CADMOS PEACE INVESTMENT FUND...ADMOS REPRESENTS MORE THAN: 190 POSITIVE IMPACTS 520 ENGAGEMENT MEETINGS 900 ESG COMPANY ASSESSMENTS 14’000 ITEMS VOTED 180 INVESTMENTS F OREWORD The

CADMOS PEACE INVESTMENT FUND

FINANCIAL & IMPACT REPORT

2018-2019

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In 1996 David de Pury, Guillaume Pictet, Henri Turrettini joined forces to create their company, de Pury Pictet Turrettini

& Cie S.A. (PPT). The firm provides both wealth management and asset management services to offer our high value-

added strategic advice based on our advanced skills and experience to our private and institutional clients.

PPT has always demonstrated a great capacity for innovation, notably as a pioneer of responsible investment. It is the

owner of the Buy and Care® strategy, manager of the Cadmos European Engagement Fund, Cadmos Balanced CHF

and Cadmos Peace Investment Fund and advisor to the Cadmos Emerging Markets Engagement Fund and the Cadmos

Swiss Engagement Fund. PPT ensures the funds’ consistency, transparency and distribution. It is a signatory to the

United Nations-supported Principles for Responsible Investment (PRI) since 2008.

KEY ENGAGEMENT IMPACTS AND PROGRESS

SINCE 2006, CADMOS REPRESENTS MORE THAN:

190 POSITIVE

IMPACTS

520 ENGAGEMENT

MEETINGS

900 ESG COMPANY ASSESSMENTS

14’000 ITEMS VOTED

180 INVESTMENTS

FOREWORD

The Cadmos Peace Investment Fund was launched in January 2018 in cooperation with the PeaceNexus Foundation, which provided the necessary seed capital. This is to our knowledge the first Fund designed to directly address UN Sustainable Development Goal 16, defined as “To promote peaceful and inclusive societies for sustainable development, provide access to justice for

all and build effective, accountable and inclusive institutions at all levels”. Currently, investors and private

companies struggle to identify how to increase their contribution to peace and SDG-16. The Cadmos Peace

Investment Fund is a response to this challenge. It provides a solution for

investors seeking both market or above market financial performance and

positive impacts on peace and stability. Since 2006, the Cadmos Funds have succeeded in simultaneously delivering

financial performance and tangible impacts. It has done so by engaging

with our portfolio companies and helping them to integrate their most

material environmental, social and governance (ESG) or sustainability topics into their corporate strategy.

The Cadmos Peace Investment Funds’ engagement goes well beyond a simple dialogue with the companies’ management. Each year we provide them with a thorough assessment of their key material sustainability and peacebuilding topics followed by a feed-back on the identified gaps. This

report confirms that companies are willing to implement our subsequent progress recommendations on improved sustainability integration and on strengthening their peace promoting business practices. The PeaceNexus Foundation is an operational foundation that engages with our investee companies to improve social impacts in conflict-affected or fragile contexts. Its proprietary Peacebuilding Business Index (PBBI) ranks the 300 economically most impactful companies in fragile states based on their contribution to peace and SDG 16.

PeaceNexus and our network of impact specialists can bring a wealth of expertise and knowledge to companies. They react positively to this unique expertise-based engagement which is always linked to the companies’ core business model. The Cadmos Peace Investment Fund invests only in

profitable companies that tend to have a net positive peacebuilding impact according to the PBBI. We believe that portfolio companies that are adapted to performing responsibly in the complex environment of conflict-prone countries are more likely to be resistant to shocks and outperform their peers. But Cadmos goes one step further, by making peacebuilding expertise available to portfolio companies. Our experts provide support on anti-corruption policies

and procedures, participation in multi-stakeholder peacebuilding relevant initiatives, conflict-sensitive human resource or supply chain management, product stewardship in fragile countries, oversight of private security personnel, etc. Our commitment to high-quality listed impact investing has been acknowledged by the UN Pinciples for Responsible Investing (PRI). The Cadmos Peace Investment Fund was shortlisted as the best “Active

Ownership Project of the Year”. The first part of this report provides a

complete overview of the Cadmos Funds’ Buy & Care® strategy. The

second part contains the 2018–2019 financial and impact

performance of the Cadmos Peace Investment Fund. It provides detailed information on the financial results,

voting activities, engagement meetings and the resulting impacts. The purpose of this report is to allow our

investors evaluate our capacity to deliver the expected risk-adjusted performance with an appropriate positive peacebuilding impact.

TABLE OF CONTENTS

THE CADMOS FUNDS’ BUY & CARE® STRATEGY

THE CADMOS FUNDS’ BUY & CARE STRATEGY........................... 4

ACTIVE PORTFOLIO

MANAGEMENT .............................................. 6

ACTIVE OWNERSHIP ................................. 8

ACTIVE ENGAGEMENT AND IMPACT ................................................. 9 Engagement process ............................................................ 10

Company Publications & Data ........................... 10 Selection of Material Topics ................................ 11 Assessment & Assessment Report ...................... 13 Shareholder Dialogue .......................................... 14 Engagement for Additional Social Impact - Peace Promoting Business Practices ................... 15 Engagement & Impact Level Assessment ........... 16

KEY DIFFERENTIATING CHARACTERISTICS ...................................... 17

TESTIMONIALS ............................................. 18

CADMOS PEACE INVESTMENT FUND

PERFORMANCES SUMMARY .............. 20

ACTIVE PORTFOLIO

MANAGEMENT ....................................... 22 Peacebuilding Business Index ..................................... 23 Regions and Sectors ...................................................... 23 Portfolio Management Summary Table ................... 24

ACTIVE OWNERSHIP ............................. 25 Voting Trends ............................................................ 25 Main Oppositions ...................................................... 25 Distribution of Votes and Oppositions ...................... 26 Active Ownership Summary Table ........................... 27

ACTIVE ENGAGEMENT AND IMPACT ........................................... 29 A) Engagement for the Strategic Integration of

Sustainability into the Business Model Achievements .................................................. 29

Selection of Material Topics ................................. 30 Assessment and Reporting ........................................... 31

Preparedness on Key Topics ........................... 31 Quality of Reporting ..................................... 31 Sustainability Organization ............................ 32 Sustainability Frameworks .............................. 32 Peacebuilding Embeddedness ........................ 32

Shareholder Dialogue .............................................. 33 B) Engagement for Additional Social Impact /

Peace Promoting Business Practices Achievements ................................................... 34

Flagship Stories ......................................................... 35 A) Engagement for the Strategic Integration of Sustainability into the Business Model Summary Table ......................................................... 36 B) Engagement for Additional Social Impact - Peace Promoting Business Practices Summary Table ......................................................... 37

INTEGRATED PERFORMANCE REPORT (SAMPLE) ............................... 39 Standard Chartered ............................................. 40

PBBI SCORECARD REPORT (SAMPLE) ............................... 45 Standard Chartered ............................................. 46

[4]


PPT has always thought it unwise to ignore, within

investment decisions, the need to tackle the world’s main

challenges. The aspirations of the international

community have been captured in the seventeen UN

Sustainable Development Goals (SGDs). Along with the

ongoing trends of global warming, population growth,

aging, increase of violent conflicts and urbanization, it

has become evident that solving these goals will pose an

even greater challenge to human society and to the

sustainability of some business models.

However, in every challenge, there lies opportunity and

this is where Cadmos stands. Among our Cadmos

engagement funds, the Peace Investment Fund was

launched to encourage conflict-sensitive and peace

promoting business practices among large multinationals.

Companies that develop business models contributing to

solve global challenges will continue to lead the markets

and shape the competitive landscape. Cadmos’ portfolio

managers therefore select highly profitable leaders with a

sustainable competitive advantage that is tackling global

challenges and which can continuously finance their

medium to long term growth.

The Cadmos Peace Investment Fund is not only about

picking the highest rated companies, but also the ones that

have the highest potential or capacity to contribute to peace

and stability. Broad-minded and experienced portfolio

managers with both strong financial and ESG skills are

required to select companies that have the highest potential

and capacity to create positive social impacts.

