CADMOS SWISS ENGAGEMENT FUND · results in 2015. Exporters with a signiﬁ cant cost base in Swiss francs suffered from the surge in the currency’s value. In a year that saw no

CADMOS SWISSENGAGEMENT FUNDBuy & Care® Responsible Investment Fund

Integrated Performance Report2015-2016C

AD

MO

S S

WIS

S E

NG

AG

EM

EN

T F

UN

D |

IN

TE

GR

AT

ED

PE

RF

OR

MA

NC

E R

EP

OR

T 2

01

5-2

01

6

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 compartment and 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 second consecutive year, de Pury Pictet Turrettini & Cie S.A. (PPT) is publishing a trans-parent, comprehensive report on the outstanding performance of the Cadmos - Swiss Engagement Fund (the Fund) launched in 20141. Cadmos is a Luxembourg-based UCITS V umbrella fund, promoted by PPT and applying our proprietary Buy & Care® strategy.

Our portfolio manag-ers’ systematic share holder engagement with the underlying compa-nies represents a unique feature of this strategy. Our objective is far-reach-ing. Overall, we aim at demonstrating that profi t-ability and responsibility can be reconciled. To that end, our investment deci-sions are based on sound fundamental analysis, a disciplined management process and a keen understanding of the compa-nies’ 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 the dialogue, the portfolio managers obtain a deeper insight into the sustainability of each company’s business model and can thus incorporate its environmental, social and gover-nance (ESG) characteristics into their fi nancial analysis. The dialogue is also highly valued by the

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

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

during the reporting cycle. The last chapter, “Engagement reports”, contains the engagement reports on selected companies, with details of the assessment and dialogue conducted by the Cadmos Funds experts. The assessments of all the 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 the Buy & Care® strategy.

1. Previously Cadmos Fund Management - Guilé Swiss 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

FINANCIAL MANAGEMENT REPORT . . . 25

Performance of the Swiss equity market . . . . . . . 26

Portfolio management review . . . . . . . . . . . . . . . . . . . 26

Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Composition of the portfolio as at 31 December 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . 28

EXERCISE OF VOTING RIGHTS . . . . . . . . . . . 29

Distribution of votes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Main oppositions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Analysis of votes by topic . . . . . . . . . . . . . . . . . . . . . . 32

SHAREHOLDER ENGAGEMENT . . . . . . . . . 37

Impact of the UN Global Compact engagement . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Impact of the fi nancially material engagement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

Improvements and main stories . . . . . . . . . . . . . . . . . 43

Long-term results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

Engagement outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

ENGAGEMENT REPORTS . . . . . . . . . . . . . . . . . . 53

TABLE OF CONTENTS

SUMMARY OF RESULTS IN 2015-2016

SUMMARY OF RESULTS IN 2015-20166/53

The Cadmos - Swiss Engagement Fund, promoted by PPT, is a compartment of the Luxembourg-based Cadmos umbrella fund. Alexandre Stucki has managed the Fund since its inception.2 In 2015, classes A and B of the compartment returned 7.9 per cent and 10.3 per cent respectively, outper-forming the benchmark index (the Swiss Leader Index - SLI), which was almost fl at at 0.07 per cent.

The Fund’s strategy proved its effectiveness in this period of high vola-tility. At December 2015 the Fund (Class B) had outperformed its index by 13.2 per cent since its launch in 2014.

Companies with small and medium capitalisa-tions outperformed the large caps, which were subject to sell-offs after a strong 2014 and mixed results in 2015. Exporters with a signifi cant cost base in Swiss francs suffered from the surge in the currency’s value. In a year that saw no clear sector-based trends, stocks in the same sector experienced varying fates.

In the pharmaceutical sector, Galenica’s share price almost doubled, fuelled by a fl ow of posi-tive news. Actelion published healthy results

throughout the year, with sales of Opsumit, its new treatment for pulmonary arterial hypertension,

beating expectations. Straumann compen-sated for the currency headwinds with opera-tional measures. Its new strategy of enlarging the product offer also began to pay off, as was evidenced by its half-yearly earnings. Roche inched higher thanks to its solid R&D pipeline, but Novartis was penal-ised by poor results in its Alcon eye-care division. Sonova felt the effects of

a slowdown in the implants segment and some loss of market shares in the United States.

Food stocks were boosted by their defensive char-acteristics and delivered robust gains, with small caps such as Bell and Lindt & Sprüngli to the fore. Nestlé managed a modest rise, maintaining its objectives of growth and margin improvement.

As the next table shows, three new companies joined the compartment: Credit Suisse, Lonza and Swiss Life. We bought Credit Suisse follow-ing the arrival of the new chief executive and the introduction of a new group strategy. In the case of Lonza, we believe that its profi ts will benefi t from the agreements signed in recent months. Our purchase of Swiss Life was prompted by the

THE FUND’S STRATEGY PROVED ITS EFFECTIVENESS IN THIS PERIOD OF HIGH VOLATILITY. AT DECEMBER 2015 THE FUND (CLASS B) HAD OUTPERFORMED ITS INDEX BY 13.2 PER CENT SINCE ITS LAUNCH IN 2014.

FINANCIAL PERFORMANCE

90

95

100

105

110

115

120

Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15

Cadmos - Swiss Engagement Fund (B) SLI Index SLI Index TR

PERFORMANCE SINCE INCEPTION

2. Alexandre Stucki Investment Management - ASIM.

SUMMARY OF RESULTS IN 2015-2016 7/53

release of a sound earnings report. The compa-ny’s life insurance business is stable in Switzerland and France and its asset-management division’s real-estate portfolio is producing attractive yields.

We sold seven positions in the course of the year. These included Clariant, where we took our profi ts

after rumours of a takeover by Evonik; Adecco, due to fears of a slowdown in US temporary employ-ment and to overambitious margin objectives; and Swatch Group, whose earnings may suffer from the fall-off in global watch sales, the strength of the Swiss franc and the launch of Apple Watch. We also sold Barry Callebaut, Belimo, Emmi and SFS.

Portfolio as at 31.12.2015 Sector ACTELION Health CareADECCO (Out) Industrial Goods & ServicesBARRY CALLEBAUT (Out) Food & BeverageBELIMO HOLDING (Out) Construction & MaterialsBELL Food & Beverage BOSSARD HOLDING Construction & MaterialsCLARIANT (Out) ChemicalsCOMPAGNIE FINANCIERE RICHEMONT Personal & Household GoodsCREDIT SUISSE GROUP (New) BanksEMMI (Out) Food & BeverageFLUGHAFEN ZURICH Industrial Goods & ServicesGALENICA RetailGEBERIT Construction & MaterialsGIVAUDAN ChemicalsHELVETIA HOLDING InsuranceKUEHNE & NAGEL Industrial Goods & ServicesLINDT & SPRUENGLI Food & BeverageLONZA GROUP (New) Health CareNESTLE Food & BeverageNOVARTIS Health CarePARTNERS GROUP HOLDING Financial ServicesROCHE HOLDING Health CareSFS GROUP (Out) Industrial Goods & ServicesSGS Industrial Goods & ServicesSIKA FINANZ Construction & MaterialsSONOVA HOLDING Health CareSTRAUMANN HOLDING Health CareSWATCH GROUP (Out) Personal & Household GoodsSWISS LIFE HLODING (New) InsuranceSWISS RE InsuranceSWISSCOM TelecommunicationsSYNGENTA ChemicalsUBS GROUP BanksVZ HOLDING Financial ServicesZURICH INSURANCE GROUP Insurance


During the period under review we expressed an opinion on 724 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 nearly 100 per cent. The additional workload

in 2015 is directly related to investors’ demands for greater transparency. Votes on remuneration have more than tripled in the last two years, rising from a low average of less than one resolution per company in 2013 to a total of 104 (3.4 per company) in 2015 and representing 14 per cent of total votes.

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.

In 2015 the AGM season was again marked by the debate on excessive executive pay. This year, we opposed 11.5 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, reasonable and well-structured remuneration policy that rewards high performance demonstrated over the long term”.

Although voices are still being raised against cases of excessive pay, we note that the latter have become less arbitrary and more likely to be justifi ed by the achievement of longer-term performance targets.

Rare are the governing bodies that take their AGM lightly. The shareholders have clearly won a round. From routine exercises with little at stake and voting results that barely excited comment during the drinks afterwards, AGMs are gradually turn-ing into meticulously orchestrated meetings with well-prepared executives and directors.

Despite all these improvements, we refused to back the board of directors in 84 of the 724 votes cast (11.6 per cent of all votes). The global rate of dissent remains stable 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

DISTRIBUTION OF OPPOSING VOTES

378

92

115

55

450

500

400

350

300

250

200

150

100

50

0

61

12

11

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

0

378

92 11555

For Against


2015 Total Total %Name 01.01 31.12 Voted Description resolutions against AgainstACTELION 1 1 1 Voted 23 1 4.35%ADECCO (Out) 1 0 1 Voted 22 0 0.00%BARRY CALLEBAUT (Out) 1 0 0 Exit before AGM 0 0 BELIMO HOLDING (Out) 1 0 1 Voted 18 2 11.11%BELL 1 1 1 Voted 16 3 18.75%BOSSARD HOLDING 1 1 1 Voted 21 2 9.52%CLARIANT (Out) 1 0 1 Voted 30 1 3.33%COMPAGNIE FINANCIERE RICHEMONT 1 1 1 Voted 24 9 37.50%CREDIT SUISSE GROUP (New) 0 1 1 Voted 32 2 6.25%EMMI (Out) 1 0 1 Voted 22 3 13.64%FLUGHAFEN ZURICH 1 1 1 Voted 18 6 33.33%GALENICA 1 1 1 Voted 21 0 0.00%GEBERIT 1 1 1 Voted 17 0 0.00%GIVAUDAN 1 1 1 Voted 24 1 4.17%HELVETIA HOLDING 1 1 1 Voted 27 4 14.81%KUEHNE & NAGEL 1 1 1 Voted 25 7 28.00%LINDT & SPRUENGLI 1 1 0 No voting rights 0 0 LONZA GROUP (New) 0 1 0 Entry a� er AGM 0 0 NESTLE 1 1 1 Voted 29 1 3.45%NOVARTIS 1 1 1 Voted 26 0 0.00%PARTNERS GROUP HOLDING 1 1 1 Voted 21 9 42.86%ROCHE HOLDING 1 1 0 No voting rights 0 0 SFS GROUP (Out) 1 0 1 Voted 18 2 11.11%SGS 1 1 1 Voted 26 9 34.62%SIKA FINANZ 1 1 1 Voted 34 5 14.71%SONOVA HOLDING 1 1 1 Voted 20 0 0.00%STRAUMANN HOLDING 1 1 1 Voted 18 1 5.56%SWATCH GROUP (Out) 1 0 1 Voted 22 8 36.36%SWISS LIFE HLODING (New) 0 1 1 Voted 24 0 0.00%SWISS RE 1 1 1 Voted 33 2 6.06%SWISSCOM 1 1 1 Voted 22 1 4.55%SYNGENTA 1 1 1 Voted 22 0 0.00%UBS GROUP 1 1 1 Voted 26 1 3.85%VZ HOLDING 1 1 1 Voted 17 2 11.76%ZURICH INSURANCE GROUP 1 1 1 Voted 26 2 7.69% 32 28 31 724 84 11.60%


As can be seen from the table opposite, we assessed twenty-seven of the companies in the Fund during this reporting cycle (January 2015 to March 2016) and engaged with twenty-one companies (78 per cent)3. This level of engagement is unique in the context of medium and large capitalisations. Credit for this success must go to the dedication of the engagement team and the stability of the portfolio managed.

For this second year of dialogue, we again placed an especially strong emphasis on face-to-face meetings. All twenty-one discussions were conducted on-site with executives at these compa-nies’ headquarters. Our dialogues generally take place in a highly constructive atmosphere, with astonishing transparency on the part of the compa-nies. The latter particularly appreciate the joint presence of our engagement team and the portfolio managers, a practice that is unique in the respon-sible-funds universe. As a result, nine companies (33 per cent) have already reached level 5, that is, showed an improvement on at least one weak point that had been raised previously.

Four new companies: Geberit, Roche, SGS and Sonova, reached level 5 in 2016. Together with Flughafen Zürich, Givaudan, Lindt & Sprüngli, Partners Group and Sika, which were also upgraded, they are described in greater detail in the chapter “Improvements and main stories” on pages 43ff.

