cadmos european engagement fund - ppt€¦ · cadmos european engagement fund ... bp plc oil &...

CADMOS EUROPEANENGAGEMENT FUNDBuy & Care® Responsible Investment Fund

Integrated Performance Report2015-2016

CA

DM

OS

EU

RO

PE

AN

EN

GA

GE

ME

NT

FU

ND

| I

NT

EG

RA

TE

D P

ER

FO

RM

AN

CE

RE

PO

RT

20

15

-20

16

De Pury Pictet Turrettini & Cie S.A.

12, rue de la CorraterieP.O- Box 5335CH-1211 Geneva 11Tel. +41 22 317 00 30Fax +41 22 317 00 33www.ppt.ch

Should you have any questions about this report, please contact :

Dominique Habegger

Head of Cadmos Funds [email protected]

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 fi rm has developed advanced skills in asset management for both private and institutional clients and currently manages around CHF 3 billion.de Pury Pictet Turrettini & Cie has always demonstrated a great capacity for innovation, notably as a pioneer of responsible investment. It is the owner of the Buy and Care® strategy, manager of the Cadmos - European Engagement Fund compart-ment, promoter of the Cadmos Fund, and ensures the funds’ consistency, transparency and distribution. PPT is a signatory to the United Nations-supported Principles for Responsible Investment (PRI).

NO TICE

This document is published for information purposes only. The content of this document does not constitute an offer for sale or a solicitation of an offer to purchase nor does it constitute an incentive to invest or to engage in arbitrage transactions. It may not be construed as a contract under any circumstances. The information contained in this document has not been analyzed with regard to your personal profi le. If you have questions regarding any investment or if you have doubts as to whether an investment decision is appropriate, please contact your particular client representative or, if applicable, seek fi nancial, legal, or tax advice from your customary advisors. de Pury Pictet Turrettini S.A. makes every effort to verify the information provided but cannot give any guarantee as to its accuracy. Past performance that might be indicated in the information transmitted by de Pury Pictet Turrettini S.A. in no way determines future returns. Any decision to invest or divest that may be made by the reader of the information appearing herein is made at the sole initiative of the investor who is familiar with the mechanisms governing the fi nancial markets.

This marketing material is not intended to be a substitute for the fund’s full documentation or for any information which investors should obtain from their fi nancial intermediaries acting in relation to their investment in the fund mentioned in this document. For Swiss investors, the paying agent is Banque Pictet & Cie S.A. and the representative agent is Fund Partner Solutions (Suisse) S.A., Route des Acacias 60, Ch-1211 Genève 73 , Switzerland. The relevant legal documentation may be obtained free of charge from the representative agent, from de Pury Pictet Turrettini & Cie S.A. or online at www.ppt.ch/en/reporting-and-documents. Cadmos Fund Management, 15A, avenue J.F. Kennedy, L-1855 Luxembourg.

This document is the intellectual property of de Pury Pictet Turrettini S.A. Any reproduction or transmission of this document in whole or in part to a third party without the prior written authorization of de Pury Pictet Turrettini S.A. is strictly prohibited.

© 2016, de Pury Pictet Turrettini & Cie S.A. All rights reserved.

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

Our portfolio managers’ systematic shareholder engagement with the under-lying companies represents a unique feature of this strategy. Our objective is far-reaching. Overall, we aim at demonstrating that profi t-ability and responsibility can be reconciled. To that end, our investment decisions are based on sound fundamental analysis, a disci-plined management process and a keen understanding of the companies’ business models, supported by our direct engagement and dialogue with the companies. In this way we make sure that we are remunerated for the specifi c risks that we are taking and that the companies are improving and reducing these risks as appropriate.

Through this dialogue, the portfolio managers obtain a deeper insight into the sustainability of each company’s business model and can thus incor-porate its environmental, social and governance (ESG) characteristics into their fi nancial analysis. The dialogue is also highly valued by the companies,

as it improves their abil-ity to judge the impact and quality of their ESG communications. In addition, our engage-ment team constantly stimulates the companies to fi nd practical ways of achieving further progress and increasing their effi ciency.

The fi rst chapter of the present report provides a summary of the Fund’s financial, voting and engagement perfor-

mance during the reporting cycle. The following four chapters consist of open information and are available on the website at http://www.ppt.ch. The last chapter contains the engagement reports on selected companies, with details of the assess-ment and dialogue conducted by the Cadmos Funds experts. The assessments of all the under-lying companies are reserved for our current and prospective investors.

WELCOME

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

Our portfolio managers’ systematic shareholder engagement with the underlying companies represents a unique feature of this strategy.

1. Previously Cadmos Fund Management - Guilé European Engagement Fund. The name of the Fund has been simplifi ed for greater clarity.

SUMMARY OF RESULTS IN 2015-2016 . . . . 5

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

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

Engagement performance . . . . . . . . . . . . . . . . . . . . . . . 10

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

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

Founding Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Company analysis & Portfolio management . . . 18

Active ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

FINANCIAL MANAGEMENT REPORT . . . 25

Revival of economic growth in Europe . . . . . . . . 26

Evolution of the European equity market . . . . . . 27

Portfolio management review . . . . . . . . . . . . . . . . . . . 28

Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Composition of the portfolio as at 31 December 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . 30

EXERCISE OF VOTING RIGHTS . . . . . . . . . . . 31

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

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

Analysis of votes by topic . . . . . . . . . . . . . . . . . . . . . . 34

SHAREHOLDER ENGAGEMENT . . . . . . . . . 39

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

Impact of the fi nancially material engagement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Improvements and main stories . . . . . . . . . . . . . . . . . 45

Long-term results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Engagement outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

ENGAGEMENT REPORTS . . . . . . . . . . . . . . . . . . 55

TABLE OF CONTENTS

SUMMARY OF RESULTS IN 2015-2016

SUMMARY OF RESULTS IN 2015-20166/55

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

Valuation and dividend yields make equities attractive in the current context of overvalued bonds. But after several years of disappointing profi ts, it will take substantially stronger growth, notably in the banking sector, for the markets to pick up steam.

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

Healthcare, consumer goods, insurance and tech-nology were the strongest contributors to the relative performance.

Novo Nordisk profi ted from the launch of new products, particularly on the US market, while Essilor International and Fresenius Medical Care

continued to reap the benefi ts of their business models, focused on ophthalmic optics and dialysis

services respectively.

The most cyclical sectors in the portfo-lio, namely industrials, chemicals, energy and utilities, weighed on the compartment’s relative performance.

Plunging crude oil and natural-gas prices dealt a blow to the profi ts of the major integrated groups, though this was partially offset by the rising profi tability of

refi ning activities. Royal Dutch Shell launched a bid for BG Group that was completed in the fi rst quarter of 2016. This deal continues Shell’s transformation into a major player in natural gas, which will be the primary source of the global energy transition.

As following table indicates, two companies entered the portfolio this year. Assa Abloy is the market leader in locks, while Novozymes is a lead-ing producer of enzymes for industrial uses and enjoys strong IP-driven barriers to entry. Five companies (Diageo, Holcim, SCOR, Syngenta and Unicredit) exited the portfolio, since their weak-ening competitive advantage or lack of satisfactory response to the engagement process made it hard to justify their current valuations.

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

140.00

130.00

120.00

110.00

100.00

90.00

80.00

70.00

60.00

50.00

40.00

oct. 06 oct. 07 oct. 08 oct. 09 oct. 10 oct. 11 oct. 12 oct. 13 oct. 14 oct. 15

Cadmos European Engagement fund (B) STOXX 50 Net Ret. (€)

FINANCIAL PERFORMANCE

PERFORMANCE SINCE INCEPTION

SUMMARY OF RESULTS IN 2015-2016 7/55

Portfolio as at 31.12.2015 Sector CountryABB Industrial Goods & Services Switzerland ARCELORMITTAL Basic Resources Luxembourg ASSA ABLOY (New) Construction & Materials SwedenAXA SA Insurance FranceBBVA Banks SpainBMW Automobile & Parts GermanyBG GROUP (Merger) Oil & Gas United KingldomBNP PARIBAS Banks FranceBP PLC Oil & Gas United KingdomCOLOPLAST Health Care DenmarkCOMPASS GROUP Travel & Leisure United KingdomCREDIT SUISSE GROUP Banks SwitzerlandDANONE Food & Beverage FranceDIAGEO (Out) Food & Beverage United kingdomENGIE Utilities FranceESSILOR INTERNATIONAL Health Care FranceFRESENIUS MEDICAL CARE Health Care GermanyGEBERIT Construction & Materials SwitzerlandHENNES & MAURITZ Retail SwedenHOLCIM (Out) Construction & Materials SwitzerlandHSBC HOLDINGS Banks United KingdomLINDE Chemicals GermanyL’OREAL Personal & Household Goods FranceNESTLE Food & Beverage SwitzerlandNOVARTIS Health Care SwitzerlandNOVO NORDISK Health Care DenmarkNOVOZYMES (New) Health Care DenmarkPUBLICIS GROUPE Media FranceRECKITT BENCKISER GROUP Personal & Household Goods United KingdomROYAL DUTCH SHELL Oil & Gas NetherlandsSAINT GOBAIN Construction & Materials FranceSAP Technology GermanySCHNEIDER ELECTRIC Industrial Goods & Services FranceSCOR (Out) Insurance FranceSGS Industrial Goods & Services SwitzerlandSOCIETE GENERALE Banks FranceSTANDARD CHARTERED Banks United KingdomSWISS RE Insurance SwitzerlandSYNGENTA (Out) Chemicals SwitzerlandTELEFONICA Telecommunications SpainTOTAL Oil & Gas FranceUBS GROUP Banks SwitzerlandUNICREDIT (Out) Banks ItalyVALLOUREC Industrial Goods & Services France


During the period under review we expressed an opinion on 861 items on the agendas of annual general meetings (AGMs). This fi gure represents a certain stabilisation in the number of voting deci-sions, whereas the previous year saw an increase

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

VOTING PERFORMANCE

THE SHAREHOLDERS HAVE CLEARLY WON A ROUND. FROM ROUTINE EXERCISES WITH LITTLE AT STAKE AND VOTING RESULTS THAT BARELY EXCITED COMMENT DURING THE DRINKS AFTERWARDS, AGMS ARE GRADUALLY TURNING INTO METICULOUSLY ORCHESTRATED MEETINGS WITH WELL-PREPARED EXECUTIVES AND DIRECTORS.

I n 2015 the AGM season was again marked by the debate on excessive executive pay. In our previ-ous activity reports we foresaw that the Minder Initiative in Switzerland and the calls for greater transparency in Europe would lead to the AGMs’ playing a more important role. This year, we opposed 11.1 per cent of pay-related items on the agenda. High though this rate may be, it has never-theless declined, refl ecting a marked improved in the transparency and consistency of current remu-neration practices. Businesses have been quick to adapt and our voting guidelines are clear: “We attach great importance to a transparent, reason-able and well-structured remuneration policy that rewards high performance demonstrated over the long term”.

Although voices are still being raised against cases of excessive pay, we note that the latter have become less arbitrary and more likely to be justified by the achievement of longer-term performance targets. Rare are the govern-ing bodies that take their AGM lightly. The shareholders have clearly won a round. From routine exercises with little at stake and voting results that barely excited comment during the drinks afterwards, AGMs are gradually turning into meticulously orchestrated meetings with well-prepared executives and directors.

400

350

300

250

200

150

100

50

0

DISTRIBUTION OF OPPOSING VOTES

20

15

15

For Against

1. Board of directors 2. Remuneration 3. Capital structure 4. Shareholder’s rights

0

353

120

266

72


Despite all these improvements, we refused to back the board of directors in fi fty of the 861 votes cast (5.8 per cent of all votes). The rate of dissent has thus declined by approximately 30 per cent compared with last year’s level.

For each vote, we evaluated the company’s situation and made a decision, according to our voting guide-lines, in the compartment’s long-term interests.

