Limestone New Europe SRI Yearbook 2009

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Printed on CyclusPrint Recycled

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About LimestoneLimestone Investment ManagementLimestone is a specialist Emerging European equity fund manager based in Tallinn. The company was founded

in 2007 and is owned by its managers. We focus exclusively on delivering to our clients’ outstanding investment

performance. Our home region and investment universe, Central and Eastern Europe, is one of the most dynamic

investment markets in the world. Limestone is one of the very fi rst New Europe based investment managers that

integrates the concepts of socially responsible investment and sustainable development into fundamental research

process as essenti al factors for long term performance and risk management.

Limestone New Europe Socially Responsible Fund A Luxembourg domiciled, UCITS III compliant long-only equity fund that invests in Central and Eastern European

companies that off er good opportuniti es for capital appreciati on and meet the Fund’s investment and social

criteria. The Fund invests in listed stocks of companies based or operati ng in New Europe – the new EU members

and membership candidates. A bott om-up fundamental research driven investment process is applied to construct

an acti vely managed high convicti on portf olio. Portf olio companies are expected to comply or to acti vely pursue

compliance with internati onal norms on Environmental, Social and Governance issues in accordance with the UN

Principles for Responsible Investment. Fund’s SRI approach is best characterized as ESG factor integrati on and

acti ve engagement with minimal negati ve screening.

InteractionTransparency

KnowledgeValue

limestone is a signatory to the united nati ons principles for responsible investment (UN PRI) and member of the european sustainable investment forum (Eurosif).

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When setti ng up LimeStone in 2007 we looked to off er

investors new approaches to investi ng in this dynamic

and vibrant region we like to call New Europe. Two years

later we are proud to celebrate the fi rst birthday of the

fi rst socially responsible investment fund launched

and managed in Eastern Europe. In this publicati on we

introduce our methods of researching and investi ng

in companies but most importantly try to explain

our philosophy and vision about socially responsible

investi ng in New Europe.

New Europe is uniquely positi oned to be at the forefront

The next few years, as the investment world switches

from the chaos mood of the crisis to rebuilding phase,

will likely mark a fi nal breakthrough for sustainable

investment. The recent near-systemic failure of markets

has well amplifi ed the need for capital markets and

investment products fi t for the social, economic and

environmental realiti es of the 21st century. Throughout

this publicati on we are trying to show and prove

that the newest part of European Union is uniquely

positi oned to be at the forefront of this transformati on

thanks to the almost complete collapse of the “old” and

a subsequent fast track built up of the “new” over the

last twenty years. No other part of the emerging world

is so directly and richly supported to become a modern

fully functi onal member of the developed world.

Various empirical researches suggest that there is a

positi ve, stati sti cally signifi cant correlati on between

corporate sustainability and fi nancial performance.

As such, it indicates that sustainability considerati ons

are an integral part of corporate fi nancial performance,

and that the integrati on of such factors into traditi onal

fi nancial valuati on can help investors gain insights

that facilitate the selecti on of stocks with an att racti ve

long term return potenti al. This integrati on has been

the main task for our research team over the last

two years. And yet, aft er these two years, we readily

admit that it is a formidable challenge to remodel the

traditi onal analyti cal framework for SRI and ESG factors’

integrati on, especially in the sti ll-emerging markets’

environment we are operati ng in New Europe. In this

publicati on we have tried to shed some light on our

eff orts and hope that it will make you share at least

some of our opti mism.

We think social responsibility is not luxury. It is just good business.

For investors less familiar with – or maybe even criti cal

towards – socially responsible investi ng, we someti mes

present the sustainability research as a part of risk

management exercise. The most profound corporate

failures over the last decade have been clear cases of

malicious or just bad governance, where the moti vati on

of managers has not been aligned with that of other

stakeholders. This is the main reason behind our

primary focus on governance. In this report we illustrate

this by describing our fi rst engagement experience from

Romania.

We sincerely hope this report will make an insightf ul

reading. As a consequence of the crisis we hope to get

interest from clients who would otherwise not have

approached us, and this publicati on has an att ached

goal to introduce us as well as New Europe.

Limestone SRI Yearbook 2009First year of SRI in New Europe

Dear Reader

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Contents

About Limestone

New Europe At Glance

SRI in New Europe

Life Aft er Boom: Don’t Waste A Good Crisis

Sustainable and Responsible Investment Trends in Europe

Marion de Marcillac, Head of Research at Eurosif

Overview of Socially Responsible Investi ng in New Europe

Financial and Extra-Financial Reporti ng in Central and

Eastern Europe – Then and Now, and Tomorrow

Geoff rey Mazullo, the Partners for Financial Stability Program

I Could Well Have Been a Spy

Marti n Pitura, Manager of GES Investment Services, Poland

SRI At Limestone

Philosophy

Approach

Research Process

Portf olio

Engagement Profi le: SIF Banat-Crisana SA

Sector Insights

SRI Explained

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16

18

18

18

18

22

23

25

36

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Central and Eastern Europe, our home region, is one

of the most dynamic investment markets in the world.

Our defi niti on of New Europe covers countries previ-

ously under the infl uence or outright occupati on of So-

viet Russia that are now new European Union members

or on the path to become members in the foreseeable

future. Re-unifi cati on and convergence of Eastern and

Western Europe is the most important geopoliti cal and

economic shift s in recent European history. This has

presented once in a life ti me investment opportunity

for emerging market investors, and a challenge for dedi-

cated pan-Europe and global investors, who yet have to

readjust their benchmarks and portf olios.

New Europe At Glance

One of the most dynamic investment markets in

the world

Spain

Portugalg

Gibraltar

RussR iaa

FFranannceeUkUkraraaiine

SSwSwNorNorwNorway

RomRomRoman

TTurTurkurkeyey

2009 EstimatesBulgariaCzech RepublicEstoniaHungaryLatviaLithuaniaPolandRomaniaSlovakiaSloveniaCroatiaSerbiaNew Europe% of EU total

Population. mln7.610.51.3102.33.438.121.35.42

4.47.4

113.723%

GDP € bln32.8136.614.788.219.429.7295.3127.363.436

43.429.8

916.610%

Monthly wage €2388957956934995567513247411400102149063926%

FDI € bln2.34.40.21.40.10.97

4.61.20.31.51.1256%

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By the end of August’09 the fi nancial support from IMF

and EU, along with contributi ons from World Bank, the

EBRD and EIB, have eased fears on the fi nancial markets

and stabilised the exchange rates in CEE, crucial for the

local fi nancial sector that has a majority of its loanbook

denominated in foreign currencies. The restricti ve

covenants that the support packages came with

reduce the ability of CEE countries to sti mulate their

economies too much, in itself a good thing that will keep

fi scal spending under control. This further forces CEE

countries to undergo a period of structural economic

adjustments in order to realign their economic model

with what is probably a whole new economic era.

Although painful in short term, the weeding-out of the

weakest and uncompeti ti ve parts of the economy will

increase the effi ciency in the uti lisati on of producti on

factors and thus boost the prospects for long term

economic growth.

Major supporti ve factors remain the direct and undirect

benefi ts from EU membreship or from the prospect of

becoming a member. This includes substanti al funds

from the EU budget for regional development, in

parti cular investments in infrastructure and agriculture.

Potenti al for producti vity growth and energy effi ciency

are substanti al. The prospect of EU membership provides

a crucial moti vati onal factor to candidate countries with

regard to economic, legal and insti tuti onal reforms.

The CEE clearly remains the most competi ti ve

producti on locati on for the European market.

Signifi cantly weakened local currencies in fl oati ng fx

regimes and large pay cuts in Euro-pegged economies

have strenghtened the region’s unit labor cost

advantage, which had somewhat eroded during the

boom. The long term convergence success story has

remained intact. Once the global economy manages

to crawl out of its slump CEE economies are again set

to achieve a sustainable 2-3 percent average growth

diff erenti al compared to euro-zone.

European Union Funds And SustainabilityBetween 2007 and 2013, the European Union invests

close to 200 billion euros in the Central and Eastern

European member states via the Structural Funds and

the Cohesion Fund. The investments in new members

serve three broad purposes: income convergence,

agricultural support and development of internal

market insti tuti ons. This is achieved by a myriad of

individual programs, each with their own set of rules

and target insti tuti ons. Widely perceived in the region

as “manna from heaven”, much att enti on is currently

focused on how to absorb these funds as quickly as

possible, so as not to lose them under EU rules. At

the same ti me, injecti ng up to 4 percent of GDP into

economies that are in a rapid catch-up process will have

signifi cant macroeconomic implicati ons.

SRI in New EuropeLife Aft er Boom: Don’t Waste A Good Crisis

CEE countries are forced to undergo a period of structural economic adjustments in order to realign their economic model with what is probably a whole new economic era.