Adding the third impact dimension to the traditional risk-

return models provides more depth and perspective to their

analysis. In particular, the portfolio managers’ participation in

the engagement meetings together with our external

sustainability experts has been instrumental to understanding

how positive or negative ESG impacts directly influence

performance and risk. By selecting and engaging highly

profitable, transparent, impact-conscious, innovative leaders,

we can simultaneously achieve better financial performances,

generate positive impacts while being exposed to lesser risks.

WHY CADMOS?

The Buy & Care investment strategy, applied since 2006, is a cyclical process designed by PPT to better integrate the financially material sustainability and peacebuilding factors. Through active ownership and direct engagement with companies, we can better select tomorrow’s winners and improve our portfolios’ risk-reward-impact profile.

[5]


The Buy & Care strategy’s three founding principles have proved to be reliable

in the long term through changing financial and economic cycles.

1. We do not invest in a stock but in a company. Every effort will be made to visit the companies and increase our understanding of their sustainable competitive advantage and of the quality of their management. Our in-depth analysis strengthens our convictions, reduces portfolio turnover and hence transaction fees, while also enabling us to deviate from the benchmarks.

2. We actively fulfill the rights and duties as a responsible shareholder. We are proud to have integrated active ownership since

2006 within our Buy & Care® strategy, which starts with

exercising voting rights. We build in-depth knowledge

of the companies’ governance, management, and

financial structure.

3. We actively seek ways to engage and generate additional social/peacebuilding impacts. As responsible shareholders, we assess our companies’

financially material sustainability – including peacebuilding –

risks and opportunities. Our gap analysis help us to engage

companies to stimulate tangible improvements through better

sustainability integration. We also stimulate new business and financial

opportunities that are contributing to solve social, environmental

and peacebuilding challenges.

We foster progress through our expert driven, “soft power” but non-indulgent dialogue with companies. Through an additional engagement for social impact (peacebuilding in fragile states) we aim to achieve further tangible impacts.

The flagship Cadmos European Engagement Fund has been managed since its inception in 2006 by

Christopher Quast together with Paolo Bozzo from PPT. Christopher has managed European Equities at PPT since 1999, outperforming the markets two

out of three years.

The Cadmos Emerging Markets Engagement Fund has been managed since its inception in 2009 by

Wojciech Stanislawski together with Juliette Alves from Comgest. Comgest has managed the flagship

Emerging Markets fund Magellan since 1994 and Wojciech joined the firm in 1999.

The Cadmos Swiss Engagement Fund has been managed since its inception in 2014 by Alexandre

Stucki together with Nathalie Kappeler from ASIM. ASIM was founded in 2006 and focuses exclusively on managing Swiss equities.

The Cadmos Peace Investment Fund which has been launched in January 2018, is managed by Paolo Bozzo together with Christopher Quast from PPT. It was recently shortlisted by the UN

PRI for the PRI Awards in the “Active Ownership Project of the year” category.

[6]

1. ACTIVE PORTFOLIO MANAGEMENT

The Cadmos Peace Investment Fund invests only in

profitable companies that have preferably a high net positive

peacebuilding impact according to the Peacebuilding Business

Index1 (PBBI). We believe conflict-sensitive and peace-

promoting business practices is a financially material topic for

all companies highly involved in fragile markets. We are

convinced that companies that are adapted to performing

responsibly in the complex environment of conflict-prone

countries are more likely to be resistant to shocks and

outperform their peers. Moreover, these companies that

invest highly in the conflict-prone countries or have a strong

presence on the ground through business partnerships via

their supply chain, are likely to contribute more to peace.

The underlying PBBI methodology developed by the

PeaceNexus Foundation in collaboration with the ESG-rating

agency Covalence, is instrumental for the pre-selection of

potential companies for the Fund. We begin by selecting 300

investable large- and mid-cap companies with the biggest

economic impact in the 75 most fragile countries2. Our main

source of data for economic impact in fragile states is the

Financial Times fDi Markets database. The fDi Markets

provides information per company and country on

investment projects, foreign direct investment and the

number of jobs created. We also consider companies with a

strong presence on the ground either through business

partnerships in fragile states via their supply chain or through

the sale of products and services.

The PBBI then ranks these 300 companies according to their

peacebuilding sensitivity based on the three levels of analysis:

global peacebuilding related ESG policies (25% of the final

score), local ESG practices (25%), and the local peacebuilding

practices (50%). The Peacebuilding Business criteria3(PBBC),

also developed by the PeaceNexus Foundation, provides a

reference4 framework to evaluate companies’ peacebuilding

behaviour. This information is gathered from various sources,

including companies’ global and local communications, global

and local media and reporting by stakeholders such as trade

unions and non-governmental organizations.

Companies with a PBBI score of more than 50% (150-200

companies) are eligible for inclusion in the Cadmos Peace

Investment Fund. But since peacebuilding data are mainly

qualitative, and new information can emerge at any time, an

advisory committee comprising PPT and the PeaceNexus

representatives may nevertheless decide to qualify any of the

remaining companies. At present, 31 of the 32 companies in

the Fund, score above 50% in the PBBI index. Facebook was

included in the Fund despite its low PBBI score, due to indices

showing the company’s willingness to improve and their

intention to hire a human rights policy director responsible for

conflict prevention and peacebuilding.

PEACEBUILDING BUSINESS INDEX- RANKING (SAMPLES)

Source:

1 For further information about the screening process and the Peacebuilding Business Index, please refer to: https://peacenexus.org/wp-content/uploads/2019/06/PBBI-methodology-final_update29.05.2019.pdf 2. We use a consensus approach to identify the states that can be considered fragile. We aggregate nine existing lists that select or rank countries based on criteria such as the risk of armed conflict, the level of development and the respect for human rights. Through this approach, we identified seventy-five fragile states in 2018.

3. For further information about the Peacebuilding Business Criteria, please refer to: https://peacenexus.org/wp-content/uploads/2019/06/PBBI-methodology-final_update29.05.2019.pdf 4. “7 ways business can be agents for peace” World Economic Forum, May 2019. Please refer to: https://www.weforum.org/agenda/2019/05/7-ways-business-can-be-agents-for-peace/

https://www.weforum.org/agenda/2019/05/7-ways-business-can-be-agents-for-peace/https://www.weforum.org/agenda/2019/05/7-ways-business-can-be-agents-for-peace/

[7]

1. ACTIVE PORTFOLIO MANAGEMENT

Over the years, our approach has evolved steadily, steered

by the Cadmos portfolio managers. We begin by screening

the healthiest investable companies in a predefined

universe. In our bottom-up stock selection process, we

select only profitable, organically growing, sustainable

businesses exposed to attractive end markets or secular

trends. Primarily for this reason, the Cadmos Funds do

not invest in tobacco companies or arms manufacturers.

We do not apply any further exclusions except when

specifically asked by our clients.

We look for companies with strong financial ratios and

profitability levels that enable them to finance further

growth while rewarding their shareholders. These

companies will be accompanied by more rigorous financial

and qualitative analysis through company visits and

external reviews. These steps will lead to a better

understanding of the companies’ long-term growth

prospects, the sustainability of their competitive

advantage, their management quality, margins, balance-

sheet quality and cash- flow generation.

A business model is only sustainable if it appropriately

integrates sustainability issues and effectively drives the

transitions which are reshaping an industry. Appropriately

positioning a company to the pace of the energy,

technological, nutritional or any other transition often

proves critical.

The delicate task of analyzing management quality is made

easier by our visits and discussions, which enhance our

ability to evaluate the consistency between a company’s

reports and its concrete actions. By going beyond the

company’s reporting and meeting its management, we

sharpen our investment convictions.

When constructing the portfolio, we apply various

techniques to check that the companies that interest us are

not overpriced. The high-quality companies thus identified

must present attractive potential for gains in the medium

and long-term. Our practical experience with applying

integrated valuation models obliges us to remain modest

and conscious that it is a continuous, difficult learning

process.