2015 Total Total %Name 01.01 31.12 Voted Description resolutions against AgainstABB 1 1 1 Voted 22 0 0.00%ARCELORMITTAL 1 1 1 Voted 12 1 8.33%ASSA ABLOY (New) 0 1 0 Entry a� er AGM 0 0 AXA SA 1 1 1 Voted 24 0 0.00%BBVA 1 1 1 Voted 22 0 0.00%BMW 1 1 1 Voted 8 2 25.00%BG GROUP (Merger) 1 1 1 Voted 23 2 8.70%BNP PARIBAS 1 1 1 Voted 20 0 0.00%BP PLC 1 1 1 Voted 25 2 8.00%COLOPLAST 0 1 1 Voted 13 1 7.69%COMPASS GROUP 1 1 1 Voted 22 0 0.00%CREDIT SUISSE GROUP 1 1 1 Voted 32 4 12.50%DANONE 1 1 1 Voted 29 0 0.00%DIAGEO (Out) 1 0 0 Exit before AGM 0 0 ENGIE 1 1 1 Voted 28 0 0.00%ESSILOR INTERNATIONAL 1 1 1 Voted 18 0 0.00%FRESENIUS MEDICAL CARE 1 1 1 Voted 8 0 0.00%GEBERIT 1 1 1 Voted 17 0 0.00%HENNES & MAURITZ 1 1 1 Voted 11 2 18.18%HOLCIM (Out) 1 0 1 Exit after AGM 24 2 8.33%HSBC HOLDINGS 1 1 1 Voted 29 1 3.45%LINDE 1 1 1 Voted 5 0 0.00%L’OREAL 1 1 1 Voted 13 0 0.00%NESTLE 1 1 1 Voted 29 1 3.45%NOVARTIS 1 1 1 Voted 26 0 0.00%NOVO NORDISK 1 1 1 Voted 18 1 5.56%NOVOZYMES (New) 0 1 0 Entry a� er AGM 0 0 PUBLICIS GROUPE 1 1 1 Voted 26 5 19.23%RECKITT BENCKISER GROUP 1 1 1 Voted 29 3 10.34%ROYAL DUTCH SHELL 1 1 1 Voted 21 0 0.00%SAINT GOBAIN 1 1 1 Voted 21 1 4.76%SAP 1 1 1 Voted 7 0 0.00%SCHNEIDER ELECTRIC 1 1 1 Voted 24 0 0.00%SCOR (Out) 1 0 1 Exit after AGM 31 4 12.90%SGS 1 1 1 Voted 26 9 34.62%SOCIETE GENERALE 1 1 1 Voted 14 2 14.29%STANDARD CHARTERED 1 1 1 Voted 31 1 3.23%SWISS RE 1 1 1 Voted 33 2 6.06%SYNGENTA (Out) 1 0 1 Exit after AGM 22 0 0.00%TELEFONICA 1 1 1 Voted 13 0 0.00%TOTAL 1 1 1 Voted 13 0 0.00%UBS GROUP 1 1 1 Voted 26 1 3.85%UNICREDIT (Out) 1 0 1 Exit after AGM 19 3 15.79%VALLOUREC 1 1 1 Voted 27 0 0.00% 41 39 41 861 50 5.81%


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

On the basis of the assess-ments carried out, we conducted an active dialogue with all the companies except Compass Group and Novozymes, through twelve on-sites visits to Basel, Geneva, Paris and Zurich (33 per cent) and twenty-four conference calls (66 per cent).2 Face-to -face meetings were given priority, in order to increase the quality of the contact with companies with whom we have been in discussion for many years. Our dialogues generally take place in a highly constructive atmo-sphere, with astonishing transparency on the part of the companies. The latter particularly appreciate the joint presence of our engagement team and the portfolio managers, a practice that is unique in the responsible-funds universe. As a result, a record twenty-four companies (63 per cent) have reached level 5, that is, showed an improvement on at least one weak point that had been raised previously.

Fiv e new companies: Engie, Geberit, Royal Dutch Shell, Schneider Electric and SGS, reached level 5 in 2016. Together with Coloplast, which was also upgraded, they are described in greater detail in the chapter “Improvements and main stories” on pages 45.

Despite an excellent discussion, Essilor was down-graded to level 4, “Approves the progress objectives clearly specifi ed”, since it still hesitates to imple-ment and communicate on some of our suggestions. At Standard Chartered, the downgrade was due to a disappointing decline in the seniority

ENGAGEMENT PERFORMANCE

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

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

DISTRIBUTION OF ENGAGEMENT LEVEL : 2010-2016

Level 6

Level 5

Level 4

Level 3

Level 2

Level 1

Average

2010-2011

2.38

2011-2012

3.52

2012-2013

3.86

2013-2014

4.19

2014-2015

4.50

2015-2016

4.44

of those attending the meeting. We also down-graded SCOR and Syngenta, which were fi nally

sold despite four and six discussions respectively with their managements in recent years. Regarding Syngenta, we felt that although the company had gradually grasped the importance of address-ing its ESG issues it had failed to provide adequate answers, particularly concerning the toxicolog-ical impact of its products. We took advantage of its becoming an attractive

acquisition target to close the position.

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


Portfolio as at 31.12.2015 Engagement type Score Change SummaryABB Meeting 5 = ARCELORMITTAL Conference Call 5 = ASSA ABLOY (New) No meeting (late entry) New New AXA SA Meeting 4 = BBVA Conference Call 5 = BMW Conference Call 5 = BG GROUP (Merger) Exit (no report) Exit Exit BNP PARIBAS Meeting 4 = BP PLC Conference Call 4 = COLOPLAST* Conference Call 3 +1 Sound basis for long-term engagement.COMPASS GROUP No Meeting 1 -3 Not interested in an engagement meeting this year.CREDIT SUISSE GROUP Meeting 5 = DANONE Conference Call 4 = DIAGEO (Out) Exit (no report) Exit Exit ENGIE* Conference Call 5 +2 Strong improvement in HR in line with FG recommandation.ESSILOR INTERNATIONAL* Conference Call 4 -1 Yet to follow through on the previous year’s recommendations.FRESENIUS MEDICAL CARE Conference Call 4 = GEBERIT** Meeting 5 +1 Precise suggestions implemented.HENNES & MAURITZ Conference Call 5 = HOLCIM (Out) Exit (no report) Exit Exit HSBC HOLDINGS Conference Call 4 = LINDE Conference Call 5 = L’OREAL** Conference Call 5 = NESTLE** Meeting 5 = NOVARTIS Meeting 5 = NOVO NORDISK Conference Call 5 = NOVOZYMES (New)** No meeting (late entry) 1 New PUBLICIS GROUPE Conference Call 5 = RECKITT BENCKISER GROUP** Conference Call 5 = ROYAL DUTCH SHELL* Conference Call 5 +1 Improvement regarding “anti-coruption” in the value chain.SAINT GOBAIN Conference Call 5 +1 Signi� cant improvements in HR and labour norms.SAP Conference Call 5 = SCHNEIDER ELECTRIC* Conference Call 5 +1 Improvement in audits and anti-corruption training.SCOR (Out) Conference Call 4 -1 Yet to follow through on the previous year’s recommendations.SGS** Meeting 5 +1 SOCIETE GENERALE Meeting 5 = STANDARD CHARTERED Conference Call 3 -1 Lower level of company representatives. SWISS RE Meeting 5 = SYNGENTA (Out) Meeting 4 -1 Still not much new on the toxicological impact. TELEFONICA Conference Call 5 = TOTAL Conference Call 5 = UBS GROUP Meeting 5 = UNICREDIT (Out) Exit (no report) Exit Exit VALLOUREC No meeting (no report) - NR * F urthe r information on these companies can be found in chapter “Improvement examples and main stories” on pages 45ff.

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


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

TESTIMONIALS FROM SOME OF THE COMPANIES WITH WHOM WE ARE ENGAGED IN DIALOGUE

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

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

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

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


TRANSFORMING SOCIAL AND ENVIRONMENTAL CHALLENGES INTO A COMPETITIVE ADVANTAGE – THE EXAMPLE OF GEBERIT

CADMOS INSTITUTIONAL EVENT 2015

Albert Baehny, president of Geberit, travelled from Jona to Geneva to attend the Cadmos Swiss Engagement Fund’s fi rst-anniversary celebrations. Geberit has also been part of the Cadmos - European Engagement Fund since the latter’s inception on 19 October 2006.

Mr Baehny has participated personally in the share-holder dialogue that we strive to maintain with all the underlying companies. In recent years, he and the head of Environment and Sustainability at Geberit, have joined Alexandre Stucki, manager of the Cadmos Swiss Engagement Fund, and Thomas Streiff, head of the Guilé engagement

team, to discuss the impact of environmental, social and governmental factors on the company’s business model.

But why should Geberit take the time to talk to Cadmos Engagement Funds or make the trip to Geneva for the anniversary? Mr Baehny was keen to answer that question: “Investors should give companies the time needed to apply a sustainable growth strategy. I therefore welcome the Cadmos Engagement Funds’ commitment to treating busi-nesses with respect, through a shareholder dialogue that allows for more pragmatic discussions.”

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

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

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

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


THE CADMOS FUNDS’ BUY & CARE® STRATEGY

16/55THE CADMOS FUNDS’ BUY & CARE® STRATEGY

FOUNDING PRINCIPLES

For nine years now we have been demonstrat-ing that active management can be reinvented to reconcile profi tability with responsibility. Active portfolio management based on thorough funda-mental analysis is the keystone of the Buy & Care investment strategy.

The strategy, developed by PPT, has now matured to a point where it may be useful to restate its three founding principles. They have proved particularly reliable in the long term and through changing fi nancial and economic cycles.

1. We do not invest in a stock but in a company. Every effort will be made to visit the compa-nies and increase our understanding of their business model and their senior managements’ ability to ensure its longevity.

2. The main aim is to create added value for our investors in the medium and long term. We are proud to have advanced active management as a whole, particularly by working with a longer time horizon that requires strict discipline in the fundamental analysis.

3. We build concentrated portfolios. Our deep analysis strengthens our convictions and reduces portfolio turnover and transaction fees, while also enabling us to deviate from the benchmarks.

The shareholder engagement that under-pins the Buy & Care strategy is applied to all the Cadmos Funds. We are convinced that continuous, non-indulgent dialogue with the companies creates value for all the stakehold-ers. It also enables the portfolio managers to integrate the ESG risks and opportunities into their investment decisions. Through this approach we strengthen our understanding and fundamental analysis of the companies. Our managers’ assessments of the risks and sustain-ability of the companies’ business models are sharpened, and their investment convictions are more solidly based. With time, the markets perceive and reward the uptrend in the compa-nies’ quality and this is reflected in the value of our investments.

This work calls for a portfolio management team with the skills required to integrate the ESG factors and link them to the classic financial valuation models.

The Cadmos Funds managers all benefi t from extensive experience and considerable freedom in their capacity as owner-partners of their company. They have been in place since the launch of each compartment and apply the Buy & Care strat-egy together with deep fundamental analysis, a low turnover rate and shareholder engagement as conducted by the engagement team.

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

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

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

17/55THE CADMOS FUNDS’ BUY & CARE® STRATEGY

In addition, the Cadmos Funds stand out from the best-in-class strategy, where investment decisions often depend on highly qualitative ESG ratings. These ratings, which rarely integrate the fi nancial parameters or take the trouble to understand the companies’ business models, lead to sub-optimal investment decisions. This strategy has diffi culty convincing traditional investors, whose scepticism increases when they consult a list of best-in-class businesses, whose social and environmental voca-tion is not always apparent.

By taking care not to ostracise profi table busi-nesses that will probably continue to grow, and

by concentrating on their progress, so as to ensure that they learn from their mistakes and from our dialogue, the Cadmos Funds play a complemen-tary and perhaps signifi cant role in the responsible investment universe.

The Buy & Care strategy is a virtual, cycli-cal process built around listening to investors’ concerns. Applied to the Cadmos Funds, it pushes back the frontiers not only of responsible invest-ment but of active management. The following diagram provides a simplifi ed view of the three-step Buy & Care process as it applies to the Cadmos - European Engagement Fund.

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

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

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

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

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

Buy

& C

are

® Buy & C

are ®

Buy & Care ®

THE CADMOS FUNDS’ BUY & CARE STRATEGY

STRATEGIC POSITIONING OF THE CADMOS FUNDS

Financial performance

Cadmos Funds

Integration

EngagementSo

cial

per

form

ance

Best in class

Exclusion

18/55

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

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

COMPANY ANALYSIS & PORTFOLIO MANAGEMENT

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

MARKET SCREENING

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

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


PPT’S INVESTMENT PROCESS”

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

Company analysisLongevity of the competitive advantage, management

quality, growth prospects, profitability and returns

ValuationIntegrated DDM, ROIC-WACC vs EV/

IC, EV/EBITDA, P/E and FCF yield

Portfolio construction

About 600 companies

About 100 ompanies

30-35 companies

19/55

COMPANY ANALYSIS – ESG INTEGRATION

3. Michael Porter: “The Link Between Competitive Advantage and Corporate Social Responsibility”; 2006.4. Mozaffar Khan, George Serafeim and Aaron Yoon: “ Corporate Sustainability: First Evidence on Materiality”; 2015.

To calculate the life of the competitive edge, we chart the factors involved (see the ppt model - longevity of the competitive advantage). This longevity is deter-mined by both the infl uence of external parameters that are diffi cult to control (in green) and the balance between the strengths and values of the company itself (in red). Our main source of inspiration was the updated version of the Michael Porter model, which takes up the essential points of his Five Forces model of 1979 but builds in social responsibility.3

In our analysis of the longevity of the competitive advantage, ESG factors play an important role. As the model above shows, this is where we inte-grate the fi nancially material ESG issues. A recent study by Harvard University sheds new light on the correlation between businesses’ sustainability and their fi nancial performance by differentiat-ing between general and fi nancially material ESG information.4 We found this study illuminating because it corresponds more closely than most to our reality. It concludes, fi rst, that businesses that are better at managing their fi nancially material ESG issues also outperform. Furthermore, accord-ing to the same data, the positive correlation does not exist if one considers only the ESG issues in

general. In other words, the fi nancial materiality of the ESG issues can be used to generate alpha, while the general ESG issues do not destroy it. This academic study, although newly published, reaches the same conclusions as the Cadmos Funds.

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

IN OUR ANALYSIS OF THE LONGEVITY OF THE COMPETITIVE ADVANTAGE, ESG FACTORS PLAY AN IMPORTANT ROLE.