Despite an excellent discussion, we downgraded Richemont to level 4, “Approves the progress objec-tives clearly specifi ed”, since in the main, it has yet to follow through on the previous year’s recom-mendations. We also downgraded Swisscom, as the company showed no interest in attending a meet-ing. But remarkably, most of the recommendations

ENGAGEMENT PERFORMANCE

3. It was not possible to schedule a meeting this year with Bell, Bossard Holding, Straumann and Swiss Life. VZ Holding has already announced that it is looking forward to a discussion in the next reporting cycle, as it is currently implementing its new social-responsibility policies. Swisscom, however, was not interested in meeting this year. Lonza Group entered the portfolio too late in the year for a fi rst assessment and meeting.

we assessed twenty-seven of the companies in the Fund during this reporting cycle (January 2015 to March 2016) and engaged with twenty-one companies (78 per cent)

made in 2014 have been implemented. We also downgraded Syngenta to level 4, despite six discus-

sions with its management in recent years. 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 toxicologi-cal impact of its products.

For company meetings we insist on including repre-sentatives 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. The dialogue is always very reveal-ing 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.

DISTRIBUTION OF ENGAGEMENT LEVEL : 2014-2016

Level 6

Level 5

Level 4

Level 3

Level 2

Level 1

Average

2.43

3.26

2014-2015 2015-2016


Portfolio as at 31.12.2015 Engagement type Level Change SummaryACTELION Meeting 2 +1 First discussion with the companyADECCO (Out) Exit Exit ExitBARRY CALLEBAUT (Out) Exit Exit ExitBELIMO HOLDING (Out) Exit Exit ExitBELL No meeting 1 = Not possible to schedule a meeting this yearBOSSARD HOLDING No meeting 1 = Not possible to schedule a meeting this yearCLARIANT (Out) Exit Exit ExitCOMPAGNIE FINANCIERE Recommandations from last year yet toRICHEMONT Meeting 4 -1 be followed throughCREDIT SUISSE GROUP (New) Meeting 5 =EMMI (Out) Exit Exit ExitFLUGHAFEN ZURICH* Meeting 3 +1 Regular dialogue based on mutual trustGALENICA Meeting 2 +1 First discussion with the companyGEBERIT** Meeting 5 +1 Suggestions implementedGIVAUDAN* Meeting 4 +2 Suggestions regarding the improvements to policy documents well receivedHELVETIA HOLDING* Meeting 2 NewKUEHNE & NAGEL* Meeting 2 +1 First discussion with the companyLINDT & SPRUENGLI* Meeting 4 +2 Suggestions regarding challenges in the verifi ed cocoa programme well receivedLONZA GROUP (New) No meeting (late entry) New NewNESTLE** Meeting 5 =NOVARTIS Meeting 5 =PARTNERS GROUP HOLDING** Meeting 4 +2 Multiple suggestions well receivedROCHE HOLDING** Meeting 5 +3 Ongoing improvementsSFS GROUP (Out) Exit Exit ExitSGS** Meeting 5 +1 Suggestion to publish historical performance data is implementedSIKA FINANZ* Meeting 4 +2 Multiple suggestions well receivedSONOVA HOLDING* Meeting 5 +3 Signifi cant improvements in labour normSTRAUMANN HOLDING No meeting 1 = Not possible to schedule a meeting this yearSWATCH GROUP (Out) Exit Exit ExitSWISS LIFE HLODING (New) No meeting 1 New Not possible to schedule a meeting this yearSWISS RE Meeting 5 =SWISSCOM No meeting 1 -1 No interest for engagement meeting this yearSYNGENTA Meeting 4 -1 Still not so much new on the toxicological impactUBS GROUP Meeting 5 =VZ HOLDING No meeting 1 = Dialogue expected next year as the CSR policies are about to be implementedZURICH INSURANCE GROUP** Meeting 2 New very constructive fi rst meeting and ready to discuss progress achieved over time

* Fur ther information on these companies can be found in chapter “Improvement examples and main stories” on pages 43ff.

** Comments to these companies can be consulted at chapter “Improvement examples and main stories” on pages 43ff. In addition, these companies’ complete engagement reports can be found in chapter “Engagement reports” on pages 53ff.


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

“… MANY THANKS FROM OUR END THAT YOU TOOK THE TIME TO COME TO BASEL AND WALK US THROUGH YOUR FINDINGS! WE VERY MUCH APPRECIATE YOUR INPUT AND VALUABLE FEEDBACK. THIS IS HOW WE CAN CONTINUOUSLY IMPROVE OUR SUSTAINABILITY REPORTING…”

DR. URSULA FISCHLER-STRASAK, BRAND MANAGEMENT, F. HOFFMANN-LA ROCHE LTD.

“… THANK YOU FOR YOUR VALUABLE INPUT DURING YOUR VISIT LAST THURSDAY. IT WAS HELPFUL TO BETTER UNDERSTAND YOUR RESEARCH APPROACH AND TO GET AN EXTERNAL VIEW ON OUR CSR REPORTING AND STRATEGY.”

ROLAND HÖGGER, HEAD OF ENVIRONMENT AND SUSTAINABILITY, GEBERIT INTERNATINAL AG.

“… THANK YOU VERY MUCH AS WELL FROM MY SIDE FOR YOUR VISIT AND THE ANALYSIS OF OUR UNGC COMMUNICATION ON PROGRESS REPORTING. YOUR RECOMMENDATIONS WERE VERY USEFUL AND I HOPE WE CAN IMPLEMENT SOME FOR OUR NEXT YEARS’ REPORT…”

DR. PERA WAIBEL, SUSTAINABILITY MANAGER, LINDT & SPRÜNGLI (INTERNATIONAL) AG.


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 governmen-tal 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 challenge for a listed company that was scrutinised quarterly for every basis point of change. Geberit began drafting an environmental strategy back in 1990. In 2005 sustainability was already one of the six initiatives defi ned by the company as a means of improving its productivity.

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

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


THE CADMOS FUNDS’ BUY & CARE® STRATEGY

16/53THE 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.

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 manage-ment as a whole, particularly by working with a longer time horizon that requires strict disci-pline in the fundamental analysis.

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

The shareholder engagement that underpins the Buy & Care strategy is applied to all the Cadmos Funds. We are convinced that continuous, non-in-dulgent dialogue with the companies creates value for all the stakeholders. It also enables the portfolio managers to integrate the ESG risks and opportunities into their investment deci-sions. Through this approach we strengthen our understanding and fundamental analysis of the companies. Our managers’ assessments of the risks and sustainability of the companies’ busi-ness models are sharpened, and their investment convictions are more solidly based. With time, the markets perceive and reward the uptrend in the companies’ quality and this is refl ected 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 fi nancial 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.


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 businesses that will probably continue to grow, and by concentrating on their

progress, so as to ensure that they learn from their mistakes and from our dialogue, the Cadmos Funds play a complementary and perhaps 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 - Swiss 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

18/53

The team responsible for portfolio management and fundamental analysis is the keystone of the Fund and largely explains its success. Alexandre Stucki and Nathalie Kappeler each possesses more than twenty years’ investment experience, including over ten years dedicated to the Swiss market. This advantage, combined with sound fundamental analysis, a disci-plined management process and a keen understanding of corporate business models has enabled the team, Alexandre Stucki Investment Management (ASIM), to build an effi cient portfolio in a short space of time.

ASIM follows the precepts of Benjamin Graham and Warren Buffet, fathers of the methods and techniques of the “value investing” approach. The investment objective is to obtain steady, sustained capital growth over the long term. ASIM selects high-quality businesses that reply to a set of

quantitative and qualitative criteria. In general, the companies must present steady, stable earn-ings growth, a sound balance sheet, a high return on invested capital and strong free cash fl ow generation. High-quality management, a stable, transparent long-term strategy, concentration on the target activities, and potential for product innovation are other key criteria when selecting the securities. To compile the information needed for its analysis, ASIM also studies the companies’ publications, meets their management regularly and talks to their competitors. The discussions held with the companies in partnership with the Engagement Team on the sustainability issues can then be used to fi ne-tune the analysis. They also provide a longer-term vision of the compa-ny’s strategy and the challenges that it may face, for example when procuring natural resources.

COMPANY ANALYSIS & PORTFOLIO MANAGEMENT

The team responsible for portfolio management and fundamental analysis is the keystone of the Fund and largely explains its success. Alexandre Stucki and Nathalie Kappeler each possesses more than twenty years’ investment experience, including over ten years dedicated to the Swiss market.

INVESTMENT PROCESS

For each of the companies followed, the primary research is conducted in-house. The portfolio managers construct a model (profi t and loss, balance sheet and cash fl ow) with a fi ve-year historical track record and fi ve-year projections. They then calcu-late a fair value for each stock in the portfolio. The fair value is derived from fi ve-year projections. The estimated earnings per share is calculated for the year 2021 and assigned a valuation multiple. To this fi gure is added the cumulative dividends over the fi ve years to 2021. This amount is discounted to the present value using the weighted average cost of capital specifi c to each company as a denominator. This gives the current fair value. The management decisions are made by comparing the fair value with the current market price of the security. The models are regularly updated and the fair values are compared daily with the current market prices.

In our qualitative analysis, ESG factors play an important role. As the model above shows (Management, Strategy, Focus on strengths,

Innovative ability), this is where we integrate 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 mate-rial ESG issues also outperform. Furthermore, according to the same data, the positive correla-tion 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.


4. Mozaffar Khan, George Serafeim and Aaron Yoon: “Corporate Sustainability: First Evidence on Materiality”; 2015.

19/53

PORTFOLIO CONSTRUCTION

BETWEEN TWENTY AND FORTY STOCKS ARE SELECTED FROM SLIGHTLY MORE THAN A HUNDRED WITH SUFFICIENT LIQUIDITY.


The investment universe is the Swiss Performance Index (SPI) of 250 stocks. Between twenty and forty stocks are selected from slightly more than a hundred with suffi cient liquidity. The fund does not seek to replicate its benchmark, the SLI (Swiss Leader Index of the thirty most liquid SPI stocks). This concentration is desirable in the case of an engagement fund, since it means that the cost of the shareholder dialogue can be contained. That concentration is combined with an extremely low turnover rate, which increases the quality of the dialogue.

The SLI, which contains the thirty most liquid companies on the Swiss market, was selected for several reasons. First, it is line with our manager’s investment style, which favours large- and mid-cap companies. Similarly to the SLI, Alexandre Stucki’s portfolios focus on a limited number of stocks. Second, it also presents the advantage of capping the weightings of the largest Swiss companies by capitalisation at 9 per cent each. The better diver-sifi cation that results enables the active manager to

limit the impacts of Nestlé, Novartis and Roche. Lastly, the SLI is the only index to comply with Swiss, European and US regulations. The Cadmos Funds, which are governed by European law, also stipulate the use of this index. As these funds do not allow for refunding of the withholding tax on dividends and there is no SLI Net Return, the SLI Price Return net of dividends was selected. For comparison, we insert the perform mance of the SLI Total Return with dividends in our charts.

The investment strategy is based solely on stock-picking. Its investment horizon is typically eighteen to thirty-six months and the portfolio turnover is low, which facilitates relations with the companies’ management. A stock cannot exceed 10 per cent of the portfolio and the fund’s fi ve largest holdings must not represent more than 40 per cent of the portfolio value (UCITS regulation). The fund is actively managed, based on alpha generation and valuation so that the portfolio is best positioned to cope with the different market phases.

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 portfo-lio manager’s view and may lead to decisions to sell.

THE PORTFOLIO MANAGEMENT PROCESS

Riskmanagement

• Stock volatility

• Portfolio VAR

Portfolio management

• Turnover

• Valuation model

• Positive perfor-mance management

Quantitativeanalysis

• Management

• Strategy

• Focus on strengths

• Innovative ability

Quantitativeanalysis

• Earnings growth

• Free cash flow generation

• Balance sheet quality

Research

• Primary research by the portfolio managers

• Research provided by brokers

• Consensus Conclusions

20/53

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 manager’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 fi nancially material issues.

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 members

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 decisions made at an AGM is well documented. Few profes-sionals would deny that the skills, independence and availability of a board of directors are criti-cal 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 fi rst and fore-most a fi nancial responsibility.

Alexandre Stucki defi nes his voting positions by studying the analyses of AGMs and the voting recommendations supplied by Glass Lewis. This independent agency is a leading provider of gover-nance 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 assess-ments throughout all the countries represented in the Fund. Nevertheless, our portfolio manager has the right to deviate from those recommenda-tions 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 remuneration policy; capital structure and distribution; and respect for the rights of long-term shareholders. Our analysis of voting in the 2015 AGM season, presented in the chapter “Exercise of voting rights in 2015”, is broken down according to that classifi cation.