Between 2007-2013, the EU will invest close to 200 billion in the CEE member states via the Structural Fund and Cohesion Fund

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In November 2008 the European Economic Recovery

Plan (EERP) was announced that proposed an

enlarged new role for the EU funds and EIB to support

investments via more fl exibility in EU fi nancing that it

is hoped would result in increased liquidity. The EERP

was also promoted as a measure that could sti mulate a

future green economy. The countries in CEE will receive

an additi onal € 6.4bn from the Regional Development

Fund and Social Fund during 2009 and 2010.

The economic crisis off ers an opportunity for the EU

to use its funds to push the new member states and

candidates onto a more sustainable development

path. Good example is the change that allows all

member states to use up to 4 percent of the Regional

Development Fund transfers for energy effi ciency

(EE) and renewable energy sources (RES) in housing.

European Investment Bank (EIB), the EU’s public bank

that provides loans and co-fi nances projects in tandem

with structural and cohesion funds, plans to increase

its lending in CEE countries’ energy, climate change and

infrastructure sectors.

EU money has all the potenti al to support the shift to an

energy- and resource effi cient economy by supporti ng

sustainable resource use and recycling, eco-friendly

technologies and sustainable mobility. In the new

member states , total energy intensity (energy usage

per unit of GDP) is sti ll, on average 40 percent higher

than in Western Europe. Buildings are responsible for

about 40 percent of the CO2 emissions across the EU,

and the soviet era blocks of fl ats common to most CEE

citi es are notoriously wasteful of heat and in urgent

need of refurbishment. Disappointi gly only 2.4 percent

of all EU funding for the 2007-2013 period has so far

been allocated for EE and RES in the CEE countries.

The economic crisis offers an opportunity for the EU to use its funds to push the new member states and candidates onto a more sustainable development path

EU transfers to new members as %GDP

Source: European Commission

0

1

2

3

4

5

avrgROBGSICZLATESTPLHULIT

Structural Actions Agriculture Other

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Eurosif was extremely pleased to welcome Limestone

Investment Management as its fi rst member affi liate

originati ng from Eastern Europe in 2008 – just one of

many signs that SRI acti vity in CEE is on the rise. As an

organisati on whose mission is to Address Sustainability

through Financial Markets across Europe, we are always

eager to see concerns about environmental, social and

governance (ESG) issues expand.

In spite, and because of, the ongoing fi nancial market

turmoil, environmental, social and governance (ESG)

issues are becoming more relevant as important criteria

for investors. Sustainable and Responsible Investment

(SRI) is growing dramati cally and becoming more

refi ned as an overall approach that meets the diverse

interests of European investors.

Eurosif defi nes SRI as a generic term covering ethical

investments, responsible investments, sustainable

investments and any other investment process that

combines investors’ fi nancial objecti ves with their

concerns about environmental, social and governance

(ESG) issues.

Market size and growthAccording to Eurosif research1 , as of December 31,

2007 and represents as much as 17.5% of the asset

management industry in Europe.

1 “European SRI Study 2008” www.eurosif.org

Core and broad SRI in Europe, 2002-2007Source: Eurosif European SRI Survey, 2008

Sustainable and Responsible Investment Trends in EuropeMarion de Marcillac, Head of Research at Eurosif

0

500

1000

1500

2000

2500

3000Broad SRICore SRI

2007 (EU-13)2005 (EU-9)2002 (EU-8)

34 105

513,2302

928

2 152,2

10

On a like-for-like basis2 , this represents a growth of

102% over two years. Over the same two-year period,

the MSCI Europe index grew 16.16% suggesti ng a real

market growth for the total SRI market of 85.5% over

two years, which is quite remarkable.

According to our esti mati on, the global SRI market can

be esti mated to reach approximately €5 trillion and

Europe now holds the largest share as illustrated in the

chart below.

SRI StrategiesEurosif segments the SRI market with Core SRI

esti mated at €512 billion and Broad SRI at €2.2 trillion.

Core SRI consists of elaborated screening strategies

2 Excluding the 4 Nordic countries covered for the fi rst ti me in this study. All growth fi gures are calculated on the 9 countries covered on both 2008 and 2006 Eurosif studies : Austria, Bel-gium, France, Germany, Italy, Spain, Switzerland, the Nether-lands and the UK.

systemati cally impacti ng portf olio constructi on and

oft en implying a values-based approach while Broad

SRI partly represents the mainstreaming of SRI and the

growing interest of large insti tuti onal investors in this

area.

Core SRI consists of ethical exclusions (more than two

negati ve criteria) as well as diff erent types of positi ve

screening (Best-in-Class, SRI theme funds, etc.).

Germany, France and Switzerland show the fastest

growth in Core SRI while the UK and Netherlands retain

the largest markets. Broad SRI is composed of three SRI

strategies which include simple exclusions, engagement,

and integrati on of ESG risks into traditi onal fi nancial

analysis. For the Broad segment, the Netherlands has

experienced the fastest growth followed by France. The

UK remains the largest Broad SRI market.

A breakdown of the various SRI strategies used at the

European level is provided below. It is worth noti ng

that SRI practi ces are rarely performed on their own

but usually in concert with an increasing number of

possible combinati ons. Rest of the World US Europe

53%

8%

39%

Global SRI Market (approx € 5 trillion)Source: Eurosif European SRI Survey, 2008

SRI strategies applied in EuropeSource: Eurosif European SRI Survey, 2008

Total SRI assets under management (AuM) in Europe has reached ¤2.665 trillion, representing 17.5% of the asset management industry in Europe

0

300

600

900

1200

1500

Integ

ration

Engag

emen

t

Simple

Exclu

sion

Other

Posit

ive Sc

reens

SRI T

heme F

unds

Best

in Cla

ss

Ethica

l Exc

lusion

398,3

103,026,2 25,1

1 20 ,01 291,1

969,

Core SRI

Broad SRI

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Market driversThe European SRI market’s growth is driven by:

• An increasing demand from insti tuti onal investors, for

which responsible investment becomes a matt er of risk

management,

• A further mainstreaming of ESG considerati ons into

traditi onal fi nancial services,

• External pressure from NGOs and media,

• A growing interest from individuals, parti cularly

wealthy individuals.

The European SRI market is clearly driven by insti tuti onal

investors although private wealthy investors are also

exhibiti ng a growing infl uence in shaping its evoluti on;

in parti cular, they are part of the driving force behind

the emergence of SRI themati c funds. Equiti es remain

the preferred SRI asset class, but fi xed income and

alternati ve asset classes (property, private equity etc.)

are now cumulati vely representi ng half of the total for

SRI allocati ons.

www.eurosif.org

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According to Mercer’s and IFC’s report, the current size

of emerging markets SRI is approximately $300 billion

consisti ng of mostly investment managers investi ng in

BRIC countries. The share of Central Eastern Europe

in that pool is virtually non-existent. The main reason

for avoiding the region has been the small size of

local markets and individual companies that make it

unsuitable for large global instruments. Among other

reasons is the lack of awareness among investment

managers about considerable developments not only

in fi nancial but also in corporate governance and ESG

reporti ng in CEE. Some corporate governance codes

even pre-date codes in the old EU member states.

Sti ll, despite the supporti ng operati ng

environment and constantly increasing ESG reporti ng,

there are limits for some SRI investors. CEE is an

emerging market with a short tangible history of

operati ng in public fi nancial markets, the existi ng ESG

reporti ng is developing and the available data cannot

be standardized yet. Therefore, those investors, that

prefer best-in-class and negati ve screening approaches

using only publicly available data, can fi nd it hard to

track down or digest the informati on.

According to recent EIRIS’ emerging markets SRI

investors survey, the biggest challenges for investi ng

in emerging economies are a lack of company ESG

disclosure, followed by corporate culture, local market

access and lack of investment research. In Limestone’s

investment universe, 50% of the companies report on

environmental and 42% on human rights issues. To

tackle the missing informati on problem and the lack of

third party research, Limestone has built its research

process around face-to-face company meeti ngs. These

meeti ngs not only help us to focus on ESG issues, but

also give us the ability to look at the company from a

wide-angle lens perspecti ve taking into considerati on

all aspects of its operati ons. Our experience shows, that

managements in CEE are willing to meet with investors

and expect guidance with extra-fi nancial issues. Many

companies have also noted that very few investors have

requested ESG data.

To bett er understand and evaluate ESG factors that

infl uence companies in CEE, ESG reporti ng and quality

of those reports should increase. In additi on to EU

directi ves,supporti ng legislati ve environment and

heightened ESG related awareness the main driver

for publicly available fi nancial and ESG data is investor

acti vism. Encouraging and helping companies through

enagagement will not only create a whole set of

transparent, sustainable companies, but it can also be

a driver for the development of wider emerging Europe

oriented sustainability research.