LONGEVITY OF THE COMPETITIVE ADVANTAGE

Access to capital• Financial (cost)• Natural or real (quality)• Human (education)

Profitability+ ROE and R&D+ Employee loyalty+ Governance

Competitiveness+ Technology+ Barriers to entry+ Community loyalty

Margins+ Cost leadership+ Efficiency (energy,

materials, etc.)+ Supplier loyalty

Social impact of the value chain – inside out Social influence on competitiveness – outside in

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

Competitive context• Intellectual property• Rule of law• Regulation

Industrial support• Infrastructure• Supplier network• Political incentives

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


20/55

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

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

VALUATION – ESG INTEGRATION

PORTFOLIO CONSTRUCTION

Constructing the portfolio involves the selection of thirty to thirty-fi ve companies with strong potential for outperformance in the medium and long term. This concentration is desirable in the case of an engagement fund, since it means that the cost of the shareholder dialogue can be contained. That concen-tration is combined with an extremely low turnover rate, which increases the quality of the dialogue.

We do not set ourselves a tracking error target, but the ratio is usually between 4 per cent and 6 per cent. The indices should not infl uence the investment-decision process but serve solely as a risk-management tool.

There are two classes: Class A for private investors and Class B for institutional investors. In both classes a signifi cant proportion of the management fees is handed on to the Fondation Guilé to fi nance the activities of the engagement team, which initi-ates and conducts the shareholder engagement.

The long-term performance can be signifi cantly increased with the additional support of an excel-lent selling discipline. Changes in the fundamentals, risks or valuation of the underlyings, together with the quality of the dialogue, will infl uence the port-folio manager’s view and may lead to decisions to sell.


- D0 to D2 = consensus expectations- D3 to Dn-1 = f(g* ; ROE) = PPT- n = longevity of competitive advantage- Dn to D

∞ = fade to long-term econ. growth

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

PPT VALUATION MODEL INTEGRATING ESG FACTORS

21/55

ACTIVE OWNERSHIP

In the past, company visits and participation in the annual general meeting (AGM) were standard practice for investors. Today, electronic trading and information systems, while useful and effi -cient, have unfortunately also made some primary

sources of information obsolete. In our opinion, voting and shareholder engagement should once again be closely linked to the portfolio manag-er’s investment decision and therefore be part and parcel of his responsibilities.

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

VOTING GUIDELINES

STURCTURE OF THE BOARD OF DIRECTORS1. Election of individual board members2. Functioning and independence of the various committees3. Separation of CEO function and president of the board of directors4. Granting of the discharge

TRANSPARENCY AND COHERENCE OF THE REMUNERATION STRUCTURE5. Appropriate structure of the remuneration system for the executive committee 6. Appropriate structure of the remuneration system for the board memebers

STRUCTURE AND OWERSHIP OF SHARE CAPITAL7. Approval of accounts and allocation of profi ts/dividends8. Appropriate capital structure9. Appointment of the auditors

SHAREHOLDERS’ RIGHTS10. Amendments to article of association, equal treatment or shareolders and anti-takeovermeasures

PROXY VOTING

The real long-term fi nancial impact of the deci-sions made at an AGM is well documented. Few professionals would deny that the skills, indepen-dence and availability of a board of directors are critical to a company’s future. The effects of a capital increase, for example, will be felt immedi-ately. For PPT, exercising the right to vote is fi rst and foremost a fi nancial responsibility.

Christopher Quast defi nes his voting positions by studying the analyses of AGMs and the voting recommendations supplied by Glass Lewis. This inde-pendent agency is a leading provider of governance assessment and voting advice and covers more than 23,000 companies in more than a hundred countries. Its assessments are used by institutional investors

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


22/55

THE GLOBAL COMPACT ENGAGEMENT PROCESS

The Cadmos Funds’ shareholder engagement is based on the four themes and ten principles of the UN Global Compact.

THE UN GLOBAL COMPACT’S 10 PRINCIPLES

HUMAN RIGHTS1. Businesses should support and respect the protection of internationally proclaimed human rights; and2. make sure that they are not complicit in human rights abuses.

LABOR STANDARDS3. Businesses should uphold the freedom of association and recognise the right to collective bargaining;4. eliminate all forms of forced and compulsory labor;5. abolish child labor; and6. eliminated discrimination in respect of employment and occupation.

ENVIRONMENT7. Businesses should support a precautionary approach to environmental challenges;8. undertake initiatives to promote greater environmental responsability; and9. encourage the development and diffusion of environmental friendly technologies.

ANTI-CORRUPTION10. Businesses should work against corruption in all forms, including extortion and bribery.

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

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

The Global Compact is a unique self-regulatory initiative signed by more than eight thousand companies who strive to align their current opera-tions with ten universally accepted principles in the areas of human rights, international labour stan-dards, environmental standards and the fi ght against corruption. The signatory company’s sole obligation is to communicate the progress achieved, so that stakeholders are better informed about its challenges.

The dialogue is established and maintained by means of a four-step process illustrated in the opposite page. The engagement team begins by assessing the comprehensiveness and quality of

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


23/55

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

The COP-Analysis conducted by the engage-ment team distinguishes between the comprehensiveness and the quality of the compa-nies’ extra-fi nancial reporting.

The comprehensiveness analysis is carried out for each of the ten Global Compact principles accord-ing to the following eight criteria.


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

1. How does the company describe the importance of the principlethe impact of this principle on its activities and performance throughout its value chain

2. To what extent does the company express commitment to the principleexplicit and practical undertaking to treat the principle as a responsibility and priority

3. How does the company integrate the principle into its strategyits practical integration into the company’s strategy and processes

4. Are the objectives clearly defi nedhow does the company transform its engagement into tangible objectives

5. Are the necessary measures properly describedare the actions ensuring proper integration into the company’s day-to day- activities

6. What performance-measurement indicators has the company identifi edrelevant, reliable, ascertainable, comparable

7. Is the control system in placeSurveillance and audit procedures as well as corrective actions

8. What is the impact of the measures takenresults, performance, successes or failures

Company data and publications

Shareholder dialogue

Assessment results

COP analysis

ENGAGEMENT PROCESS

24/55

By contrast, the analysis of information qual-ity covers all ten principles and seeks rather to determine whether the information published is suffi ciently credible and accessible and is likely to be taken into account by the fi nancial markets.

This formal distinction between the comprehen-siveness and the quality of the information enables us to focus the company’s attention on the ques-tions of materiality and content when one of the key Global Compact principles has not been prop-erly addressed. On the other hand, when the ESG

risks and opportunities appear to have been well managed but the information seems poorly commu-nicated or inaccessible to investors, the experts from the engagement team focus the dialogue on the quality and transparency of the reporting. Companies that publish convincing, comprehen-sive, high-quality information will probably be able to reduce their risk premium and boost their share price. Successful shareholder engagements should therefore be of direct benefi t to the Cadmos Funds’ investors.

Since 2013, we have done more every year to inte-grate the fi nancial materiality of ESG issues into the engagement process and thus the investment process. At fi rst, each company received specifi c fi nancially material questions from the portfolio managers prior to our meetings. In 2015 we went a step further by introducing the Financial Materiality Focus or FMF, a table that sets out our main long-term ESG concerns. By discussing these points openly with the company, our portfolio managers gain valuable insights. In this way we make sure that we are remu-nerated for the risks that we are taking and that the companies are improving and reducing these risks. Of course, since the areas that we pinpoint should be of major concern to any portfolio manager they are also those on which the company should concen-trate its communication to shareholders.

When our portfolio managers bring up these fi nancially material ESG factors and express their desire to see the company give them more thought and communicate them more clearly, senior management listens closely. Presented as a means of creating value, the adjustments that we

deem necessary appear more modest. Businesses are prepared to consent, particularly since the request comes from a loyal investor.

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

QUALITY ANALYSIS: SIX CRITERIA TO ASSESS THE QUALITY OF THE REPORTING

1. Accessibility (information easy to fi nd ) 2. Clarity (information precise and easy to understand) 3. Comparability (year-on-year comparison with competitors) 4. Accuracy (relevance of the collected information) 5. Reliability (confi dence in the accuracy of information) 6. Rapidity (consistent frequency)


FINANCIAL MATERIALITY FOCUS

FINANCIAL MANAGEMENT REPORT

26/55FINANCIAL MANAGEMENT REPORT 2015

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

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

REVIVAL OF ECONOMIC GROWTH IN EUROPE

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

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

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

EUROZONE: UNEMPLOYMENT RATE (%)

13

12

11

10

9

8

7

6

oct. 99

EurozoneGermanyFrance

oct. 03 oct. 07 oct. 11 oct. 15

EUROZONE PMI – PURCHASING MANAGER INDICES

ManufacturingServices50 (above = growth)

Jan. 07 Jan. 09 Jan. 11 Jan. 13 Jan. 15

60

55

50

45

40

35

30

Source : Markit Source : Eurostat, Deutsche Bundesbank

27/55FINANCIAL MANAGEMENT REPORT 2015

EVOLUTION OF THE EUROPEAN EQUITY MARKET

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

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

In the following weeks, the release of quarterly earnings’ reports hinted at another stagnation in profi ts, with the growth in some sectors (such as consumption, thanks to the positive effect of the euro’s fall against the US dollar) offset

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

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

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

EUROPEAN EQUITY INDEX (DJ STOXX 50) 12 MONTHS IN 2015

Jan. Feb. Mar. Apr. May Jun.

2015

Jul. Aug. Sep. Oct. Nov. Dec.

3680

3580

3480

3380

3280

3080

2980

2880

Source: Bloomberg

3180

28/55

PORTFOLIO MANAGEMENT REVIEW

More than 75 per cent of the companies selected as from 2009 are still present in the fund, and we have remained a shareholder of the majority of the companies for at least fi ve years. By compar-ison, Mercer estimates in its 2010 study that on average a company remains in a portfolio scarcely more than eighteen months, and slightly less than two years in the case of responsible investment funds.5 The Fund’s long-term outperformance is partly explained by its calm and considered management style.

Healthcare, consumer goods, insurance and tech-nology were the strongest contributors to the relative performance.

Novo Nordisk profi ted from the launch of new prod-ucts, particularly on the US market, while Essilor

International and Fresenius Medical Care continued to reap the benefi ts of their business models focused on ophthalmic optics and dialysis services respectively.

L’Oréal fi nally saw a slight acceleration in growth in its European domestic markets, and Reckitt Benckiser is successfully applying its expansion strategy in the area of non-prescription products and emerging-market countries.

AXA demonstrated the positive impact of its strat-egy for return to growth, based on new-product launches. Swiss Re produced remarkable results in a context of surplus capital that remains tough for reinsurers and prompted us to take profi ts on its competitor, SCOR, during the year.

FINANCIAL MANAGEMENT REPORT 2015

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

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

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

140.00

130.00

120.00

110.00

100.00

90.00

80.00

70.00

60.00

50.00

40.00

oct. 06 oct. 07 oct. 08 oct. 09 oct. 10 oct. 11 oct. 12 oct. 13 oct. 14 oct. 15

Cadmos European Engagement fund (B) STOXX 50 Net Ret. (€)

PERFORMANCE SINCE INCEPTION

5. Mercer LLC: “Investment horizons - Do managers do what they say?”; 2010.

29/55

SAP was busy transforming its business model, which is now centred on the cloud. This new strat-egy is already proving successful.

The most cyclical sectors in the portfolio, namely industrials, chemicals, energy and utilities, weighed on the compartment’s relative performance.

ABB and Schneider Electric have to adjust to lower potential in China. Vallourec and ArcelorMittal are suffering from falling demand, the former in relation to oil and gas, and the latter, owing to over-production by Chinese players, who have appeared en masse in the export markets. Linde is seeing a fall off in orders for new projects in Asia.

Plunging crude oil and natural-gas prices dealt a blow to the profi ts of the major integrated groups, though this was partially offset by the rising profi tability of refi ning activities. Royal Dutch Shell launched a takeover bid for BG Group and completed the deal in the fi rst quarter of 2016. This operation continues Shell’s transformation into a major player in natural gas, which will be the primary source of the global energy transition.

Although earnings rose in 2015, the European banks suffered a new wave of devaluation. This was triggered by fears of the impact of the ECB’s

negative-rate policy on their net interest margins and by the sector’s lack of growth despite the revival in credit demand. These key players in the European economy must continue to adapt their cost base in order to reach their goal of an acceptable return on equity. Two banks with a strong presence in the Asian markets, HSBC and Standard Chartered, felt the effects of the current economic slowdown.

In 2015, fi ve companies, Diageo, Holcim, SCOR, Syngenta and Unicredit, exited the portfolio. The reasons were the weakening of their competitive advantage, the lack of a satisfactory response to the engagement process and thus, the diffi culty of justifying their valuations. We are often asked for examples of companies that we have sold because of lackluster engagement. It is never quite that simple, since in most cases an exit results from a combi-nation of factors. Nevertheless, the decision to sell Syngenta was closely linked to the insights gained during our engagement. As mentioned earlier, we had conducted six discussions with its management in previous years. We felt that the company had grasped the importance of addressing the ESG issues but had failed to provide adequate answers to the one that was most fi nancially material, that is, product risk.

As can be seen in the following table, two compa-nies entered the portfolio this year. Assa Abloy is the market leader in locks, while Novozymes is a

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

At the end of December 2015, the compartment (Class B) was up 23.4 per cent, whereas the benchmark had gained only 14.8 per cent.

