harm stakeholders and the company itself. Companies must therefore make every reasonable effort to ensure compliance and demonstrate integrity, good governance, and responsible business practices. Here we provide examples of companies that have acted on our ESG recommendations, with their key topics and performance scores.

Danone As a multinational food-products corporation, Danone has two main sustainability issues: the environmental and social impact of its products, especially the provision of healthy, safe, nutrient-rich food, and its access to water. Its suppliers’ environmental impact is also relevant, particularly to the sustainability of its own agricultural and procurement practices.

Product environmental impact Supplier environmental impact Product social impact 0

10

20

30

40

50

60

70

80

90

100

0

10

20

30

40

50

60

70

80

90

100

SAP By promoting environmentally friendly technology, SAP plays a significant part in improving its customers’ environmental footprint. SAP’s main asset is its workforce, and the company must find ways to continue attracting and retaining talented people. For this provider of software and technology solutions, management of its intellectual capital is of vital importance. Privacy issues are one of the main reputational risks.

Product environmental impact Diversity and employee loyalty Product social impact

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Assessment

P reparedness

on

K ey T opics

12% 24%

0%-50% 51%-60% 24%

61%-70% 71%-80% 81%-90% 41%

91%-100%

P eacebuilding

10%

10%

embeddedness

0%-20% 21%-40% 41%-60% 61%-80%

80%

81%-100%

12%

18%

Q uality

of reporting 0%-40% 41%-60% 61%-70%

35%

71%-80% 81%-90%

35%

91%-100%

6% 12%

S ustainability O rganization 0%-40% 41%-60% 61%-70%

53%

71%-80% 29%

81%-90% 91%-100%

12%

12%

S ustainability

6%

frameworks

0%-40% 41%-60% 61%-70%

18%

71%-80% 53%

81%-90% 91%-100%

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Assessment Preparedness on key topics The portfolio companies’ average score for preparedness on key topics is 82 per cent. A score of 100 per cent would reflect absolute best practice by all the companies in the Fund in relation to their respective key topics (51 in total) according to all five indicators (materiality, commitment and strategy, objective and actions, indicators and monitoring, and achievements). 65 per cent of the portfolio companies have scores above 80 per cent and so are already well positioned to manage their key topics.

Peacebuilding embeddedness The portfolio companies’ average score related to how the company has embedded peacebuilding in its operations is 33 per cent. A score of 100 per cent would reflect absolute best practice by all the companies that we assessed, according to six indicators (see page 19). Only 10 per cent of the portfolio companies have scores above 40 per cent. Our aim is to increase companies’ awareness of the financial materiality of peacebuilding in the fragile countries in which they operate and to improve their communication on this topic.

Gaps

As these statistics illustrate, the Cadmos Peace Investment Fund is mainly invested in companies that already show above-average sensitivity to financially material ESG topics but are still learning to integrate peacebuilding. Based on the gaps identified by the assessments, we formulate at least three recommendations that we believe will have an impact on the company’s future while being easy to implement. Here we provide two examples of gaps and recommendations, presented to two of our portfolio companies during our engagement meetings. One example concerns Danone, a recognised ESG leader, and the other Standard Chartered, a multinational English bank deriving all of its business from the emerging economies is less familiar with the subject.

Danone Quality of reporting The portfolio companies’ average score for quality of reporting is 77 per cent. A score of 100 per cent would reflect absolute best practice by all the companies that we assessed, according to all six indicators (accessibility, clarity, comparability, accuracy, reliability, and integration). Today 53 per cent of the companies have scores above 80 per cent and already count among the businesses that are best at communicating about their ESG challenges.

Sustainability organization The portfolio companies’ average score for quality of sustainability organization is 88 per cent. A score of 100 per cent would reflect absolute best practice by all the companies that we assessed, according to all four indicators (strategy integration, responsibility, employee inclusiveness, and stakeholder inclusiveness). Today 82 per cent of the portfolio companies have scores above 80 per cent and already count among the businesses that are best at integrating sustainability into their organization.

Sustainability frameworks The portfolio companies’ average score for ability to report according to the principal reporting or impact frameworks is 54 per cent. A score of 100 per cent would reflect absolute best practice by all the companies that we assessed, according to all four of the most widely adopted frameworks (UN Global Compact, Sustainable Development Goals, UN Guiding Principles, and Global Reporting Indicators). 88 per cent of the portfolio companies have scores above 40 per cent and are already among the businesses communicating broadly by means of these frameworks. The other 12 per cent, however, have scores of below 40 per cent and have yet to be persuaded to use them.

Gap: For all three key challenges analysed i.e. product environmental impact, supplier environmental impact and product social impact the objectives are rather general, making it hard to validate achievements and the effectiveness of the related actions. Recommendation: Though Danone is among the leaders in non-financial reporting it could optimise its strategy for tackling its main ESG challenges by setting specific short- and long-term objectives.

Standard Chartered Gap: Valid for all three key topics: the bank explains the risks and opportunities in detail, as well as its commitments and general management approaches (position statements), but fails to provide a comprehensive description of actions, monitoring and achievements. Recommendation: Standard Chartered should align its reporting more closely with tangible targets (e.g. SDGs) and be more specific about actions, monitoring and achievements during the reporting year.