Overview of Socially Responsible Investi ng in New Europe

CountryPolandSlovakiaEstoniaHungaryLithuaniaSloveniaLatviaBulgariaCroatiaCzech RepublicRomania

Stock ExchangeWarsaw Stock ExchangeBratislava Stock ExchangeTallinn Stock ExchangeBudapest Stock ExchangeVilnius Stock ExchangeLjubljana Stock ExchangeRiga Stock ExchangeBulgarian Stock Exchange - SofiaZagreb Stock ExchangePrague Stock ExchangeBucharest Stock Exchange

Corporate Governance Code Publication Year20022003200420042004200420052007200720072009

Corporate Governance Codes in CEE

Source: Partners for Financial Stability Program

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As in other emerging markets, the biggest challenges in SRI investments in CEE are a lack of publicly available standardized ESG information

Investor activism is the most important driver for better ESG disclosure and transparency

Today 50% of companies in Limestone’s investment universe report on environmental and 42% on human rights issues

0%

10%

20%

30%

40%

50%

60%

70%

80%

OtherLanguageLack of investment

research

Localmarketaccess

Corporate Culture

Lack ofcompany

ESGdisclosure

0%

10%

20%

30%

40%

50%

60%

70%

80%

OtherDo notapply

ESG criteria

Greenenergy/

technology

Corporate governance

Environ-mental

practises

Negativesocial

screening

Inter-nationalnormscriteria

*Source: Emerging Markets Investor Survey Report: An analysis of responsible investments in emerging markets by EIRIS

Key challenges to emerging markets investment*

ESG/SRI criteria uti lized*

13

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Over the past decade listed companies in Central

and European (CEE) have signifi cantly improved their

fi nancial and extra-fi nancial reporti ng. Whereas eight

years ago only a minority of CEE listed companies

disclosed detailed informati on on corporate

governance, today a majority of companies provides

this informati on online, in the English-language as well

as in local language. Furthermore, blue-chip companies

in all CEE markets increasingly disclose environmental,

social and governance (ESG) data; many publish a stand-

alone English-language ESG report or dedicate a secti on

of the annual report to ESG issues.

In 2001 the Partners for Financial Stability (PFS) Program

conducted its fi rst regional survey, “Investor Relati ons

Online.” At that ti me, less than 20% of the companies

surveyed provided brief biographical informati on online

in English on supervisory board members. In 2003, the

PFS Program conducted its fi rst “Survey of Reporti ng

on Corporate Social Responsibility (CSR).” At that ti me,

no company in the region issued a stand-alone English-

language ESG report online.

During a relati vely short period of ti me listed companies

in these former socialist economies have dramati cally

reoriented their reporti ng to move closer in tune with

the stringent requirements of the European Union (EU).

The breadth and quanti ty of informati on disclosed has

increased dramati cally and the quality of the informati on

disclosed has improved considerably. Today, more and

more companies have separate secti ons of their website

dedicated to corporate governance, CSR, investor

Financial and Extra-Financial Reporting in Central and Eastern Europe – Then and Now, and Tomorrow

Geoff rey Mazullothe Partners for Financial Stability Program

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relati ons and/or sustainability. Many of these secti ons

include archives of presentati ons, reports and stati sti cs.

A plethora of factors have contributed towards

companies’ improved fi nancial and extra-fi nancial

reporti ng, including: adopti on of Internati onal

Financial Reporti ng Standards (IFRS) across the EU;

corporate scruti ny of input costs (such as energy and

water); heightened public awareness of ESG issues;

implementati on of corporate governance codes;

implementati on of nati onal legislati on as well as EU

directi ves related to transparency; the negati ve impact

of high-profi le corporate scandals worldwide; pension

reform programs creati ng new domesti c insti tuti onal

investors; and a wide range of public-private

partnerships addressing corporate governance, CSR and

socially-responsible investment (SRI)..

Ironically, many companies conti nue to note that to

date not a single insti tuti onal investor has inquired

about ESG issues or requested ESG data. Limestone is

one of a few forward-thinking investors that engages

companies on extra-fi nancial issues. Bolstered by the

United Nati ons Principles for Responsible Investment

(PRI) and similar regional as well as nati onal initi ati ves,

insti tuti onal investors can play an important part in

encouraging companies to integrate ESG issues into

their bott om line, sustainably and over the long-term.

Year aft er year, SRI funds across the EU increase assets

under management. In order to att ract these investors,

CEE listed companies should conti nue to deepen and

strengthen their fi nancial as well as extra-fi nancial

reporti ng.

About the Partners for Financial Stability (PFS) ProgramThe United States Agency for Internati onal Development (USAID) established the Partners for Financial Stability (PFS) Program in 1999 as a public-private partnership to help complete reforms necessary to create sound, private and well-functi oning fi nancial sectors in the eight Central and Eastern European (CEE) countries that have since joined the European Union. In 2005, the geographical focus of the program shift ed to South East Europe (SEE). East-West Management Insti tute (EWMI), a New York-based not-for-profi t organizati on, is currently the primary implementi ng partner. The PFS Program is mandated to fi ll remaining gaps in the insti tuti onal development of the fi nancial sector in CEE and SEE countries through regional integrati on and cooperati on, selecti ve technical assistance programs and the practi cal applicati on of lessons learned in neighboring countries. The substanti ve areas covered under the PFS Program are: accounti ng, auditi ng, banking, capital markets, insurance and pension reform. Since 2001 the PFS Program has conducted 16 semi-annual regional surveys of Investor Relati ons Online of the largest listed companies in CEE and 12 semi-annual regional surveys of Reporti ng on Corporate Social Responsibility by the largest listed companies in CEE. The surveys are the data center of a multi -faceted initi ati ve dedicated to strengthening fi nancial / extra-fi nancial reporti ng, including: more than 15 seminars on investor relati ons for listed companies, several seminars on socially-responsible investment (SRI), corporate governance/CSR workshops for academics and students, capital markets workshops for fi nancial journalists and an internship program for students/recent graduates. For more informati on, please visit the PFS Program website at www.pfsprogram.org

16

“I was sti ll a student, studying at the Warsaw School

of Economics, when GES Investment Services from

Stockholm, Sweden, back then the Caring Company,

asked me to perform a pilot study in the late 1990s. I

gladly accepted the invitati on. My task was to assess

the amount and quality of CSR informati on performed

by largest companies on the Warsaw Stock Exchange.

I started my research in Warsaw, where I was based,

within a couple of weeks. Back then Internet was not

as we know it today, so the best way to contact the

companies was by telephone. I started calling every

company on my list in hope of getti ng in touch with

a friendly soul at the Investor Relati ons Department,

who would be kind enough to send me the company’s

latest Annual Report or any other offi cial document to

help me in my research. I remember that I was quite

surprised in the beginning by some of the companies’

impolite manner. I remember that I was put on hold

quite many ti mes by the secretaries who had to speak

to several people before they found somebody willing

to speak with me. The person at the Investor Relati ons

Department, if such a person ever existed, was quite

suspicious as to my asking for these documents. People

told me they did not have the mandate to make such

decisions, managers had to ask their managers if it was

company policy to send the reports to third parti es.

I oft en felt as if I was being interrogated and I was

questi oned over and over again and had to explain

precisely why I wanted to read a certain company’s

offi cial documents. I remember one parti cular ti me

where the person on the other line was very straight

with me and told me that I could well be a spy from a

competi tor and therefore hung up the phone. Imagine

my bewilderment! Aft er a lot of explaining, persistence

and pati ence from my side I luckily received the

informati on I was looking for.

I Could Well Have Been a Spy

Marti n PituraManager of GES Investment Services, Poland

17

Times have certainly changed and I am no longer the

poor student phoning round various companies, but

Manager of GES Investment Services in Poland. GES

Investment Services’ headquarters is in Stockholm,

Sweden. We have subsidiary companies in Denmark,

Poland and Switzerland. We cover approximately 4,200

companies from all over the world, including Poland and

other countries in former Eastern Europe. It is our job to

help Limestone assess their investment universe in the

Limestone Fund New Europe Socially Responsible from

a non-fi nancial perspecti ve, i.e. Environmental, Social

and Governance (ESG).I can honestly say that good

progress in communicati ng ESG in this part of the world

has been made, compared with when I fi rst started out

in 1990s. I am pleased to say that many companies now

receive good grades in accordance with GES Global

Ethical Standard and GES Risk Rati ng. Others sti ll have

some work to do when it comes to understanding

the importance of publishing and communicati ng ESG

informati on. They need to understand that, from an

investor’s point of view transparency is central. An

investor must feel secure when deciding upon investi ng

in a certain company. Therefore, the more accurate,

comprehensive and relevant ESG informati on published

the bett er for the investor, because it helps the potenti al

investor in his or her decision-making to invest or not

invest in a certain company and in the end att ract capital.

A company that does not understand such issues might

in the long run miss the opportunity to att ract funds,

and in the end fi nds itself operati ng in a tougher market

environment. I would thus like to encourage companies

to start taking Environmental, Social and Governance

issues more into considerati on. Aft er all, caring for

such aspects of a company’s operati ons will ulti mately

lead to gaining comparati ve advantage in the market,

and who knows, maybe more and more companies will

fi nd themselves as potenti al candidates in Limestone’s

Investment Universe.“.