OUTLOOK

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

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


30/55

COMPOSITION OF THE PORTFOLIO AS AT 31 DECEMBER 2015

Portfolio as at 31.12.2015 Sector CountryABB Industrial Goods & Services Switzerland ARCELORMITTAL Basic Resources Luxembourg ASSA ABLOY (New) Construction & Materials SwedenAXA SA Insurance FranceBBVA Banks SpainBMW Automobile & Parts GermanyBG GROUP (Merger) Oil & Gas United KingldomBNP PARIBAS Banks FranceBP PLC Oil & Gas United KingdomCOLOPLAST Health Care DenmarkCOMPASS GROUP Travel & Leisure United KingdomCREDIT SUISSE GROUP Banks SwitzerlandDANONE Food & Beverage FranceDIAGEO (Out) Food & Beverage United kingdomENGIE Utilities FranceESSILOR INTERNATIONAL Health Care FranceFRESENIUS MEDICAL CARE Health Care GermanyGEBERIT Construction & Materials SwitzerlandHENNES & MAURITZ Retail SwedenHOLCIM (Out) Construction & Materials SwitzerlandHSBC HOLDINGS Banks United KingdomLINDE Chemicals GermanyL’OREAL Personal & Household Goods FranceNESTLE Food & Beverage SwitzerlandNOVARTIS Health Care SwitzerlandNOVO NORDISK Health Care DenmarkNOVOZYMES (New) Health Care DenmarkPUBLICIS GROUPE Media FranceRECKITT BENCKISER GROUP Personal & Household Goods United KingdomROYAL DUTCH SHELL Oil & Gas NetherlandsSAINT GOBAIN Construction & Materials FranceSAP Technology GermanySCHNEIDER ELECTRIC Industrial Goods & Services FranceSCOR (Out) Insurance FranceSGS Industrial Goods & Services SwitzerlandSOCIETE GENERALE Banks FranceSTANDARD CHARTERED Banks United KingdomSWISS RE Insurance SwitzerlandSYNGENTA (Out) Chemicals SwitzerlandTELEFONICA Telecommunications SpainTOTAL Oil & Gas FranceUBS GROUP Banks SwitzerlandUNICREDIT (Out) Banks ItalyVALLOUREC Industrial Goods & Services France


EXERCISE OF VOTING RI GHTS

32/55EXERCISE OF VOTING RIGHTS IN 2015

DISTRIBUTION OF VOTES

At the end of December 2015, the portfolio of the Cadmos - European Engagement Fund comprised thirty-nine companies. We systematically exercised our voting rights, as we had done in 2014. The introduction of a new electronic voting platform ensured that we were able to vote on 100 per cent of the Fund’s companies. We actually exercised our voting rights on forty-one companies. The reason is that we voted on four companies that exited the portfolio after their AGMs, and that two companies entered the portfolio after their AGMs (see Summary of results in 2015–2016).

During the period under review we expressed an opinion on 861 items on AGM agendas, represent-ing an increase of more than 20 per cent in the voting decisions to be made in the last two years. This additional workload is directly related to the greater transparency demanded by investors.

The majority of the resolutions submitted to the vote, i.e. almost 75 per cent, concerned the structure of the board of directors and the capital structure.

Votes on remuneration ha ve more than doubled in the last two years, rising from 63 resolutions in 2013 to 135 in 2015 and representing 16 per cent of total votes. Even though we had foreseen that development in our 2013 Activity Report, we were surprised by its magnitude and the speed of adjust-ment shown by the companies in the portfolio. The subject of executive pay is losing some of its media appeal. There are fewer fl agrant excesses and most of the outbidding tactics have been curbed. But the issue is still newsworthy and will remain contro-versial as long as these pay packages are not truly aligned with the shareholders’ interests and under-stood by the public. Fortunately, the increased

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

Votes on remuneration ha ve more than doubled in the last two years, rising from 63 resolutions in 2013 to 135 in 2015 and representing 16 per cent of total votes.

DISTRIBUTION OF VOTES

Board of directors43%

Shareholder’s rights 10%

Capital structure31%

Remuneration16%


MAIN OPPOSITIONS

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

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

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

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

In 2015 our main oppositions (17.2 per cent of our votes against management) concerned non-re-spect for shareholders’ rights.

We group under this theme, which will be addressed in detail in the next chapter, all the reso-lutions related to equal treatment of shareholders, anti-takeover measures, and statutory changes, particularly those linked to multiple or limited voting rights.

400

350

300

250

200

150

100

50

0

DISTRIBUTION OF OPPOSING VOTES

20

15

15

For Against

1. Board of directors

2. Remuneration 3. Capital structure 4. Shareholder’s rights

0

353

120

266

72

Themes Nb. Vote Against %1- Board of directors 373 20 5.4%2- Remuneration 135 15 11.1%3- Capital structure 266 0 0.0%4- Shareholders’ rights 87 15 17.2%Total 861 50 5.8%


ANALYSIS OF VOTES BY TOPIC

The fi rst topic addressed in our voting guidelines – the structure of the board of directors – is of fundamental importance to a company’s devel-opment. After the AGM, the board is the highest organ of management, defi ning the strategy to follow, appointing the senior management that will apply that strategy, and rewarding or sanc-tioning it according as the objectives are reached.

A board of directors must be a cohesive and compe-tent team, available to attend the meetings and able to discuss and evaluate management’s performance freely and openly.

The table below lists the eleven companies where we challenged at least one item on the agenda concerning the board structure.

VOTE CONCERNING: BOARD OF DIRECTORS

Name Vote # Dissent % Dissent DescriptionARCELORMITTAL 5 1 20% VII) Elect Wilbur L. Ross, Jr.BMW 5 1 20% 6.3) Elect Norbert ReithoferCOLOPLAST 8 1 13% 5.A) Elect Michael Pram RasmussenHENNES & MAURITZ 4 1 25% 13) Nomination CommitteeHOLCIM 15 1 7% 2) Ratifi cation of Board and Management ActsSCOR 9 1 11% 4.) Ratifi cation of Supervisory Board ActsSGS 15 8 53% 4.1.1) Elect Sergio Marchionne 4.1.2) Elect Paul Desmarais, Jr. 4.1.3) Elect August von Finck 4.1.5) Elect Ian Gallienne 4.1.9) Elect Gérard Lamarche 4.2) Elect Sergio Marchionne as chairman 4.3.1) Elect August von Finck for Nominating and Remuneration Committee 4.3.2) Elect Ian Gallienne in Nominating and Remuneration CommitteeSOCIETE GENERALE 6 2 33% 4) Related Party TransactionsSOCIETE GENERALE SA 6 1 17% 12) Elect Gérard MestralletSWISS RE 18 1 6% 6.1.3) Elect Raymond K. F. Ch’ienUBS GROUP 16 1 6% 3) Ratifi cation of Board and Management ActsUNICREDIT 7 3 43% O43.2) List Presented by Group of Shareholders O.5) Authorization of Competing Activities

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

directors (previously three of the nine) proposed for election to the board. We still fi nd that dispro-portionate and prejudicial to the interests of the remaining shareholders.

Many investors protested against this state of affairs. In fact, while the major shareholders hold almost a third of the share capital, nearly 30 per cent of the remaining 70 per cent of shareholders also signalled their opposition to the election of certain directors. We believe that this substantial opposi-tion relates primarily to the independence issues listed in the table below.

BOARD OF DIRETORS


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

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

VOTE CONCERNING: BOARD OF DIRECTORS

Agree Name Description % Our objectionsARCELORMITTAL VII) Elect Wilbur L. Ross, Jr. 90.8% Too many mandatesBMW 6.3) Elect Norbert Reithofer 84.5% Other governance issueCOLOPLAST 5.A) Elect Michael Pram Rasmussen Accepted! Board’s lack of independenceHENNES & MAURITZ 13) Nomination Committee Accepted! Committee chairman is the chairman of the boardHOLCIM 2) Ratifi cation of Board and Management Acts 97.8% Ongoing investigationsSCOR 4.) Ratifi cation of Supervisory Board Acts 91.1% Lack of transparencySGS 4.1.1) Elect Sergio Marchionne 73.1% Lack of transparency 4.1.2) Elect Paul Desmarais, Jr. 71.4% Too many mandates 4.1.3) Elect August von Finck 69.4% Board’s lack of independence 4.1.5) Elect Ian Gallienne 72.1% Board’s lack of independence 4.1.9) Elect Gérard Lamarche 68.1% Board’s lack of independence 4.2) Elect Sergio Marchionne as chairman 73.0% Board’s lack of independence 4.3.1) Elect August von Finck for Nominating and Remuneration Committee 67.0% Board’s lack of independence 4.3.2) Elect Ian Gallienne in Nominating and Remuneration Committee 70.7% Board’s lack of independenceSOCIETE GENERALE 4) Related Party Transactions 89.8% Board’s lack of independenceSOCIETE GENERALE SA 12) Elect Gérard Mestrallet 76.0% Too many mandatesSWISS RE 6.1.3) Elect Raymond K. F. Ch’ien 69.6% Too many mandatesUBS GROUP 3) Ratifi cation of Board and Management Acts 88.9% Ongoing investigationsUNICREDIT O43.2) List Presented by Group of Shareholders 43.1% Vote in favor of this list - more independent board O.5) Authorization of Competing Activities 93.1% Potential confl ict of interest

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

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

REMUNERATION


VOTES CONCERNING: REMUNERATION

Name Vote # Dissent % Dissent DescriptionBG GROUP 1 1 100% 2) Remuneration Report (Advisory)BP 2 1 50% 2) Remuneration Report (Advisory)CREDIT SUISSE GROUP 3 1 33% 4.1) Board CompensationHENNES & MAURITZ 2 1 50% 14) Remuneration GuidelinesPUBLICIS GROUPE 10 4 40% O.7) Severance Agreement for Kevin Roberts O.8) Severance Agreement for Jean-Michel Etienne O.9) Severance Agreement for Anne-Gabrielle Heilbronner O.12) Remuneration of Kevin Roberts, ExecutiveRECKITT BENCKISER GROUP 5 2 40% 2) Remuneration Report (Advisory) 26) Long Term Incentive PlanSCOR 4 3 75% O.5) Remuneration of Denis Kessler, CEO E.24) Authority to Grant Stock Options E.25) Authority to Issue Restricted SharesSWISS RE 4 1 25% 7.1) Board CompensationUNICREDIT 1 1 100% O.10) Severance-related Group Policy

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

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

VOTES CONCERNING: REMUNERATION

Agree Name Item % Our objectionsBG GROUP 2) 82.1% Pay performance disconnect; Fixed salary signifi cantly exceeds peersBP 2) 88.8% Pay performance disconnect; Concerns regarding payout stucture, targets & disclosureCREDIT SUISSE GROUP 4.1) 97.8% Excessive compensationHENNES & MAURITZ 14) Accepted! Insuffi cient overall disclosure; Poor overall designPUBLICIS GROUPE O.7) 61.8% Allows payouts for sub-target bonus performance O.8) 61.8% Allows payouts for sub-target bonus performance O.9) 61.9% Allows payouts for sub-target bonus performance O.12) 85.9% Poor disclosure of extraordinary pension paymentsRECKITT BENCKISER GROUP 2) 82.8% Excessive compensation; Poor compensation structure/ performance conditions 26) 81.7% Poor compensation structure/performance conditions; Excessive award opportunitySCOR O.5) 73.7% Excessive compensation; Poor compensation structure/ performance conditions E.24) 72.3% Excessive compensation; Poor compensation structure/ performance conditions E.25) 70.9% Excessive compensation; Poor compensation structure/ performance conditionsSWISS RE 7.1) 86.7% Excessive compensationUNICREDIT O.10) 93.3% Seeks authority to exceed established limits; Potentially excessive severance agreement


The table on previous page presents the ap proval rate for each disputed point and the voting result. Most of the resolutions that we opposed were also the most controversial, sometimes mobil-ising nearly 40 per cent of the dissenting votes.

Although voices are still being raised against the continuing cases of excessive pay, we note that the latter have become less arbitrary and more likely to be justifi ed by the achievement of longer-term targets. Rare are the governing bodies that take their AGM lightly. The shareholders have clearly won a round. From routine exercises with little at stake and voting results that barely excited comment during the drinks afterwards, the AGMs are developing into meticulously orchestrated meetings where executives and directors are well prepared to face their shareholders.

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

VOTE CONCENING: SHAREHOLDERS’ RIGHTS

Name Vote # Dissent % Dissent DescriptionBMW 1 1 100% 7.) Amendments to ArticlesBG GROUP 2 1 50% 23) Authority to Set General Meeting Notice Period at 14 DaysBP 4 1 25% 24) Authority to Set General Meeting Notice Period at 14 DaysCREDIT SUISSE GROUP 4 3 75% III.a) Authorize Proxy to Vote on Additional Shareholder Proposals III.b) Authorize Proxy to Vote on Additional Board Proposals III) Transaction of Other BusinessHOLCIM 2 1 50% 4) Amendments to Articles Relating to VegüVHSBC HOLDINGS 1 1 100% 13) Authority to Set General Meeting Notice Period at 14 DaysNESTLE 2 1 50% 7) Additional or Miscellaneous ProposalsNOVO NORDISK 1 1 100% 8) Transaction of Other BusinessPUBLICIS GROUPE 4 1 25% E.24) Amendments to Articles to Create the Offi ce of CensorRECKITT BENCKISER GROUP 2 1 50% 29) Authority to Set General Meeting Notice Period at 14 DaysSAINT GOBAIN 2 1 50% 22) Authority to Set General Meeting Notice Period at 14 DaysSGS 2 1 50% 5) Amendments to Articles Relating to VegüVSTANDARD CHARTERED 2 1 50% 31) Authority to Set General Meeting Notice Period at 14 Days

CAPITAL STRUCTURE

SHAREHOLDERS’ RIGHTS

Our third topic relates to all the AGM resolutions regarding - capital distribution or structure. We also include in this category the approval of the accounts and election of the auditor. These two

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

In the fourth topic, on shareholders’ rights, we have grouped all the items related to equal treat-ment of shareholders, anti-takeover measures and statutory changes.