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Engagement quality

E ngagement I ntensity 100% 80% 60% 40% 20% 0% On-Site Meetings

Conference Calls

No Meeting

2017-2018

E ngagement

level of companies

2017-2018

Level

2

5

Shows improvments on recommendations

13

4

Acknowledge recommendations

1

3

Accepts the principle of regular dialog

0

2

Agrees to discuss assessment results

1

1

Acknowledges receipt of assessment

0

0

no meeting conducted

Description

P eacebuilding

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(#)

ambitions

(#)

2017-2018

Level

Description (Social Entrepreneurship/Social Investments)

0

3

Company is willing to have an in-depth peacebuilding assessment with PeaceNexus

4

2

Company intends to follow-up with PeaceNexus

4

1

Company signalizes basic interest in further exploring their role in peacebuilding

2

0

Company declares that peacebuilding is not an issue for them


Engagement quality

Engagement intensity Of the sixteen companies with whom we held discussions in this engagement cycle, three received on-site visits (18 per cent) and thirteen joined us through conference calls (76 per cent). Keep in mind that all these companies are in other Cadmos funds and that in 2014 we substantially increased the proportion of face-to-face meetings relative to conference calls. This helped us reach new milestones with companies with whom we had been in discussion for many years. Prior to any conference call or meeting, we send the companies a complete assessment summary as a basis for discussion. For more information on our engagement process, see pages 15ff.

Companies appreciate our practice of conducting a thorough analysis rather than sending out questionnaires; especially as we do not restrict our findings to a score but instead provide feedback specific to each issue along with pragmatic shareholder recommendations. The Cadmos Funds’ “soft power” engagement is clearly conducive to a dialogue that is both influential and constantly constructive. The general trend over the years reveals a solid, stable desire on the part of the companies to engage in the dialogue, testifying to the credibility that the Cadmos Funds have acquired in the eyes of European businesses. It is gratifying to see that we have maintained such a high success rate with the companies over the years.

Engagement level To provide a transparent measure of the impact of our engagement for ESG Integration with the companies, we assess each company according to a scale of five engagement levels ranging from 0 to 5. The opposite table provides an overview of the number of companies having attained each level in 2017–2018. The engagement targets set for the Cadmos Funds are ambitious. Our first goal is to create a dialogue with each company within three years. As can be seen from the tables opposite and on the previous pages, we engaged with all the companies that had been in

the Cadmos universe for at least three years. Only one companies did not participate this year (level 0 or 1): Unilever, whom we met in 2016, the year of its entry into the Cadmos portfolio. While the average engagement level currently stands at 3.88, we expect it to decline at first in 2018–2019 as we begin to engage with the other fourteen companies in the Fund. In the mid-term, we expect this graph to reveal a continuous uptrend, albeit with some fluctuations, owing to an increase in the number of new companies entering the portfolio and existing companies that will reach level 5 and leave the Fund.

Peacebuilding ambition To each of the nine companies with whom we engaged during this pilot peacebuilding phase we attributed a qualitative peacebuilding-ambition level ranging from 0 to 3. The table opposite shows the number of companies having attained each level after the first engagement meeting. While today the average stands at 1.2, we expect it to decline at first in 2018–2019 as we begin to engage with the other fourteen companies in the Fund. In the medium term it should rise. Our first peacebuilding goal is to create additional, dedicated peacebuilding dialogues with a vast majority of the portfolio companies within three years. As the table opposite shows, we initially convinced eight of the ten pilot companies to follow up with our experts. Unilever did not take part in an engagement meeting

this year and Essilor began by not wanting to follow up on peacebuilding, but changed its mind later in the year. So, for this first pilot phase, 100 per cent of the companies with whom we engaged agreed to follow up with our peacebuilding experts at PeaceNexus.

“for this first pilot phase, 100 per cent of the companies with whom we engaged agreed to follow up with our peacebuilding experts at PeaceNexus”

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Engagement impact

3

3

2017-2018

Nb. of companies with positive engagement impacts (5 years rolling) Nb. of positive engagement impacts (cumulative since launch) Nb. sold companies with engagement impact

E ngagement

impact since launch

2017-2018

2013-2014

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Engagement impact

Our long-term (five-year) impact objective is to generate positive additional impacts at a majority of our portfolio companies. We motivate the companies to follow our recommendations regarding material topics (engagement level 5), social impact partnerships and, particularly for this fund, peacebuilding initiatives. It is too early to measure the impact of new peacebuilding initiatives from this pilot phase of the Fund, but we have seen impact from on-going engagements with companies that are in the Cadmos Peace Investment Fund and other Cadmos funds. This paramount objective may be measurable only in four years’ time but we got off to a good start in this pilot phase, already creating tangible impacts (engagement level 5 and social impact partnerships) for three companies - also included in other Cadmos Funds - that have implemented our recommendations and improved on at least one weak point raised in the previous year. Among the three is SGS, which showed progress on social impact partnerships initiated by Cadmos. Through our privileged contacts, we were able to collaborate with SGS on the additional social impact project outlined below. For some of our large European companies we conduct a special assessment of social impact embeddedness, similar to that of peacebuilding embeddedness. Our aim is to study the extent to which they create additional impacts through strategic partnerships with social entrepreneurs or non-governmental organizations. We also propose follow-up meetings so that they may benefit from KiKLab’s HHH – Head, Heart and Hands analysis, which spots potential gaps in the company’s readiness to partner. The ultimate aim is to formulate progress recommendations and tangible suggestions for additional social impacts. These last may include executive training, capacity building, partnership design, structuring of social impact bonds and of course matchmaking with social enterprises. Below we present the examples of Danone and Nestlé. They are among the three companies that implemented our recommendations and improved on at least one weak point raised the previous year.