GES Investment Services – founded in 1992 – is Northern Europe’s leading research and service provider for Responsible Investment based on internati onal guidelines for Environmental, Social and Governance (ESG) issues. We are the only research provider in the Nordic countries to have certi fi ed our services according to the European Voluntary Quality Standard (VQS). GES Investment Services’ clients consist of numerous well-known pension funds, banks and other investors. Assets under GES Investment Services’ advice is approximately EUR 350 billion. www.ges-invest.com

18

PhilosophyNew social and ecological challenges are conti nuously

changing the environment in which companies operate

and compete. Especially true in rapidly developing New

Europe, where change has been the very nature of life

and business over the last twenty years, companies that

embrace the change enhance their competi ti ve positi on

and deliver above average shareholder value over ti me.

Our funds’ aim is to deliver excellent returns by investi ng

in companies doing business in New Europe that have

the willingness and potenti al to contribute and best

adapt to the shift to a more sustainable society. We

invest in companies that are open to proacti ve approach

to social responsibility issues. We believe that such

companies exhibit higher management quality, bett er

stakeholder relati ons, greater resilience to economic

shocks and lesser risk to any loss of market reputati on.

In turn these companies att ract lower risk premiums

relati ve to peers and consequently a higher valuati on

and out-performance over the long term.

ApproachA cornerstone of our research process has always

been an interacti on with target companies and their

managements. Our experience has shown that owners’

and managers’ long term vision is a key extra fi nancial

criterion that determines companies’ subsequent

fi nancial success. A long term vision can only be viable

if it is in accord with the surrounding society, consisti ng

of all the stakeholders of the company. We believe

that good management of environmental, social and

governance (ESG) issues over ti me translates into

good fi nancial performance. Therefore, we engage

with companies in our portf olios to help them identi fy

the business case for responsible business practi ces;

encourage companies to comply with the UN Global

Compact principles; and transparently report on

the implementati on of their ESG considerati ons and

performance.

Socially Responsible Investi ng is a dynamic investment

approach for Limestone. We respond to the values and

aspirati ons of our investors by seeking to engage in

dialogue with companies to both bett er understand, as

well as help shape them in ways that favour sustainable

and responsible practi ces. At the same ti me it is the

response that we get from the companies that shapes

our understanding and helps us to further develop each

and every investment case. Our investment process

is based on the beliefs that success in stock selecti on

needs superior insights and that effi cient portf olio

management requires good risk control

Research ProcessLimestone’s research process is based on fundamental

valuati on with integrated SRI screening. Negati ve

screening is only used to exclude companies in sectors

that do not qualify as ethical investments, such as

manufacturing of weapons, alcohol and tobacco

products, as well as companies acti ve in gambling. The

core of research process is assessment of company level

environmental, social and governance issues. Most

informati on for these assesments are gathered during

personal meeti ngs with companies.

Typically the risk profi le of sectors is assessed based on

their suscepti bility of problems related to specifi c risks,

such as environment or social issues. In our approach

we move towards more company-specifi c evaluati on

with sector risks on the backround. We feel that sector

based profi ling should not aff ect investment decisions

driven by fundamental valuati on and ti lt preference

towards less risky sectors in research and valuati on

process. Therefore, in our approach only company-

specifi c risks really aff ect fundamental valuati on.

Our acti vely analyzed investment universe is esti mated

to be consti tuted of 300 to 350 companies that are

covered with fi nancial forecasts and target prices. The

universe is dynamic and is conti nuously updated to

include IPOs, exclude delisted companies, add new

ideas in pre-IPO universe etc. Forecast horizon in

company databases is three years.

SRI At Limestone

18

19

In esti mati on of fundamental value we use discounted

cash fl ow, justi fi ed forward P/E and excess return

models. Justi fi ed P/E model calculates forward-looking

P/E for three years in the future which is multi plied by

forecasted EPS and the result is discounted back to the

present at esti mated justi fi ed cost of equity. Excess

return model uti lizes the extended forecast period

unti l fi ve years in the future and uses the same cost

of equity fi gure. The model adds discounted surplus

to current book value to derive a justi fi ed price. In

additi on to justi fi ed P/E and excess return models we

occasionally uti lise also more detailed discounted cash

fl ow models. In discounted cash fl ow analysis we have

built two types of DCF models. A short-term DCF model

enables to establish target price of parti cular company

in a short-ti me frame by using limited number of inputs.

For thorough forecasti ng tasks we use a detailed DCF

model with signifi cantly higher number of input factors.

Forecast horizon in DCF models is in the range of 5-10

years, depeding on company-specifi c requirements.

Financial informati on is received from as many publicly

available sources as possible, like fi nancial data vendors,

stock exchanges and company sites; in the small-cap

universe detailed fi nancial informati on is oft en received

directly from the companies. Industry-and market

cycle related informati on is screened constantly and

in-house views are compared to market consensus as

well as individual third-party research reports and other

industry specifi c analysis available. Cost of equity in all

fundametal models is derived by country-specifi c risk-

free rate, internati onal equity premium and sector-

specifi c beta.

In calculati on of cost of equity we integrate the ESG

evaluati on and assign grade for each company on

Environmental, Social and Governance categories, based

on available public informati on, risk rati ng analysis from

GES Investment Services and our understanding on the

basis of company meeti ngs. In the valuati on model each

company is assigned a grade from 1-5 depending on our

assessment for the company in each parti cular category.

Depending on evaluati on we use a scale of additi ons

or subtracti ons to the cost of equity derived purely

through fundamental evaluati on of country-specifi c risk

free rate, company beta and universal equity premium

that increases or decreases the target discount rate. As

opposed to traditi onal approach, whereby company

beta is adjusted on the basis of SRI factors, we prefer

direct adjustment to the cost of equity, as beta factor

is primarily refl ecti on of sector risk. According to

the evaluati on of ESG factors the cost of equity for a

parti cular company can vary by up to 250 bps that

will provide for signifi cant diff erence in fundamental

valuati on that provides strong SRI preference to our

investment process and stock selecti on and higher

valuati on for companies with bett er score according to

ESG factors.

InteractionTransparencyKnowledge

Value

19

20

Our investment process is based on the belief that success in stock

selecti on needs superior insights. Collaborati ve interacti on with companies

is the best way to gain that insight.

We respond to the values of our investors by seeking to engage in dialogue

with companies to both bett er understand, as well as help shape them in

ways that favor sustainable and responsible practi ces.

At the same ti me it is the response that we get from the companies that

shapes our understanding and helps us to further develop each and every

investment case.

Factors

Sources

Target price

Targetprices300

400 300

20

Research Process

21

A&D Pharma Holding Nv-Gdr

Rel. to DJ Stoxx EU Enlarged TMI

100.00 100.0382.31

63.4256.55 52.98 50.31

42.6451.09

69.19 73.07 72.6581.88

90.87100.00

93.7081.65

60.0553.90 50.36

43.1036.51 40.23

49.0753.04 53.74

63.88 68.24

0102030405060708090

100110

Jul 08 Aug 08 Sep 08 Oct 08 Nov 08 Dec 08 Jan 09 Feb 09 Mar 09 Apr 09 May 09 Jun 09 Jul 09 Aug 09Limestone Fund - New Europe Socially Responsible DJ Stoxx EU Enlarged TMI

17.4%

6.8%

-22.9% -6.2%

14.0%

4.6%

0.37

10.3%

4.4%

56.7% 22.4%

7.4%

4.4%

34.5% 0.97

7.0%

4.4%

20.5%

-29.2%

15.5%

14.0%

-5.1%

-2.6%

7.0%

3.9%

-11.3%

3.0%

-0.2%

-6.8%

11.8%

DJ Stoxx EU Enlarged TMI

CONTACT INFORMATION

Phone +3727120801+3726282370www.limestonefunds.euinfo@limestonefunds.eu

FaxWebe-mail

INVESTMENT OBJECTIVE MANAGER COMMENTARY (as at 31.08.2009)

PERFORMANCE

ALLOCATION

STATISTICS

KEY INFORMATION

Fund Manager

Benchmark

Base Currency

NAV

Number of Holdings

Fund Launch Date

Quotation

Fees

Legal Structure

Custodian

Fund Domicile

Administrator

Investment Manager

Auditor

CodesISINBloombergReuters

EUR

90.87

26

31.07.2008

Daily

2.5% Management Fees

SICAV

Kredietbank Luxembourg S.A.

Luxembourg

Kredietrust Luxembourg S.A.

Limestone Investment Management

GES Investment Services

Deloitte S.A.