CADMOS’ COMPANY ANALYSIS AND PORTFOLIO MANAGEMENT

Constructing the portfolio involves the rigorous selection of only those companies with the strongest potential for

outperformance in the medium to long term. This concentration is desirable in the case of an engagement fund, since it

means that the cost of the shareholder dialogue with the management of invested companies may be contained. That

concentration is combined with a lower turnover rate, which increases the quality of the dialogue. We do not set ourselves

a tracking-error ratio target but the ratio is usually rather high. The indices should not influence the investment-decision

process but serve solely as a risk-management tool. Moreover, the long-term performance can be significantly increased with

the additional support of an excellent selling discipline. Changes in the fundamentals, risks or valuation of the underlyings,

together with the quality of the dialogue, will influence the portfolio manager’s view on company’s future prospect and may

lead to decisions to sell or buy more.

[8]

2. ACTIVE OWNERSHIP

Voting provides our portfolio managers with valuable information about the quality of a company’s governance. It is also a necessary first step before engaging with the management. Few professionals would deny that the skills, independence and availability of a board of directors are critical to a company’s future. The effects of a capital increase, for example, will be felt immediately. For PPT, exercising the right to vote is first and foremost a financial responsibility.

The Cadmos portfolio managers define their voting

positions by studying the analyses of annual general

meetings (AGMs) and the voting recommendations

supplied by various proxy advisory firms. They have the rights and the duty to deviate from the proxy’s

recommendations, should they find that these do not

take full account of the companies’ business models and

particularities or do not correspond to their respective

internal voting guidelines, which are available on request. For the European, Swiss and the Peace

Investment Fund, the selected proxy advisor is Glass

Lewis. This independent agency is a leading provider of

governance assessment and voting advice and covers more than 23,000 companies in more than a hundred

countries. It can supply consistent assessments

throughout all the countries represented in the Fund.

For the Cadmos Emerging Markets Engagement Fund,

Comgest works with Institutional Shareholder Services (ISS) and benefits from its global reach: ISS has nineteen

offices worldwide and an experienced research team

fluent in twenty-five languages.

For reporting purposes, we apply the format of PPT’s voting guidelines, dividing the items under discussion at an AGM into four topics: the structure of the board of directors; the transparency and coherence of the remuneration structure; structure and ownership of share capital; and shareholders’ rights.

VOTING GUIDELINES

STRUCTURE OF THE BOARD OF DIRECTORS 1. Election of individual board members 2. Functioning and independence of the

various committees 3. Separation of CEO function and chairman

of the board of directors 4. Granting of the discharge

TRANSPARENCY AND COHERENCE OF THE REMUNERATION STRUCTURE

5. Appropriate structure of the remuneration system for the executive committee

6. Appropriate structure of the remuneration system for the board members

STRUCTURE AND OWNERSHIP OF SHARE CAPITAL

7. Approval of accounts and allocation of profits/dividends

8. Appropriate capital structure 9. Appointment of the auditors

SHAREHOLDERS’ RIGHTS 10. Amendments to articles of association,

equal treatment of shareholders and anti-takeover measures

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3. ACTIVE ENGAGEMENT & IMPACT

Through direct, expert-driven and regular engagement meetings with our companies, Cadmos promotes change and

progress and spurs them onto enhancing positive impacts. For our portfolio managers – and hence for our investors – it

leads to better understanding of how convincingly the company is addressing its material sustainability topics.

Cadmos’ engagement process has two objectives.

A. Engagement for the Strategic Integration of Sustainability into the Business Model:

Engagement for the strategic integration of sustainability

into the business model is the Cadmos Funds’

overarching goal and their common denominator. All our

dialogues and engagement meetings are designed to motivate companies not only to give greater consideration

to the tangible financial risks of inaction, negligence or

even unlawful behavior but essentially to increase the

integration of the key material environmental, social and governance topics into their strategy and communication.

We view this true integration of sustainability factors into

the heart of a company’s strategy and daily operations as

the next major milestone. To reach it, our engagement goes well beyond simple dialogue with the company’s

management. Each year, the portfolio managers and our

experts make clear progress recommendations based on

an assessment of each company’s identified gaps. The

companies are often aware of their challenges or ready to consent to certain adjustments, particularly as these are

proposed by a loyal investor and come with expert advice.

B. Engagement for Additional Social Impact Peace Promoting Business Practices:

Our dialogue with the investee companies together

with external experts is also geared to achieving

additional peacebuilding and broader social impacts.

For the companies from the Cadmos Peace Investment Fund, these engagement activities are

initiated by PeaceNexus as well as other selected

organisations. Our experts provide advice on anti-

corruption policies and procedures, participation in multi-stakeholder peacebuilding relevant initiatives,

conflict-sensitive human resource or supply chain

management, product stewardship in fragile countries,

oversight of private security personnel and on SDG-

16 reporting.

We also advise companies on setting-up targeted

blended finance instruments, on partnerships with

social enterprises or on improving their SDG linked communication. This is to be done by promoting

global partnerships – SDG 17.

These recommended projects are always linked to the

companies’ core business and aim to strengthen their sustainable competitive advantage.

As a long-term investor, we value additional social impact and in particular more resilient companies as a potential means to strengthen our portfolio companies’ competitive advantage while contributing to the SDG’s.

Cadmos Peace Investment Fund investees are systematically introduced to the PeaceNexus Foundation. Established in Switzerland in 2009, it has built a unique expertise in business and peace. Together with NexusVesting, Covalence and its network of experts, they provide capacity building services to organisations allowing them to increase their effectiveness and contribution to building more inclusive and peaceful societies.

Selected Cadmos portfolio companies benefit from specific advice related to all relevant SDG’s to create additional social impact through global partnerships.

https://www.google.ch/imgres?imgurl=https://sustainabledevelopment.un.org/content/images/E_SDG_Icons-16.jpg&imgrefurl=https://sustainabledevelopment.un.org/sdg16&docid=6xwR7ewCIHw3jM&tbnid=Cq86zLlAziJGAM:&vet=10ahUKEwjDnvvg_endAhVL1iwKHRPID9AQMwg2KAAwAA..i&w=466&h=466&bih=1070&biw=2133&q=sdg%2016&ved=0ahUKEwjDnvvg_endAhVL1iwKHRPID9AQMwg2KAAwAA&iact=mrc&uact=8

[10]

ENGAGEMENT PROCESS

The table below provides an overview of the Cadmos engagement process. All steps leading to “Shareholder dialogue” are

consistent across all Cadmos Funds. Engagement for additional social impact is applied whenever relevant and whenever

we have identified specific additional social impact opportunities for a company. All companies from the Cadmos Peace

Investment Fund benefit from a special “SDG 16” peacebuilding engagement, designed to stimulate the companies that are

active in fragile countries to contribute to regional stabilization with additional peacebuilding initiatives.

1- COMPANY PUBLICATIONS AND DATA

The first step consists of collecting each company’s sustainability data. Our engagement team studies all the company

disclosures, as well as media publications and specific databases (CDP, PRI, Bloomberg, SASB etc.). For media

controversies and stories, they use the RepRisk database.


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CLIMATE CHANGE IMPACT

ENGAGEMENT PROCESS

2- 2- SELECTION OF MATERIAL TOPICS

Our engagement team has condensed all the material issues affecting the companies into nine topics. Together these topics encompass all the issues identified by traditional sustainability frameworks such as the UN Global Compact, the Global Reporting Initiative, the UN Guiding Principles and the Sustainable Development Goals. Unlike those frameworks, we have allowed the topics to overlap rather than making them mutually exclusive, so as to target the companies’ most material issues instead of generic categories. Human rights do not appear as a single topic. Instead, particularly in the light of the UN Guiding Principles on Human Rights, they are considered overarching, and are integrated into all nine topics. We believe that application of the UN Guiding Principles on Business and Human Rights, known as the “Ruggie Principles”, will represent the main challenge for large multinationals. Moreover, these principles rightfully regard climate change as a human-rights issue.

E

S

G

Human rights do not appear as a single topic.

Instead, particularly in the light of the UN Guiding

Principles on Human Rights, they are considered

overarching, and are integrated into all nine topics.