SGS

Nestlé

SGS has been quick to set up a pilot training programme for unemployed youth in South Africa through its SGS Academy business line. As part of this project, the SGS RISKSTAR training qualification addresses the lack of skilled workers in the areas of health, safety and the environment.

Nestlé took up the recommendations made at the previous briefing; namely, to provide more information on the outcomes and impacts of the measures related to “Creating Shared Value (CSV)”. Similarly to the previous meetings, the discussions with the global head of public affairs, the head of CSV engagement and an investor-relations officer focused on critical aspects. Nestlé’s representatives were both competent and objective in sharing their views of the company. They welcomed our recommendations for reducing the complexity of the very comprehensive CSV report. At the request of the head of CSV engagement, we sent Nestlé the assessment results to help it improve its disclosure.

Danone At the last briefing, in January 2017, we recommended publishing a supplier’s code of conduct, to be developed if necessary. Shortly afterwards, the company brought out its new Code of Conduct for Business Partners.

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Peacebuilding follow-up

P eacebuilding

follow - up engagement

Yes

No

9

7

2 0 INTERESTED

IN-DEPTH

F lagship

story

SAP After a first conference call with the engagement team, SAP wanted to know more about the company’s ranking in the Peacebuilding Business Index and how its position could be improved. Its sustainability team is also interested in exploring different topics, including peacebuilding, to demonstrate the company’s contribution to society as a whole. In a follow-up call with NexusVesting, SAP agreed to undergo a thorough peacebuilding assessment and suggested meetings with those employees working on sustainability issues, human resource management, sustainable procurement and social-responsibility programmes. NexusVesting spent a day at SAP’s headquarters in Walldorf, where it attended a number of constructive meetings and learned more about the company’s labour policy and practices, its work with governmental clients and its social-responsibility programmes. NexusVesting also spoke to SAP’s product-development people, including those at Ariba, who have developed software that helps clients identify risks in their supply chain and thus prevent child labour or forced labour. The importance of clients to SAP’s impact on the world and the challenges entailed in measuring the clients’ share of that impact was one of the key insights obtained from the visit.

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The peacebuilding-assessment highlights SAP’s key strengths, such as its “living diversity” principle and its software products geared to financial transparency and supply- chain management. Together they contribute to tackling fragility issues such as corruption and forced labour. SAP also runs an impressive number of IT training programmes for young people in Africa and involves its staff in its social – responsibility activities through voluntary services. It welcomed the report, which is currently under discussion internally. The report makes a number of recommendations, including adaptation of labour policy and practices to fragile contexts; a due diligence appraisal of clients in parts of the world where powerful software tools can be used against fundamental rights; and development of a policy responding to SDG 16. All would represent further steps in the company’s contribution to stabilisation and peace in fragile states. By opening its doors to NexusVesting and investing time in thinking about possible contributions, SAP has already made a substantial commitment. We recognise this and are keen to see whether our recommendations lead to action.


Peacebuilding follow-up

We first conducted a special peacebuilding assessment for ten of our portfolio companies. Our aim was to study the extent to which they embedded peacebuilding in their business strategies. Nine companies were willing to discuss our findings during a first engagement meeting. We propose that they take advantage of PeaceNexus’s expertise by accepting a thorough peacebuilding assessment based on the foundation’s proprietary PBBC methodology. By the end of June 2018, all nine companies eventually met PeaceNexus individually for at least one ad-hoc peacebuilding engagement meeting. This also enabled us to discuss their PBBI scorecard with them, and particularly their position in the PBBI ranking. This ranking stimulates the companies to progress, by appealing direct to their competitive spirit. And here too, the insights obtained give us a clearer view of the gaps in the companies’ strategies or communication. We can then formulate further tangible project recommendations. By the end of this pilot phase in June 2018, two companies, SAP and L’Oréal, had agreed to a

thorough peacebuilding assessment which were recently submitted. L’Oréal is already considering options for follow-up actions A summary of the engagement with SAP and L’Oréal is presented here. Below, we also showcase the example of SGS, illustrating that peacebuilding is a difficult or sensitive subject which requires further engagement meetings with Cadmos and PeaceNexus in order to achieve progress or tangible impacts. The Cadmos process culminates when we can formulate specific, additional and tangible project recommendations such as executive training, capacity building, strategic support to integrate SDG 16 and peacebuilding into a company’s strategy and of course providing technical local or peacebuilding assistance in specific markets. The implementation of these initiatives will be managed and financed outside the scope of our mandate, but our aim is to follow up year after year in order to report to our investors more tangible impacts from our portfolio companies. As a long-term investor we value the increased resilience of companies whose actions are helping to stabilise the fragile countries in which they operate, even as they contribute to realising SDG 16.