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

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


A large number of Swiss fi rms h ave been challenged in the last two years on the subject of sharehold-ers’ rights. Indeed the ordinance against excessive remuneration in Swiss listed companies (ORAB), which entered into force on 1 January 2014, calls for signifi cant statutory amendments. To their credit, the Swiss companies have made every effort to comply rapidly with the requirements. In the case of two companies (Holcim and SGS) we decided not to back the statutory changes proposed. In our view the changes ran counter to the shareholders’ interests. They also provided for a second vote

to be held during the same AGM in the event of a negative vote on remuneration. This provision does not allow shareholders voting by corre-spondence or electronic means to take part in the second vote. The shareholders’ rights are therefore too severely limited. Except in the case of UBS in 2014, this vote has received relatively little opposition. Subsequently several provisions, some of them controversial, that would restrict the companies’ room for manoeuvre have been inserted into the draft amendment to Swiss law on limited companies.

VOTE CONCENING: SHAREHOLDERS’ RIGHTS

Agree Name Item % Our objectionsBMW 7.) 97.9% Limits shareholder rightsBG GROUP 23) 89.7% Shortened notice period could disenfranchise shareholdersBP 24) 87.3% Shortened notice period could disenfranchise shareholdersCREDIT SUISSE GROUP III.a) 94.3% Insuffi cient information III.b) 99.1% Insuffi cient information provided by the Company III) Accepted! Granting unfettered discretion is unwiseHOLCIM 4) 95.9% Amendment is not in best interests of shareholdersHSBC HOLDINGS 13) 88.6% Shortened notice period could disenfranchise shareholdersNESTLE 7) Accepted! Insuffi cient information provided by the CompanyNOVO NORDISK 8) Accepted! Granting unfettered discretion is unwisePUBLICIS GROUPE E.24) Accepted! Amendment is not in best interests of shareholdersRECKITT BENCKISER GROUP 29) 87.9% Shortened notice period could disenfranchise shareholdersSAINT GOBAIN 22) 87.1% Shortened notice period could disenfranchise shareholdersSGS 5) 72.3% Amendment is not in best interests of shareholdersSTANDARD CHARTERED 31) 93.0% Shortened notice period could disenfranchise shareholders

SHAREHOLDER ENGAGEMENT

40/55SHAREHOLDER ENGAGEMENT 2015 – 2016

As outlined in the introduction, during this reporting cycle we were able to hold discus-sions with thirty-six of the thirty-eight assessed companies in the portfolio, representing a record engagement rate of more than 95 per cent. We did so by means of twelve on-site visits to Basel, Geneva, Paris and Zurich (33 per cent) and twen-ty-four conference calls (66 per cent), so that the only exceptions were Compass Group and Novozymes.6 This outstanding result was achieved despite the fact that three of the companies in the compartment are not signatories to the Global

Compact.7 It is gratifying to see that this success rate exceeds those of other investors who conduct a dialogue based mainly on intimidation.

In 2014 we substantially increased the proportion of face-to-face meetings relative to conference calls. This has helped us to reach new milestones with companies with whom we have been in discus-sion for many years. These remarkable and stable results, shown in the following chart, testify to the credibility that the Cadmos Funds have acquired in the eyes of the European companies.

IMPACT OF THE UN GLOBAL COMPACT ENGAGEMENT

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

Many companies emphasise the valu e of this exchange of ideas with the portfolio manager and a member of the engagement team. At L’Oréal, for example, we were able to meet the same represen-tatives for the third successive year. They welcome the opportunity to explore new ways of improving the company’s reporting or of conveying to main-stream investors that sustainability management strengthens a company’s business model.

More and more companies now contact us on their own initiative to pursue the previous years’

discussion. They are speaking out publicly about their desire for a healthy dialogue with their stake-holders. But they are also increasingly critical of over-simplifi ed exclusion criteria, ratings and other ESG classifi cations that are often compiled once a year based on laborious questionnaires. The Cadmos Funds’ “soft power” engagement is clearly conducive to a dialogue that is both infl uential and constantly constructive.

The Cadmos Funds’ “soft power” engagement is clearly conducive to a dialogue that is both influential and constantly constructive

CONTACT WITH THE COMPANIES IN THE COMPARTMENT

70%

60%

50%

40%

30%

20%

10%

0%Meetings Conference calls No dialogue during timeframe

2011-2012 2012-2013 2013-2014 2014-2015 2015-2016

41/55SHAREHOLDER ENGAGEMENT 2015 – 2016

Although the dialogue must maintain a certain rate of engagement to be infl uential, that ratio does not suffi ce to judge its effect. With that in mind, we use a scale of six levels, designed to provide a transparent measure of the extra-fi nancial impact

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

The effectiveness targets set for t he Cadmos Funds are ambitious. Our fi rst goal is to create a continu-ing dialogue with all the companies, represented by level 3. We have reached that goal with all except Compass Group and Novozymes. The remaining thirty-six companies have responded regularly to the engagement team’s approaches.

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

that have reached level 5. In this reporting period a record twenty-four companies (63 per cent) reached that level, meaning that they had improved on at least one weak point that had been raised.

As the graph below shows, only three companies had reached level 5 in 2010. This evolution can be quantifi ed by tracking the average level of engage-ment over time. Today the average stands at 4.44, whereas it was only 2.38 fi ve years ago.

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

DISTRIBUTION OF ENGAGEMENT LEVEL : 2010-2016

2010-2011 2011-2012 2012-2013 2013-2014 2014-2015 2015-2016

Level 6

Level 5

Level 4

Level 3

Level 2

Level 1

Average

2.38

3.523.86

4.194.50 4.44

2014-2015 2015-2106 Level Description 0 0 (6) (Recommendations publicized) 24 24 5 Shows improvements on at least one weak point raised 16 10 4 Approves the progress objectives clearly specifi ed 1 2 3 Displays awareness and accepts the principle of an annual dialogue 1 0 2 Agrees to a detailed discussion about our assessment 0 2 1 Acknowledges receipt of our assessment

ENGAGEMENT LEVEL OF COMPANIES (#)

42/55

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

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

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

Standard Chartered’s downgrade was due to the lower level of seniority of its representatives. We also downgraded Syngenta, which was eventually sold despite six discussions with its management in previous years. We felt the company had grad-ually understood the importance of addressing the ESG issues but had failed to provide adequate answers, particularly relating to the toxicological impact of its products. We took advantage of the fact that the company has become an attractive acquisition target to close the position.

SHAREHOLDER ENGAGEMENT 2015 – 2016

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

43/55

IMPACT OF THE FINANCIALLY MATERIAL ENGAGEMENT

The preliminary identifi cation of the Financial Materiality Focus confi rms our projections: the principles relating to human rights and complic-ity in human rights abuses in the value chain cover the issues that we consider the most fi nancially material (for some 40 per cent of our companies). They embrace broad concepts that deal with the physical integrity (health, safety etc.) and moral integrity (human dignity, right to personal image and honour, respect for the private sphere etc.) of consumers and communities. Businesses in the food, healthcare, telecommunications and media industries are particularly vulnerable and are directly penalised by reputational issues.

In the case of the chemical, oil and construc-tion-materials industries, together with insurers and public electricity suppliers, (about 30 per cent of the companies) we are more concerned about the three environmental principles. For industry and services in particular (about 20 per cent of the companies) the anti-corruption principle is a major risk factor. Lastly, and primarily for the rare compa-nies in the portfolio that are active in distribution, travel and leisure (fewer than 10 per cent) the four principles related to international labour standards constitute a fi nancially material threat.

Nevertheless, we remain convinced that the applica-tion of the UN Guiding Principles on Business and Human Rights, known as the “Ruggie Principles”, continues to represent the main challenge for large multinational companies. These principles, endorsed unanimously by the UN Human Rights

Council in June 2011 and supported by the OECD, the European Union and some leading businesses, require that states and companies take new measures to avoid direct or indirect human rights abuses in their cross-border activities. In Switzerland and Europe the debate around institutionalising the Ruggie Principles has intensifi ed, though appar-ently the process could take several years. The greatest challenge may consist of enabling victims of human-rights abuses and breaches of the envi-ronmental standards of Swiss companies to lodge a complaint in Switzerland and receive compensation. In April 2015, a broad coalition of organisations launched the Responsible Business Initiative in Switzerland. This initiative calls for the introduc-tion of stringent rules obliging businesses to respect human rights and the environment in particular in their activities abroad. By demanding that the duty of due diligence prescribed by the Ruggie Principles be written into Swiss law, it aims at establishing a common base of the minimum human rights stan-dards that every company must respect.

This initiative has recently collected 140,000 signa-tures. It will soon foster a healthy and necessary debate that we have already begun. To help busi-nesses grasp the issues at stake and incite them to play a leading role, we organised a conference in January 2014 at the Graduate Institute in Geneva, addressed by Professor John Ruggie and attended by more than fi ve hundred people.8 The following table presents a selection of the FMFs of the Fund’s underlying companies as discussed with them.

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

Portfolio as at 31.12.2015 Financial Materiality Focus – Addressed by Portfolio managersABB Bribery and corruption risk on large contracts. Opportunities in environmental innovations and eca-e� ciencyARCELORMITTAL New technologies linked to automotive industry ASSA ABLOY (New) NewAXA SA � e fairness and the safety of the products Impact of climate change on asset managementBBVA Large business in Latin America – access to retails customers Money laundering / KYC + exposure to corruptionBMW Life-cycle impact and gas emissions New technologiesBG GROUP (Merger) ExitBNP PARIBAS Product-selling issues (retail) and data privacy Money laundering / KYCBP PLC Environmental impacts and climate change risks – stranded assets Managing the energy transition (natural gas, renewable energy)COLOPLAST Transparency in devices and product pricing Access to healthcare and safe products


44/55

COMPASS GROUP Food safety Working conditions of the sta� CREDIT SUISSE GROUP Human rights track record of corporate clients in emerging markets ESG issues taken into consideration in project � nanceDANONE � e provision of healthy, nutrient-rich and safe food Responsibel sourcingDIAGEO (Out) ExitENGIE Risks related to its own nuclear plants Gas distribution in France, LNG and electricity infrastructureESSILOR INTERNATIONAL Access to vision care - bottom of the pyramid Presence in emerging markets could raise corruption issuesFRESENIUS MEDICAL CARE Transparent pricing of devices and services Access to quality healthcare servicesGEBERIT Human rights risks in the supply chain Corruption riskHENNES & MAURITZ Sourcing (excessive working hours, health and safety etc.) Labour normsHOLCIM (Out) ExitHSBC HOLDINGS Opportunities in micro� nance and microcredits Money laundering / KYCLINDE Health and safety of the workers and users Risks of corruption and bribery in some marketsL’OREAL Product safety Environmental technology (better e� ciency and substitution)NESTLE � e provision of safe, healthy, nutrient-rich food. Responsible sourcingNOVARTIS Access to healthcare Responsible procurementNOVO NORDISK Access to healthcare (opportunity and risk) and di� erential pricing Presence in emerging markets could raise corruption issuesNOVOZYMES (New) Product innovation (energy, water, climate change, agriculture) Product safety and public acceptance og GMOPUBLICIS GROUPE Responsible marketingRECKITT BENCKISER GROUP Product safety Environmental technology (better e� ciency and substitution)ROYAL DUTCH SHELL Environmental impacts and climate change risks – stranded assets Managing the energy transition (natural gas, renewable energy)SAINT GOBAIN Environmental impact (risk & opportunity from innovation)SAP Data privacy Driving environmentally friendly technology (so� ware)SCHNEIDER ELECTRIC Bribery and corruption risk in large contracts Opportunities in environmental innovations and eco-e� ciencySCOR (Out) ExitSGS Business integrity Traceability and compliances (inspection of critical sites)SOCIETE GENERALE Product-selling issues (retail) and data privacy Money laundering / KYC processSTANDARD CHARTERED Risks of � nancing projects with damaging e� ects Risk of money laundering (KYC process)SWISS RE Reliability and integrity of (re)insurance solutions and services Growing impact of climate change on asset managementSYNGENTA (Out) Product risks and impact on the environment Corruption risk when dealing with private or public clientsTELEFONICA Data privacy Corruption exposure in emerging marketsTOTAL Environmental impacts and climate change risks – stranded assets Managing the energy transition (natural gas, renewable energy)UBS GROUP Human rights track record of corporate clients in emerging markets PRI principles taken into consideration in Wealth ManagamentUNICREDIT (Out) ExitVALLOUREC No Assessment


45/55

IMPROVEMENTS AND MAIN STORIES

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

COLOPLAST

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

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

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

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

Essilor is the world leader in corrective lenses, with 25 per cent of the market and a strong advantage in terms of technology and innovation. A strat-egy of integrating the value chain (laboratories, machines etc.) enables it to seize market share or, in some cases, control the market. Essilor shows signifi cant growth potential in the emerging-mar-ket countries. Providing affordable solutions to 2.5 billion people living in poverty and without access to visual correction represents a huge opportunity.