LU0373664472LIMNESR LX


Alvar Roosimaa Veronika Roosimaa

The Fund seeks growth of capital through investment in the equity se-curities of issuers in countries within Central and Eastern Europe believed to offer good opportunities for capi-tal appreciation and which meet the Fund’s investment and social criteria. The Fund invests primarily in the listed stocks of companies based or operat-ing in CEE. The Fund Manager applies bottom-up fundamental research driv-en investment process to construct an actively managed high conviction port-folio of favourably priced companies that comply with international norms on Environmental, Social and Gover-nance issues in accordance with the UN Principles for Responsible Investment.

Trends & MarketsIncreasing number of leading indicators and actual data from the industrialized world is confi rming the improvement in global economy while hous-ing and lately also employment data provided more signs of stabilization – and maybe even recovery. Euroland continues to surprise to the upside, especially encouraging are signs that German and French economies are out of recession, both grew by 0.3% in 2Q. Along with German export data that showed growth in June, news cannot get much more encouraging for CEE that largely depends on exports to Western Europe. The Ifo economic expectations indicator increased sharply for the eighth month in a row in the strongest monthly rise since German reunifi cation, confi rming the positive developments. A sharp increase in Ifo expectations has never failed to be accompanied by a sharp increase in German industrial production growth rates, which is generally very supportive of CEE exports.Countries that have reached out for IMF help are progressing well despite occasional bumps on the road. Serbia completed the latest set of negotia-tions under the EUR 3bn stand-by arrangement with macroeconomic framework for 2009 now allowing widening the fi scal gap from 3% of GDP to 4.5% without increasing taxes. The IMF mission also accepted the government’s strategy for 2010, which calls for public administration reforms, but no tax hikes or wage/pension cuts. The outcome of the talks is crucial for the IMF’s decision on whether to approve the disbursement of a sec-ond installment. Similar talks have commenced with Latvia with an important effect of silencing the rumors of an imminent devaluation. The most important domestic top down indication came from Poland where GDP grew 1.1% in 2Q, again proving the resilience of Polish economy to global recession. Still, outside of Poland real green shoots are diffi cult to fi nd in CEE economies.

Portfolio & StrategyAsseco Poland surprised positively with 2Q results, comfortably beating consensus. The positive surprise was fueled by increased gross margin and low effective tax rate. A forecast from the CEO calls for record-high results in FY09, as the backlog for 2009 is already at 90% of the total ‘08 sales and new “signifi cant” contracts for software to be announced soon. Ceramika Nowa Gala, our favored industrial play, published rather weak 2Q results on the back of a drop in gross margins. The balance sheet remains healthy and as preliminary June/July data is signaling rebound in construc-tion demand, CNG remains attractive for us with plenty of potential for long-term growth.If trying to forecast near term market direction, there is no doubt it will be decided by global – increasingly Chinese these days – leading indicators, and risk appetite in global fi nancial markets. We are delighted to see that more attention is starting to turn to second tier Polish and Romanian names, where we are currently fi nding most of value. International fund fl ows have so far averted CEE despite turning positive for the rest of emerg-ing markets over the summer. This will have to change eventually.

Performance

Calendar Year Performance

SectorCountry

Position Environmental Rating Social Responsibility Rating

Absolute Measure Relative Measure (DJ Stoxx EU Enlarged TMI)

Poland

Cash

Best Monthly Return Best Monthly Alpha

21.2%

11.8%

35.4% 13.5%

32.7%FinancialsRomania

Worst Monthly Return Worst Monthly Alpha

13.6%IndustrialsAustria

Boryszew SA

Sharpe (1M Euribor) Information Ratio

9.0%MaterialsCzech Republic

CEZ AS

Standard Deviation Tracking Error

7.9%ITOther

Teraplast

Downside Deviation (1M Euribor) Beta

6.8%StaplesCroatia

SIF 1 Banat-Crisana

Sortino (1M Euribor) Jensen Alpha

6.2%TelcoBulgaria

Bulgarian Real Estate Fd Inc

Maximum Drawdown

4.4%

4.4%

-57.4%

4.4%UtilitiesHungary

Vienna Insurance Group

Percentage of Positive Months

3.5%

4.3%

46.2%

4.0%EnergySerbia

Swedbank AB - PRF

3.0%

4.3%

3.5%DiscretionarySlovakia

Ceramika Nowa Gala SA

0.0%

4.2%

0.0%HealthSlovenia 0.0%

FundFund

Weight

Inception Inception

Rel. to DJ Stoxx EU Enlarged TMI

Fund

Fund

11.0%

71.5%

24.4%

-47.0%

-9.2%

-9.1%

6.8%

35.5%

28.7%

-49.6%

-27.2%

-31.8%


1 month

YTD

3 months

2008*

1 year

2007

3 years

2006

5 years

2005

Inception

2004

-5.8%

8.3%

1.8%

5.7%

4.3%

-3.9%

-5.0%

-6.2%

-3.5%

-7.6%

11.8%

This document is for information purposes only and does not constitute an offer or a recommendation to buy the Fund mentioned. While Limentsone Investment Management uses reasonable efforts to obtain information from sources which it believes to be reliable, Limestone Investment Management makes no representation or warranty as to the accuracy, reliability or completeness of the information. Unless otherwise stated, all fi gures are unaudited. Each investment in this product bears risks, such as value and profi t fl uctuations. Investments in foreign currencies may be subject to currency exchange rates. Past performance is no guarantee for current nor future results. The performance data does not factor in the commissions and charges levied on the issue and redemption of units. The performance is calculated on a net asset value basis, with income reinvested. All fi gures shown in the report are based on monthly data over 5 years or over the period since launch if it is less than 5 years. All fi gures over 1 year and additionally, risk measures shorter than 1 year, are annualized.

Investment Advisor

Limestone Investment Management is a signatory to the UN Principles for Re-sponsible Investment

A&D Pharma

BoryszewTeraplast CEZ

SIF1

BREF

VIG

Swedbank

NowaGala

A

A-

B+

B

B-

C+

C

aa-b+bb-c+c

Ind

ustr

y R

isk

Company Risk

A&D Pharma

Boryszew

Teraplast

CEZ

SIF1

BREF

VIG

Swedbank

NowaGala

A

A-

B+

B

B-

C+

C

aa-b+bb-c+c

Ind

ustr

y R

isk

Company Risk

* Since 31.07.2008

Fund Size10 994 228

NA

NA

Cash 11.8%Cash 11.8%

Limestone FundNew Europe Socially Responsible

22

SIF1 is one of fi ve SIFs, a group of Romanian closed

end funds created through various stages of mass

privati zati on process whereby wider public was granted

shares in these vehicles to compensate for Soviet era

nati onalizati on and other illegaliti es. Its main acti viti es

include investment services and management of the

investment portf olio, consisti ng of stakes in numerous

public and private companies.

Investment case:While shares in SIFs are the most liquid fi nancial

instruments on Bucharest Stock Exchange, they

are lacking transparency with regard to managerial

practi ces, strategy and fi nancial planning. Coupled with

outdated legislati ve base, these factors have created

a situati on where SIFs are valued by the market at a

large discount to their actual value. We believe that the

Romanian fi nancial market is in a fast track transmission

process to be harmonized with European standards,

and discounts based on structural ineffi ciencies will

start to contract in the nearest future.

Main focus for Engagement:The main goal was to understand bett er and positi vely

infl uence any change in corporate governance

procedures, especially in shareholder rights and

minority protecti on issues, which are the most

pronounced current problems. Also the implementati on

of a Corporate Social Responsibility policy that would

focus on handling ESG matt ers within the portf olio

holdings. Due to the wide spectrum of holdings in SIFs

and their infl uence in Romanian corporate community,

any initi ati ve from SIFs side could have a real impact.

Concerns and Questi ons addressed:• The central concern and the major discount factor

weighing on the company’s market valuati on is

the lack of informati on about corporate governance

policies. Any steps to improve transparency there

would be warmly welcomed by other stakeholders.

• There is no informati on available on how

the company handles central environmental issues.

A good way to start would be to identi fy and report

the environmental aspects related to the operati ons

of the portf olio companies. There is no publicly

available informati on on whether and how the fund

incorporates ESG concerns in its investment strategy.

• How does the company view the local legislati on

that caps the ownership to 1% in SIFs? How can

the company infl uence the process of removing

this limitati on? Will the company remove the cap

directly once legislati on allows for it?

Engagement Profile: SIF Banat-Crisana SA

23

Meeti ng Notes and FeedbackThe meeti ng took place in Bucharest at ING

headquarters. Present were Henriett e Spinka from SIF1,

Jakob König from GES Investment Services and Veronika

and Alvar from Limestone. The discussion was friendly

and open. To answer our main concerns Ms Spinka

confi rmed that SIF1 management supports bett er

transparency in ownership issues and the change of

ownership threshold, but is deadlocked by the law and

current corporate code to initi ate much change. There

have also been concrete steps in environmental issues

with regard to companies controlled by SIF1 and there

is a person directly responsible for these matt ers. It was

acknowledged that the lack of informati on is a concern

and our involvement and potenti al help in the future

was welcome.