L’Oréal

SGS

L’Oréal has shown a keen interest in peacebuilding issues from the start. It is among the top 5 companies in the Peacebuilding Business Index and wants to become the peacebuilding champion. NexusVesting has visited L’Oréal’s headquarters twice since the first engagement call and met the vice-president and chief ethics officer to explore the best ways to collaborate. L’Oréal has even agreed to organise field trips to identify opportunities on the ground. A detailed peacebuilding report has been submitted and L’Oréal is currently considering options for follow-up. L’Oréal’s greatest potential, when it comes to addressing the inequality gap and other conflict issues in fragile states, lies in its progressive labour and sourcing policy.

SGS was at first reluctant to discuss its peacebuilding role with the Fund’s engagement team. It perceived the topic as too political to be in line with its own strict principles of neutrality and discretion. But a follow-up meeting with the sustainability team enabled NexusVesting to explain the Peacebuilding Business Criteria in greater detail and show that the Fund’s approach to measuring business’s role in the stability and peace of conflict-affected countries is pragmatic and adapted to existing business models. This information and a long-standing relationship with the Cadmos funds prompted SGS to meet PeaceNexus and discuss a possible collaboration. As a result of the meeting, the foundation submitted a proposal to map SGS’s operations in conflict-affected countries to get a clearer picture of the company’s challenges and opportunities in these contexts. PeaceNexus also proposed to conduct a more detailed analysis of SGS’s contribution to Sustainable Development Goal 16, which is to promote peace, justice and security.

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Peacebuilding summary table PORTFOLIO MANAGEMENT Portfolio as at 30.06.2018

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PBBI

PEACEBUILDING EMBEDDEDNESS ASSESSMENT AND AMBITIONS

Score

Score

Assessment Summary

DANONE

70%

39%

Danone is active also in fragile states with the potential to contribute to peacebuilding to a certain extent. The company has non-discrimination policies, a responsible procurement approach, regular engagement with local stakeholders and transparency policies. However, most of these policies and approaches are not tailored specifically to fragile economies. There are some examples in the dimension of labour (e.g. through the Jita Project in Bangladesh with the main objectives to create job opportunities for several thousand women living in fragile economic conditions) and products (e.g. through “Nutriplanet”) that are explicitly relevant.

2

ESSILOR INTERNATIONAL

56%

28%

Essilor addresses most of the assessed dimensions of peacebuilding on a general level, i.e. referring to all operations. However, the reporting does not focus on fragile economies in particular. Most information can be found regarding labour and sourcing. Further, the company adapts its products and services to local requirements and characteristics as well as to vulnerable groups and has thus the potential to contribute to peacebuilding in the countries where it operates.

0

L'OREAL

79%

28%

L'Oréal is actively preventing the discrimination of labour also through supplier social audits. The company conducts a due diligence, but there is no evidence for enhanced due diligence related to conflict context and political complexity. Except donations/philanthropy to fight famine in Nigeria, Somalia, Yemen and South Sudan, no other information was found how the company is actively engaged in community relations of fragile states. The company has an anti-corruption policy and measures defined in the Code of Ethics. L'Oréal is adapting its products and services to the local requirements of the Indian market, but no other relevant markets were mentioned. Reporting suggests conflict-sensitive risk assessments are performed but there is no description of how the company is demonstrating and promoting inclusive security measures.

2

NESTLE

81%

44%

Overall, there is abundant information about management approaches, targets, actions and achievements with regard to the six assessment criteria. However, Nestlé's CSV disclosure does not yet systematically inform about its operations in fragile economies. That said, the company has a target to ensure that all FTSE4Good Countries of Concern (13 countries) where the company operates are covered by a human rights impact assessment and that employees are trained to reduce human rights risks.

1

ROYAL PHILIPS

78%

39%

Philips makes explicit reference to principles of non-discrimination in its General Business Principles. Philips is committed not to purchase raw materials that finance armed groups in for example the Congo (DRC). It has due diligence procedures in place and adopted a position paper on responsible sourcing in relation to conflict minerals. Philips is also supporting Congolese communities through conflictfree sourcing of minerals. Philips does not report concrete deals with fragile host governments on for example taxes, but declares to be open to this in its Tax Principles. It shows evidence of adapting its solutions to local realities (for example healthcare in Uganda). No reference is made to Security & Human Rights or Free Prior Informed Consent.

2

SAP

67%

33%

SAP is preventing the discrimination of marginalized demographic groups and has a non-discrimination policy in place. The company is systematically evaluating and promoting responsible suppliers among their customers. With the help of online collaboration platforms like SAP® Product Stewardship Network, companies can ensure their supply chain is using responsibly sourced materials and thus stopping the purchase of minerals from conflict zones. SAP is also reporting on the engagement with local communities for example in Ghana. The company is demonstrating good corporate governance practices and has implemented an anti-corruption policy and measures.