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.

LABOUR STANDARDS3. Businesses should uphold the freedom of association and recognise the right to collective bargaining;4. eliminate all forms of forced and compulsory labour;5. abolish child labour; 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 below. The engagement team begins by assessing the compre-hensiveness and quality of all the information

published on the ten Global Compact principles (company data and publications). It forwards its assessments to the fund management team, to have the latter validate, fi rst, the improvements and shortcomings noted, and second, the fi nan-cially 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 compa-nies’ highest executive and operational bodies. This document focuses their attention on their company’s strengths and weaknesses and not on occasionally abstract ESG ratings.

22/53

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 engagement team distinguishes between the comprehensiveness and the quality of the companies’ 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


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 remunerated for the risks that we are taking and that the companies are improving and reducing these risks. Of course, since the areas that we pinpoint should be of major concern to any portfolio manager they are also those on which the company should concentrate its communication to shareholders.

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

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

Testimonials from companies in favour of this approach of integrated dialogue motivate us to continue on the 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 inte-grating 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

26/53FINANCIAL MANAGEMENT REPORT 2015

PERFORMANCE OF THE SWISS EQUITY MARKET

For Swiss equities, 2015 was a volatile year. Decisions by central banks and developments in the global economy affected the stock markets worldwide. In January, the Swiss National Bank’s decision to abandon its minimum exchange rate of 1.20 Swiss francs per euro triggered a surge in the currency’s value against the euro and the dollar. The Swiss stock market collapsed, shedding 14 per cent in two days. The market then rebounded, as the dollar strengthened against the Swiss franc and the euro recovered slightly. Investors’ confi -dence returned, boosted by the release of largely positive full-year results for 2014 and healthy US macroeconomic fi gures, together with the central banks’ loose monetary policies. Summer saw Greece taking centre stage. In June, fears that the country would default on a payment to the IMF had the markets plunging back into the red. But investors’ hopes revived when the European Union

accorded Greece a bridging loan of 7 billion euros. The upturn had just got off the ground when it was stopped in its tracks by the devaluation of the renminbi and the spectre of a slowdown in China and the emerging-market countries. Once again the Federal Reserve and the European Central Bank stepped in to shore up the markets. The ECB cut its interest rates and launched a quantitative easing programme. In December the Fed raised its key rate by 25 basis points in its fi rst hike for seven years, citing the improvement in the US economy.

Small and medium capitalisations outperformed the large caps, which were subject to sell-offs after a strong 2014 and mixed results in 2015. Exporters with a signifi cant cost base in Swiss francs suffered from the surge in the currency’s value. In a year that saw no clear sector-based trends, stocks in the same sector experienced varying fates.

PORTFOLIO MANAGEMENT REVIEW

Small and medium capitalisations outperformed the large caps, which were subject to sell-offs after a strong 2014 and mixed results in 2015.

The Fund’s strategy proved its effectiveness in a highly volatile year. In 2015, classes A and B of the compartment returned 7.9 per cent and 10.3 per cent respectively. Its benchmark, the Swiss Leader Index, remained stable at 0.1 per cent.

Since inception, classes A and B of the compartment were up 12 per cent and 15.7 per cent respectively, whereas the benchmark had gained only 2.5 per cent. Thus, they had outperformed the benchmark by 9.5 per cent and 13.2 per cent respectively.

The Fund does not replicate the index. Its objec-tive is to deliver steady growth of the invested capital. It is actively managed, with the accent on stock picking and value creation, so that the port-folio is best positioned to cope with the different market phases. It invests in companies that present steady earnings growth, a sound balance sheet, a high return on investment and strong free cash fl ow generation.

90

95

100

105

110

115

120

Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15

Cadmos - Swiss Engagement Fund (B) SLI Index SLI Index TR

PERFORMANCE SINCE INCEPTION

27/53FINANCIAL MANAGEMENT REPORT 2015

Since inception, the Fund’s turnover is less than 30 per cent, which represents a holding period of three to four years. By comparison, Mercer esti-mates 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 funds5.

In the pharmaceutical sector, Galenica’s share price almost doubled, fuelled by a fl ow of good news. The company has secured an exclusive licensing agreement with Roche to commercialise the latter’s prescription drug Mircera in the United States. Its solid fi rst-half results highlighted a strong increase in operating profi t on the back of cost-cut-ting measures. Galenica is preparing to split into two entities, Vifor Pharma and Galenica Santé, by the fourth quarter of 2016. Actelion reported healthy results throughout the year, with sales of Opsumit, its new treatment for pulmonary arte-rial hypertension, beating expectations. Straumann compensated for the currency headwinds with operational measures. Its new strategy of enlarg-ing the product offer also began to pay off, as was evidenced by its half-yearly earnings. Roche inched higher thanks to its solid R&D pipeline, but Novartis was penalised by poor results in its Alcon eye-care division. Sonova felt the effects of a slowdown in the implants segment and some loss of market shares in the United States.

Food stocks profi ted from their defensive char-acteristics and delivered robust gains, with small caps such as Bell and Lindt & Sprüngli to the fore. Nestlé managed a modest rise while maintaining its objectives of growth and margin improvement.

The banking sector was bolstered by the central banks’ monetary policies, as evidenced by UBS. Once again, the smaller groups were the best performers. VZ Holding’s business model deliv-ered double-digit profi t growth. Partners Group should see a sharp rise in earnings in 2016 and 2017 as it begins to receive substantial performance fees. Credit Suisse failed to convince investors despite a new chief executive and a new strategy.

Insurance stocks found favour early in the year, owing to their high dividend yield. Later, they were subject to profi t-taking. Swiss Re and Swiss Life performed well nevertheless, buoyed up by positive earnings reports. But results at Zurich Insurance disappointed investors.

Luxury-goods companies suffered from the surge in the Swiss franc and the slump in watch sales, particularly in the all-important Hong Kong market. Richemont and Swatch reported weak-ening profi t margins.

It was a good year for the portfolio’s chemical companies. The results published throughout the period were largely positive, notably at Clariant, Givaudan and Sika. Syngenta’s stock held up despite disappointing earnings, thanks to the takeover attempts by Monsanto.

In the course of 2015, we made some changes to the portfolio’s composition. We reduced the number of positions from thirty-two stocks at the end of 2014 to twenty-eight at the end of December 2015. The four largest positions are Novartis, Nestlé, Roche and Givaudan, the same as the year before.

As the next table shows, three new companies joined the compartment: Credit Suisse, Lonza and Swiss Life. We bought Credit Suisse following the arrival of the new chief executive and the introduc-tion of a new group strategy. In the case of Lonza, we believe that the agreements signed in recent month will boost its profi ts. Our purchase of Swiss Life was prompted by a solid earnings report. The company’s life insurance business is stable in Switzerland and France and its asset-management division’s real-es-tate portfolio is producing attractive yields.

We sold seven positions in the course of the year. These included Clariant, where we took our profi ts after rumours of a takeover by Evonik ; Adecco, due to fears of a slowdown in the US temporary employment market and overambitious margin objectives; and Swatch Group, whose earnings may suffer from the fall-off in global watch sales, the strength of the Swiss franc an d the launch of Apple Watch. We also sold Barry Callebaut, Belimo, Emmi and SFS.

IN 2015, CLASSES A AND B OF THE COMPARTMENT RETURNED 7.9 PER CENT AND 10.3 PER CENT RESPECTIVELY. ITS BENCHMARK, THE SWISS LEADER INDEX, REMAINED STABLE AT 0.1 PER CENT.

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

28/53

Portfolio as at 31.12.2015 SectorACTELION Health CareADECCO (Out) Industrial Goods & ServicesBARRY CALLEBAUT (Out) Food & BeverageBELIMO HOLDING (Out) Construction & MaterialsBELL Food & Beverage BOSSARD HOLDING Construction & MaterialsCLARIANT (Out) ChemicalsCOMPAGNIE FINANCIERE RICHEMONT Personal & Household GoodsCREDIT SUISSE GROUP (New) BanksEMMI (Out) Food & BeverageFLUGHAFEN ZURICH Industrial Goods & ServicesGALENICA RetailGEBERIT Construction & MaterialsGIVAUDAN ChemicalsHELVETIA HOLDING InsuranceKUEHNE & NAGEL Industrial Goods & ServicesLINDT & SPRUENGLI Food & BeverageLONZA GROUP (New) Health CareNESTLE Food & BeverageNOVARTIS Health CarePARTNERS GROUP HOLDING Financial ServicesROCHE HOLDING Health CareSFS GROUP (Out) Industrial Goods & ServicesSGS Industrial Goods & ServicesSIKA FINANZ Construction & MaterialsSONOVA HOLDING Health CareSTRAUMANN HOLDING Health CareSWATCH GROUP (Out) Personal & Household GoodsSWISS LIFE HLODING (New) InsuranceSWISS RE InsuranceSWISSCOM TelecommunicationsSYNGENTA ChemicalsUBS GROUP BanksVZ HOLDING Financial ServicesZURICH INSURANCE GROUP Insurance

Many uncertainties cloud the outlook in 2016. The macroeconomic context presents a mixed picture. The United States has returned to growth and Europe is seeing a timid recovery, aided by the European Central Bank’s expansionary monetary stance, the less restrictive fi scal policies, a weaker euro and a low oil price. In contrast, some of the emerging-market economies are losing steam and may suffer a reversal of capital fl ows following the

Federal Reserve’s rate hike. The Chinese economy is in transition, with services and consumption destined to replace manufacturing and construc-tion as its main drivers. Its GDP growth is set to be lower than in the past. Russia and Brazil have been hit by the fall in commodity prices. In Switzerland, household consumption and public spending should continue to offset the decline in exports. But the construction industry is showing signs of weakness.

FINANCIAL MANAGEMENT REPORT 2015

OUTLOOK

COMPOSITION OF THE PORTFOLIO AS AT 31 DECEMBER 2015

EXERCISE OF VOTING RIGHTS

30/53EXERCISE OF VOTING RIGHTS IN 2015

DISTRIBUTION OF VOTES

At the end of December 2015, the portfolio of the Cadmos - Swiss Engagement Fund comprised twenty- eight companies. We systematically exer-cised 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 thirty-one companies. The reason is that we voted on four companies that exited the portfolio after their AGMs, while one new company entered the portfolio after its AGM, and our shares in two other companies do not carry voting rights (see Summary of results in 2015–2016).

During the period under review we expressed an opinion on 724 items on AGM agendas, represent-ing an average of slightly more than twenty-three items per company. This is almost twice as much as in 2013, when the average was twelve items for the Swiss companies in which we were invested. This additional workload is directly related to the greater transparency demanded by investors, and particularly the adoption of the Minder Initiative.

The majority of the resolutions submitted to the vote, that is, almost 77 per cent, concerned the structure of the board of directors and the capital structure.

Votes on remunerat ion have more than tripled in the last two years, rising from a low average of less than one resolution per company in 2013 to a total of 104 (3.4 per company) in 2015 and representing 14 per cent of total votes. Even though we had foreseen that development in our 2013 Activity Report, we were surprised by its magnitude and the speed of adjustment shown by the companies in the portfo-lio. There are fewer fl agrant excesses and most of the outbidding tactics have been curbed. But the issue is still newsworthy and will remain controversial as long as these pay packages are not truly aligned with the shareholders’ interests and understood by the public. The vast majority of the resolutions are still accepted but shareholders’ approval rates are

diminishing every year. Fortunately, the increased transparency that we enjoy today greatly improves our ability to assess the correspondence between the company’s performance and the remuneration proposed. This positive development means that our portfolio manager is better equipped to judge whether senior managements’ interests are aligned with our own. We encourage the companies to work with two types of capped variable pay. The annual bonus rewards individual performance during the year but must also depend on the company’s results. However, we prefer 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 remunerat ion have more than tripled in the last two years, rising from a low average of less than one resolution per company in 2013 to a total of 104 (3.4 per company) in 2015 and representing 14 per cent of total votes.

DISTRIBUTION OF VOTES

Board of directors61%

Shareholder’s rights 9%

Capital structure16%

Remuneration14%


MAIN OPPOSITIONS

Of the 724 votes cast, we voted against the boards of directors’ recommendations 84 times, that is, in 11.6 per cent of cases. The chart below shows that remuneration still represents a major point of

contention (11.5 per cent of votes against manage-ment recommendations) but was not the only item that caused concern, nor the most important.

The chart below shows that remuneration still represents a major point of contention (11.5 per cent of votes against management recommendations) but was not the only item that caused concern.

Although this rat e of opposition 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 (16.7 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.