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

DIVERSITY AND EMPLOYEE LOYALTY

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

CORE LABOR STANDARDS

COMPLIANCE

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

IMPACT ON COMMUNITIES

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

PRODUCT SOCIAL IMPACT

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

SUPPLIER ENVIRONMENTAL

IMPACT

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

PRODUCT ENVIRONMENTAL

IMPACT

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

SUPPLIER SOCIAL IMPACT

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

BUSINESS INTEGRITY

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

[12]


ENGAGEMENT PROCESS

From these nine material topics, we select the most material topics for each company, depending on that company’s

characteristics and industry sector. Our initial selection will be guided by the company’s materiality matrix or its own definition of its priorities. Next, our analysts will challenge the company’s view by going over the nature of any recent or

recurring media controversies. In the third step, we consider the priorities set by specific sector frameworks such as the SASB Materiality Map™. This is an interactive tool that identifies and compares disclosure topics across different industries and sectors. The final decision as to the maximum three most material topics is made by the portfolio manager,

considering the company’s business model and its development strategy.

E

S

• Rigorous and transparent process

• Select the most material topics

• Decision by portfolio manager

G

The final decision as to the most material topics is

made by the portfolio manager, considering the

company’s business model and its development

strategy. We encourage companies to better integrate

these topics into their strategy and report on them in

relation to their financial materiality.


COMPLIANCE


COMPLIANCE






IMPACT


IMPACT


IMPACT


IMPACT






BUSINESS INTEGRITY

BUSINESS INTEGRITY

MATERIALITY MEDIA MATRIX CONTROVERSIES

BUSINESS MODEL

SECTOR FRAMEWORKS

[13]

ENGAGEMENT PROCESS

3- ASSESSMENT AND ASSESSMENT REPORT The engagement process is a robust, comprehensive

methodology designed to assess and benchmark a company’s

preparedness to address its most material sustainability topics.

Preparedness is assessed according to five criteria that draw

heavily on the UN Guiding Principles, particularly the

operational principles of policy commitment and human-rights

due diligence. The five criteria are: materiality; commitment and

strategy; objectives and actions; indicators and monitoring; and

achievements. These criteria are used to identify gaps in the

company’s preparedness to address its most material issues.

The assessment of reporting quality comprises six criteria:

accessibility, clarity, comparability, accuracy, reliability and

integration, to determine how well the company’s publications

address the most material topics. We want to make sure in

particular that the reported sustainability data are linked to

financial reports or metrics (essentially top line, bottom line and

risks).

We also assess each company’s sustainability organization and

governance. Four criteria measure the extent to which

sustainability is integrated into the company’s overall strategy,

the level in the organization with ultimate responsibility for

sustainability management, the extent which the company

involves and engages its employees and the extent to which it

engages its shareholders and other stakeholders.

Fourth, we assess quantitatively how closely companies adhere

to specific sustainability frameworks, such as the UN Guiding

Principles, the UN Global Compact, the Global Reporting

Initiative and the Sustainable Development Goals. In the case of the UNGPs for instance, a company would receive the

highest score if it had adopted the reporting framework,

established a human rights policy, performed due diligence and

implemented a remediation process.

For all companies from the Peace Investment Fund, a

“Peacebuilding Embeddedness” assessment is conducted. It

allows us to point out the financial materiality of PeaceNexus’

Peacebuildling Business Criteria (PBBC) and motivate the

management bodies to follow-up with our experts to

strengthen their peace promoting business practices. The six

indicators below are taken directly from the Labour, Sourcing

and Stakeholder Engagement dimensions of the PBBC. They

are also the most reported on within public documents.

Peacebuilding embeddedness assessment

The assessments of all these individual criteria are based on a

simple four-grade scoring system from 0 to 3. Every score

comes with a detailed commentary. These assessments are not

primarily used to select the best companies but essentially to

make them progress on their identified gaps to best practices.

An assessment summary report is sent to each company’s

highest executive and operational bodies. It aims to redirect

their attention to their company’s strengths and weaknesses

and not on abstract scores or ratings. We focus on the main

sustainability gaps and improvement suggestions that we want

to address directly with the company. The assessment report

thus stimulates key company representatives to participate in a

constructive dialogue with the engagement team and the

portfolio managers.

[14]

ENGAGEMENT PROCESS

4- SHAREHOLDER DIALOGUE

At meetings with the companies, we insist on including representatives of both the investor relations and corporate social

responsibility departments. By providing pragmatic help and advice and emphasizing the business case for sustainability

including peacebuilding embeddedness, we first encourage the companies to better integrate their most material topics into

their strategy and operations.

Our assessment and through gap analysis give credibility to our recommendations, which are specific, tangible and easily

implemented. According to the companies’ feedback, we are the only asset manager to conduct meetings that bring

together the financial expertise of the portfolio managers and the sustainability expertise offered by the senior consultants

of our external engagement team from BHP – Brugger & Partners.

PPT and BHP collaborated closely on developing the assessment and engagement process, which represents many years

of combined engagement expertise. Since inception of the Cadmos Funds in 2006, BHP’s engagement team conducts the

company assessments, and its senior consultants organise, coordinate and lead the engagement meetings. The senior

consultants below all have extensive expertise in advising companies on sustainability issues.

We formulate clear progress recommendations and

support companies to better integrate financially

material sustainability topics or to create additional

tangible social impacts related to the SDG’s

Shareholder dialogue

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

Objective

• Focus on financial materiality - Push for integration • Gap analysis — Increase awareness to progress • Progress recommendations - Stimulate best-practices • Raise interest on social impact - Provide support

[15]

ENGAGEMENT PROCESS

5- ENGAGEMENT FOR ADDITIONAL SOCIAL IMPACT -

PEACE PROMOTING BUSINESS PRACTICES

“Engagement for additional social impact” and in

particular related to peacebuilding and the SDG-16 is

applied systematically within the Cadmos Peace

Investment Fund. Social impact is penetrating

discussions at board level, and some companies have

begun to make it a core element of their business

strategy for exploring new market opportunities and

addressing millennials’ expectations. Yet, most

companies are still struggling on how to scale, integrate

and report on social impact or the SDG’s.

Major SDG’s are often too large for any one party to tackle alone. As a growing body of evidence shows, social enterprises, NGO’s, foundations, developing agencies and other organization together with corporates are able to achieve far more positive social and environmental impact, while benefiting the communities that they serve on a scale not possible when acting alone.

This is to be done in particular by promoting partnerships directly

linked to their business models. This explains our propensity to

present Cadmos in connection with SDG-17.

At the end of every engagement meeting, we urge selected

companies to follow up with an exclusive meeting with the

PeaceNexus Foundation. They conduct tailored in-depth

assessments to identify clear gaps and formulate tangible progress

recommendations.

Inspired by: Stockholm Resilience Center (Illustration: Azote)


[16]

ENGAGEMENT PROCESS

6- ENGAGEMENT AND IMPACT LEVEL ASSESSMENT

A. Engagement for the Strategic Integration of Sustainability into the Business Model Level (0-5)

Cadmos is among a minority of funds which transparently

reports the successes as well as the non-achievements of its

engagement activities. To evaluate our engagement progress,

we measure the engagement level of each company. Only

when a company reaches level 5, signifying that it has acted on

one of our recommendations, we consider that we have

achieved a desired impact. In any case, we continue to engage

with the companies every year to foster new progresses and

tangible impacts. The first target is to create a dialogue (level

2) with each portfolio company within three years. Our long-

term (five-year) impact objective is to generate positive

additional impacts at a majority of our portfolio companies.

B. Engagement for Additional Social Impact – Peace Promoting Business Practices Level (0-5)

Since 2017, we also assess the progress we make with

individual companies on our specific engagement for

additional social impact. We use a similar scale from 0 to 5 to

monitor the progress companies are making based on the

suggestion of KiKLab, the PeaceNexus Foundation or other

social impact partners. Whenever a discussed additional social

impact or peacebuilding project is being implemented, we

consider it having reached level 5. The implementation of

these Cadmos originated projects are mostly financed by the

companies themselves. The Fund will report whenever

possible on the achieved impacts.

SPECIALISED PEACEBUILDING AND SOCIAL IMPACT PARTNERS

Our impact partners and in particular the PeaceNexus Foundation have developed their own specific methodology to

conduct tailored in-depth assessments of the willing portfolio companies. Through meetings, interview and desk research,

insights are obtained which give a clearer view of the gaps for tangible peacebuilding or social impacts.