2

SCHNEIDER ELECTRIC

68%

33%

SE is operational in fragile states such as Syria, Yemen, Madagascar, Egypt, Nigeria, Kenya, and Pakistan. But its communications is not tailored to description of what specifically it does to adapt its technologies and services to the unstable or conflict situations in these countries. Its contribution has to be deducted from generic descriptions of BoP innovations such as decentralised renewable energy technology access in rural areas. Hard to assess what the significance of this is, compared to overall business and revenues. But the company is starting to address matters such as human rights and conflict minerals, referencing related international standards, and its capacity building activities can serve well to help vulnerable communities.

1

SGS

56%

33%

SGS addresses most of the assessed dimensions, but not explicitly related to fragile economies. However, there are specific due diligences for "high risk" countries. With the Product Conformity Assessment, SGS is addressing local needs and regional characteristics of products also in fragile economies. The SGS Corporate Security team ensures that security arrangements adequately protect the company's people and assets and respect human rights.

1

SIKA

67%

17%

Sika has both a company Code of Conduct and a Supplier Code of Conduct alongside more specific policies to address responsible business practices and responsible local sourcing. The current reporting does only to a very limited amount address challenges and specific practices in connection with doing business in fragile economies.

1

UNILEVER

85%

33%

"Unilever has a good track record of engaging with local communities and suppliers in order to enhance local livelihood, and of addressing human rights impacts on the ground. However, these efforts are not yet described in the light of peacebuilding. Regarding sourcing for example, the company has a convincing system in place to uncover and disclose risks and impacts to communities related to land issues, but does not treat this from the perspective of fragile states. There is some evidence that the company is adapting its products and services to the local requirements and characteristics and to vulnerable groups. The company adresses security but not in the context of fragile states. Unilever has however played a proactive role within the private sector in preparing for and responding to crises such as epidemics by contributing to emergency and disaster relief.

0

Ambitions


Peacebuilding summary table PEACEBUILDING FOLLOW-UP MEETINGS Interested In-depth

Impact summary

Yes

No

Danone is ranked 27th in the PBBI ranking and was in the peacebuilding pilot conducted before launching the Fund in January 2018. A face-to-face follow-up meeting dedicated exclusively to peacebuilding was held in 2018 with mixed results. The company indeed showed low familiarity with peacebuilding topics. Nevertheless, Danone is willing to progress and further follow-up with us through their sustainability team.

Yes

No

Essilor is ranked 114th in the PBBI ranking and was in the peacebuilding pilot conducted before launching the Fund in January 2018. At a subsequent follow-up meeting dedicated exclusively to peacebuilding, held in February 2018, Essilor representatives were extremely pleased to have been included in the Fund, expressing that peacebuilding was an area of great interest to them, and highly aligned with their objectives from a CSV perspective. Essilor suggested holding further follow-up meetings in the near future to deepen the discussion regarding their peacebuilding embeddedness, with the specific goal of having a clearer set of questions and topics to discuss with the PeaceNexus Foundation team.

Yes

Yes

L’Oréal is ranked 4th in the PBBI ranking and was in the peacebuilding pilot conducted before launching the Fund in January 2018. In our initial engagement meeting regarding the topic of peacebuilding, we were pleased that L’Oréal representatives in attendance responded with surprise and positivity to their inclusion in the Fund and their above-average peacebuilding track-record. This position contemporaneously showed the large impact that L’Oréal’s actions can have on high-risk, fragile communities, while also highlighting the immense potential and room for improvement. They were interested in knowing specifically how they were scored, and further familiarizing themselves with the PBBI methodology. After an initial desire to collaborate on a peacebuilding screening, a subsequent meeting with the Chief Ethics Officer resulted in an agreement to pursue a full peacebuilding assessment between the summer and fall of 2018.

Yes

No

Nestlé is ranked second within the PBBI Methodology developed by the PeaceNexus Foundation and hence shows a high potential for peacebuilding in fragile economies. Cadmos has a solid dialogue track-record with Nestlé which always showed high reactivity to respond on our recommendations. Nestlé showed interest to know more about the Fund’s peacebuilding methodology and information sources. We discussed various follow-up option including the options of conducting an in-depth peacebuilding assessment or pursuing a business coalition on the ground in a fragile market of interest.

Yes

No

Philips is ranked 6th in the PBBI ranking and was in the peacebuilding pilot conducted before launching the Fund in January 2018. A subsequent follow-up call dedicated exclusively to peacebuilding was held in which Philips expressed their pleasure at being included in the Fund, translating into an offer to collaborate on a thorough, in-depth peacebuilding assessment, or any other specific peacebuilding project.

Yes

Yes

SAP is ranked 41st in the PBBI ranking and was in the peacebuilding pilot conducted before launching the Fund in January 2018. The subsequent conference call held with the head of sustainability strategy was productive, with our partners PeaceNexus and Covalence presenting results of their PBBI analysis for the company. SAP revealed they were in the process of considering their broader social impact, and clearly defining their priorities regarding their CSR strategy at large. This presents a unique opportunity for SAP to refocus their efforts on achieving peacebuilding through their software, something they explicitly are extremely keen on learning more about. Finally, SAP expressed their desire to proceed with a more thorough, in-depth peacebuilding assessment upon their Investor Relations team's review of the proposal.