Themes Nb. Vote Against %1- Board of directors 439 61 13.9%2- Remuneration 104 12 11.5%3- Capital structure 115 0 0.0%4- Shareholders’ rights 66 11 16.7%Total 724 84 11.6%

DISTRIBUTION OF OPPOSING VOTES

378

92

115

55

450

500

400

350

300

250

200

150

100

50

0

61

12

11

For Against

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

0

378

92 11555


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 development and was the most controversial in the 2015 voting season. After the AGM, the board is the highest organ of management, defi ning the strategy to follow, appointing the senior management that will apply that strategy, and rewarding or sanctioning it according

as the objectives are reached. A board of directors must be a cohesive and competent team, available to attend the meetings and able to discuss and evaluate management’s performance freely and openly.

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

VOTE CONCERNING: BOARD OF DIRECTORS

Name Vote # Dissent % Dissent DescriptionBELIMO HOLDING 11 2 18.2% 5.1.3) Elect Hans Peter Wehrli 5.2.1) Elect Hans Peter Wehrli as ChairmanBELL 10 3 30.0% 5.6) Elect Hansueli Loosli 6) Elect Hansueli Loosli as Chairman 7.1) Elect Leo Ebneter as Compensation Committee MemberBOSSARD HOLDING 12 1 8.3% 4.1.2) Elect Anton LauberCOMPAGNIE 14 8 57.1% 4.2) Elect Jean-Blaise EckertFINANCIERE 4.4) Elect Yves-André IstelRICHEMONT 4.6) Elect Ruggero Magnoni 4.9) Elect Alain Dominique Perrin 4.11) Elect Norbert Platt 4.18) Elect The Duke of Wellington 5.2) Elect Yves-André Istel as Compensation Committee Member 5.3) Elect the Duke of Wellington as Compensation Committee MemberEMMI 13 2 15.4% 6.1.4) Elect Stephan Baer 6.2.2) Elect Stephan Baer as Nominating and Compensation Committee MemberFLUGHAFEN ZURICH 11 6 54.5% 8.A.2) Elect Corine Mauch 8.A.4) Elect Andreas Schmid 8.A.5) Elect Ulrik Svensson 8.B) Elect Andreas Schmid as Chairman 8.C.2) Elect Andreas Schmid as non-voting Nominating and Compensation Committee Member 8.C.4) Elect Vincent Albers as Nominating and Compensation Committee MemberHELVETIA HOLDING 19 3 15.8% 4.1.1) Elect Doris Russi Schurter 4.113) Elect Herbert J Scheidt 4.2.4) Elect Doris Russi Schurter as Nominating and Compensation Committee MemberKUEHNE & NAGEL 16 5 31.3% 4.1.C) Elect Karl Gernandt 4.1.I) Elect Bernd Wrede 4.2) Elect Karl Gernandt as Chairman 4.3.A) Elect Karl Gernandt as Compensation Committee Member 4.3.E) Elect Bernd Wrede as Compensation Committee MemberPARTNERS GROUP 13 5 38.5% 7.1.1) Elect Peter Wuffl i as ChairmanHOLDING 7.1.3) Elect Alfred Gantner 7.1.7) Elect Steffen Meister 7.2.2) Elect Steffen Meister as Nominating and Compensation Committee Member 7.2.3) Elect Peter Wuffl i as Nominating and Compensation Committee MemberSFS GROUP 10 2 20.0% 5.1.D) Elect Karl Stadler 5.3.B) Elect Karl Stadler as Nominating and Compensation Committee MemberSGS 15 8 53.3% 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 as Nominating and Remuneration Committee Member 4.3.2) Elect Ian Gallienne as Nominating and Remuneration Committee MemberSIKA FINANZ 14 5 35.7% 3) Ratifi cation of Board Acts 4.1.2) Elect Urs F. Burkard 4.1.4) Elect Willi K. Leimer 4.1.8) Elect Jürgen Tinggren 4.4.2) Elect Urs F. Burkard as Compensation and Nominating Committee MemberSTRAUMANN HOLDING 11 1 9.1% 6.1) Elect Gilbert Achermann as ChairmanSWATCH GROUP 12 5 41.7% 5.1) Elect Nayla Hayek 5.3) Elect Georges Nicolas Hayek 5.6) Elect Nayla Hayek as Chairwoman 6.1) Elect Nayla Hayek as Compensation Committee Member 6.3) Elect Georges N. Hayek as Compensation Committee MemberSWISS RE 18 1 5.6% 6.1.3) Elect Raymond K. F. Ch’ienUBS GROUP 16 1 6.3% 3) Ratifi cation of Board and Management ActsVZ HOLDING 9 1 11.1% 4.1.3) Elect Albrecht LanghartZURICH INSURANCE 17 2 11.8% 4.1.5) Elect Thomas K. EscherGROUP 4.2.4) Elect Thomas Escher as Remuneration Committee Member

BOARD OF DIRETORS


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 opposition relates primarily to the independence issues listed in the table below.

VOTE CONCERNING: BOARD OF DIRECTORS

Name Vote # Dissent Agree % Our objectionsBELIMO HOLDING 11 2 86.5% Board’s lack of independence 91.6% Board’s lack of independenceBELL 10 3 98.8% Lack of board committees 98.8% Lack of board committees 97.6% Lack of board committeesBOSSARD HOLDING 12 1 99.5% Board’s lack of independenceCOMPAGNIE 14 8 Accepted! Board’s lack of independenceFINANCIERE Accepted! Board’s lack of independenceRICHEMONT Accepted! Board’s lack of independence Accepted! Board’s lack of independence Accepted! Board’s lack of independence Accepted! Board’s lack of independence Accepted! Board’s lack of independence Accepted! Board’s lack of independenceEMMI 13 2 Accepted! Board’s lack of independence Accepted! Board’s lack of independenceFLUGHAFEN ZURICH 11 6 84.6% Board’s lack of independence 82.2% Board’s lack of independence 79.2% Serves on too many boards 85.4% Board’s lack of independence 79.6% Board’s lack of independence 81.6% Board’s lack of independenceHELVETIA HOLDING 19 3 86.5% Board’s lack of independence 84.8% Board’s lack of independence 95.7% Board’s lack of independenceKUEHNE & NAGEL 16 5 Accepted! Board’s lack of independence Accepted! Board’s lack of independence Accepted! Board’s lack of independence Accepted! Board’s lack of independence Accepted! Board’s lack of independencePARTNERS GROUP HOLDING 13 5 89.9% Board’s lack of independence 82.0% Board’s lack of independence 80.1% Board’s lack of independence 65.9% Board’s lack of independence 87.7% Board’s lack of independenceSFS GROUP 10 2 98.9% Board’s lack of independence 98.0% Board’s lack of independenceSGS 15 8 73.1% Board’s lack of independence 71.4% Serves on too many boards 69.4% Board’s lack of independence 72.1% Board’s lack of independence 68.1% Board’s lack of independence 73.0% Board’s lack of independence 67.0% Board’s lack of independence 70.7% Board’s lack of independenceSIKA FINANZ 14 5 Accepted! Specifi c issues linked to takeover (Saint-Gobain) 82.5% Specifi c issues linked to takeover (Saint-Gobain) 83.5% Specifi c issues linked to takeover (Saint-Gobain) 83.6% Specifi c issues linked to takeover (Saint-Gobain) 79.3% Specifi c issues linked to takeover (Saint-Gobain)STRAUMANN HOLDING 11 1 98.4% Related party transactionsSWATCH GROUP 12 5 Accepted! Board’s lack of independence Accepted! Board’s lack of independence Accepted! Board’s lack of independence Accepted! Board’s lack of independence Accepted! Board’s lack of independenceSWISS RE 18 1 69.6% Serves on too many boardsUBS GROUP 16 1 88.9% Ongoing investigationsVZ HOLDING 9 1 99.9% Related party transactionsZURICH INSURANCE GROUP 17 2 98.8% Board’s lack of independence 99.3% Board’s lack of independence

34/53

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.

REMUNERATION

We have already mentioned executive pay, an issue that led us to oppose at least one recommenda-tion of nine AGMs. We note that in a Europe-wide comparison, Swiss remuneration tends to be positioned above the average. In addition, and undoubtedly owing to the transparency introduced

by the Minder Initiative, a large portion of that pay package is discretionary and overly focused on the short term. Below we present the nine compa-nies where we were unable to back all the pay resolutions in 2015.

Now let us focus on Partners Group, which received the most shareholder opposition in this area, and where we opposed every pay-related resolution put to the vote. Although awards are linked to the company’s performance, ultimately they are granted at the discretion of the board of directors. In particular, there appears to be no limit to an executive’s individual award under the incentive plans. We are also concerned that non-execu-tive directors are eligible to receive awards under both the Employee Participation Plan and the

Management Carry Programme, including those directors responsible for administering the plan. In accordance with best practice recommenda-tions, non-executive directors should not receive equity-linked awards, particularly if the awards are granted on the same terms as to executives. Furthermore, we believe that grants that vest subject to continuous service could deter direc-tors from expressing dissenting views at board meetings and, in extreme cases, using the ulti-mate sanction of resigning.

VOTES CONCERNING: REMUNERATION

Name Vote # Dissent % Dissent DescriptionBOSSARD HOLDING 3 1 33.3% 5.1) Board CompensationCOMPAGNIE FINANCIERE 3 1 33.3% 9.2) Fixed Executive CompensationRICHEMONTGIVAUDAN SA 4 1 25.0% 7.1) Board CompensationHELVETIA HOLDING 4 1 25.0% 5.3) Variable Board RemunerationKUEHNE & NAGEL 3 1 33.3% 7) Remuneration ReportPARTNERS GROUP 3 3 100.0% 3) Compensation ReportHOLDING 6.1) Board Compensation 6.2) Executive CompensationSWATCH GROUP 5 2 40.0% 4.3) Variable Compensation (Executive Directors) 4.4) Variable Compensation (Executive Management)SWISS RE 4 1 25.0% 7.1) Board CompensationSWISSCOM 3 1 33.3% 1.2) Remuneration Report

EXERCISE OF VOTING RIGHTS IN 2015

35/53

The table above presents the approval rate for each disputed point and the voting result. Most of the resolutions that we opposed were also the most controversial, sometimes mobilising one third of dissenting votes, as in the case of Partners Group.

Although voices are still being raised against the continuing cases of excessive pay, we note that overall 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 ex-ibility 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 valu-ation 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

Most of the resolutions that we opposed were also the most controversial, sometimes mobilising one third of dissenting votes, as in the case of Partners Group.

Our third topic relates to all the AGM resolu-tions 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 nancial and accounting consistency. This is usually the least controversial topic and this year we did not oppose any of the boards’ proposals.