PEACENEXUS FOUNDATION Recognized pioneer in connecting businesses and peacebuilding (PBBC Methodology) Catriona Gourlay (Executive Director) & Johannes Schreuder (Dialogue with business lead)

NEXUSVESTING

Supports PeaceNexus in providing in-depth peacebuilding assessments and recommendations Anne Gloor (Founder and Managing Director)

COVALENCE

Supports PeaceNexus in the development and calculation of the PBBI Antoine Mach and Marc Rochat (Co-founders and Partners)

[17]

KEY DIFFERENTIATING CHARACTERISTICS

The Buy & Care® strategy is attractive to both

investors who are mainly pursuing financial returns

as well as to the most demanding ESG investors.

The Cadmos Funds have achieved to outperform

and create additional social impacts in most market

circumstances since 2006.

Our portfolio managers are not subject to possibly

dogmatic exclusion rules or ESG ratings. Ratings and

exclusions can be useful as they stimulate companies to

improve but they tend to be backward looking, often

take insufficient account of the companies’ business

models and are rarely factored into the share price. As a

result, they can lead to sub-optimal investment

decisions.

The Cadmos Funds portfolio managers are fully

responsible for the Fund’s financial and impact

performance. They carefully select a limited number of

portfolio companies leading the markets and shaping the

competitive landscape and strengthen their convictions

by directly engaging with the management and

operational teams of these companies to foster

continuous progress.

Engagement for the strategic integration of

sustainability into the business model and

engagement for additional social impacts are the

main distinguishing features of the Cadmos Funds.

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 with companies. The expertise

of PPT and its engagement partners have won the

companies’ respect and trust as competent, demanding

but pragmatic shareholders.

Active ownership starts in the pre-investing phase by

analyzing the governance and communication of a

company and by voting in our interest as a long-term

shareholder at general meetings. Each year we undertake

a rigorous and comprehensive assessment of their

reporting. We identify the gaps and engage with our

investee companies by making progress

recommendations to more coherently integrate ESG.

Cadmos is also setting a new standard for creating

additional impacts within listed equities by connecting

our portfolio companies with the expertise of our social

impact partners.

In 2019, the Cadmos Peace Investment Funds was nominated by the United Nations-supported Principles for Responsible Investment (PRI) awards within the category "Active Ownership Project of the Year".

[18]

TESTIMONIALS

After the first year, Cadmos already received many testimonials from companies. On this page we list a few examples from the 2018-2019 engagement cycle.

“The engagement of PeaceNexus with SAP via the Peace Investment Fund was instrumental in raising our awareness about our contribution to peacebuilding and SDG 16. Their solid peacebuilding assessment on SAP provided us with concrete recommendations to further strengthen our contribution.”

-Will Ritzrau, Director of Sustainability, SAP

“Sika aims to be well positioned for the future, especially as sustainability has been a crucial aspect of our business practices. The assessment results and the discussion with the Cadmos Engagement Funds provide an important impulse for the further development of strategical and operational sustainability-related topics and initiatives.”

-Dominik Slappnig, Head of Corporate Communication & IR, Sika AG

“…We further discussed the assessment points that you raised and how to implement them. We are looking forward to continuing our engagement together… Our discussion on peace building arrived at a moment when we also started to think of the connections between sustainability and peace. I continue to think it’s a very relevant angle for both action and communication, that requires a structured and long-term approach vs one-shot studies…”

-Emilienne Lepoutre, Sustainability Manager, Schneider Electric

“Since the inclusion of Essilor in the Cadmos European Engagement Fund in 2006, we had the opportunity to discuss annually with its independent experts’ team the finding and always very useful evaluations of Essilor’s preparedness in managing relevant ESG aspects. The interactions have been highly constructive and based on mutual respect and appreciation.”

-Xavier Galliot, Chief Sustainability Officer, EssilorLuxottica

17

CADMOS PEACE

INVESTMENT

FUND

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ACTIVE PORTFOLIO MANAGEMENT

The Cadmos Peace Investment Fund, managed and

distributed by de Pury Pictet Turrettini (PPT), is a sub-fund

of the Luxembourg-based Cadmos Fund. Christopher Quast,

the head of European equity management at PPT since 1999,

together with Paolo Bozzo are managing the Fund since its

inception. Within that period from January 26th 2018 to

December 2018, the Fund (Class A) returned -9.3%,

between our reference indexes (MSCI All Countries

World Index Net Return and MSCI Europe Net

Return) which returned -8.2% and -13.1% respectively.

Until the end of September, the fund was able to perform

strong, but it saw a sharp drop towards the end of the year.

During the volatility times, the main drivers of the drawdown

were the cyclical part of the portfolio, namely the industrials

and the financial stocks, while more defensive sectors, such

as health and food, have slowed the decline of the overall

portfolio.

During the year it welcomed two new entrants (Facebook and

Microsoft), while selling one company (BBVA). Our decisions take

into account of many factors, such as the sustainability of the

business model, the market valuation, the peacebuilding business

index and the portfolio’s overall balance.

The engagement team continued to engage with the companies

represented in the portfolio, together with the portfolio manager,

who took part in all the dialogues conducted. The information

obtained from this year’s engagement process enriched again the

investment process and sharpened our insight into the sustainability

of each company’s business model.

ACTIVE OWNERSHIP

During the period under review, we expressed an opinion

on 570 items on the agendas of annual general meetings

(AGMs). This figure represents a certain stabilisation in the

number of voting decisions at least within Europe.

Votes on remuneration have risen to 82 in 2018 as

consultative or binding votes on remuneration have been

introduced in many developed markets over the past years.

77% of the resolutions submitted to the vote still concern

the structure of the board of directors and the capital

structure.

Of the total 570 votes that we cast, forty-six or 8.1% were

against management recommendations.

Overall, the items that once again elicited most of our oppositions

were linked to the structure and independence of the board of

directors (twenty-eight “Against” votes). In relative terms,

shareholders’ rights was the most contentious category with one

in five votes against management recommendations.

ACTIVE ENGAGEMENT AND IMPACT

We engaged with nineteen companies in the Fund in this

reporting cycle, through six on-site visits and thirteen

conference calls. Together, these companies represent 66%

of the thirty-two that we assessed.

Our engagement targets for the Cadmos Peace Investment

Fund are ambitious. The first target is to create a dialogue

with each company within three years. We will be able to

monitor this first indicator in 2020. We are surprised by the

high rate of engagement we reached already in this first

engagement cycle and the quality of the peacebuilding

dialogues we held with these companies.

Regarding peacebuilding and SDG-16 specifically, we

stimulate all our portfolio companies to implement more

conflict-sensitive and peace-promoting business practices

within their operations in fragile states (Engagement for

additional social impact - level 5).

We discussed Peacebuilding with 69% of the portfolio

companies. 7 companies accepted an in-depth

peacebuilding assessment or are already discussing a

potential tangible project to improve their peace promoting

business practices.

Moreover, we aim to generate positive impacts within five years

at a majority of our portfolio companies regarding their

sustainability integration, by motivating them to follow our

recommendations (engagement for the strategic integration of

sustainability into the business model - level 5). This objective will

be measurable in 2022 but if we consider companies from the

Fund which have been in the Cadmos universe since 2013, this

objective would be reached by 93% of companies. During the

period under review, eight companies (ABB, Essilor-

Luxottica, L’Oréal, Nestle, Schneider Electric, SGS, Sika

and Standard Chartered.) acted on our recommendations

and improved on at least one weak point raised the year

before.

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Paolo Bozzo and Christopher Quast of PPT have managed the flagship Cadmos European Engagement Fund according to the

Buy & Care ® strategy since its inception on January 26th 2018. Mr. Quast has managed European equities at PPT since 1999 and.

Paolo Bozzo has 16 years of financial markets expertise.