Yes

No

Schneider Electric is ranked 39th in the PBBI ranking and was in the peacebuilding pilot conducted before launching the Fund in January 2018. Schneider is clearly intrigued by the new peacebuilding approach presented in our first discussion regarding the topic. The company's ranking triggered some questions and a strong desire for further understanding of the Fund's underlying methodology. A subsequent follow-up meeting with the Sustainability Performance Manager was even more encouraging, as they reacted favorably to Schneider's inclusion in the Fund, while remarking that the PBBI criteria correspond well with their existing sustainability priorities and framework. This is extremely promising for the future, particularly given that peacebuilding has, to this point, seldom been the primary lens that Schneider has looked at its actions and responsibilities though. Ultimately, the meeting resulted in an interest from Schneider to pursue a proposal to articulate SDG16 contributions, and clearly demonstrate peacebuilding's place in their sustainability framework.

Yes

No

SGS is ranked 118th in the PBBI ranking and was in the peacebuilding pilot conducted before launching the Fund in January 2018. SGS representatives responded with a certain degree of caution to our first meeting regarding peacebuilding embeddedness, primarily on account of understandable client risks. Peace is an extremely sensitive topic in SGS's realm, and in the unstable environments that they operate in. Furthermore, SGS has many governmental clients, such as government port authorities for instance, and its primary responsibility is to address these clients' needs. A follow-up meeting was held which helped to better explain the PBBC Methodology. Another brainstorming workshop with PN Foundation is planned.

Yes

No

Sika is ranked 43rd in the PBBI ranking and was in the peacebuilding pilot conducted before launching the Fund in January 2018. At a subsequent follow-up meeting in April 2018 dedicated exclusively on peacebduilding, more information was provided regarding the assessment methodology and related scorecard and an offer to collaborate was made as they consider their next steps in attempting to deepen their engagement with the topic.

N/R

N/R

Unilever is ranked first in the PBBI ranking and was in the peacebuilding pilot conducted before launching the Fund in January 2018. Although an initial peacebuilding embeddedness assessment was made, due to time constraints it could not be evaluated and debriefed along with Unilever representatives in a formal discussion as of yet.

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Integrated Performance Report and PBBI Scorecard

The content of the following integrated performance report of companies was produced mainly by the engagement team, the portfolio managers, the Cadmos coordination team and their engagement partners. It provides an account of the investment, voting and engagement activities conducted on behalf of the Cadmos Funds with selected companies in the portfolio as at 30 June 2018. The company presented here (SAP) is representative of our portfolio. The PPBI Scorecard presented here (SAP) is produced by Covalence and contains data sourced by Covalence for the purpose of the Cadmos Peace Investment Fund. The complete set of PPBI Scorecards as well as the integrated performance reports for all the companies mentioned in this pilot phase are available on a case by case basis. Please contact us at cadmos@ppt.ch.


Integrated Performance Report 2017-2018

SAP Investment case Sector: Industry: Country: ISIN:

Technology Software Germany DE0007164600

Performance 1Y: 14.30% 3Y: 67.90% 5Y: 66.60%

World leader in the enterprise application software business, spanning all types of industries and major markets. SAP’s information management systems are successfully geared towards medium-sized companies, with industry-specific solutions and a rapidly expanding range of services being offered. This enables it to grow rapidly, and steal market share from its competitors, such as Oracle and an increasing amount of smaller players. The german company is the world’s largest application software company, and the world’s third-largest independent software supplier overall. SAP continues to make progress in its shift towards higher growth cloud revenues, as it invested heavily in this sector, most notably in data centers, and should see this strategy payoff heavily in the medium term.

Voting review 2017: 4 votes total, 1 opposing Cadmos voted against the ratification of the supervisory board acts, as the board has failed to put the company’s remuneration policy up for an advisory vote at its annual meeting of shareholders. Only 50.5% of votes were cast in favor of endorsing the actions of the supervisory board.

Engagement review Notes on last engagement

Level of engagement

The engagement with SAP has been very consistent over the last few years. The assessment results were discussed and taken up with great interest. The company representative added valuable information to our analysis and referred to recent developments within SAP that will be considered in future assessments. Main point to improve is making the Diversity Policy available. This point was discussed already in the previous year, but is still not implemented.

9th engagement cycle and 8th discussion with the company since its entry into the portfolio. Type of meeting: Virtual Meeting.