Below is the lett er from Teodora Sferdian, the Director

of Development Division of SIF1:

“By courtesy of Mrs. Henriett e Spinka, the study

prepared by GES Investment Services was submitt ed

and analyzed by SIF Banat-Crişana’s management. Your

remarks are perti nent and they meet our interests and

intenti ons to improve Corporate Governance procedures

and implement a CSR- policy as soon as possible.

As Mrs. Spinka told you, we are much preoccupied

with these issues and starti ng 2009 the reports and

informati on addressed to investors will comprise the

aspects regarding ESG-issues and how SIF manages ESG

risk factors.

We very much appreciate your objecti vity in analyzing

our company, your valuable recommendati ons being of

real help.”

Regarding the legislati on about SIFs corporate

governance and shareholder treatment problems, there

have been important developments at the highest level

in 2009. Senate legislati ve council, in July, gave green

light to the proposal to change the legislati on regarding

SIFs ownership threshold. The proposal includes a

change in the SIFs ownership regulati on by eliminati ng

any restricti on related to the size of ownership. It is an

important step forward for the all-important change

that should be voted in parliament in September 2009.

Engagement Meeting

Purchase Period and Median Price

0

500

1000

1500

2000

2500

3000

3500

4000

4500

01.08 02.08 03.08 04.08 05.08 06.08 07.08 08.08 09.08 10.08 11.08 12.08 01.09 02.09 03.09 04.09 05.09 06.09 07.09 08.09

Volume ‘000Price

0

0,5

1

1,5

2

2,5

3

24

Sector Insights

24

25

Rapid development of communicati on standards

and technology worldwide and exponenti al growth

from almost non-existent base in Emerging Europe

are the key drivers in internet and communicati ons

sector. Communicati on industry is signifi cant in ways

it transforms working practi ces through conference

calling and video conferencing, which leads to a

signifi cant reducti on in travel, transport and related

acti viti es that have an environmental impact. The

integrati on of all communicati on services into bundled

packages of fi xed line and mobile voice, data and TV/

video is the leading trend that drives the industry

and plays an important part in competi ti veness and

consolidati on. Innovati on and constant introducti on of

new value added services or components is the key to

succeed in ti mes when mobile penetrati on has reached

complete saturati on and communicati on devices like

laptops and phones have become interchangeable.

Need to bridge the digital divide is as much a social

challenge as it is a unique business opportunity with a

chance to „create“customers with product innovati on.

Rigorously enforced code of conduct covering access

to confi denti al informati on and privacy protecti on is a

necessary part of business.

Economic:- Brand Management- Customer Relati onship Management- Innovati on Management- IT Security- Privacy Protecti on- Service development

Environmental:- Environmental Policy/- Management System- Operati onal Eco-Effi ciency- Climate Strategy- Electro Magneti c Fields radiati on- Upgradability, reusability, recyclability of products

Social:- Digital Inclusion- Standards for Suppliers - Impact of Telecommunicati on Services- Stakeholder Engagement

Communicati onsComputer Services & Internet, Telecommunicati ons

Sector Specifi c Factors

Source: GES Risk Rati ng for Limestone

Communicati ons Sector ESG Scores5 best ranked by corporate governance score

Environmental Score Human Rights Score Corporate Governance Score

Sector Statistics

Assessed companies to totalcompanies in Limestone's universe

Number of companieswith Corporate Governance Score

Number of companieswith Human Rights Score

Number of companieswith Environmental Score

Number of companiesin Limestone's universe

9

6

5

9

4,5%

0% 20% 40% 60% 80% 100%

Telefónica O2Czech Republic

Matav

Eesti Telekom

Netia

TP Telekom Polska

26

A sector all about consumer tastes and evolving spending

habits that make it necessary for companies to expend

a lot of eff ort on brand management, cost effi cient and

adaptable producti on processes that ensure quality

and sustainable customer relati onship management.

For apparel manufacturing new challenges come

from innovati on of new materials and products with

superior environmental and more health conscious

characteristi cs. In service sectors people are the single

most important asset. An advanced employment model

including talent att racti on and retenti on strategy, human

capital development, and fi rm ethical principles are pre-

requisites for success. Especially in Emerging Europe

where energy effi ciency is relati vely low, companies

have to focus on eco-effi cient practi ces, including energy

and water consumpti on. Rise in consumer awareness

in areas of healthy nutriti on and eco-lifestyle open up

challenges and opportuniti es. Innovati ve concepts with

regard to recreati onal acti viti es and travel are expected

by customers and ensure competi ti ve advantage.

Rapidly expanding demand for the transport of

people increases infrastructure requirements, calling

for ecologically effi cient and community conscious

development strategies.

Economic:- Customer relati onship management- Brand management- Cost effi ciency- Adaptable producti on processes- Innovati on Management- Scorecards/Measurement systems- Water Operati ons- Customer safety and rights management- Food Safety

Environmental:- Environmental policy/management system- Biodiversity protecti on strategy- Climate Strategy- Eco Tourism- Operati onal Eco-Effi ciency- Green facility management

Social:- Stakeholder engagement- Standards for suppliers- Access to Water- Human Rights & Corrupti on- Healthy Living- Local Impact of Business Operati ons

Discreti onaryClothing, Accessories and Footwear, Hotels, Restaurants, Leisure, Tourism




Sector Statistics






30

9

7

30

15%

0% 20% 40% 60% 80% 100%

Komputronik

Barlinek

Central EuropeanMedia Enterprises

Allami Nyomda

Sava

Discreti onary Sector ESG Scores5 best ranked by corporate governance score

27

The key element for sustaining long-term profi tability in

energy companies is to secure access to next generati on

hydrocarbon reserves. CEE is not famous for large oil and

gas reserves and therefore, local energy companies are

forced to acquire assets outside the region and at many

ti mes in ecologically and politi cally sensiti ve countries.

Among the array of business risks and opportuniti es

created by social, economical and environmental factors

are rising locati on and development costs, complex and

deep geology of oil and gas reservoirs, the lack and

cost of skilled manpower, health and safety issues and

community management. In additi on, for securing long

term competi ti veness, energy companies must focus on

their operati onal eco-effi ciency, managing carbon risks

and concentrati ng on producing cleaner end-products.

Technology innovati on and highly skilled, constantly

learning and developing, human resources are driving

the competi ti veness of companies in advanced seismic

monitoring and drilling businesses that are playing

important role against the backdrop of increasingly

smaller and less accessible oil/gas fi elds.

Economic:- Customer Relati onship Management- Brand Management- Explorati on & Producti on- Gas Portf olio- Access to reserves, licenses and capital- Commodity pricing- Refi ning capex and margins

Environmental:- Environmental Policy/ Management System- Operati onal Eco-Effi ciency- Carbon management- Biodiversity- Refi ning/Cleaner Fuels- Renewable Energy

Social:- Occupati onal Health&Safety- Stakeholder Engagement- Standards for Suppliers- Social Impacts on Communiti es- Availability of skilled workforce

EnergyOil Equipment & Services, Oil and Gas Producers




Sector Statistics






7

7

7

7

3,5%

0% 20% 40% 60% 80% 100%

Petrom

MOL

Lotos Group

PKN Orlen

OMV

Energy Sector ESG Scores5 best ranked by corporate governance

28

In this service driven industry credibility and

compliance with best practi se corporate governance

is mandatory. As fi nancial companies’ main asset is

skilled, highly moti vated and experienced workforce,

investment in employee relati ons with focus on

knowledge management is very important. As banking

has increasingly become close to uti lity-like service,

the involvement of customers and wider stakeholder

engagement in product innovati on is unavoidable.

Risk management in any kind of fi nancial service

has become the key to long term success, and the

range of risks that must be taken into considerati on

is expanding constantly. For insurance sector, issues

like climate change, resource scarcity and changing

demographics are both sources of new risks and new

business opportuniti es. The need for more regulati on in

the sector, especially with regard to investment banking

and wealth management, which was amplifi ed by the

recent crisis, means increased dependency on politi cal

decision-making. As banking sector in New Europe is

mostly owned and controlled by Western European

fi nancial groups, cross border communicati on and

responsibility for local needs is a common challenge.