The sub-fund ended 2018 with a return of -9.3%, between our

reference indexes (MSCI All Countries World Index Net

Return and MSCI Europe Net Return) which returned -8.2%

and -13.1% respectively. The fund does not have an official

benchmark as the investment universe is also driven by the

companies having the highest impact in fragile states which

are mainly European companies. At the end of the year in

2018, the Fund comprised thirty-two companies. During the

year, it welcomed two new entrants1, and divested one

company2. Our decisions take into account of many factors,

such as the sustainability of the business model, multiples-

based valuations, the peacebuilding business index and the

portfolio’s overall balance.

Until the end of September, the fund performed strong, but

it experienced a sharp drop towards the end of the year.

During the high volatility of the fourth quarter of 2018, the

most cyclical part of the portfolio, namely financials and

industrials, caused most of this negative performance.

Particularly, ABB did not escape the liquidation waves at the

end of the year despite its business restructuring around

industrial automation and robotics. Schneider, despite a

resilient business model, is suffering from the perception of a

slowdown in its European markets. 3M also suffered from its

exposure to the automotive sector, semiconductors and

China. In the financial sector, BBVA and banks in general are

still struggling to demonstrate that they can transform their

business model to generate returns on equity in excess of their

cost of capital. Standard Chartered is however, well

positioned to take advantage of structurally superior

economic growth in Asia.

More defensive sectors, such as health and food, have slowed

the decline in the portfolio. Nestlé, Unilever and L'Oréal were able to maintain a stable valuation thanks to a steady increase

in their profitability. However, Anheuser-Busch Inbev

experienced strong downward pressure due to its indebted

balance sheet following the acquisition of SAB Miller.

Vestas and Mastercard generated excellent performances

thanks to their good results and strong growth prospects

despite macroeconomic uncertainties

The first signs that the year would not be easy appeared in the

beginning of February: a potential overheating of the US

economy following the sharp drop in corporate taxes in the

context of good economic growth and full employment, and the

signs over sharp wage increases caused the first concerns.

Towards the end of the first quarter, customs measures against

China and several Western allies announced by the Trump

administration contributed to the increase in volatility. In

October, markets started going through a sharp correction,

unprecedented since the great financial crisis of 2008. Investors

first feared the impact of monetary tightening in the US, which

caused a sudden rise in long-term rates, increased political risks

in Europe (Brexit, Italy, Germany, then France) and finally, the

slowdown in the Chinese economy. The implementation of new

tariffs by the US against China, and Chinese retaliatory measures

have had the first impact on the results of the most globalised

companies. Uncertainty about the future of trade policy in this

crucial region has led to a halt in their investment decisions. In

the current context, it was difficult to optimize a production

tool implemented in multiple regions, particularly in the

automotive industry or for major technology players.

Despite the difficult economic environment, European

companies produced a profit growth close to 10%. This growth

is not as spectacular as that of the US companies, but they were

able to take advantage of the significant reduction in their tax

burden from the beginning of 2018.

1. Facebook and Microsoft 2. BBBVA

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PEACEBUILDING BUSINESS INDEX

As described on pages 6ff, the Fund invests essentially in

companies that demonstrate a net positive contribution to

peacebuilding. The Peacebuilding Business Index takes the

300 companies with the biggest economic footprint (capital

investment and job creation) in fragile countries and ranks

them according to their contribution to peacebuilding in

fragile countries. Company scores range from 86 per cent for

the company with the highest net contribution (Unilever), to

30 per cent for the company with the lowest score (Facebook)

according to the PBBI. As the table below shows, more than

75 per cent of the companies in the Fund rank in the top 100

and less than 10% of the Fund’s companies rank among the

bottom half. All companies with a score higher than 50% have

a net positive peacebuilding impact and can hence be freely

invested by the Fund. This is the case for the whole portfolio

except for Facebook. We nevertheless decided to invest in

Facebook because the company was significantly undervalued

compared to its growth potential and because our expertise as

engaged shareholders could be more effective to foster

positive changes than simply excluding the company.

Facebook PBBI rating had dropped significantly in net

negative territory due notably to severe controversies around

the use of the platform in Myanmar. But Facebook’s business

model is not fundamentally ill-suited to promote peace and

stability. For instance, the company played an important role

in the Jasmine revolution which inspired similar actions

throughout the Arab world, in a chain reaction which became

known as the Arab Spring. More recently, the Defendamos la

Paz movement, gathering various defenders of the peace

accord in Colombia, was born on WhatsApp. Our investment

decision was also supported by Facebook’s announcement to

recruit a director of human rights policy to work on “conflict

prevention” and “peace-building”. The company will remain

on a constant watchlist and will be divested if we do not

achieve any relevant progress. Therefore, we invested

additional effort towards engaging with the company. Firstly,

we connected with the Facebook Asia and Myanmar team to

discuss their monitoring of hate speech, fake news and fake

accounts. Secondly, the Executive Director of PeaceNexus,

personally wrote to the head of Global Affairs of Facebook

to provide recommendations for improvement and offer

support of the Foundation to implement these. Thirdly, the

Fund joined the investors initiative to prevent the distribution

of objectionable content following the Christchurch shooting

in March 2019. We will closely monitor developments within

Facebook and the uptake of recommendations given to

Facebook by the investor community.

REGIONS AND SECTORS

The majority of companies which have the biggest economic

impact in fragile states – as provided by the PBBI - are based

in Europe. As can be seen below, the Fund has hence a

European overweight compared to global equity indices.

We do not take regional nor sector bets but the quality and

growth bias of our fundamental bottom-up approach will also

result in a natural overweight of Industrial Goods & Services,

Food & Beverage and Technology companies.

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PERFORMANCE

PBBI


PORTFOLIO MANAGEMENT

Portfolio as at 31.12.2018 Sector Country Score Ranking Contrib. 2018 In Cadmos since

3M Industrial Goods & Services USA 59% 75 -0.96% 2018

ABB Industrial Goods & Services Switzerland 64% 45 -0.99% 2006

ACCENTURE Industrial Goods & Services Ireland 71% 20 -0.28% 2018

ADIDAS Consumer Discretionary Germany 59% 91 0.16% 2018

ALLIANZ Insurance Germany 55% 136 -0.37% 2018

ALPHABET Technology USA 60% 68 -0.20% 2018

ANHEUSER-BUSH INBEV Food & Beverage Belgium 62% 51 -1.32% 2018

APPLE Technology USA 53% 188 -0.24% 2018

ATLAS COPCO Industrial Goods & Services Sweden 57% 119 -0.46% 2018

AXA SA Insurance France 59% 93 -1.03% 2006

BBVA (Out) Banks Spain 76% 8 -0.95% 2018

BMW Automobiles & Parts Germany 59% 83 -0.82% 2007

COLGATE-PALMOLIVE Personal & Household Goods USA 59% 82 -0.21% 2018

DANONE Food & Beverage France 67% 33 -0.38% 2006

ESSILORLUXOTTICA Health Care France 57% 115 -0.06% 2006

FACEBOOK (New) Technology USA 30% 300 -0.25% 2018

FOMENTO ECONOMICO MEX. Food & Beverage Mexico 72% 16 -0.43% 2014

JOHNSON & JOHNSON Health Care USA 72% 15 -0.61% 2018

KONINKLIJKE PHILIPS Health Care Netherlands 66% 37 -0.42% 2017

LINDE Chemicals Germany 57% 116 0.07% 2008

L'OREAL Personal & Household Goods France 80% 5 0.30% 2006

MASTERCARD Financial Services USA 71% 19 0.46% 2018

MICROSOFT (New) Technology USA 72% 13 -0.13% 2018

NESTLE Food & Beverage Switzerland 81% 2 0.11% 2006

PEPSICO Food & Beverage USA 80% 3 -0.12% 2018

SAP Technology Germany 62% 52 -0.23% 2009

SCHNEIDER ELECTRIC Industrial Goods & Services France 70% 21 -0.60% 2006

SGS Industrial Goods & Services Switzerland 69% 25 -0.44% 2006

SIKA Construction & Materials Switzerland 57% 101 -0.24% 2014

STANDARD CHARTERED Banks Britain 56% 130 -1.32% 2007

TOTAL Oil & Gas France 67% 31 -0.18% 2006

UNILEVER Personal & Household Goods Britain 86% 1 0.29% 2016

VESTAS WIND SYSTEMS Oil & Gas Denmark 51% 223 0.82% 2018

For a complete overview of the investment cases for any portfolio company, please contact us at [email protected]. The Integrated

Performance Reports (IPRs) and the PBBI scorecards are accessible upon requests. The IPR’s provide full details on financial

performances, voting activities and engagement progress. The PBBI Scorecards, provide full details on local peacebuilding practices,

local ESG practice, global ESG policies as well as how the negative and positive news were spread among the PBBI indicators and the

countries. One IPR and PBBI scorecard from the last engagement cycle is available at the end of this report

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ACTIVE OWNERSHIP

VOTING TRENDS

During the period under review we expressed an opinion on

570 items on AGM agendas, stabilising the increase in the

voting decisions. The chart shows that while voting items

per company have increased since 2014, the number of

votes against management has decreased. This is natural due

to increased transparency and regulation, better-prepared

AGMs and governing bodies and more active shareholders

like Cadmos. We have exercised our voting rights since 2006

and observed a paradigm shift in corporate governance in 2014.