CAPITAL STRUCTURE

VOTES CONCERNING: REMUNERATION

Name Vote # Dissent % Agree Our objectionsBOSSARD HOLDING 3 1 98.3% NEDs receive performance-related compensationCOMPAGNIE FINANCIERE 3 1 Accepted! Fixed pay signifi cantly exceeds peers; RICHEMONT disclosure concernsGIVAUDAN SA 4 1 96.1% NEDs receive deferred awardsHELVETIA HOLDING 4 1 91.5% NEDs may participate in executive planKUEHNE & NAGEL 3 1 Accepted! No disclosed incentive limits and LTI performance metricsPARTNERS GROUP HOLDING 3 3 66.9% Poor overall design 72.7% NEDs may participate in executive plan 72.2% Excessive amount; discretionary awardsSWATCH GROUP 5 2 Accepted! Lack of performance-related remuneration Accepted! Lack of performance-related remunerationSWISS RE 4 1 86.7% Excessive compensationSWISSCOM 3 1 96.7% Lacks long-term incentive plan; poor overall design

EXERCISE OF VOTING RIGHTS IN 2015


VOTE CONCENING: SHAREHOLDERS’ RIGHTS

Name Vote # Dissent % Dissent DescriptionACTELION 2 1 50.0% 8) Additional or Miscellaneous ProposalsCLARIANT 2 1 50.0% III.1) Transaction of Other BusinessCREDIT SUISSE GROUP 4 2 50.0% III.a) Authorize Proxy to Vote on Additional Shareholder Proposals III.b) Authorize Proxy to Vote on Additional Board ProposalsEMMI 2 1 50.0% 4) Amendments to Articles Relating to VegüVKUEHNE & NAGEL 2 1 50.0% 5.2) Amendments to Articles relating to VegüVNESTLE 2 1 50.0% 7) Additional or Miscellaneous ProposalsPARTNERS GROUP HOLDING 2 1 50.0% 5) Amendments to Articles Relating to VegüvSGS 2 1 50.0% 5) Amendments to Articles Relating to VegüVSWATCH GROUP 2 1 50.0% 9) Amendments to Articles Relating to VegüVVZ HOLDING 2 1 50.0% 7) Amendments to Articles Relating to VegüV

VOTE CONCENING: SHAREHOLDERS’ RIGHTS

Name Vote # Dissent % Agree Our objectionsACTELION 2 1 Accepted! Insuffi cient information provided by the companyCLARIANT 2 1 Accepted! Granting unfettered discretion is unwiseCREDIT SUISSE GROUP 4 2 94.3% Insuffi cient information provided by the company 99.1% Insuffi cient information provided by the companyEMMI 2 1 Accepted! Amendment is not in best interests of shareholdersKUEHNE & NAGEL 2 1 Accepted! Amendment is not in best interests of shareholdersNESTLE 2 1 Accepted! Insuffi cient information provided by the companyPARTNERS GROUP HOLDING 2 1 92.7% Amendment is not in best interests of shareholdersSGS 2 1 72.3% Amendment is not in best interests of shareholdersSWATCH GROUP 2 1 Accepted! Amendment is not in best interests of shareholdersVZ HOLDING 2 1 93.1% Amendment is not in best interests of shareholders

In our view the changes ran counter to the share-holders’ interests. The proposed amendment would allow remuneration proposals rejected by the annual meeting to be approved at the same meet-ing under a new proposal from the board. Since shareholders voting by proxy would not have access to such information in advance, and may in fact instruct the independent proxy to vote in management’s favour on new proposals submitted during the meeting, we believe such a procedure may seriously infringe on the rights of institutional

shareholders. As the shareholders’ rights are therefore too severely limited, we decided to reject these amendments, even though most of the other changes proposed are rather positive. 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 manoeu-vre have been inserted into the draft amendment to Swiss law on limited companies.

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.

A large number of Swiss fi rms have been chal-lenged in the last two years on the subject of shareholders’ rights. Indeed the ordinance against excessive remuneration in Swiss listed

companies (ORAB), which entered into force on 1 January 2014, calls for signifi cant stat-utory amendments. To their credit, the Swiss companies have made every effort to comply rapidly with the requirements. In the case of seven companies (Credit Suisse, Emmi, Kühne & Nagel, Partners Group, SGS, Swatch and VZ Holding) we decided not to back the statutory changes proposed.

SHAREHOLDERS’ RIGHTS

SHAREHOLDER ENGAGEMENT

38/53SHAREHOLDER ENGAGEMENT 2015 – 2016

As outlined in the introduction, during this report-ing cycle we were able to hold discussions with twenty-one of the twenty-seven assessed companies in the portfolio, representing a record engagement rate of more than 78 per cent 6.This level of engage-ment is unique in the context of medium and large capitalisations. Credit for this success must go to the dedication of the engagement team and the stability of the portfolio managed.

All twenty-one active dialogues were on-site meetings with executives at these companies’ head-quarters. This outstanding result was achieved

despite the fact that the majority (15) of the compa-nies in the compartment are not signatories to the Global Compact.7

In 2015 all the meetings were face-to-face as opposed to conference calls. This has helped us reach new milestones with companies with whom we have been in discussion for many years. These remarkable and stable results, shown in the following chart, testify to the credibility that the Cadmos Funds have acquired in the eyes of the Swiss companies.

IMPACT OF THE UN GLOBAL COMPACT ENGAGEMENT

6. It was not possible to schedule a meeting this year with Bell, Bossard Holding, Straumann and Swiss Life. VZ Holding has already announced that it is looking forward to a discussion in the next reporting cycle, as it is currently implementing its new social-responsibility policies. Swisscom, however, was not interested in meeting this year. Lonza Group entered the portfolio too late in the year for a fi rst assessment and meeting.

7. Actelion, Bell, Bossard, Flughafen Zürich, Galenica, Givaudan, Helvetia, Partners Group, Roche, SGS, Sonova, Straumann, Swiss Life, Swisscom and VZ Holding.

AS OUTLINED IN THE INTRODUCTION, DURING THIS REPORTING CYCLE WE WERE ABLE TO HOLD DISCUSSIONS WITH TWENTY-ONE OF THE TWENTY-SEVEN ASSESSED COMPANIES IN THE PORTFOLIO, REPRESENTING A RECORD ENGAGEMENT RATE OF MORE THAN 78 PER CENT.

CONTACT WITH THE COMPANIES IN THE COMPARTMENT

80%

70%

60%

50%

40%

30%

20%

10%

0%Meetings Conference calls No dialogue during timeframe

2014-2015 2015-2016

Many companies emphasise the value of this exchange of ideas with the portfolio manager and a member of the engagement team. At Roche, for example, we were able to get together with four management representatives in the fi rst year and six in 2015. They welcome the opportunity to explore new ways of improving the company’s reporting

or conveying to mainstream investors that sustain-ability management strengthens a company’s business model.

More and more companies now contact us on their own initiative to pursue the previous years’ discus-sion. They are speaking out publicly about their


2014-2015 2015-2106 Level Description 0 0 (6) (Recommendations publicized) 6 9 5 Shows improvements on at least one weak point raised 2 6 4 Approves the progress objectives clearly specifi ed 0 1 3 Displays awareness and accepts the principle of an annual dialogue 13 5 2 Agrees to a detailed discussion about our assessment 9 6 1 Acknowledges receipt of our assessment

ENGAGEMENT LEVEL OF COMPANIES (#)

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

The effectiveness targets set for the Cadmos Funds are ambitious. Our fi rst goal is to create a continu-ing dialogue with all the companies within four to fi ve years, represented by level 3. We have reached that level with sixteen of the twenty-nine assessed companies in only two years and seem to be on track to meet our goal.

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 nine companies (one third) reached that level, meaning that they had improved on at least one weak point that had been raised.

As the table shows, only six companies had reached level 5 in our previous engagement round. The evolution can be quantifi ed by tracking the average level of engagement over time. Today the average stands at 3.26, whereas it was only 2.43 in the previous year.

desire for a healthy dialogue with their stakeholders. But they are also increasingly critical of over-sim-plifi 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 condu-cive to a dialogue that is both infl uential and constantly constructive.

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 trans-parent measure of the extra-fi nancial impact of the UN Global Compact engagement with the compa-nies. The following table shows the evolution over the last two reporting cycles.

DISTRIBUTION OF ENGAGEMENT LEVEL : 2014-2016

Level 6

Level 5

Level 4

Level 3

Level 2

Level 1

Average

2.43

3.26

2014-2015 2015-2016

40/53

As regards upgrades, Geberit, Roche, SGS and Sonova are the four new companies reaching level 5 this year.8 Flughafen Zürich has risen to level 3 while Givaudan, Lindt & Sprüngli, Partners Group and Sika have all advanced to level 4. The following chapter provides details of these improvements, and a chart of our engagement activities may be found in the introduction, under “Engagement perfor-mance 2015–2016”.

Three companies were downgraded. Among them was Richemont, which was lowered despite an excellent discussion. Richemont was downgraded to level 4, “Approves the progress objectives clearly specifi ed”, since in the main, it has yet to follow through on the previous year’s recommendations.

Swisscom was returned to level 1, as a visit had proved impossible. But we had had a good meeting with the company in the previous year and trust that we shall manage to engage with it again in 2016–2017. Swisscom is fairly advanced in terms of implementing its social-responsibility strategy. We had mainly recommended that it improve its exist-ing Code of Conduct, which is rather superfi cial, by being more explicit about the corruption issues.

We also downgraded Syngenta, despite six discus-sions with its management in previous years. We felt that the company had gradually understood the importance of addressing the ESG issues but had failed to provide adequate answers, particularly relating to the toxicological impact of its products.

8. Richemont was downgraded from level 5 to level 4.

SHAREHOLDER ENGAGEMENT 2015 – 2016

AS REGARDS UPGRADES, GEBERIT, ROCHE, SGS AND SONOVA ARE THE FOUR NEW COMPANIES REACHING LEVEL 5 THIS YEAR.

41/53

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 50 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, fi nance and media industries are particularly vulnerable and are directly penalised by reputational issues.

In the case of the chemical and construction-mate-rials industries, together with insurers and public electricity suppliers, (about 30 per cent of the companies) we are more concerned about the three environmental principles. For industry and services in particular (about 20 per cent of the companies) the anti-corruption principle is a major risk factor. Lastly, and primarily for the rare companies that we follow that are active in distribution, travel and leisure the four principles related to interna-tional labour standards constitute a fi nancially material threat.

Nevertheless, we remain convinced that the application of the UN Guiding Principles on Business and Human Rights, known as the “Ruggie Principles”, continues to represent the main challenge for large multinational compa-nies. 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 apparently the process could take several years. The greatest challenge may consist of enabling victims of human-rights abuses and breaches of the environmental stan-dards of Swiss companies to lodge a complaint in Switzerland and receive compensation. In April 2015, a broad coalition of organisations launched the Responsible Business Initiative in Switzerland. This initiative calls for the introduction of stringent

rules obliging businesses to respect human rights and the environment in particular in their activ-ities 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.9

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

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


THE PRELIMINARY IDENTIFICATION OF THE FINANCIAL MATERIALITY FOCUS CONFIRMS OUR PROJECTIONS: THE PRINCIPLES RELATING TO HUMAN RIGHTS AND COMPLICITY IN HUMAN RIGHTS ABUSES IN THE VALUE CHAIN COVER THE ISSUES THAT WE CONSIDER THE MOST FINANCIALLY MATERIAL

42/53

Portfolio as at 31.12.2015 Financial Materiality Focus – Addressed by Portfolio managersACTELION Access to health care Responsible procurementADECCO (Out) ExitBARRY CALLEBAUT (Out) ExitBELIMO HOLDING (Out) ExitBELL TBCBOSSARD HOLDING Complicity – supply chain (supply from Asia) ; product liability Life-cycle issuesCLARIANT (Out) ExitCOMPAGNIE FINANCIERE Risks of complicity in human rights abuses (sourcing of raw materials)RICHEMONT Occupational health and safety (gold and gemstone mises, leather tanning)CREDIT SUISSE GROUP (New) Human rights track-record of corporate clients in emerging markets ESG issues taken into consideration in project fi nanceEMMI (Out) ExitFLUGHAFEN ZURICH Stakeholder dialogue on environmental and health issues Environmental impacts (risks regarding climate change)GALENICA Access to health care Ethical business practicesGEBERIT Human rights risks in supply chain Corruption riskGIVAUDAN Sourcing of raw materials – extraction from delicate environments Opportunities for sustainable sourcing and innovative sourcingHELVETIA HOLDING Use of sustainable investment when investing its capital Impact of climate change on insurance portfolio and on asset managementKUEHNE & NAGEL Broker, no ownership on the shipping mean ; risk of corruption Complicity in human rights abusesLINDT & SPRUENGLI Sourcing of raw materials : Human rights risks in Ghana and Turkey (hazelnuts) Opportunities of sourcing sustainably – innovation in sourcingLONZA GROUP (New) TBCNESTLE The provision of safe, healthy, nutrient-rich food Responsible sourcingNOVARTIS Access to health care Responsible procurementPARTNERS GROUP HOLDING Importance of ESG criteria when allocating client’s funds. Impact of principles of responsible investment (PRI) on the investment processROCHE HOLDING Access to healthcare Lify cycle of productsSFS GROUP (Out) ExitSGS Business integrity Traceability and compliance (inspection of critical sites)SIKA FINANZ Environmental impact and innovation (risk/opportunity) Impact of the new sustainability evaluation process on product developmentSONOVA HOLDING Product safety and access to hearing aids Presence in China could raise corruption issuesSTRAUMANN HOLDING Product safety Access to productsSWATCH GROUP (Out) ExitSWISS LIFE HLODING (New) Product safety FairnessSWISS RE Reliability and integrity of (re)insurance solutions and services Growing impact of climate change on asset managementSWISSCOM Data privacy Driving environmentally friendly technology (software)SYNGENTA Data privacy CorruptionUBS GROUP Human rights track-record of corporate clients in emerging markets PRI principles taken into consideration in wealth managementVZ HOLDING Data privacy Ethical marketingZURICH INSURANCE GROUP The suitability and adequacy of the insurance policies CSR issues in asset management


43/53

IMPROVEMENTS AND MAIN STORIES

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

FLUGHAFEN ZÜRICH

We begin with Flughafen Zürich, whose revenues derive from aviation operations and the commercial infrastructure at Zurich Airport. The airport is enjoy-ing an increase in local-passenger traffi c, and a large real-estate project, The Circle, is under way just a few steps from the terminals. One of Zurich Airport’s main concerns is the environmental impact of its operations, including carbon and noise emissions. This also affects its reputation and relations with the public. In addition, with its increasing involvement in airport development projects abroad, issues such as anti-corruption in emerging countries come into play.