As mentioned earlier, we downgraded the company to level 4, as we are frustrated by the lack of prog-ress on an issue that we had raised for the seventh time this year. But we nevertheless want to high-light its “Vision For Life™” programme. Backed by a €30 million initial investment, this aims at accelerating initiatives that target less privileged

visually impaired people in the developing coun-tries. Through these transversal initiatives Essilor demonstrates its commitment to funding, monitor-ing and measuring the impact of projects that can be scaled up for the benefi t of millions of people with poor eyesight. The programme comprises measures such as raising awareness, building capac-ity and creating basic vision-care infrastructure. In order to ensure systematic implementation of the group’s mission of improving lives by improv-ing sight, Essilor has created a global division charged with addressing the growing challenge of uncorrected poor vision. Since the launch of this mission in 2013, half a million fi rst-time wearers in developing countries have been equipped with corrective lenses. By the end of 2015 at least one million additional people with poor vision should have had benefi ted from the initiative.

ENGIE

ESSILOR


46/55

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

made at the 2014 discussion. First, it has released a new Code of Conduct refl ecting its main ethi-cal and legal challenges. Second, it has convened its fi rst external stakeholder panel, comprising experts from different fi elds, and will repeat this event every other year. This measure follows through on our earlier proposal that the company prove the reliability of its non-fi nancial reporting.

L’Oréal was one of the Fund’s fi rst holdings and remains a key asset. We have just held our fi fth discussion with the company, which was already at level 5 in the previous cycle. For the third year in a row, we were able to get together with exactly the same representatives, a situation that is ideal for building the mutual trust and appreciation that characterise this dialogue.

L’Oréal’s sustainability disclosure is of high quality and comprises several documents providing differ-ent levels of detail. At the previous meeting in Paris, we had suggested that the company share

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

Nestlé is one of the fi rst adopters of a new and demanding reporting framework destined for companies that make an offi cial commitment to adhere to the United Nations Guiding Principles on Business and Human Rights. The core element of this outstanding commitment is the human rights impact assessment, an evaluation of the positive and negative impacts that a company’s business activities may have on the people with whom it works, does business and interacts along the entire value chain –that is, the rights holders –in a specifi c country.

The assessments provide Nestlé with feedback and input from its own employees and from trade union representatives, suppliers, farmers, local communities and other stakeholders in high-risk countries. In this way, the company can create and implement action plans that address any gaps between international human rights standards and current practice in the countries in which it oper-ates. To ensure qualifi ed input, more than thirty

thousand Nestlé employees have already received training in human rights, using the company’s online tool. In principle the training focuses on high- risk countries, but it also takes in the rele-vant corporate departments at Nestlé headquarters. Furthermore, the company’s Integrity Reporting System enables employees to report anonymously by phone or the web on any illegal or non-com-pliant behaviour observed, as well as seek advice or information on company practice.

Nestlé will integrate this additional non-fi nancial performance information into its annual Creating Shared Value report. It has also published details of the assessment methodology in a White Paper, “Talking the Human Rights Walk”, produced in collaboration with the Danish Institute for Human Rights, one of the most renowned organisations in this fi eld. Through this additional voluntary commitment, Nestlé is again proving itself a leader in promoting the Sustainable Development Goals on a global scale.

GEBERIT

L’ORÉAL

NESTLÉ

NOVOZYMES

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

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


47/55

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

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

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

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

RECKITT BENCKISER


ROYAL DUTCH SHELL

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

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

48/55

Schneider Electric products and services contrib-ute to sustainability by promoting more effi cient use of energy and the development of alternative energy sources. By tracking its research and devel-opment investment and the revenues of its Green Premium the company signals its ability to focus on fi nancial materiality and the connection with core business. Schneider Electric is number one or two worldwide across all its products, while showing robust growth in the emerging-market countries. We identifi ed bribery and corruption as the key fi nancially material issue and addressed it at our discussion last year. We welcomed the company’s cooperation with Transparency International but asked for more tangible performance indica-tors and achievements. As regards quality, we also recommended some improvements to the struc-ture and content of the reporting. In 2015, the

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

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

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

SCHNEIDER ELECTRIC

SGS

SGS is among the six companies upgraded to level 5 this year. For the fourth consecutive year we visited the senior vice-president in charge of corporate development, communications and investor relations at the head offi ce in Geneva. SGS’s challenges include maintaining the high-est standards of business integrity and ensuring safe working conditions, and this is well under-stood. The sustainability information published has progressed over the years, even though there is still ample room for improvement. Action has

been taken on last year’s recommendation to provide performance data over a period of three to fi ve years instead of only one year. In addition, specifi c aspects of the labour norms are now more comprehensively covered, as proposed in the last meeting. For SGS, attracting and retaining skilled, trustworthy staff is the most important challenge of all and is of particular relevance to the quality assurance and verifi cation business.


CONCLUSION

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

consideration to the tangible fi nancial risks of inaction, negligence or even unlawful behaviour.

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

49/55

9. O’Sullivan and Gond, “Engagement: Unlocking the Black Box of Value Creation”, Sustainalytics & Cass Business School, 2016.10. ABB, AXA, BP, Credit Suisse, Essilor, Engie, Danone, Heineken, H&M, HSBC, Nestlé, Novartis, Royal Dutch Shell, Société Générale, Standard Chartered, Total and UBS.

LONG-TERM RESULTS

TREND IN THE QUALITY OF THE 10 GLOBAL COMPACT PRINCIPLES

Corruption

Env. friendly technology

Environmental responsibility

Precautionary approach

Discrimination

Child labour

Forced labour

Freedom of association

Complicity

Human rights2006 2007 2008 2009 2010 2011 2012 2013 2014


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

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

This confi dence is underpinned by the positive developments in the portfolio’s companies in relation to the ten principles of the Global Compact, as can be seen in the graph below. The stable track record since 2006 enables us to select seventeen compa-nies –almost half the companies in the Fund –and follow their evolution over a period of nine years.10

We observe continuous overall progress of around 7 per cent a year in relation to all ten principles of the Global Compact. The improvement in ESG performance indicates, fi rst, that the company is generating more value for all its stakeholders and therefore for society. But it also signals that the portfolio is exposed to fewer non-fi nancial risks. In principle, when the markets become aware of this progression, a corresponding contraction in the risk premium will register directly in the share price, to the benefi t of existing shareholders.

Implementation of the “Complicity” and “Freedom of association” principles has advanced more than 100 per cent since 2006. Businesses have realised that reputation pays little heed to legal distinctions and national borders. The progress seen, particu-larly on the “Complicity” principle, is therefore related to the integration of suppliers and other members of the value chain into the companies’ social responsibility policies.

Performance on the “Human rights”, and “Corruption” principles has also made great strides

of between 80 per cent and 100 per cent during the same period. The average improvement on all ten principles now stands at 77 per cent.

This trend cannot be credited solely to the infl uence of the Cadmos Funds but rather to all the participants everywhere that are working to create a more sustain-able world. In addition, businesses have understood that managing opacity has become more diffi cult. The increased transparency that we enjoy today, aided by the Internet, rarely leaves abuses unpunished.

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

50/55

The fi gures presented here refl ect in concrete terms a clear increase in awareness of the need to provide quality information on the ESG issues.

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

The chapter “Active Ownership” explained that we systematically analyse the implementation of each principle throughout the management cycle according to eight criteria. Not surprisingly, the overall progress is the same as for the ten princi-ples, that is, 7 per cent a year.

As discussed several times in recent y ears, we note an increasing professionalism in the way the compa-nies are implementing their social responsibility. The most striking improvements appear in the fi rst

and three last steps of the eight-step management process. To begin with the fi rst step, companies are now far more adept at describing the impor-tance and materiality of each principle in relation to their business model (+93 per cent). This was often neglected in the early days of ESG reporting, when the information tended to centre on individual case studies or new internal developments rather than the priorities from a business perspective.

The next four criteria on the chart: publication of explicit commitments from senior management, and defi nition of consistent strategies and tangible objectives, followed by the appropriate measures, were already becoming established practice in 2006 and even then obtained high scores.

The last three steps are where we observed the greatest improvements, with the relevance of the companies’ performance indicators improving most of all (+102 per cent). These performance indicators are now monitored far more effec-tively, for instance through audits and corrective measures (+92 per cent). Finally, the companies have made considerable progress in reporting their achievements and relating these to the objectives and indicators. They also report their non-achievements and provide a commentary on these (+75%).

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

TREND IN THE COMPREHENSIVENESS OF ESG INFORMATION

Achievements

Monitoring

Indicators

Measures

Objectives

Strategy

Commitment

Materiality 2006 2007 2008 2009 2010 2011 2012 2013 2014


51/55

TREND IN THE QUALITY OF ESG INFORMATION

Timeliness

Reliability

Accuracy

Comparability

Clarity

Accessibility2006 2007 2008 2009 2010 2011 2012 2013 2014

The increased reliability is explained pr imarily by the growing number of companies that appoint authorised independent third parties to validate or certify their ESG reports. The difference in quality between the ESG reports and the fi nancial reports is narrowing every year.

More often than not we recommend that the compa-nies reduce the amount of ESG information and incorporate it into an integrated fi nancial report.

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


In addition we have a direct interest in fostering broad awareness of the fundamental qualities of the companies in which we invest. This awareness is conducive to an increase in the share price and the Cadmos Funds’ investors are the primary beneficiaries.

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

comparability and reliability of the data published. In those three areas, and since 2006, the improve-ments range between 46 per cent and 86 per cent.

52/55

ENGAGEMENT OUTLOOK:


The impact of our dialogue –a refl ection of how closely the companies are listening –has grown steadily since 2006, the year of our fi rst shareholder engagement. Looking beyond the expressions of thanks from senior managements, we are proud of the tangible results that we publish every year, which tend to show that the Cadmos Funds are exerting an infl uence on businesses’ social responsibility. Furthermore, the shareholder dialogue has enabled our portfolio managers to assess the fi nancial impact of the environmental, social and governance issues and thus to develop unique expertise.

Take, for example, the tripartite meetings between the portfolio managers, the engagement team and the company’s representatives. Through this innovative practice the Cadmos Funds are ideally positioned to achieve the delicate but necessary integration of the fi nancially material ESG factors into the investment processes.

As promoter of the Cadmos Funds, PPT works each year to consolidate and strengthen that acqui-sition. We consider it our fi duciary responsibility to integrate the companies’ ESG situation into our

models, especially when the impact on revenue, margins, capital structure or cost of capital (risks) is substantial and therefore fi nancially material.

Transparency in relation to human rights will be one of our priorities. We have mandated Fondation Guilé to intensify its analysis of this topic, to which we have always paid close attention. Both environmental and human-rights issues will have an increasing infl uence on a company’s perfor-mance. The UN Guiding Principles on Business and Human Rights will eventually apply to any busi-ness with signifi cant international operations. These developments are the subject of growing debate in Switzerland, as a broad coalition of organisations has launched an initiative calling for the duty of due diligence prescribed by the Ruggie Principles to be written into Swiss law. Proponents emphasise that Swiss companies, admired for their quality and strong brands, cannot afford to make headlines in connection with human rights abuses and envi-ronmental damage in their global activities. The companies argue that they are already managing these risks and that regulation could make them less competitive.

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

We prefer to see companies act on their own initia-tive and introduce measures that fi t their situation rather than those required by law. Indeed, the shareholder engagement makes one realise that each of the companies –even within the same sector –has its own culture and constraints that make standardised solutions diffi cult to apply. On the other hand, we also recognise that companies that are slow to act are exposing their sharehold-ers and society at large to a risk that could have dramatic consequences.

As stated elsewhere in this report, we would not invest in a company with signifi cant unmanaged risks. As regards the companies in our portfolio, we will always be at their side, helping them to antic-ipate social movements and take the appropriate steps to reconcile responsibility and profi tability.

Since we expect to see an increased focus on human rights, along with further improvements in transparency, as from 2016 we shall include the UN Global Principles in all our human rights assessments. Companies such as Nestlé are start-ing to use the UNGP Reporting Framework –the fi rst comprehensive guide to reporting on human rights issues. The increased emphasis on this area also enlarges the scope of our discussions with the portfolio companies; this will be of particular value to the companies at an advanced engage-ment level. In addition, we plan to introduce a new qualitative rating, evaluating the quality of each assessed company’s reporting on the UN Global Principles.


To remain at the forefront of innovation, gain deeper insight into the companies and create even more of a tangible impact, we shall deploy what we have called our new Profit-Purpose Partnership strategy in the next engagement cycle. We have already begun work on this with additional advisors and expect to be able to report on our achievements in the coming financial year.