It is undeniable that investors like Cadmos have led to improved

corporate governance, particularly among the large European

companies. But much can still be done to ensure the

independence and appropriate mix of attributes and expertise of

some companies’ boards.

MAIN OPPOSITIONS

Of the 570 total votes cast, Cadmos voted against the

management recommendations forty-six times, that is,

in 8.1% of cases. To some extent, this illustrates the

improvements in the governance of Cadmos investee

companies. We however opposed at least one item at 55%

of our companies which is a mark of how seriously we take

our role as active shareholders. The information obtained

from this year’s AGM season continues to sharpen our

insight into the governance of each company. We were able

to vote on all companies of the voting equity securities that

were in the Fund at the time of the AGMs. This means that

we actually exercised 100% of our voting rights of our

portfolio companies, since the AGM’s of Accenture, Apple,

Facebook and Microsoft happened before these companies

entered the Fund.

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ACTIVE OWNERSHIP

DISTRIBUTION OF VOTES AND OPPOSITIONS

In 2018, our main oppositions (twenty-eight of a total

forty-six votes against the management) related to the

structure and independence of the board of directors. After

the AGM, the board is the highest organ of management,

defining the strategy to follow and appointing the senior

management that will apply it. We exercise our voting rights to

support board members which enables the board to increase

its level of competence, independence, diversity and

availability. Five “against the management” votes were linked

to excessive, poorly designed or opaque remuneration

structures, three on capital structure and ten on shareholder’s

rights.

The vast majority of our portfolio companies do, however, not

present controversial governance issues. We vote in favor of all

items for more than 45% of our portfolio companies. We voted

“against management” at only one item for 28% of the

companies. For eight companies3, though, we opposed more

than one of the voting items presented. The majority of

companies that we opposed to at least one resolution were due

to a lack of independence of the board of directors. This was

particularly true for SGS, Sika and Anheuser-Bush Inbev where

a majority of the directors are affiliated with the company. This

raises concern about the objectivity of the board and its ability

to perform its proper oversight role. At Alphabet our

oppositions were linked to “shareholder’s rights” as we

supported four specific shareholder proposals.

OF THE 570 TOTAL VOTES CAST, WE VOTED AGAINST THE MANAGEMENT’S

RECOMMENDATIONS FOURTY-SIX

TIMES, THAT IS, IN 8.1% OF CASES.

3. Alphabet, Anheuser-Bush Inbev, Atlas Copco, BMW, EssilorLuxottica, Fomento

Economico Mexicano, SGS and Sika.

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VOTE

ACTIVE OWNERSHIP

ACTIVE OWNERSHIP

Portfolio as at 31.12.2018 Description Resolutions Against

3M Voted 16 1

ABB Voted 24 1

ACCENTURE Entry after AGM 0 0

ADIDAS Voted 10 0

ALLIANZ Voted 12 0

ALPHABET Voted 20 5

ANHEUSER-BUSH INBEV Voted 20 6

APPLE Entry after AGM 0 0

ATLAS COPCO Voted 27 2

AXA SA Voted 23 0

BBVA (Out) Voted 14 0

BMW Voted 9 3

COLGATE-PALMOLIVE Voted 13 1

DANONE Voted 16 0

ESSILORLUXOTTICA Voted 25 4

FACEBOOK (New) Entry after AGM 0 0

FOMENTO ECONOMICO MEXICANO Voted 8 2

JOHNSON & JOHNSON Voted 15 1

KONINKLIJKE PHILIPS Voted 12 0

LINDE Voted 29 0

L'OREAL Voted 19 1

MASTERCARD Voted 16 0

MICROSOFT (New) Entry after AGM 0 0

NESTLE Voted 28 1

PEPSICO Voted 16 1

SAP Voted 11 0

SCHNEIDER ELECTRIC Voted 18 0

SGS Voted 24 9

SIKA Voted 53 7

STANDARD CHARTERED Voted 28 0

TOTAL Voted 20 1

UNILEVER Voted 25 0

VESTAS WIND SYSTEMS Voted 19 0

For a complete overview of the voting activities for any portfolio company, please contact us at [email protected]. The

Integrated Performance Reports (IPRs) are accessible upon requests. They provide full details on financial performances,

voting activities and engagement progress. One IPR from the last engagement cycle is available at the end of this report.

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AGAINST VOTES

ACTIVE OWNERSHIP

ACTIVE OWNERSHIP

Portfolio as at 31.12.2018 Board of Directors Remuneration Capital Structure Shareholder’s Rights

3M 0 0 0 1

ABB 0 1 0 0

ACCENTURE 0 0 0 0

ADIDAS 0 0 0 0

ALLIANZ 0 0 0 0

ALPHABET 1 0 0 4

ANHEUSER-BUSH INBEV 5 1 0 0

APPLE 0 0 0 0

ATLAS COPCO 2 0 0 0

AXA SA 0 0 0 0

BBVA (Out) 0 0 0 0

BMW 2 1 0 0

COLGATE-PALMOLIVE 0 0 0 1

DANONE 0 0 0 0

ESSILORLUXOTTICA 1 2 1 0

FACEBOOK (New) 0 0 0 0

FOMENTO ECONOMICO MEXICANO 1 0 1 0

JOHNSON & JOHNSON 0 0 0 1

KONINKLIJKE PHILIPS 0 0 0 0

LINDE 0 0 0 0

L'OREAL 0 0 0 1

MASTERCARD 0 0 0 0

MICROSOFT (New) 0 0 0 0

NESTLE 0 0 0 1

PEPSICO 0 0 0 1

SAP 0 0 0 0

SCHNEIDER ELECTRIC 0 0 0 0

SGS 9 0 0 0

SIKA 7 0 0 0

STANDARD CHARTERED 0 0 0 0

TOTAL 0 0 1 0

UNILEVER 0 0 0 0

VESTAS WIND SYSTEMS 0 0 0 0

For a complete overview of the voting activities for any portfolio company, please contact us at [email protected]. The Integrated

Performance Reports (IPRs) are accessible upon requests. They provide full details on financial performances, voting activities and

engagement progress. One IPR from the last engagement cycle is available at the end of this report.

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A) ENGAGEMENT FOR THE STRATEGIC INTEGRATION OF SUSTAINABILITY INTO THE BUSINESS MODEL - ACHIEVEMENTS

We already engaged with twenty-one companies in the Fund in this first engagement cycle through six on-site visits

and thirteen conference calls. Together, these companies represent 66% of the thirty-two that we assessed. Our

engagement targets for the Cadmos Peace Investment Fund are ambitious. The first target is to create a dialogue with each

company within three years. We will be able to monitor this first indicator in 2020. We are surprised by the high rate of trust

we reached already in this first engagement cycle and the quality of the peacebuilding dialogues we held with these companies.

We will monitor their implementation of our recommendations systematically on a yearly basis.

To provide a transparent measure of the impact of our engagement with the companies, we measure the engagement level of

each company, in order to evaluate our engagement progress. Only when the company reaches level 5, signifying that it has

acted on one of our recommendations, we consider that we have made the desired impact as responsible shareholders. In

particular, last briefing's recommendation to provide data on most KPI’s for five consecutive years – which helps to see progress

or decrease - was taken into consideration and is now available in SGS’ sustainability report. Previous year’s recommendation

to make relevant policy documents of EssilorLuxottica publicly available was taken up in the case of the Code of Ethics which

was released in 2018. L'Oréal has decided to monitor its CO2 footprint by applying science-backed targets and being in line

with previous year's recommendation.