The company takes its impact on the environ-ment very seriously and responds with concrete strategies, measures and achievements. At our

second discussion with the heads of environmental protection and investor relations we recommended integrating issues such as anti-corruption, employee satisfaction, safety and security into the reporting. In particular, the information on the fi ght against corruption should include the consulting projects with foreign airports mentioned above.

Flughafen Zürich’s representatives were eager to learn more about our methodology, and in their turn they shared valuable background information. There was an open and interactive discussion of our recommendations and a willingness to pursue the conversation in the coming years. The company has not formally approved our progress objectives, but it seems keen to improve its approach to social Responsibility.

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 responds to our earlier proposal that the company prove the reliability of its non-fi nancial reporting.

Givaudan is the leader in the fragrance and fl avour industry and expects to outgrow the market, thanks to market share gains, increasing exposure to emerg-ing markets, and new segments such as Health and Wellness. In terms of social responsibility, its sourc-ing of raw materials that are extracted from fragile environments is a major fi nancially material risk. However, sustainable and innovative approaches to sourcing present opportunities. The ratio of natural to synthetic fragrances and fl avours is fi fty-fi fty. Eighty per cent of materials are sourced direct and the demand for natural ingredients is increasing. As supplies are scarce, prices are on the rise.

It is essential for Givaudan to employ responsi-ble methods of procuring key ingredients such as vanilla, citrus and patchouli. The company is an active member of SEDEX, which is one of the largest collaborative platforms for sharing ethical supply-chain data and is accessible to suppliers and clients. However, a sizeable number of Givaudan’s suppliers,

providing around three hundred botanical species for natural fragrances, are still an inherent reputa-tional risk. We suggest building formal partnerships with these suppliers and with eligible third parties, aimed at ensuring sustainable sourcing practices, including fair and transparent pricing.

Again this year, the spirit of the conversation was open and constructive. The weaknesses identifi ed were positively received and discussed, notably by the new global sustainability manager, who was partic-ipating for the fi rst time. At certain moments in the discussion, when the head of investor relations tended to trivialise a particular issue, his two colleagues from sustainability management intervened by taking up the point more refl ectively and self-critically. In contrast to the previous year’s recommendations, which have not yet been taken further, this year’s suggestions seem to have sparked a more positive reaction, worthy of the upgrade to engagement level 4.

GEBERIT

GIVAUDAN


44/53

Helvetia entered the Fund in late 2015, so this was our fi rst assessment of and meeting with the company. For this medium-sized insurer, active in the life and non-life businesses, mainly in Switzerland, the main social-responsibility risks concern the impact of climate change on its insur-ance portfolio and its asset management.

This fi rst meeting took place with the head of corporate responsibility and the head of investor relations at Helvetia’s branch offi ce in Zurich.

Helvetia’s reporting on the relevance of climate change proved to be outstanding, thanks to well-developed risk and opportunity analyses. We recommended setting specifi c quantitative goals for the environmental issues as a whole to underline Helvetia’s commitment to this area. The exchange with the company representatives was very constructive and prepared the ground for future meetings, where we hope to be able to discuss the progress achieved over time. We therefore awarded Helvetia engagement level 2.

HELVETIA HOLDING

Kuehne & Nagel was among the companies that we had not managed to meet prior to the 2015–2016 reporting period. The head of corporate controlling and the head of quality, safety, health and the environment, who is also in charge of secu-rity and dangerous goods, gave us details of their responsibilities.

As one of the world’s leading logistics provid-ers, active in sea- and air-freight services and contract logistics, the company is exposed to compliance issues in cross-border transactions and depends on the integrity of its business part-ners. As regards its environmental impact, it could reduce its footprint by providing its customers with environmentally friendly solutions. This would add value to Kuehne & Nagel’s services.

In view of the company’s strong commitment to promoting environmental responsibility within its

own operations and among its customers, we also recommend that it systematically highlight and explain the materiality of its efforts.

The absence of meaningful information on core labour norms such as freedom of association, child labour and forced labour is striking in a company with a global reach. We urge Kuehne & Nagel to address those issues in its policy documents and sustainability reporting. While it provides very comprehensive coverage of health and safety and sound documentation of its philan-thropic activities, we should like to see more details on subjects such as the minimum wage, overtime and access to healthcare.

The meeting with the company representatives was very constructive. They made it clear that they were open to discussing further improve-ments, thereby justifying an engagement level of 2.

KUEHNE & NAGEL

LINDT & SPRÜNGLI

This was our second meeting with senior representatives of Lindt & Sprüngli at their headquarters in Kilchberg. As the world’s leading producer of premium chocolate, the company faces major sourcing challenges in fragile countries such as Ghana (cocoa beans) and Turkey (hazelnuts). Other issues are climate change, the increasing conversion from cocoa farming to the more prof-itable high-yielding crops, the cocoa farmers’ poor skills, and the pressure to provide comprehensive product information and fair-trade labelling.

Lindt & Sprüngli’s social-responsibility report-ing is still in the development stages and slightly below average. The reporting on human rights has improved somewhat from the year before and remains the strongest area, with a focus on traceability.

For example, the company has further reduced the risks related to its sourcing of cocoa and hazelnuts through farmer training and verifi -cation. We mentioned its efforts in this area in our previous report. However, the information on critical ingredients (including semi-fi nished prod-ucts) is still not suffi ciently comprehensive. We suggest adhering to common reporting practices, in particular the GRI framework, and disclosing more robust and, where possible, quantitative information, including a reference to a base line. This would increase critical stakeholders’ trust in Lindt & Sprüngli. At present, one could get the impression that the company relied too much on the strength of its brand’s association with high-qual-ity chocolate products. That brand image could be eroded by newly acquired entities or less exclusive product lines, or the positioning of competitors that are working hard at sustainability.


45/53

NESTLÉ

PARTNERS GROUP

The results of UNGC assessments and the ques-tions and feedback from the portfolio manager and the Guilé engagement team were well received, and openly and competently discussed. The representatives welcomed our suggestions, fi rst, that the reporting explain more clearly the challenges inherent in introducing the company’s verifi ed cocoa programme in Ghana; and second, that the company develop scientifi cally sound case studies documenting the impact of its efforts (e.g. the training for hazelnut farmers in Turkey). They also spoke frankly about the challenges to the company’s sourcing policies and delivery

practices in Ghana which are fully controlled and misused by the national cocoa board and its staff. Lindt & Sprüngli sources all its bulk beans in Ghana which represents a serious cluster risk, given the fl uctuations in harvested production. It has now mandated an intermediary to ensure that the procured cocoa beans are stored in offi -cial warehouses and inspected continuously. This action is designed to prevent seizure by the cocoa board if the board misses its production targets; or unwanted blending of the beans; or attempted brib-eries. Consequently, we have raised the company to engagement level 4.

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 communi-ties and other stakeholders in high-risk countries. In this way, the company can create and implement action plans that address any gaps between interna-tional human rights standards and current practice in the countries in which it operates. 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 relevant corporate departments at Nestlé head-quarters. Furthermore, the company’s Integrity Reporting System enables employees to report anonymously by phone or the web on any illegal or non-compliant behaviour observed, as well as seek advice or information on company practice.

Nestlé will integrate this additional non-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.

Partners Group is a fi nancial company specialised in private markets: private equity, private debt, private real estate and private infrastructure. With more than 30 billion euros under management, it is one of the largest independent players in the private-market arena. It is benefi ting from the uptrend in capital allocated to private investments by pension funds and investment companies. A carbon footprint of close to three hundred direct investments could negatively affect the portfo-lio’s performance. Violations of human rights and labour norms by the portfolio companies and private-market investment partners would be likely to trigger disinvestment by socially conscious insti-tutional investors. Integrity and ethical business practices on the part of management and staff are of the utmost relevance to fi rms in this industry.

The company seems well aware of these issues, as the chief executive, the responsible-investment

manager and the vice-president of business devel-opment were eager to discuss them with us for the second year in a row. The comprehensiveness of Partners Group’s reporting has improved slightly. Nevertheless it remains at the narrative level. While the reader does get some information, still rather generic, on the integration of ESG criteria into the investment process, the company discloses hardly any details on how it handles social responsibility issues within its organisation. It has neither a formal structure in this area nor clearly defi ned responsibil-ities and processes for integrating sustainability and social responsibility into its business and support activities. Its commitment to the Principles of Responsible Investment is not convincingly refl ected in its communications, though the company is active in one of the working groups and submitted a report on progress for which it received a Top-A rating. We suggested that it do more to tell external stakeholders about its engagement.



The meeting took place in an atmosphere of openness and mutual trust. All three of the fi rm’s participants were keen to discuss the fi ndings of the assessment and routes to further improvement with the port-folio manager of the Cadmos - Swiss Engagement Fund and the Guilé engagement team. Most of the suggestions were well received. Following up on

one the previous year’s recommendations, the chief executive announced that a new Code of Conduct would be introduced and that employees would undergo special training. This action, together with the continuing interest shown in some other propos-als from 2014, justifi es the company’s upgrade to level 4 of our engagement scale.

ROCHE HOLDING

Six representatives were present at the meet-ing, from areas including investor relations; group safety, security, health and environmen-tal protection; sustainability communications; and compliance. This testifi es to how seriously the company takes our shareholder engagement. The chief compliance offi cer and head of sustain-ability and the head of investor relations were the two most active company participants, respond-ing to specifi c questions and explaining issues such as pricing models in Europe and the emerg-ing economies. Roche has different prices in the emerging-market countries, to enable systematic access to medication. In Europe it is currently

testing a pay-for-performance pricing policy. The main challenge is to obtain the data from physi-cians. Roche justifi es its above-average margins by the innovative nature of its products.

It seems that a number of teams and functions across the organisation consider the ESG issues an important part of Roche’s business. The engage-ment level was raised from 2 to 5, as action had been taken on our previous year’s recommen-dation to publish the relevant policy documents (Code of Conduct, directive on integrity etc.), demonstrating Roche’s readiness to listen to and learn from legitimate stakeholders.

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

Sika is a well-managed leader in speciality chemicals for construction and industry, particularly the auto-motive industry. It enjoys robust growth, thanks to innovation, but is currently struggling against a hostile takeover from rival Saint-Gobain. Its founders, the Burkard family, want to sell their 16 per cent stake and majority voting rights at a premium to Saint-Gobain, without involving the other shareholders.

Despite this diffi cult situation, Sika was available for the second year in a row in 2015 to discuss its main social responsibility issues. Sourcing of raw materials is a key challenge, but other equally relevant issues include the resource effi -ciency of building materials during design and use; the sustainability of the systems and solu-tions provided; occupational health and safety; waste and energy management; anti-corruption; and anti-competitive bidding practices.

As regards human rights, the environment and anti-corruption, the company makes it clear that its commitments also apply to the entire value chain. The reporting on these issues is at an advanced level and has even improved slightly with the publication of more details on achievements.

Following the previous year’s discussion, we again suggested launching a formal dialogue with internal and external stakeholders. The main aim would be to identify issue areas where Sika could reduce its exposure or develop new sustainable solutions, or both. Prior to that, it should revise the materiality matrix, by aggregat-ing some of the issues and eliminating those related to a specifi c measure, such as compliance in the case of sponsoring or donations. The qualifi cation process for new and existing suppliers could be further improved. We suggest looking at how this

SGS

SIKA FINANZ


SONOVA HOLDING

ZURICH INSURANCE GROUP

is handled by Geberit and Holcim, who have intro-duced a pragmatic classifi cation and fi lter system based on country- and product-specifi c exposures.

Sika has shown a keen interest in learning from other portfolio companies’ good practices, partic-ularly in the area of supply-chain and stakeholder management. The investor relations manager said

that the stakeholder engagement process would be reviewed that year, in response to our recommenda-tion. Later in the year, the company contacted us with a view to further meetings on the subject of the fi nancial materiality of its ESG issues. As the suggested whistle-blowing system is also likely to be introduced, we had no hesitation in upgrading Sika to level 4 of the engagement scale.