2017-2018 Engagement Cycle

1


Integrated Performance Report 2017-2018

SAP Preparedness on key topics Sustainability focus By driving environmentally friendly technology, SAP has a significant influence in improving its customers’ environmental footprint. SAP’s main asset is its workforce and the company has to find ways to attract and retain talented people also in the future. As a software and technology solutions company intellectual capital management is crucial and privacy issues are one of the major reputation risks. Product environmental impact SAP’s reporting on product environmental impact is on a good level. Even though climate and energy is not explicitly included in materiality matrix as a key topic this year, the description of its relevance is provided in the report. The Environmental Policy outlining the commitment to and management of environmental issues is good but could be more detailed, especially regarding product impact. The company sets strong tangible long-term objectives related to CO2 emissions and shows advanced measures to improve its customers’ environmental footprint through SAP´s products and services. Diversity and employee loyalty SAP reporting in the area of diversity and employee loyalty is very advanced. Human capital is part of the company’s materiality matrix. Detailed commitments are expressed and management approaches are described. Concrete actions are illustrated and short-term as well as long-term objectives are provided. SAP’s disclosure contains also comprehensive information on the monitoring regarding the elimination of discrimination. However, a detailed description of non-achievements and all key indicators is missing. Product social impact SAP’s reporting on product social impact, especially data security and customer privacy, but also product quality and safety, is outstanding. Various aspects of the topic are listed in the materiality matrix and risks as well as opportunities are depicted in detail. Detailed commitments towards data safety are expressed in the Code of Conduct. Governance and management approaches are described. SAP formulates clear short and long term goals and reports on measures as well as (non)achievements.

Product environmental impact Diversity and employee loyalty Product social impact 0

10

20

30

40

50

60

70

80

90

100

Materiality

Commitment & Strategy

Achievements

Indicators & Monitoring

Objectives & Actions

Materiality

Commitment & Strategy

Achievements

Indicators & Monitoring

Objectives & Actions

Materiality

Achievements

2017-2018 Engagement Cycle

Indicators & Monitoring

Commitment & Strategy

Objectives & Actions

2


Integrated Performance Report 2017-2018

SAP Quality of reporting The quality of SAP’s sustainability reporting is at an outstanding level. Sustainability related documents are easily accessible and they avoid excessive and unnecessary technical terms and other content likely to be unfamiliar to stakeholders. The company’s sustainability disclosure features a GRI and UNGC content index and the report is verified by a third party. Comparability of data is advanced and year-to-year comparisons are given for a period of at least 3 years. Concerning accuracy, data measurement techniques and calculation methods are described. The company publishes an integrated annual report featuring financial and sustainability information in an interlinked manner.

SAP Benchmark 0

10

Accessibilit y

20

Clarit y

30

40

Co mparabilit y

50

Accuracy

60

70

80

Reliabilit y

90

100

Int egrat io n

Sustainability organization Sustainability is an integral part of SAP’s business strategy and many SAP products help to manage sustainability challenges of its customers. The company is engaging its employees on sustainability through people survey, trainings, and volunteering programs. Reference on individual performance targets/incentives (MbO) for top management linked to the company’s sustainability goals was not found. SAP regularly interacts with stakeholders. There is also a sustainability advisory panel consisting of expert representatives. The company has active partnerships with organizations such as UNIDO, econsense, Transparency International and others.

Strategy Responsibility Employee inclusiveness Stakeholder Inclusiveness 0

1

2

3

Reference to sustainability frameworks UNGC: The company is a signatory to the UN Global Compact communicating on its progress. SDG: There is a special web summary Sustainable Development Goals on how SAP contributes to each of 17 general SDGs but their 169 specific targets are not discussed specifically. SAP also identified seven most material SDGs together with its stakeholders. UNGP: The company has instituted a policy on human rights and conducts specific due diligence to identify, prevent, mitigate and account for its human rights impacts. GRI: The company report has been prepared in accordance with the GRI Standards: Core option.

UNGC SDGs

UNGP GRI 0

2017-2018 Engagement Cycle

1

2

3

3


Integrated Performance Report 2017-2018

SAP Gaps and Recommendations

Gap 1: SAP has completed a materiality assessment in 2016 and now published a materiality matrix. However, compared to peers with a similar level of corporate responsibility reporting, the matrix is not very detailed and focuses only on 5 issues. Recommendation 1: It could be considered to further elaborate the materiality matrix and taking up more issues (or specific sub-topics) to show the relevance for the company and its stakeholders. Gap 2: While the quality of reporting in general is on an excellent level, there is still one limitation in accessibility: The Diversity Policy is not available publicly. Recommendation 2: The Engagement Team recommends making the Diversity Policy publicly available. Gap 3: The Environmental Policy outlining the commitment to and management of environmental issues is good but could be more detailed, especially regarding product impact. Recommendation 3: The Engagement Team recommend taking up the different aspects of product environmental impact in more detail in the Environmental Policy. Gap 4: Negative achievements with regard to most objectives or actions towards product environmental impact management are missing. Recommendation 4: Negative achievements (if there are any) could be reported more systematically.

Social impact partnerships Social impact embeddedness SAP participates in innovative entrepreneurial endeavours, establishing the SAP Innovation Center for instance. SAP has also joined forces with Acumen, a pioneer of impact investing, with the SAP Social Entrepreneur Fellowship. However, information on the outcomes of such projects is limited. Follow-up meetings and progress In our engagement meeting regarding the company’s social impact strategy, SAP representatives expressed a clear interest in further exploring our methodology in order to reach specific recommendations and improvements, and hence were also interested in taking our Readiness to Partner Assessment. Although they have not yet had a chance to complete the survey, a follow-up call was held in order to further explore the company’s social impact approach.