This objective will be measurable only in 2022, but if we consider companies from the Fund which have been in the

Cadmos universe since 2013, this objective would be reached by now. The table above shows indeed the fourteen

portfolio companies (93% of long-term holdings) that have implemented our recommendations and improved on at

least one weak point raised in the past five years. During the period under review, eight companies acted on our

recommendations and improved on at least one weak point that had been raised the year before. They are ABB,

EssilorLuxottica, L’Oréal, Nestlé, Schneider Electric, SGS, Sika and Standard Chartered. When companies have shown

improvements in multiple years such as EssilorLuxottica, Nestlé, L’Oréal and many more, they are shown on the most recent

year. Altogether, going back to 2013, we have recorded 37 instances of positive engagement. This is 37 companies that have

improved upon a specific point in response to the suggestions provided by Cadmos.

DURING THE PAST FIVE YEARS, 14 COMPANIES IMPLEMENTED OUR RECOMMENDATIONS AND

IMPROVED ON WEAK POINTS RAISED THE

PREVIOUS YEAR.

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SELECTION OF MATERIAL TOPICS

Our recommendations are formulated on the basis of

identified gaps which become visible through our

systematic yearly assessments. We try to avoid

standardized assessment which may not apply to certain

sectors or companies. Together with our external experts,

we assess key material topics for each company according

to their core business activities. For the Cadmos

European Engagement Fund, three key topics stand out

as the most financially material to the universe of

companies in the Fund: which are “Product Social

Impact”, “Product Environmental Impact” and

“Business Integrity and Compliance”.

“Product social impact”, concerns 70% of the companies

and has been the most important issue as company’s

products and services can positively or negatively affect

its customers directly with regard to their physical, mental

and spiritual well-being, or as a whole, in relation to their

integrity, dignity or heritage. Companies must exercise

due care and foresight in managing their products and

services throughout their life cycle, to prevent

controversies and foster positive impacts.

On the environmental side, “product environmental impact”,

was considered a key material topic for about 50% of the

companies. Companies must adopt a precautionary approach to

local or global environmental challenges and promote

environmental responsibility, resource efficiency and pollution

prevention throughout the life cycle of their products and

services.

“Business integrity and compliance”, which is important for any

firm, was selected as a key material topic for 50% of the

companies in the Fund. Companies must comply with a variety

of external rules at national, regional and global levels, as well as

their own internal systems of control. Compliance concerns the

company’s ability to act upon according to these rules and

prevent employees from crossing the line to reach business

targets, on purpose or through negligence. Dishonest or illegal

practices such as bribery, money laundering, collusion, tax

evasion, fraud and insider trading can harm stakeholders and

the company itself. Companies must therefore make every

reasonable effort to ensure compliance and demonstrate

integrity, good governance, and responsible business practices.

50%

10%

10%

70%10%

20%

10%

10%

50%

Product environmental impact

Climate change impact

Supplier environmental impact

Product social impact

Impact on communities

Supplier social impact

Core labor standards compliance

Diversity and employee loyalty

Business integrity and compliance

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ASSESSMENT AND REPORTING

The portfolio companies’ average score for preparedness on key topics is 77%. The decrease is due to the fact that we only assessed

ten quite advanced pilot companies in 2017-2018. A score of 100 % reflects absolute best practice by all the companies in the

Fund in relation to their respective key topics, for all five indicators (materiality, commitment and strategy, objective and actions,

indicators and monitoring, and achievements).

About 60% of the portfolio companies have scores above 80 % and are already well positioned to manage their key material

topics. There are plenty of opportunities for these companies to progress and even more so for the 40% remaining.

The portfolio companies’ average score for quality of reporting is 72%. A score of 100% reflects absolute best practice by all the

companies that we assessed, for all six indicators (accessibility, clarity, comparability, accuracy, reliability, and integration).

Today 31% of the companies have scores above 80 % and already count among the businesses that are among the best at

communicating about their ESG challenges. ESG communication is becoming increasingly complex and heavy. Companies are

increasingly following-up on our progress recommendations linked to better integration between the sustainability and financial

information. Nestlé for example reduced its CSV report from previously 179 pages to 113 and also published a 16 pages extract.

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0 10 20 30 40 50 60 70 80 90 100

QUALITY OF REPORTING

Accessibility Clarity Comparability Accuracy Reliability Integration

0

1

2

3Materiality

Committment Strategy

Objectives ActionsIndicators Monitoring

Achievements

PREPAREDNESS ON KEY TOPICS

2018-2019

2017-2018

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The portfolio companies’ average score for quality of sustainability organization is 83%. A score of 100% would reflect absolute

best practice by all the companies that we assessed, for all four indicators (strategy integration, responsibility, employee

inclusiveness, and stakeholder inclusiveness).

Today 81% of the portfolio companies have scores above 80% and already count among the businesses that are best at

integrating sustainability into their organization. As mentioned in the foreword, we nevertheless view the true integration of

sustainability factors into the heart of a company’s strategy and daily operations as the next major milestone.

The portfolio companies’ average score for ability to report according to the principal reporting or impact frameworks is 50%.

A score of 100 % reflects absolute best practice by all the companies that we assessed, for all four most widely adopted

frameworks (UN Global Compact, Sustainable Development Goals, UN Guiding Principles, and Global Reporting Indicators).

63% of the portfolio companies have scores above 50% and are already among the businesses communicating broadly by means

of these frameworks. We do not expect companies to sign-up or follow all these frameworks but expect them to coherently

reference them according to their overall strategy and ambitions.

The portfolio companies’ average score on “Peacebuilding embeddedness” is 2.0. This illustrates that a majority of the

companies provide detailed information on peacebuilding relevant topics but do not link these initiatives to their activities in

fragile and conflict affected countries (score 3).

We are encouraging conflict-sensitive and peace promoting business practices among our portfolio companies with the support

of our social impact experts, including reporting on this topic.

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0 0.5 1 1.5 2 2.5 3

SDG

UNGP

GRI

UNGC

SUSTAINABILITY FRAMEWORKS

0 0.5 1 1.5 2 2.5 3

Decent working conditions

Diversity/Non-discrimination

Due diligence process

Capacity building

Local engagement

Global/sectorial engagement

PEACEBUILDING EMBEDDEDNESS

0 0.5 1 1.5 2 2.5 3

Strategy

Responsibility

Implementation

Stakeholder Inclusiveness

SUSTAINABILITY ORGANISATION

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SHAREHOLDER DIALOGUE

The Cadmos Peace Investment Fund mainly invests in companies that already show above-average sensitivity to financially

material sustainability topics. Based on the gaps identified by the assessment, we nevertheless target to formulate at least three

practical recommendations that we believe will have an impact on the companies’ future. Here, we provide two examples of

gaps and recommendations presented during our engagement meetings.

BASED ON THE ASSESSMENT, WE FORMULATE RECOMMENDATIONS

THAT WE BELIEVE WOULD HAVE AN

IMPACT ON THE COMPANIES FUTURE

WHILE BEING EASY TO IMPLEMENT.

Gap 1: Though the company has identified the use of resources and the prevention of negative impacts of its production and products to natural environment, neither specific objectives nor useful indicators are published.

Recommendation 1: Essilor-Luxottica is using different chemical substances in the production which might have ecotoxicological effects if accidentally released or negligently used. As unintended spills happened during the reporting period, the company should consider defining appropriate targets and related KPIs to be disclosed. Gap 2: The specific risks and opportunities of the two topics compliance and business ethics, which are highlighted in Essilor’s Registration Document

Documents

CADMOS PEACE INVESTMENT FUND...ADMOS REPRESENTS MORE THAN: 190 POSITIVE IMPACTS 520 ENGAGEMENT MEETINGS 900 ESG COMPANY ASSESSMENTS 14’000 ITEMS VOTED 180 INVESTMENTS F OREWORD The