Sonova is the leading manufacturer of hearing instru-ments and the owner of the Phonak and Unitron brands. Since 2010 and its acquisition of Advanced Bionics, its products have included cochlear implants. Sonova uses innovation to outgrow the market and gain market shares. An aging population and the company’s expansion into emerging markets, espe-cially China, should keep its growth rate in the mid single digits. For Sonova, as a medical technology company, the main sustainability issues are prod-uct safety and access to its products. The privacy and security of patient data, employee satisfaction and the fi ght against corruption are also important challenges. Other relevant issues include diversity programmes, occupational health and safety and material and waste management.

This was the second year of assessment and our second meeting with the company’s

representatives. The progress made since 2014 and the drive shown by the new people on the sustain-ability team demonstrate the high level of Sonova‘s engagement and justifi ed the upgrade to level 5.

Indeed, Sonova has made remarkable progress in its social-responsibility reporting since the previous year, and covers all the Global Compact principles in its communication. It can now continue to progress by shifting from qualitative information and general statements to more precise, quantifi ed and verifi able content. The company has taken decisive action in several ways, such as opening a hotline where employees can raise compliance concerns anonymously, and offer-ing clients a battery-collection system. We would welcome feedback on the performance of these initiatives as well as an analysis of the ways in which it will keep improving.

As with Helvetia, so with Zurich Insurance this was our fi rst assessment and meeting, seeing that the company entered the portfolio in 2015. But unlike the former, this Swiss direct insurer conducts most of its activities outside Switzerland. In terms of social responsibility, its issues are similar to those of other insurers.

Zurich Insurance is a signatory to the Principles of Responsible Investment and publishes a compre-hensive RI Transparency Report. Asset-liability management is the cornerstone of its investment process. The ESG issues are incorporated into its investment decisions, raised with the companies with whom it does business, and considered when selecting an external manager.

The environmental reporting is also outstanding, thanks to a detailed description of the environmen-tal management system, systematic presentation of key performance indicators, and the traceability of its progress over time.

The company could strengthen its reporting on the materiality of some issues by providing more information on how it defi nes the material aspects and presenting the results in a materiality matrix. In the meantime, the engagement score was set at level 2 for this constructive and well-prepared fi rst meeting.

As a responsible shareholder, we encourage most of the companies in our fund to give greater consid-eration 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, partic-ularly as these are proposed by a loyal investor.

CONCLUSION

48/53

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 promising9. 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 devel-opments in the portfolio companies in relation to the ten principles of the Global Compact, which can be seen in the graph below. The stable track record since 2006 enables us to select seventeen companies –three from the Fund (Credit Suisse, Nestlé and Novartis) and the others from the European and Emerging Markets compartments –and follow their evolution over a period of nine years10.

LONG-TERM RESULTS

We observe continuous overall progress of around 7 per cent a year in relation to all ten principles of the Global Compact. The improve-ment in ESG performance indicates, fi rst, that the company is generating more value for all its stake-holders 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.

9. O’Sullivan and Gond, “Engagement: Unlocking the Black Box of Value Creation”, Sustainalytics & Cass Business School, 2016.wngraded from level 5 to level 4.10. ABB, AXA, BP, Credit Suisse, Essilor, Engie, Danone, Heineken, H&M, HSBC, Nestlé, Novartis, Royal Dutch Shell, Société Générale, Standard Chartered, Total and UBS.

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.

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


49/53

TREND IN THE COMPREHENSIVENESS OF ESG INFORMATION

Achievements

Monitoring

Indicators

Measures

Objectives

Strategy

Commitment

Materiality 2006 2007 2008 2009 2010 2011 2012 2013 2014

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

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

While we cannot formally prove that this uptrend translates into better performance that is what we are observing. Responsible companies are more successful at protecting their competitive edge, tend to gain more market share and 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 compensate for the capital invested and even increase their margin. They seem to be better equipped to meet their shareholders’ expectations, while also responding to society’s increasing demands.

The chapter “Active Ownership” explained that we systematically analyse the implementation of each principle throughout the management cycle accord-ing to eight criteria. Not surprisingly, the overall progress is the same as for the ten principles, that is, 7 per cent a year. As discussed several times in recent years, we note an increasing professionalism in the way the companies are implementing their social responsibility. The most striking improve-ments 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 importance and materiality of each principle in relation to their business model (+93 per cent). This was often neglected in the early days of ESG reporting, when the information tended

to centre on individual case studies or new inter-nal 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 effectively, for instance

The stable track record since 2006 enables us to select seventeen companies –three from the Fund (Credit Suisse, Nestlé and Novartis) and the others from the European and Emerging Markets compartments –and follow their evolution over a period of nine years.


50/53

through audits and corrective measures (+92 per cent). Finally, the companies have made consider-able 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%).

We also observe a gratifying uptrend in the qual-ity of the ESG information (see the chart below). Particular progress is noted in the clarity, compa-rability 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.

The increased reliability is explained primarily 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.

TREND IN THE QUALITY OF ESG INFORMATION

Timeliness

Reliability

Accuracy

Comparability

Clarity

Accessibility2006 2007 2008 2009 2010 2011 2012 2013 2014

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


51/53

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.

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 business with signifi cant international operations. These developments are the subject of growing debate in Switzerland, as a broad coalition of organ-isations has launched an initiative calling for the duty of due diligence prescribed by the Ruggie Principles to be written into Swiss law. Proponents emphasise that Swiss companies, admired for their

quality and strong brands, cannot afford to make headlines in connection with human rights abuses and environmental damage in their global activ-ities. The companies argue that they are already managing these risks and that regulation could make them less competitive.

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 shareholders and society at large to a risk that could have dramatic consequences.

As stated elsewhere in this report, we would not invest in a company with 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 trans-parency, as from 2016 we shall include the UN Global Principles in all our human rights assess-ments. Companies such as Nestlé are starting to use the UNGP Reporting Framework –the fi rst comprehensive guide to reporting on human rights issues. The increased emphasis on this area also enlarges the scope of our discussions with the port-folio companies; this will be of particular value to the companies at an advanced engagement level. In addition, we plan to introduce a new qualita-tive rating, evaluating the quality of each assessed company’s reporting on the UN Global Principles.

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

ENGAGEMENT OUTLOOK


52/53

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 we engage with for the Cadmos Funds are already becoming experts at collaborating with a variety of social entrepre-neurs. In 2005, Danone established the Danone

Communities Fund, a social incubator designed to encourage social business initiatives around the world, in keeping with the company’s mission. For example, Danone took a minority stake in La Laiterie du Berger, a Senegalese business selling products made of locally produced milk. It has been supporting this social enterprise’s production, marketing and sales efforts ever since, thus helping build a stronger local dairy industry.

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 exam-ples of social impact investment. Our ambition is to foster such mutually rewarding partnerships whenever possible.

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

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

TO REMAIN AT THE FOREFRONT OF INNOVATION, GAIN DEEPER INSIGHT INTO THE COMPANIES AND CREATE EVEN MORE OF A TANGIBLE IMPACT, WE SHALL PROGRESSIVELY DEPLOY WHAT WE HAVE CALLED OUR NEW PROFIT-PURPOSE PARTNERSHIP STRATEGY IN THE NEXT ENGAGEMENT CYCLE. WE HAVE ALREADY BEGUN WORK ON THIS WITH ADDITIONAL ADVISORS AND EXPECT TO BE ABLE TO REPORT ON OUR ACHIEVEMENTS IN THE COMING FINANCIAL YEAR.


ENGAGEMENT REPORTS

The content of the following engagement reports was produced by the Guilé engagement team and the portfolio managers. It provides an account of the dialogue conducted on behalf of the Cadmos Funds with selected companies in the portfolio as at 31 March 2016. The complete set of engagement reports for all the companies in the Fund is available on request. The six companies presented here (Geberit, Nestlé, Partners Group Holding, Roche Holding, SGS and Zurich Insurance Group) are representative of our portfolio. They are all at level 5 except Zurich Insurance Group, a new entrant whose fi rst engagement report is included and Partners Group whose meeting was quite interesting and justifi ed an upgrade from level 2 to level 4. A commentary on these companies and all the others that have made signifi cant changes is found in the chapter “Improvements and main stories”, pages 43 ff. A summary table listing all the companies with their engagement level is provided in the introductory chapter “Engagement performance” on 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

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

— 9th CSR reporting assessment— 8th discussion with the company since its entry

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

Financial company specialized in private markets: private equity, private debt, private real estate and private infrastructure. With more than EUR 30bn under management it has become one of the largest independent players in the private markets arena. It benefits from the increased capital allocation for private investments by pension funds and insurance companies.

ENGAGEMENT REVIEW

— 2nd CSR reporting assessment— 2nd discussion with the company since its entry

into the portfolio

2015: meeting in in the offices of Partners Group in BaarParticipants: the CFO, the Responsible Investment Manager and the VP of Business Development


— The comprehensiveness of Partners Group (PG) reporting slightly improved. Nevertheless it remains at a very narrative level. While the reader gets some still rather generic information on the integration of ESG criteria in the investment process, PG discloses hardly any details on how it handles CSR issues within its organization.

— Reporting on human rights is the most detailed section, however it continues to be only partial as hardly any information is provided on the materiality, commitment, strategy and achievements.

— Labor norms are partly addressed. Apart from non-discrimination the reader is not provided with details on how these aspects are managed by PG.

— With the exception of the company’s participation in the CDP Climate Change program, information on PG’s approach to tackle environmental issues remains sketchy.

— Disclosure of PG‘s approach regarding anti-corruption is the least detailed of the four issue areas. This is mainly due to the fact that there is no information on achievements.


— The quality of the reporting did not improve compared to last year.

— The Corporate Responsibility section in the Annual Report is well structured and clearly formulated.

— However, with the exception of the community development projects the reporting remains rather generic.

— As no quantitative data is provided, it is hard to compare PG’s ESG performance on a year-to-year basis.

— Furthermore, the non-financial information is not verified by a third party and there are no references related to how this information is compiled.


The CO2-footprint of close to 300 direct investments could negatively affect the portfolio performance. Human rights and labor norm violations of the portfolio companies and the > 630 private market investment partners could trigger disinvestment of socially conscious institutional investors. Integrity and ethical business practices of management and staff are of utmost relevance.

PARTNERS GROUP NON SIGNATORY TO THE GLOBAL COMPACT


Partners Group


0 20 40 60 80 100

RESULT OF QUALITY ASSESSMENT FOR PARTNERS GROUP 2014

Human rights

Labor norms

Environment

Corruption

basic emerging advancing outstanding

RESULT OF COMPREHENSIVENESS ASSESSMENT PER ISSUE AREA FOR PARTNERS GROUP 2014

CSR ORGANISATION

— Partners Group has neither a formal corporate responsibility organisation nor defined responsibilities nor clearly defined processes for integrating sustainability/social responsibility considerations in its business and support processes. Nevertheless, the company has created the position of an investment officer in charge of company relevant applied ESG research, knowledge management, networking and in particular, to participate in formal meetings of the investment committee. At executive level, the CFO is in charge of CSR related activities.


1. The PRI commitment is not convincingly reflected in the company’s pubic communication though PG is active in one of the working groups and has submitted a report on progress for which it has received a Top-A rating. The Guilé Engagement Team suggests sharing this engagement more actively with external stakeholders.

2. To further strengthen the credibility of its CSR commitment, more substantive information on the ESG integration in the investment process would be required. The company should look at the information provided by other investors such as Zurich and Credit Suisse which is much more advanced.

3. We recommends revising the Code of Conduct in such a way that it will serve as a useful guideline for employees when dealing with clients and other relevant stakeholder. Presently, it is a rather shallow declaration which has been met with scepticism.

4. In order to improve its reporting on the materiality of the different issue areas, The Guilé Engagement Team suggests consulting its stakeholders to get a clear understanding of which aspects are material and therefore of high priority.

5. The disclosure of detailed information on how PG avoids corruption would further improve its trustworthiness. In particular, details on anti-money laundering and the handling of gifts would be of major relevance.

6. In general, the content of the website is scarce. If the company decides to keep it lean, it should at least consider providing a sort of overview on material issues and related measures which could be a first step to towards GRI reporting.

7. Once again, we suggests that the company considers signing the UN Global Compact.

LEVEL OF ENGAGEMENT

The atmosphere at the meeting was very open and trust-based. All three participants were eager to discuss with the portfolio manager of Cadmos Swiss Engagement Fund and the Guilé Engagement Team the findings of the assessment and also potential approaches for further improvement. Most of the suggestions we made were well received by the participants of Partners Group. The CFO announced that a new Code of Conduct will be introduced and that employees will have to undergo specific training. Furthermore, Partners Group will establish a 360° review of employees’ individual performances which shall also improve adherence to good practice and governance rules.