We have also paid close attention to how busi-nesses introduce and adapt to integrated reporting. Since 2009, the International Integrated Reporting Council or IIRC has been working to produce a globally accepted integrated-reporting framework. To cite the council: “Integrated report-ing is an evolution of corporate reporting, with a focus on conciseness, strategic relevance and future orientation. As well as improving the quality of information contained in the fi nal report, <IR> makes the reporting process itself more productive, resulting in tangible benefi ts”. We welcome this tool and encourage companies to adopt it in their reports, at least from a content point of view. By focusing on the links between ESG and fi nancial materiality, we are better able to understand how a company is managing its risk.

We also believe that the time is right for another form of engagement: helping businesses focus on new opportunities. We have initiated such projects occasionally throughout the history of the Fund. For instance, we collaborated with an insurance company to develop microinsurance products. Our plan now is to stimulate partnerships between our underlying companies and social entrepreneurs, with the aim of fi nding solutions to environmental and social challenges.

Some of the companies in the Fund are already becoming experts at collaborating with a variety of social entrepreneurs. In 2005, Danone established the Danone Communities Fund, a social incubator designed to encourage social business initiatives around the world, in keeping with the company’s mission. For example, Danone took a minority stake in La Laiterie du Berger, a Senegalese business selling products made of locally produced milk. It has been supporting this social enterprise’s produc-tion, marketing and sales efforts ever since, thus helping build a stronger local dairy industry.

Novo Nordisk’s Base of the Pyramid project is facilitating access to diabetes care for the work-ing poor in low- and middle-income countries. The company has joined forces with the public sector, with faith-based organizations and with local social entrepreneurs in Kenya, Nigeria, Ghana and India.

At Essilor, a programme called “Vision for Life™ – Eye Mitra” has been successfully launched in India. It aims at empowering local entrepreneurs to become providers of basic vision care, so that people in their community can enjoy a better quality of life.

All the initiatives described above are examples of social impact investment. Our ambition is to foster such mutually rewarding partnerships systematically.

ENGAGEMENT REPORTS

The content of the following engagement reports was produced by the Guilé engagement team and the portfolio managers. It provides an account of the dialogue conducted on behalf of the Cadmos Funds with selected companies in the portfolio as at 31 March 2016. The complete set of engage-ment reports for all the companies in the Fund is available on request. The companies presented here (Geberit, L’Oréal, Nestlé, Novozymes, Reckitt Benckiser and SGS) are representative

of our portfolio. They are all at level 5 except Novozymes, a new entrant whose fi rst engage-ment report is included. A commentary on these companies and on all the others that have made signifi cant changes is found in the chapter “Improvements and main stories”, pages 45 ff. A summary table listing all the companies with their engagement level is provided in the introductory chapter, “Engagement performance”, page 11.

INVESTMENT CASE

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

ENGAGEMENT REVIEW

— 6th CSR reporting assessment— 4th discussion with the company since its entry

into the portfolio

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

COMPREHENSIVENESS OF THE COMPANY’S CSR REPORTING

— Geberit maintains highly comprehensive reporting on sustainability issues.

— Excellent coverage of human rights issues, focusing on the area of employee health and safety as well as education and training.

— Information on labor norms is solid, but not very detailed. Compared to last year, the company’s materiality score has moderately increased due to placing greater emphasis on its materiality analysis.

— Continued high-level coverage of environmental issues with particularly strong information on environmental friendly products and technologies.

— Reporting on the anti-corruption principle has improved compared to last year, mainly due to the revised Code of Conduct which aims to ensure that employees behave ethically and in accordance with the law. The updated materiality matrix lists anticompetitive behavior as the “most material” issue and adds anti-corruption and compliance as “material” issues which is in line with last year’s conclusion at the briefing.

QUALITY OF THE COMPANY’S CSR REPORTING

— The quality of Geberit´s reporting on non-financial issues is advanced.

— Information is very detailed and presented in a structured manner. Data gathering and management techniques are adequately described. The website containing the annual report is user-friendly and provides information in a clear and well-organised manner.

— Geberit organised an external stakeholder panel for the first time and published the experts’ recommendation together with its response. For this reason Geberit gets maximum scoring for the “reliability” criteria.

CORPORATE RESPONSIBILITY ISSUES

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

GEBERITSIGNATORY TO THE GLOBAL COMPACT SINCE 2008

Average last twelve months for companies from industrialized economies

Geberit

Accessibility Clarity Comparability Accuracy Reliability Timeliness

0 20 40 60 80 100

RESULT OF QUALITY ASSESSMENT FOR GEBERIT 2014

Outstanding

Advancing

Emerging

Basic

human right{1}

complicity{2}

freedom ofassociation

{3}

forced labor{4}

child labor{5}

discrimination{6}

env. precautionaryapproach

{7}

environmentalresponsability

{8}

env. friendly technologies

{9}

anti-corruption{10}

2014 2013 2012

RESULT OF COMPREHENSIVENESS ASSESSMENT PER PRINCIPLE FOR GEBERIT

CSR ORGANISATION

— Both the Group Executive Board and the Board of Directors examine and approve Geberit’s sustainability strategy. Accordingly, achievements of objectives are submitted to both bodies for review and verification at least once a year.

— The Head of the Environment and Sustainability Department directly reports to the CEO and both participated in the briefing.

SUGGESTED AREAS WITH POTENTIAL FOR PROGRESS

1. Although the layout of the new Code of Conduct (CoC) is quite comprehensive, it is not very appealing. The Guilé Engagement Team suggests revisiting the codes of peers which contain both a clear definition of compliance rules and norms and also practical dilemmas as well as guidance to overcome these. Information on how the Geberit CoC is internally distributed and on how employees’ adherence is monitored could also be improved.

2. The wording of the CoC is occasionally non-binding. Formulation such as “we try to adhere” should be prevented because this will confuse rather than help employees in dealing appropriately with certain challenges.

3. In its reports, Geberit refers to “Green Procurement” which is misleading because the Code of Suppliers Conduct (2008) addresses health and safety as well as human rights norms. The Guilé Engagement Team suggests using “responsible procurement” or a similar term.

LEVEL OF ENGAGEMENT

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

(6) (Recommendations publicized)

5 Shows improvement on at least one weak point raised

4 Approves the progress objectives clearly specified

3 Displays awareness and accepts the principle of an annual dialogue

2 Agrees to a detailed discussion about our assessment

1 Acknowledges receipt of our assessment

GEBERITSIGNATORY TO THE GLOBAL COMPACT SINCE 2008

INVESTMENT CASE

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

ENGAGEMENT REVIEW


into the portfolio

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


— L’Oréal’s sustainability disclosure is again at a high level, covered in several documents with different levels of detail.

— There has been a significant improvement in the two monitoring and achievement criteria for the human rights principle which deserves to be classified as “outstanding”. The depth of information regarding the complicity principles remains at an advancing level as in the previous year.

— In the area of labor practices, L’Oréal explains in detail how it is implementing the four underlying princi-ples. However, the related objectives are vague which makes it difficult to measure progress. There is a slight improvement regarding the coverage of the discrimina-tion principle: the description is now very convincing of measures taken for its adherence.

— L’Oréal provides meaningful information on its environmental practices and there is a measureable improvement in the environmentally friendly tech-nology principle because its materiality is better explained and the strategy is clearer.

— Information on the corruption principle is of a high quality. However, L’Oréal’s specific objectives and achievements are still presented in a rather general way.


— The quality of L’Oréal’s sustainability reporting remains at a high level and is above industry average.

— Information on its sustainability performance is submitted as an integrated part of the Registration Document and is also covered in the Progress Report.

— Non-financial reporting is verified by an external auditor.

— Nevertheless, the accessibility and clarity of the CSR disclosure could be improved, as some documents are hard to find or are not available.


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

L’ORÉALSIGNATORY TO THE GLOBAL COMPACT SINCE 2003


L’Oréal


0 20 40 60 80 100

RESULT OF QUALITY ASSESSMENT FOR L’ORÉAL 2014

Outstanding

Advancing

Emerging

Basic

human right{1}

complicity{2}


{3}

forced labor{4}

child labor{5}

discrimination{6}


{7}


{8}


{9}

anti-corruption{10}

2014 2013 2012

RESULT OF COMPREHENSIVENESS ASSESSMENT PER PRINCIPLE FOR L’ORÉAL

CSR ORGANISATION

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


1. Generally speaking, more specific and verifiable objectives, information on measures and achievements would enhance both the relevance of the related principle as well as the credibility of the company’s related implementation activities. L’Oréal’s representatives confirmed that they will take this up although it is not always easy to convince executive and line managers to formulate quantitative targets. They were referring to alternative product ingredients for which it is difficult to formulate clear objectives, mainly because it is not foreseeable when the R&D team will be successful and a new product will be approved.

2. There is a certain redundancy in the information published in the Registration Document and the Performance Report. The engagement team suggests eliminating these overlaps by restructuring the content and chapters in the respective documents, in order to prevent inconsistencies in the disclosed information.

3. The different policy documents and codes of conduct are becoming outdated. We strongly recommend reviewing them.

4. In its 2014 Progress Report, L’Oréal highlighted its sustainable sourcing practices by referring to the example of babaçu oil procurement from Brazil. In the related story there is only a brief reference to the fact that several hundred families have benefited from the company’s enhanced partnership with a local agricultural cooperative, which employs women as babaçu-nut gatherers. Nor does the report explain how the target group has benefited from the agreement or to what extent it has been involved in defining their specific needs. The Guilé Engagement Team recommends disclosing further information about other such tangible and authentic stories in future, and making the information less catchy but more evidence-based.This can be achieved by describing outcomes and impact with reference to a baseline, set and monitored by the target group. This proposal was well received by the participants from L’Oréal.

LEVEL OF ENGAGEMENT

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







L’ORÉALSIGNATORY TO THE GLOBAL COMPACT SINCE 2003

INVESTMENT CASE

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

ENGAGEMENT REVIEW


into the portfolio

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


— Nestlé’s 2014 Creating Shared Value (CSV) report and the Annual Report address the 10 principles and related commitments very comprehensively and convincingly.

— The disclosure on human rights is very exhaustive and credible, nevertheless, the related objectives could be more specific. With the exception of food security the published objectives are hardly measurable and/or there is no timeframe.

— Nestlé’s information on actions to prevent child labor is now meeting best practice due to its systematic human rights impact assessment procedures described in the “Talking the

— Human Rights Walk” report. Yet, the objectives and measures taken could be described more precisely for the other 3 labor principles.

— Nestlé further improved its reporting on the environmental responsibility principle by providing detailed information on all of our eight assessment criteria.

— Information on the corruption principle remains outstanding. However, Nestlé’s specific objectives and achievements in exposed markets are still presented in a rather general way.


— The quality of Nestlé’s reporting is again outstanding.

— The clear structure of the short and full version of the CSV report as well as the navigation aid is very helpful for different stakeholders to find the information of interest.

— The extensive report has also become significantly leaner and more user-friendly: the number of pages has been reduced from 400 to 300.

— Timewise, the CSV report is now released with the AR which led to a higher rating.


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

NESTLÉSIGNATORY TO THE GLOBAL COMPACT SINCE 2001


Nestlé


0 20 40 60 80 100

RESULT OF QUALITY ASSESSMENT FOR NESTLÉ 2014

Outstanding

Advancing

Emerging

Basic

human right{1}

complicity{2}


{3}

forced labor{4}

child labor{5}

discrimination{6}


{7}


{8}


{9}

anti-corruption{10}

2014 2013 2012

RESULT OF COMPREHENSIVENESS ASSESSMENT PER PRINCIPLE FOR NESTLÉ

CSR ORGANISATION

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

— Furthermore, Nestlé receives advice from external advisory groups, in particular through the CSV Council and Nestlé Nutrition Council.


1. Present reporting on achievements in particular related to sourcing issues is still very much output oriented. The engagement team suggested providing in the future more material information on outcomes and impacts of the measures taken, which was also one of the main conclusions of a formal stakeholder consultation in 2014 initiated by Nestlé. Considering the complexity of impact reporting, we suggest conducting examples of scientifically sound case studies explaining for a specific issue area the achieved benefits from different stakeholders’ perspective. The “tangible” results of these studies should/could be published for specific target groups.

2. Policy documents should be frequently overhauled. For instance the Nestlé Sourcing Guidelines does not provide any or only very general recommendations related to hazelnut and vanilla production or procurement which are both rather sensitive products due to the humanitarian situation in the sourcing countries.

3. In its CSV summary report, Nestlé describes its different specific commitments (e.g. in the area of nutrition, rural development and water) examples aimed at demonstrating in a tangible way how measures are being implemented. In the case of nutrition, Nestlé discloses absolute figures on reductions in the use of sensitive ingredients (e.g. sugar) however, in future, we think that Nestlé should disclose relative reduction figures, with reference to an “official” target and baseline.

4. With regards to achieving nutritional best practices, the company mentions its own “Nutritional Profiling System” as the main reference for product evaluation, which is only generally explained. Nestlé should provide more information on the applied profiling system, particularly on how targets, baselines and criteria are defined in order to increase credibility.

LEVEL OF ENGAGEMENT

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







NESTLÉSIGNATORY TO THE GLOBAL COMPACT SINCE 2001

INVESTMENT CASE

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

ENGAGEMENT REVIEW

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

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


— Novozymes’ sustainability disclosure is at an advancing to outstanding level in three out of the four UN Global Compact issue areas.

— Least developed is the reporting about labor norms, particularly forced and child labor. As far as human rights are concerned, the sections regarding product responsibility, employee and workplace development as well as occupational health & safety are the most comprehesively covered. Information about the inclusion of specific human rights aspects in the supplier management system is of a generic nature. The description of labor norms issues is the most detailed section in terms of non-discrimination and diversity.

