limestone new europe sri yearbook 2009
DESCRIPTION
Following its first anniversary, Limestone New Europe SRI Fund has published an SRI Yearbook as the first attempt in Emerging Europe to give a hands-on overview of the investment landscape from the perspective of socially responsible investor. The focus of this publication is to show that the newest part of the European Union is uniquely positioned to be at the forefront of necessary transformation thanks to the almost complete collapse of the "old" and a subsequent fast track built up of the "new" over the last twenty years. The investment team gives an overview of how sustainability considerations are integrated into traditional financial valuation to gain insights that facilitate the selection of stocks with an attractive long term return potential. The remodeling of the traditional analytical framework for SRI and ESG factors' integration, especially in the still-emerging markets' environment of New Europe, is a formidable challenge.TRANSCRIPT
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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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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
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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*
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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
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“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
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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
DJ Stoxx EU Enlarged TMI
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%
DJ Stoxx EU Enlarged TMI
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 Specifi c Factors
Source: GES Risk Rati ng for Limestone
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
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 Specifi c Factors
Source: GES Risk Rati ng for Limestone
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
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 Specifi c Factors
Source: GES Risk Rati ng for Limestone
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
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 Specifi c Factors
Source: GES Risk Rati ng for Limestone
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
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 Specifi c Factors
Source: GES Risk Rati ng for Limestone
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
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 Specifi c Factors
Source: GES Risk Rati ng for Limestone
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
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 Specifi c Factors
Source: GES Risk Rati ng for Limestone
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
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 Specifi c Factors
Source: GES Risk Rati ng for Limestone
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
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 Specifi c Factors
Source: GES Risk Rati ng for Limestone
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
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 Specifi c Factors
Source: GES Risk Rati ng for Limestone
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
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