2017-2018 Engagement Cycle

4


Integrated Performance Report 2017-2018

SAP Contribution to peacebuilding

Labor

Peacebuilding embeddedness SAP has a non-discrimination policy in place and systematically evaluates and promotes responsible suppliers. With the help of platforms like SAPÂŽ Product Stewardship Network, companies can ensure their supply chain is using responsibly sourced materials. SAP is also reporting on its engagement with local communities.

Security

Sourcing

Community Relations

Products

Governance

Peacebuilding ambitions The SAP representative was very enthusiastic about the Peace Investment Fund initiative and suggested follow-up to better understand the underlying methodology and improve on peacebuilding.

Follow-up meetings and progress SAP is ranked 41st in the PBBI ranking and was in the peacebuilding pilot conducted before launching the Fund in January 2018. The subsequent conference call held with the head of sustainability strategy was productive, with our partners PeaceNexus and Covalence presenting results of their PBBI analysis for the company. SAP revealed they were in the process of considering their broader social impact, and clearly defining their priorities regarding their CSR strategy at large. This presents a unique opportunity for SAP to refocus their efforts on achieving peacebuilding through their software, something they explicitly are extremely keen on learning more about. Finally, SAP expressed their desire to proceed with a more thorough, in-depth peacebuilding assessment upon their Investor Relations team’s review of the proposal.

The peacebuidling assessment and engagement has been conducted in cooperation with the PeaceNexus Foundation.

2017-2018 Engagement Cycle

5


Peacebuilding Business Index (PBBI)

SAP AG

Company Scorecard

September 2017

(Software & Services)

Country: DE Exchange: DB ISIN: DE0007164600 Final Score | Rank

Local Peacebuilding Practices

Local ESG Practices

Global ESG Policies

67% | 41st / 300

63% | 55th / 300

74% | 27th / 300

71% | 73rd / 300

Score: share of positive news over total news (positives and negatives) SAP (300) classified withPeers the PBBC

Score: share of positive news over total news (positives and negatives) classified with ESG criteria

Score: aggregated performance on selected ESG indicators

The final score combines 3 values: Local Peacebuilding Practices (weighting 50%), Local ESG Practices (25%), and Global ESG Policies (25%). The Peacebuilding Business Index (PBBI) ranks the 300 most economically impactful companies in fragile states.

Labour

Governance

100 60

Security

Governance

100

80

Product

Sourcing

40

80

Economic

60 40

20

Society

20

0

100 80 60 40 20 0

0

Environment

Society Products

Economic

Community

Human Rights

Governance

These scores are based on ESG data provided by Thomson Reuters

Scores calculated for each category of Covalence’s ESG criteria

Scores calculated for each category of the Peacebuilding Business Criteria (PBBC)

SAP

Human Rights

Labor

Labor

Peers (300) Labour

100 SAP AG registers a good score in the Peacebuilding Business Index: 67% (peers average: 55%), and is ranked 41st out of 300 companies. 80 th The best result is found in Local ESG Practices (74%, 27 / 300), followed by Global ESG Policies (71%, 73rd / 300) and Local 60 SecurityPractices, SAP AG’s strengths Sourcing are found in the following PBBC Peacebuilding Practices (63%, 41st / 300). In Local Peacebuilding 40 categories: Community (score of 67%), Labour (53%), and Products (52%). 20 0

Peacebuilding Business Criteria (PBBC)

PBBC results in most active countries

Labour

Sourcing

Positive news

Community

Community Safety

Human Rights monitoring

Supply Chain Security Solve problems

Community

Serve at-risk Safety populations

Human Rights

Solve

Governance

Adapt to conflict-prone monitoring markets

Products

problems Board expertise on fragile states

populations

Inclusive tax deal

Adapt to conflict-…

Community Relations

Informal property rights at-risk Serve

Governance

Good offices services

expertise on…

Social Investments Board

Multi-stakeholer Inclusive tax consultations deal

Informal Avoid sourcing from conflict-related… property rights

Good offices

Community

Highten due diligence services procedures

Social

Multi-

stakeholer… Employ insider mediators

Hire locally

Include at-risk

populations Avoid sourcing from conflict-…

Sourcing

Promote/support local Investments businesses

Labour

Negative news

Products

Governance

Highten due diligence…

Promote/supp ort local…

Employ insider mediators

Hire locally

Include at-risk populations

20 18 16 14 12 10 8 6 4 2 0

350 300 250 200 150 100 50 0

Security Products

Security

The size of bubbles reflects the volume of information: narrative content gathered from corporate, media and stakeholder sources regarding the activities of SAP AG in 76 fragile countries. The data has been classified with the PBBC and sorted by countries. The color of bubbles indicates the sentiment: the share of positive news over total news (positive + negative news), from green (100%) to red (0%).

PeaceNexus Foundation https://peacenexus.org/ Route de Lausanne 107, CH-1197 Prangins Tel +41(0)22 365 15 00

Covalence SA http://www.ethicalquote.com/ Avenue Industrielle 1, CH-1227 Carouge-Geneva el +41(0)22 800 08 55


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Performance & Impact Report on the Fund's Pilot Phase