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CEMEXConcrete foundations for sustainable impact

Hermes SDG Engagement High Yield Fund, Q4 2019

Cemex is a vertically integrated provider of cement and construction materials. It is the largest producer of ready-mix concrete worldwide and has an aggregates business. We are excited by the potential to work with the company to help generate impacts that contribute to achieving the Sustainable Development Goals (SDGs).

ENGAGEMENT CASE STUDY

Aaron Hay Lead Engager, Hermes SDG Engagement High Yield Fund

Jaime Gornsztejn Director of Corporate Governance, Hermes EOS

Cemex’s global business mix¹Investment caseCemex’s financial policy is broadly creditor friendly, featuring a large asset-sale plan and deleveraging as key priorities, and its debt-maturity plan is long dated and diversified across instruments. The company’s EBITDA margins have historically been higher in Mexico than in other regions due to its local retail business accounting for a higher proportion of sales. But lower domestic demand, linked with the transition to the new national government, should bring the benefits of the company’s wider geographic footprint into relief. In particular, the prospects for US sales are attractive due to the country’s infrastructure plans and solid housebuilding market.

Engagement contextCemex’s products demand significant amounts of energy and natural resources. The process of cement production means that reducing carbon emissions caused by its operations is an exceptional challenge, and the company must confront other sustainability concerns: local air, water and land pollution; waste minimisation and management; and the impact of its business on communities. With extensive supply chains and global operations, employee health and safety and fair and ethical employment standards are essential – particularly in developing regions. The company has the opportunity to capitalise on the emergence of new and alternative building materials that can provide environmental and social benefits, while managing the risks of existing products and their considerable carbon footprints.

1 Cemex Investor Relations as at September 2019.

This document does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments.

Monterrey

75%of sales are made to international customers

42,000employees working across 50 countries

For professional investors only

The drivers for our engagement with the company, and our current objectives, are described below:

SDG-focused engagement

Theory of changeCemex targets a 29% reduction in carbon emissions by 2030 and has achieved a 21.6% decline against a 1990 baseline. Moreover, the company has demonstrated expertise in procuring renewable energy for its operations. With a window of 10 years to innovate in product development and operations, and engage its customers, we need to understand if the company can intensify its climate action, particularly against a baseline that will be 40 years old by 2030.

Cemex generates 43% of its sales from products with outstanding sustainability attributes and aims to increase this proportion to 50% by 2030. This is a laudable and achievable commercial goal. We believe the company should disclose its methodology and quantify the benefits of sustainability attributes so investors can understand whether novel solutions are contributing to more sustainable industry, innovation and infrastructure outcomes at a commercial scale. Moreover, we question whether the goal could be more ambitious, given its progress to date and the 10 years remaining for it to close the gap.

Across the materials and construction sectors, vast improvements in human-capital disclosures can be made. It remains difficult to understand whether companies, particularly those operating in the developing world, offer truly fair, equitable and safe employment. To clearly demonstrate its contributions to decent work and economic growth, there may be an opportunity for Cemex to show leadership by providing transparency about the wages, benefits and working conditions it provides, particularly in developing regions. This could be achieved through clear and comparable quantification.

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SDG alignment Employer-employee relations

Engagement theme Supply chain ethics, due diligence and reporting

Engagement theme Combating climate change

The company’s supply chains include about 18,000 workers in Central and South America, Europe and the Middle East and Africa. In these regions, working for an employer that pays fair wages, provides benefits and ensures a safe working environment can improve the overall quality of life for individuals and families.

SDG alignment Carbon-emissions reduction

Cement manufacturing accounts for about 8% of global emissions. The International Energy Agency estimates that emissions from the sector must fall by at least 16% by 2030 to bring it in line with the Paris Agreement’s targets. Even if the industry enables considerable emissions reductions in the built environment, it must reduce its own by changing the processes and energy sources it uses. This is in its own interests as well as for the good of the planet and society at large: cement-industry supply chains are exposed to acute physical and transition risks exacerbated by climate change.

SDG alignment Sustainability-driven innovation

SDG alignment Lowering emissions in the built environment

Clinker, the ingredient responsible for at least 50% of the cement sector’s carbon emissions, is essential to the finished product. We believe cement companies must research and innovate to develop alternatives and novel materials that rely less on this material. This won’t be achieved simply by allocating capital to research and development: the sector needs to educate policymakers and customers on the safety and benefits of the alternatives to generate demand for sustainable materials that are also cost-competitive.

Concrete plays a role in reducing emissions and increasing the resilience of communities and cities. It is a key material in urban infrastructure that not only has a low carbon intensity but is adapted to the physical risks of a warming planet. As a cost-effective material, it can play a role in expanding safe, affordable urban housing, as well as sustainable city and transport infrastructure.

We believe the company’s extensive supply chain – which includes production, distribution and marketing across the world – requires robust social and environmental due diligence. Hermes raised this in an engagement dialogue in 2016, when only 12% of Cemex’s procurement was covered by such practices. By 2018, the company reported that supplier screening had increased to 30% of procurement against a target of 55% by 2020. We will encourage and challenge the business as appropriate to help it achieve this goal, and improve the transparency of its supplier audits.

In 2018, we pressed the company to develop and disclose science-based emission-reductions targets in line with the commitments of the Paris Agreement. In a 2019 meeting with the company’s Head of Sustainability, we learned that the firm had developed new sustainability goals and indicators extending to 2030, which will be science-based. These have now been published, and target a 29% reduction in emissions.

Further engagement objective: board-skills evaluation

In 2017, we observed that a lack of board evaluation raised concerns about skills coverage and potential weaknesses in how the company is overseen. The company secretary agreed that the board could benefit from a structured assessment, and we are now monitoring this process.

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