Economic:- Brand management - Customer relati onship management- Anti -crime policy/measures- Stakeholder engagement- Risks and costs of legislati on - Responsible product and contract design

Environmental:- Environmental policy/management system- Business opportuniti es fi nancial services/products from ESG integrati on into lending and asset management- Integrati on of ESG into property and casualty insurance products and claims management- Business risk infrastructure/project fi nance- Sustainable real estate fi nancing

Social: - Stakeholder engagement- Job security- Hiring and retaining knowledge- Code of ethics in investments/ fi nancing- social valude added: fi nancial inclusion/capacity building- Access to Insurance

FinancialsBanks, Financial Services, Insurance




Sector Statistics






34

12

13

31

17%

0% 20% 40% 60% 80% 100%

Bank Pekao

Bank Handlowy

Bank Millennium

ING Bank Slaski

Swedbank

Financial Sector ESG Scores5 best ranked by corporate governance score

29

An ageing populati on in Europe means constantly rising

demand for healthcare services and pharmaceuti cal

products. Convergence process in Emerging Europe

directly translates into increased healthcare related

consumpti on, as there is sti ll a wide cap to be closed to

Western European standards. The big pharmaceuti cal

industry is purely research driven and heavily dependent

on the development of innovati ve drugs with high sales

potenti al. Emerging Europe’s pharmaceuti cals industry

is mostly generics driven, and thus very sensiti ve to

sales and margins, as well as public healthcare budgets

in their specifi c target markets. Good established

connecti ons to, and bett er understanding of the specifi cs

of the vast underdeveloped pharmaceuti cals markets of

former Soviet Union are key competi ti ve advantages for

many Emerging European pharmaceuti cals companies.

Access to drugs, the new charter of drugs, research

into diseases with less commercial potenti al and global

patent protecti on are the key social and economic

issues. The focus is increasingly shift ing on preventi ve

medicine and services, bett er compliance, conti nuous

improvement in customer oriented services and

consolidati on to meet effi ciency constraints.

Economic:- Brand Management- Customer Relati onship Management- Innovati on Management- Marketi ng Practi ces- Research and Development - Life cycle engineering- Product safety- Responsible services- Fair commercial practi ses- Sustainability of intellectual property system

Environmental:- Climate Strategy- Environmental Policy/ Management System- Operati onal Eco-Effi ciency- Use of hazardous and toxic substances- Green building and facility management- Environmental safety of human and animal pharmaceuti cals- Sustainable raw materials

Social:- Addressing Cost Burden- Animal Testi ng- Bioethics- Health Outcome Contributi on- Occupati onal Health&Safety- Stakeholder Engagement- Standards for Suppliers- Strategy to Improve Access to Products

HealthMedical Products, Pharmaceuti cals




Sector Statistics






12

5

7

11

6%

0% 20% 40% 60% 80% 100%

Polska GrupaPharma

A&D Pharma

HTL-Strefa

Egis

Krka

Health Sector ESG Scores5 best ranked by corporate governance score

30

Increasingly stringent environmental regulati ons for

producti on processes and customer end products make

it necessary for industrial companies to control and

manage their emission profi le and become involved

in product take back and recycling programs. Many

companies and sub-sectors in Industrials are exclusively

and directly reliant on oil, which poses a major

challenge, as society worldwide is seeking to diversify

its energy sources. Hence, alternati ve fuels and energy

effi ciency will play an increasingly important role. The

increasing emphasis on low-cost countries in the global

sourcing and producti on strategy poses an opportunity

for Emerging Europe but also challenges in the areas

of human rights risks, occupati onal health and safety

considerati ons, and community development. With

regard to consumer products and electronics, where

consumpti on growth is excepti onally high in emerging

economies, addressing the issues of disposal, product

packaging and sales in the management of the product

life cycle, as well as extending the life cycle of products,

becomes a high priority. Transport and logisti cs, great

benefi ciaries of free trade and opening of markets

in CEE, need constant modernisati on of integrated

informati on systems to improve effi ciency.

Economic:- Brand Management- Customer relati onship management- Innovati on- Anti trust Policy- Quality management- Life-cycle engineering- Eco-effi ciency, safety and lean end of life opti ons of products- Non-fi nancial Project Evaluati on

Environmental:- Environmental policy/management system- Use of environmentally friendly raw materials and producing environmentally friendly products - Climate protecti on strategy- Product take back and recycling - Biodiversity- Transport and logisti cs- Resource effi ciency- Use of hazardous and toxic substances- Green buildin

Social:- Occupati onal health and safety- Stakeholder engagement- Standards for suppliers- Hiring and retaining knowledge- Avoiding corrupti on and illegal market practi ses

IndustrialsAuto Parts and Tires, Constructi on and Materials, Diversifi ed Industrials, Durable Household Products, Electronic

Equipment, Transportati on, Infrastructure and Logisti cs




Sector Statistics






47

27

24

24

23,5%

0% 20% 40% 60% 80% 100%

Opozcno

Koelner

Elektrobudowa

Intereuropa

Wienerberger

Industrials Sector ESG Scores5 best ranked by corporate governance score

31

As a known source of technologically skilled non-

expensive labour, the key for success in this sector,

Emerging Europe has been well positi oned for rapid

growth in this sector. The main long term challenges

and opportuniti es are associated with the use of end-

products: energy effi ciency, safety and lean end-of-life

opti ons. Preparing for customers’ present and future

carbon constraints is an important part of securing the

competi ti veness in hardware and equipment product

portf olios. Regulatory demand for environmental

protecti on of air, soil and water systems drive the

markets for new soluti ons. Demand for energy

effi cient buildings has created demand for specialised

soluti ons in producti on of hard- and soft ware as well

as services. Regulatory development and general

drive for more effi ciency in planning and product

life cycle management are boosti ng IT investments.

Sti ll a signifi cant problem across emerging markets,

protecti on of intellectual property of soft ware is an

issue that needs more att enti on and concerted acti on.

The industry of IT and internet services is in midst of a

major shift of producti on to lower cost countries, which

is another opportunity for Emerging Europe. First and

foremost, talent att racti on and retenti on management

is the key for sustainable success.

Economic:- Brand Management- Customer Relati onship Management- Innovati on Management- Privacy and data Protecti on- Supply Chain Management- Shift from Products to Services- Life cycle engineering- Effi ciency of IT Infrastructure

Environmental:- Climate Strategy- Environmental Policy/ Management System - Hazardous Substances Operati onal Eco-Effi ciency- Product Stewardship- Upgradability/ reusability/recyclability of products

Social:- Corporate Citi zenship- Digital Inclusion- Human Capital Development- Labor Practi ce Indicators- Social Reporti ng- Stakeholder Engagement- Standards for Suppliers- Hiring and retaining knowledge

Informati on TechnologyComputer Hardware & Electronic Offi ce Equipment, Soft ware & IT Services




Sector Statistics






6

1

2

6

3%

0% 20% 40% 60% 80% 100%

Teta

Sygnity

Qumak-Sekom

ATM

Asseco Poland

Comarch

IT Sector ESG Scores5 best ranked by corporate governance score

32

Chemical companies are faced with increased

public scruti ny and legislati ve pressures to be more

environmentally friendly in terms of their feedstocks,

producti on processes and end-products. Thus, to secure

their long term competi ti veness, chemical companies

must focus on developing innovati ve products and

processes that meet the current and future needs of

the consumers and environment. Renewed producti on

processes, alternati ve and renewable raw materials,

management of mineral waste and replacement of

toxic reagents are among the crucial elements of

innovati on for chemicals industry. For metals and

mining companies, the main long term profi tability

drivers are access to reserves, licenses and capital,

commodity pricing and managament of skyrocketi ng

operati ng costs due to producti on constraints. The

sector faces many challenges, starti ng from mining

safety to managing the complexiti es of environmental

and legislati ve requirements. The essenti als for this

sector are community management, technological

advancements, sustainable and safe mine design and

climate change and waste management to prevent

water contaminati on.

Economic:- Customer relati onship management- Anti trust Policy- Responsible Lobbying- Fair commercial practi ses- Innovati on of processes and products - Effi cient process design- Access to reserves- Commodity pricing- Access to licenses and capital

Environmental:- Climate strategy- Environmental policy/ management system- Geneti cally modifi ed organisms- Advanced environmental performance- Product and substance risk management and assessment- Renewable raw materials- Transport and facility safety- Biodiversity- Mineral Waste Management

Social:- Occupati onal health and safety- Standards for suppliers- Social Impacts on Communiti es- Stakeholder Engagement- Confl icts over land use and protecti on of human rights

MaterialsChemicals, Steel, Metals and Mining




Sector Statistics






17

12

7

16

8,5%

0% 20% 40% 60% 80% 100%

Synthos

Paged

Impexmetal

KGHM

Ciech

Materials Sector ESG Scores5 best by corporate governance score

33

Rising living standards in Emerging Europe have over

the last decade fuelled demand for modern housing

as well as new retail space and offi ces. Leading trend

in Eastern European real estate sector is expansion

within the region, which is helping good business

practi ces to be introduced across borders. The sharp

rise in energy costs for all uses has made the amount

of operati onal energy used in buildings a disti ncti ve

factor in their att racti veness. Buildings with low energy

intensity reduce the impact of energy costs and thus

energy price volati lity. Occupati onal health and safety

risks can be addressed through selecti on criteria to the

constructi on companies, as well as in the maintenance

services management. Monitoring the contractors

can ensure that constructi on processes are effi cient

and environmentally friendly. Challenges are in the

areas of social integrati on of buildings and constant

improvement of eco-effi ciency. Socially responsible

investment practi ces have lately started to expand into

real estate investi ng, which will hopefully further foster

sustainable business practi ses in the sector.