— Novozymes’ reporting about environmental issues, on the other hand, is outstanding: strong commitments, clear management approaches and tangible targets.

— The management of business integrity (including anti-corruption) is portrayed comprehensively. However, the reporting lacks detailed information about the fight against corruption.


— Novozymes presents very high quality sustainability reporting.

— Both the corporate website and the integrated annual report feature accessible, clear and well-structured information and comparable and reliable data.

— Tangible data (GRI and own KPIs) is presented, data governance is explained and the report content is externally assured.

— The reporting leaves room for more background information (complementing the company’s life cycle assessments) and the inclusion of external benchmarks.


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

NOVOZYMESSIGNATORY TO THE GLOBAL COMPACT SINCE 2001


Novozymes


0 20 40 60 80 100

RESULT OF QUALITY ASSESSMENT FOR NOVOZYMES 2014

Outstanding

Advancing

Emerging

Basic

human right{1}

complicity{2}


{3}

forced labor{4}

child labor{5}

discrimination{6}


{7}


{8}


{9}

anti-corruption{10}

2014

RESULT OF COMPREHENSIVENESS ASSESSMENT PER PRINCIPLE FOR NOVOZYMES

CSR ORGANISATION

— Novozymes’ sustainability governance structure is considered to be an example of UN Global Compact LEAD best practice.

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


1. There is a potential to report in more detail on environmental issues (and with a link to targets and KPIs) in terms of measures and achievements. In the latter case, a stronger focus on non-achievements and challenges would help make the sustainability report more balanced.

2. With regards to human rights, the Guilé Engagement Team suggests further explaining the implementation of the Ruggie Principles (due diligence etc.). Also a more in-depth description of the company’s supplier management system would add value, alongside tangible measures and (non-)achievements.

3. In the case of forced and child labor, more specific information about targets, actions and achievements would be desirable, beyond the mere explanation of the supplier management system.

4. As the current reporting mostly addresses business integrity at a generic level, the engagement team suggests sharing more details about the fight against corruption, especially with regards to a description of relevance and tangible targets.

5. From a quality point of view we recommend including more background information (complementing the company’s life cycle assessments) and comparisons with external benchmarks (where applicable).

LEVEL OF ENGAGEMENT

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







NOVOZYMESSIGNATORY TO THE GLOBAL COMPACT SINCE 2001

INVESTMENT CASE

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

ENGAGEMENT REVIEW


into the portfolio

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


— Reckitt Benckiser continues to provide advanced sustainability reporting that has even slightly improved compared to last year.

— Reporting on human rights is very detailed and features clear commitments, management approaches and goals. Principles along the value chain could profit from more detailed information on their materiality, objectives and achievements.

— From a labor point of view, reporting remains at a good level. Commitments are also strong along the value chain.

— Environmental reporting remains at a very detailed level as sustainability is embedded across the life cycle of products. Reporting towards environmentally friendly technologies has improved as the company is strengthening its culture of innovation.

— The fight against corruption is described in a comprehensive manner. The materiality of the principle is particularly well addressed as the company is exposed to corruption due to its international operations.


— Quality of reporting is excellent. — Information is very detailed and presented in a

clear and structured manner. — Sustainability information is streamlined into

one document integrating GRI guidelines. — However, some information is redundant

throughout the report and could be regrouped. — Principles and methodologies used in

reporting sustainability are well explained and independent assurance is provided.

— The company is reporting for the first time in line with the GRI G4.


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

RECKITT BENCKISER NON SIGNATORY TO THE GLOBAL COMPACT

Outstanding

Advancing

Emerging

Basic


Reckitt Benckiser


0 20 40 60 80 100

RESULT OF QUALITY ASSESSMENT FOR RECKITT BENCKISER 2014

human right{1}

complicity{2}


{3}

forced labor{4}

child labor{5}

discrimination{6}


{7}


{8}


{9}

anti-corruption{10}

2014 2013 2012

RESULT OF COMPREHENSIVENESS ASSESSMENT PER PRINCIPLE FOR RECKITT BENCKISER

CSR ORGANISATION

— Sustainability at Reckitt Benckiser is governed by a corporate responsibility framework, which comprises the Vision and Values, the Code of Conduct, core Group policies, control arrangements and reporting.

— The Board has overall responsibility for sustainability and corporate responsibility and undertakes a formal review of environmental, social and governance matters at least annually. The Chief Executive Officer has specific responsibility for sustainability policies and performance. The Category Group Director - Innovation & Sustainability, with whom we spoke, coordinates the sustainability program on a day-to-day basis.


1. Environmental impacts of products are modelled with the Sustainable Innovation Calculator, streamlining Life Cycle Assessments. It would be very interesting to learn more about how the social impact of products or initiatives is managed and measured. We would appreciate knowing more about current activities and approaches regarding the challenge to measuring social impact.

2. Materiality of forced labor could be explained in more detail. 3. While reporting on anti-corruption activities has improved compared to last year, it is still slightly lagging

behind the reporting levels achieved by the company’s peers. The Guilé Engagement Team identified room for improvement especially regarding the formulation of tangible objectives and the reporting of concrete measures.

4. Quality of reporting is excellent and has even further improved compared to last year. Regarding comparability, however, the team made one further suggestion on ways in which the reporting could be further advanced: It would be interesting to see region-specific data to know whether Reckitt Benckiser differentiates its reporting along various regions of operations.

5. Once again, the engagement team encourages Reckitt Benckiser to sign the UN Global Compact (UNGC), especially as the reporting is in line with the UNGC principles and requirements and other peers are signatories of the initiative.

LEVEL OF ENGAGEMENT

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








CSR ORGANISATION

— Sustainability at Reckitt Benckiser is governed by a corporate responsibility framework, which comprises the Vision and Values, the Code of Conduct, core Group policies, control arrangements and reporting.

— The Board has overall responsibility for sustainability and corporate responsibility and undertakes a formal review of environmental, social and governance matters at least annually. The Chief Executive Officer has specific responsibility for sustainability policies and performance. The Category Group Director - Innovation & Sustainability, with whom we spoke, coordinates the sustainability program on a day-to-day basis.


1. Environmental impacts of products are modelled with the Sustainable Innovation Calculator, streamlining Life Cycle Assessments. It would be very interesting to learn more about how the social impact of products or initiatives is managed and measured. We would appreciate knowing more about current activities and approaches regarding the challenge to measuring social impact.

2. Materiality of forced labor could be explained in more detail. 3. While reporting on anti-corruption activities has improved compared to last year, it is still slightly lagging

behind the reporting levels achieved by the company’s peers. The Guilé Engagement Team identified room for improvement especially regarding the formulation of tangible objectives and the reporting of concrete measures.

4. Quality of reporting is excellent and has even further improved compared to last year. Regarding comparability, however, the team made one further suggestion on ways in which the reporting could be further advanced: It would be interesting to see region-specific data to know whether Reckitt Benckiser differentiates its reporting along various regions of operations.

5. Once again, the engagement team encourages Reckitt Benckiser to sign the UN Global Compact (UNGC), especially as the reporting is in line with the UNGC principles and requirements and other peers are signatories of the initiative.

LEVEL OF ENGAGEMENT

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








INVESTMENT CASE

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

ENGAGEMENT REVIEW

— 6st CSR reporting assessment— 5th discussion with the company since its entry

into the portfolio

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


— Content-wise, the sustainability disclosure has slightly improved and is at an advancing level, however it is not yet outstanding.Reporting on human rights significantly improved to a good level but is less advanced when compared with its peers. In particular, information on the complicity principle is still rather fractional.

— While anti-discrimination is exhaustive, the other labor norm principles are only superficially covered. In particular, the related strategies, objectives and measures are presented in a cursory way.

— Coverage of environmental issues has improved. SGS’ approach to tackling climate change challenges is convincingly presented with sound explanations on its materiality, management approach and targets. Reporting on environmentally friendly technologies remains the least detailed of the 3 environmental principles but has slightly improved.

— SGS’s course of action in preventing corruption is authentically described, in particular its relevance. Yet, considering its related exposure, the depth of the disclosure could be further improved.


— The quality of SGS’s reporting improved signifi-cantly compared to last year.

— The “reports & policies” section provides useful and understandable background information.

— A comprehensive, publicly available data bank allows customizable data analysis including multi-annual comparisons.

— The report is now verified by a third party and submitted together with the annual report.

— Nevertheless, there are still only a few references explaining internal data collection, compilation and analysis which would further strengthen credibility.


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

SGS NON SIGNATORY TO THE GLOBAL COMPACT


SGS


0 20 40 60 80 100

RESULT OF QUALITY ASSESSMENT FOR SGS 2014

Outstanding

Advancing

Emerging

Basic

human right{1}

complicity{2}


{3}

forced labor{4}

child labor{5}

discrimination{6}


{7}


{8}


{9}

anti-corruption{10}

2014 2013 2012

RESULT OF COMPREHENSIVENESS ASSESSMENT PER PRINCIPLE FOR SGS

CSR ORGANISATION

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


1. The Sustainability Review often refers to the Sustainability Greenbook which is the internal guidance for senior managers. The Guilé Engagement Team suggests providing a sort of summary of this document which would strengthen SGS’ credibility. The company should look at Swiss Re‘s reporting, as they publish sector specific policies related to sensitive insurance risks.

2. Some of the published targets such as for internal training are not very meaningful. Instead of defining output related indicators (e.g. ratio training costs/employment costs) SGS should think about introducing outcome or even impact targets which would be more convincing for longer term oriented investors.

3. Volume-wise, the Sustainability Review is at the upper limit with 100 pages. We suggest reducing the size of the document to less than 50 pages which would make it much more attractive and reader-friendly. Comprehensive disclosure will still be assured through the on-line report.

4. Due to its core business which is quality control, auditing and verification, environmental and social impact assessment, due diligence services, SGS should be a “role model” concerning compliance and prevention of corruption. With 42 reported breaches of the code of integrity in 2014 the company seems not to be there yet. We strongly recommend further strengthening its compliance framework and processes.

LEVEL OF ENGAGEMENT

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







SGSNON SIGNATORY TO THE GLOBAL COMPACT

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 fi rm has developed advanced skills in asset management for both private and institutional clients and currently manages around CHF 3 billion.de Pury Pictet Turrettini & Cie has always demonstrated a great capacity for innovation, notably as a pioneer of responsible investment. It is the owner of the Buy and Care® strategy, manager of the Cadmos - European Engagement Fund compart-ment, promoter of the Cadmos Fund, and ensures the funds’ consistency, transparency and distribution. PPT is a signatory to the United Nations-supported Principles for Responsible Investment (PRI).

NO TICE

This document is published for information purposes only. The content of this document does not constitute an offer for sale or a solicitation of an offer to purchase nor does it constitute an incentive to invest or to engage in arbitrage transactions. It may not be construed as a contract under any circumstances. The information contained in this document has not been analyzed with regard to your personal profi le. If you have questions regarding any investment or if you have doubts as to whether an investment decision is appropriate, please contact your particular client representative or, if applicable, seek fi nancial, legal, or tax advice from your customary advisors. de Pury Pictet Turrettini S.A. makes every effort to verify the information provided but cannot give any guarantee as to its accuracy. Past performance that might be indicated in the information transmitted by de Pury Pictet Turrettini S.A. in no way determines future returns. Any decision to invest or divest that may be made by the reader of the information appearing herein is made at the sole initiative of the investor who is familiar with the mechanisms governing the fi nancial markets.

This marketing material is not intended to be a substitute for the fund’s full documentation or for any information which investors should obtain from their fi nancial intermediaries acting in relation to their investment in the fund mentioned in this document. For Swiss investors, the paying agent is Banque Pictet & Cie S.A. and the representative agent is Fund Partner Solutions (Suisse) S.A., Route des Acacias 60, Ch-1211 Genève 73 , Switzerland. The relevant legal documentation may be obtained free of charge from the representative agent, from de Pury Pictet Turrettini & Cie S.A. or online at www.ppt.ch/en/reporting-and-documents. Cadmos Fund Management, 15A, avenue J.F. Kennedy, L-1855 Luxembourg.

This document is the intellectual property of de Pury Pictet Turrettini S.A. Any reproduction or transmission of this document in whole or in part to a third party without the prior written authorization of de Pury Pictet Turrettini S.A. is strictly prohibited.

© 2016, de Pury Pictet Turrettini & Cie S.A. All rights reserved.

CADMOS EUROPEANENGAGEMENT FUNDBuy & Care® Responsible Investment Fund

Integrated Performance Report2015-2016

CA

DM

OS

EU

RO

PE

AN

EN

GA

GE

ME

NT

FU

ND

| I

NT

EG

RA

TE

D P

ER

FO

RM

AN

CE

RE

PO

RT

20

15

-20

16

De Pury Pictet Turrettini & Cie S.A.

12, rue de la CorraterieP.O- Box 5335CH-1211 Geneva 11Tel. +41 22 317 00 30Fax +41 22 317 00 33www.ppt.ch

Should you have any questions about this report, please contact :

Dominique Habegger

Head of Cadmos Funds [email protected]

cadmos european engagement fund - ppt€¦ · cadmos european engagement fund ... bp plc oil &...

Documents