PARTNERS GROUP NON SIGNATORY TO THE GLOBAL COMPACT

1.

INVESTMENT CASE

A leader in personalized healthcare and diagnostics, Roche is the largest biotech company, with a dominant position in oncology. The company also develops drugs in the area of neuroscience, infectious diseases, immunology, cardiovascular and metabolism. Its current pipeline is rich and promising. The launch of new products could drive profitability higher.

ENGAGEMENT REVIEW

— 2nd CSR reporting assessment— 2nd discussion with the company since its entry

into the portfolio

2015: meeting at the headquarters of Roche in BaselParticipants: the Brand Strategy, the Head of Investor Relations, the Chief Compliance Officer & Head of the Sustainability Committee, the ad interim Head of Corporate Reporting, the Editor in Chief of the Annual Report, the Senior Sustainability Controller, the Head of Sustainability Communications, the SHE manager, the Investor Relations – SRI and the HR on Reporting


— The comprehensiveness of Roche’s non-financial reporting generally remains at an advanced level.

— In addition to the Code of Conduct a comprehensive Supplier Code of Conduct has recently been published, which addresses Roche’s commitment to human rights more explicitly than its commitment to to labor norms.

— While the strategic aspects of labor norm principles are covered well, specific information on indicators, monitoring and achievements is scarce, especially for forced and child labor.

— Coverage of environmental issues is at a good level similar to during the previous year’s assessment. In particular, information on emissions and energy consumption is well reported.

— Though the company has updated its Code of Conduct, disclosure on business ethics and compliance just meets good industry practice. The related rating was lower compared to the previous year mainly due to the lack of concrete objectives and indicators.


— The quality of Roche’s non-financial reporting is clearly above average.

— Following the Guilé Engagement Team’s recommendation, more policy documents and guidelines are now available. It is easy for specialised readers to find additional information on specific issues. The Code of Conduct has been updated and a Supplier Code of Conduct has also been published.

— Regarding accuracy, more information on non-financial data compilation is available which led to significantly higher scoring compared to the previous year’s assessment.


The following issues are of utmost relevance: access to health care, including diagnostics; lifecycle of products; drug efficacy, safety & counterfeiting; biosimilarity; data transparency on clinical trials; disease awareness and education on treatment, employee engagement and talent retention; executive compensation; and corruption in emerging markets.

ROCHENON SIGNATORY TO THE GLOBAL COMPACT


Roche


0 20 40 60 80 100

RESULT OF QUALITY ASSESSMENT FOR ROCHE 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

RESULT OF COMPREHENSIVENESS ASSESSMENT PER PRINCIPLE FOR ROCHE

CSR ORGANISATION

— The Corporate Sustainability Committee (CSC) is responsible for developing the Group’s sustainability strategy and guidelines, and reports on related activities and progress. It is also responsible for assessing social, environmental and ethical risks which are incorporated into the Group Risk Report. CSC is headed by the Chief Compliance Officer who participated in the briefing. The Head of Investor Relations, who also joined the meeting, is a member of the CSR Core Team besides the Patent Officer and delegates from the CEO Office, Group Human Resources, Communications, Strategic Planning & Special Projects, Group Safety, Security, Health and Environment as well as the Pharma and the Diagnostic Leadership Team, to mention the most prominent.

— The CSC submits regular activity reports to the Corporate Executive Committee and the Board of Directors’ (BoD) Corporate Governance and Sustainability Committee (CGSC). The CGSC assists the BoD in matters relating to corporate governance, compliance and in promoting the sustainable management of the company’s activities. Roche’s CSR organizational set-up is worthy of being described as best practice.


1. In 2014, Roche conducted a materiality analysis amongst key stakeholders. While this is a step in the right direction, the outcome is not yet convincing. The materiality matrix is rather confusing. Regrouping and clustering material issues would improve reader friendliness. Further, the explanations about “Why this it material” are inconsistent: while there is a good explanation for some of the relevant issues (e.g. “drug efficacy, safety & counterfeiting” and “patent policies”), the materiality is not explained at all for others (e.g. for “biosimilarity”, “data transparency on clinical trials” and “disease awareness & education on treatment”). The company should reassess and reformulate the way in which they describe why specific issues are of relevance.

2. The materiality matrix should be updated by checking it with critical yet legitimate internal and external stakeholders. This process should be transparently explained in the company’s reporting.

3. Implementation targets are only generally explained. More specific objectives should be set, ideally giving quantitative ambitions, realistic timeframes and comparable baseline data. This is also valid for the Code of Conduct which remains rather vague in many parts .

LEVEL OF ENGAGEMENT

Representatives from different areas such as Investor Relations, Group Safety, Security, Health and Environmental Protection (SHE), Sustainability Communications, and Compliance were present at the briefing which is a strong indication of the Company’s serious interest in our assessment results. The Chief Compliance Officer and Head of Sustainability and the Head of Investor Relations were the most active during the meeting, responding to specific questions and explaining issues such as pricing models in Europe and in emerging economies. It seems that non-financial issues are considered an important part of Roche’s business across various teams and functions. The Guilé Engagement Team’s recommendation from the previous year to publish relevant policy papers was embraced which demonstrates the company’s readiness to listen and to learn from legitimate stakeholders.








CSR ORGANISATION

— The Corporate Sustainability Committee (CSC) is responsible for developing the Group’s sustainability strategy and guidelines, and reports on related activities and progress. It is also responsible for assessing social, environmental and ethical risks which are incorporated into the Group Risk Report. CSC is headed by the Chief Compliance Officer who participated in the briefing. The Head of Investor Relations, who also joined the meeting, is a member of the CSR Core Team besides the Patent Officer and delegates from the CEO Office, Group Human Resources, Communications, Strategic Planning & Special Projects, Group Safety, Security, Health and Environment as well as the Pharma and the Diagnostic Leadership Team, to mention the most prominent.

— The CSC submits regular activity reports to the Corporate Executive Committee and the Board of Directors’ (BoD) Corporate Governance and Sustainability Committee (CGSC). The CGSC assists the BoD in matters relating to corporate governance, compliance and in promoting the sustainable management of the company’s activities. Roche’s CSR organizational set-up is worthy of being described as best practice.


1. In 2014, Roche conducted a materiality analysis amongst key stakeholders. While this is a step in the right direction, the outcome is not yet convincing. The materiality matrix is rather confusing. Regrouping and clustering material issues would improve reader friendliness. Further, the explanations about “Why this it material” are inconsistent: while there is a good explanation for some of the relevant issues (e.g. “drug efficacy, safety & counterfeiting” and “patent policies”), the materiality is not explained at all for others (e.g. for “biosimilarity”, “data transparency on clinical trials” and “disease awareness & education on treatment”). The company should reassess and reformulate the way in which they describe why specific issues are of relevance.

2. The materiality matrix should be updated by checking it with critical yet legitimate internal and external stakeholders. This process should be transparently explained in the company’s reporting.

3. Implementation targets are only generally explained. More specific objectives should be set, ideally giving quantitative ambitions, realistic timeframes and comparable baseline data. This is also valid for the Code of Conduct which remains rather vague in many parts .

LEVEL OF ENGAGEMENT

Representatives from different areas such as Investor Relations, Group Safety, Security, Health and Environmental Protection (SHE), Sustainability Communications, and Compliance were present at the briefing which is a strong indication of the Company’s serious interest in our assessment results. The Chief Compliance Officer and Head of Sustainability and the Head of Investor Relations were the most active during the meeting, responding to specific questions and explaining issues such as pricing models in Europe and in emerging economies. It seems that non-financial issues are considered an important part of Roche’s business across various teams and functions. The Guilé Engagement Team’s recommendation from the previous year to publish relevant policy papers was embraced which demonstrates the company’s readiness to listen and to learn from legitimate stakeholders.








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

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

INVESTMENT CASE

This Swiss direct insurer conducts the majority of its activities outside Switzerland. Indemnity insurance is its main business. Zurich is also active in life insur-ance. Zurich insurance offers an attractive dividend yield of more than 5%. The group is growing its operating earnings by reducing costs throughout its business, increasing operational efficiency, improving processes, and enhancing investment returns.

ENGAGEMENT REVIEW

— 1st CSR reporting assessment— 1st discussion with the company since its entry

into the portfolio

2015: meeting in the offices of Zurich Insurance in ZurichParticipants: the Investor Relations Officer, the Senior Investor Relations Officer & Group Rating Agency Manager and the Sustainability Manager (via phone)


— Zurich’s reporting on human rights is quite sound, in particular in terms of health and safety, and it explicitly extends this across the value chain.

— Labor norms are the least comprehensive area within Zurich’s reporting. Despite a clear commitment to all labor norms, the details of implementing this commitment in practice, such as monitoring mechanisms, are largely missing from Zurich’s publicly available documentation.

— Reporting on environmental issues is outstanding, in particular thanks to the company’s in-depth description of its corresponding management system, the systematic presentation of key performance indicators, and the traceability of progress over time.

— Zurich is committed to fighting corruption and bribery and presents sound information on the management processes designed to support this endeavor. However, there is a lack of information on objectives, on indicators used to measure performance, and on achievements in this field.


— The quality of Zurich’s sustainability reporting is not very satisfying. The fact that information is spread across a significant number of different documents, makes it challenging for stakeholders to gather all the relevant information. The rather disintegrated way of reporting creates a consider-able amount of redundant information.

— Moreover, the scarcity of quantitative data means that that stakeholder struggles to evaluate the accuracy of the methods used to gather, compile and analyze the information.


Zurich Insurance Group needs to ensure that it has a sound responsible investment strategy with clear goals. It also needs to keep an eye on the impacts of climate change on its asset management. At the same time, the group has an opportunity to enhance its reputation by providing fair and sustainable products to a wide range of customers.

ZURICH INSURANCESIGNATORY TO THE GLOBAL COMPACT SINCE 2011


Zurich Insurance


0 20 40 60 80 100

RESULT OF QUALITY ASSESSMENT FOR ZURICH INSURANCE 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 ZURICH INSURANCE

CSR ORGANISATION

— Zurich’s Group Executive Committee (GEC) has formed the Corporate Responsibility Working Group to advise it on strategy, priorities and objectives, and to track performance. The Working Group ensures that the Group’s corporate responsibility strategy remains integrated into the Group strategy and enables Zurich to live up to Zurich Basics, the Zurich Commitment and the UN Global Compact’s principles on human and labor rights, the environment and anti-corruption. It reports to the GEC twice a year on progress and developments.

— The Working Group comprises senior representatives from General Insurance, Global Life, Group Operations and Technology, Investment Management, Group Finance and our Chief Human Resources Officer. It is chaired by the CEO of General Insurance, a member of the Group Executive Committee. The composition of the Working Group is reviewed annually.


1. As an actor in the insurance industry with a comprehensive portfolio of assets, Zurich needs to ensure that they have a sound responsible investment strategy with clear qualitative and quantitative objectives and indicators. Responsible investment is one of the most material concerns from a corporate responsibility point of view.

2. The Guilé Engagement Team in particular encourages Zurich Insurance Group to further specify how they want to achieve their stated ambition to become a leader in responsible investment.

3. Reporting on the materiality of different issues could be strengthened by giving more information on the process used to define materiality and by depicting the results in a materiality matrix, with added contextualized information about the specific risks and opportunities linked to the different issues.

4. The overall quality of the reporting could be strengthened by reducing redundant information across different publications and by consolidating information in a number of key documents, that are made easily accessible to interested audiences.

5. Finally, the Guilé Engagement Team recommends strengthening the accuracy of the information reported by including more quantitative information on the indicators which Zurich uses to monitor their activities, on the objectives they set for themselves, and on the achievements they have made in different areas.

LEVEL OF ENGAGEMENT

This was our first engagement dialogue with Zurich Insurance Group. The exchange with the company representatives was very constructive and prepared the ground for future meetings, in which the progress achieved over time will be discussed, as well as the potential for further improvement.







ZURICH INSURANCESIGNATORY TO THE GLOBAL COMPACT SINCE 2011

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 compartment and 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 SWISSENGAGEMENT FUNDBuy & Care® Responsible Investment Fund

Integrated Performance Report2015-2016C

AD

MO

S S

WIS

S E

NG

AG

EM

EN

T F

UN

D |

IN

TE

GR

AT

ED

PE

RF

OR

MA

NC

E R

EP

OR

T 2

01

5-2

01

6

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]

Documents

CADMOS SWISS ENGAGEMENT FUND · results in 2015. Exporters with a signiﬁ cant cost base in Swiss francs suffered from the surge in the currency’s value. In a year that saw no