Economic:- Stakeholder Engagement- Revenue/effi ciency growth- Co-operati on/Customer relati ons- Ability for fl exible adapti on/innovati on

Environmental:- Biodiversity- Building Materials- Climate Change Strategy- Environmental Policy/ Management System- Operati onal Eco-Effi ciency- Resource Conservati on and Resource Effi ciency- Green building- Environmental and social aspects of site selecti on

Social:- Social Integrati on- Standards for Suppliers - Health and well being of building users- Innovati on- Know-how management

Real EstateDevelopment, Maintenance, Investi ng




Sector Statistics






15

5

2

15

7,5%

0% 20% 40% 60% 80% 100%

Sparkassen Immobilien

ECM Real EstateInvestments

Echo Investments

Ronson Europe

Dom Development

Real Estate Sector ESG Score5 best ranked by corporate governance score

34

As a pure consumers’ industry staples is strongly

infl uence by shift ing consumer demands and new

consumpti on patt erns. As the sector is far from

mature in Emerging Europe, innovati on and smart

expansion strategy can lead to signifi cant market share

gains. New market niches with higher margins and

exponenti al sales growth, such as the producti on and

marketi ng of organic/healthy nutriti on, off er additi onal

opportuniti es. High level of competi ti on in retailing

with the recent success of hard discounters has been

important factor in keeping consumer prices down.

Emerging interest and new economic means among

CEE consumers fuels interest in lifestyle and health,

which strongly infl uences purchasing habits and

creates new customer needs waiti ng to be sati sfi ed.

On the operati onal level, the management of supply

chain and effi ciency of transport systems are of crucial

importance. E-commerce is becoming an indispensable

element in the competi ti ve retail market, off ering new

opportuniti es and means to more effi ciency, especially

as Emerging Europe consumers are used to and

therefore much more adapti ve to change. The sector is

also one of the most obvious targets for takeovers and

consolidati on from Western peers.

Economic:- Brand Management- Customer relati onship management- Health and nutriti on- Product safety- Controversial ingredients- Consumer informati on

Environmental:- Climate strategy- Environmental policy/ management system- Management of geneti cally modifi ed organisms- Packaging- Raw material sourcing/ use of recycled raw materials- Operati onal eco-effi ciency- Climate protecti on in producti on and transportati on

Social:- Occupati onal health and safety- Standards for suppliers- Responsibility for alcoholic beverages- Employment standards- Labour rights and standards in producti on

StaplesBeverages, Food Producers, Food and Drug Retailers, General Retailers




Sector Statistics






19

9

7

13

9,5%

0% 20% 40% 60% 80% 100%

Bomi

Elstar Oils

Emperia Holding

Mieszko

Eurocash

Staples Sector ESG Score 5 best ranked by corporate governance score

35

Uti liti es are aff ected by trends in liberalizati on of

markets and prices, growing demand for energy in an era

of rapidly rising prices, and securing stable sustainable

access to resources. Recent developments related to

greenhouse gas emissions from carbon intensive power

generati on and carbon credit systems are aff ecti ng

the sector directly. Popular oppositi on to large scale

infrastructure projects with potenti al polluti on risks

are a challenge to be tackled at all levels of society.

Electric and gas uti liti es have implicit and someti mes

explicit responsibility to enhance both supply- and

demand-side effi ciency as a key component to reduce

environmental impact. Water companies are challenged

by an increased scarcity of accessible and clean water

resources, infrastructure maintenance, and regulati on

that could be politi cally moti vated. Responsibility can

be demonstrated by investi ng beyond administrati vely

required and fi nancially opti mal levels to limit drinking

water losses from distributi on infrastructure and

ensuring access to and bett er treatment of sewage.

Increased competi ti on from liberalizati on rewards

integrated, cost-effi cient and customer oriented energy

and water management strategies.

Economic: - Customer Relati onship Management- Market Opportuniti es- Price Risk Management- Scorecards/Measurement Systems

Environmental:- Biodiversity- Climate Strategy- Electricity Generati on Environmental Policy/ Management System- Operati onal Eco-Effi ciency- Transmission & Distributi on and security of supply- Responsibility for both supply-side and demand-side energy effi ciency- Manufactured Gas Plants- Use of hazardous and toxic substances- Fuel mix

Social:- Occupati onal Health&Safety - Stakeholder Engagement- Fuel Poverty

Uti liti esElectricity, Gas Distributi on, Uti liti es




Sector Statistics






3

3

3

3

1,5%

0% 20% 40% 60% 80% 100%

Transelectrica

CEZ

Tallinna Vesi

Uti liti es Sector ESG Score5 best ranked by corporate governance score

36

The concept of socially responsible investment (SRI)

has many denotati ons, it is also called sustainable,

social, ethical and responsible investment by diff erent

practi ti oners who conti nue to debate over correct

semanti cs of the noti on. We at Limestone use the term

SRI for describing ethical and sustainable investment

approaches that integrate environmental, social and

governance (ESG) factors into the investment process.

Responsible or sustainable investi ng is one of the

leading topics in fi nance today, generati ng increased

interest among wider network of investors than ever

before. In September 2008, global sustainably managed

assets reached EUR 5 trillion, with Europe holding the

largest share of 53% and United States following with

39%. About EUR 210 bn, or 4% is invested into emerging

markets SRI products.

There are four main driving forces behind ESG factor

considerati on, fi rst socio-economic drivers created by

public pressure waves of the OECD countries, where

government recogniti on is increasing with ESG compliant

legislati on being enforced on insti tuti onal investors’

fi duciary duti es on an internati onal scale. Second,

investment analysis drivers are shaping investment

managers’ stock selecti on processes by integrati ng

ESG factors to valuati on models to bett er monitor ESG

associated risks. Third, portf olio management drivers

created by discussions about portf olio effi ciency gains

or losses through ESG oriented investment methods and

fourth driver is unlocking the sustainable alpha through

engagement in companies and introducti ng importance

of transparancy and sustainability of operati ons.

Organisati ons that promote assessing and reporti ng

ESG risk have only started to appear on global capital

markets. The two main initati ves linking asset owners,

asset managers and corporati ons are United Nati ons

Principles for Responsible Investment (UNPRI) and

United Nati ons Global Compact (UNGC).

SRI Explained

United Nati ons Principles for Responsible Investment number of signatories

Source: UNGC, UNPRI

United Nati ons Global Compact number of parti cipants

0

1000

2000

3000

4000

5000

6000

7000

8000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2006 2007 2008 2009

AUMUSD 18 tn

0

100

200

300

400

500

600

37

Both organizati ons have considerably increased their

signatory base – approximately 550 UNPRI signatories

currently represent over EUR 12 trillion in assets

under managament, which is about 37% of global

professionally managed assets.

ESG Opportuniti es and RisksCompanies face a various degree of ESG based risks and

opportuniti es depending on the industries and cultures

in which they operate. A company that incorporates

ESG exposures into its long-term strategic planning and

adequatey communicates these factors and stategies

to investors will provide a more complete picture

of that company’s prospecti ve value. Strategically

incorporati ng ESG analysis may also positi on companies

to bett er anti cipate future operati ng environments,

including potenti al costs or burdens to their existi ng

business model.

• Carbon emissions,

greenhouse gas

emissions, disclosure/

measurement and

reporti ng

• Climate change: eff ect

on company/risk

exposure/ opportuniti es

• Ecosystem change

• Faciliti es citi ng

environmental risks

• Hazardous waste

disposal/cleanup

• License to operate in

communiti es

• Polluti on

• Renewable energy

• Resource depleti on

• Toxic chemical use and

disposal

• Animal welfare

• Child labour

• Community relati ons

• Discriminati on

• Diversity

• Faciliti es

• GMO

• Living wage disputes

• Predatory lending

• Politi cal contributi ons

• Politi cal risk of

involvement in troubled

markets

• Sexual harassment

• Shareowner advisory

vote on executi ve

compensati on

• Slave labor

• Cumulati ve voti ng

• Dual-class shares

• Executi ve compensati on

• Majority voti ng

• Poison pills

• Say on pay

• Separati on of chairman/

CEO positi on

• Shareowner rights

• Staggered boards

• Takeover defences/

market for control

Environmental risks created

by operational decisions

Social risks arising from

policies and practises

regarding human resources

and workplace

Risks created by flaws in

corporate governance

policies and procedures

Source: CFA Program Curriculum Volume 5 Level 3 2008/ Risk Management by Don M. Chance, Kenneth Grant, and John Marsaland, Environmental, Social, and Governance Factors at Listed Companies by CFA Insti tute

38

Types of ESG Investment

39

40

Documents

Limestone New Europe SRI Yearbook 2009