Sustainalytics: 10 For 2015 Full Report

Thematic Research
10 for 2015:
Generating value in a fragile market
Dr. Hendrik Garz, Doug Morrow
January 2015
About Sustainalytics
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expertise and a thorough understanding of more than 40 industries. In 2012, 2013
and 2014, Sustainalytics was voted best independent responsible investment
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January 2015
10 for 2015
Foreword
2015 Staring down challenges, building on successes
Ive always believed in the motto Success Breeds Success, more from personal and
professional experience than from any logical or scientific explanation. Accordingly, I fully
expect the ESG business segment to build upon its successes of last year to achieve even
more significant accomplishments in 2015. Of course, the drivers of ESG success are both
complex and multi-dimensional. While capturing them all is too big a task for this foreword,
Im pleased to add my thoughts about what might be in store for the ESG industry in 2015,
ever wary of the investment industry mantra that past performance is no indication of
future results.
Michael Jantzi
Chief Executive Officer
michael.jantzi@sustainalytics.com
By all accounts 2014 was a good year for ESG globally. We saw increased ESG integration by
asset managers, some of it explicitly mandated by ESG-minded pension funds and high net
worth clients, but also a tangible increase in ESG adoption by traditional asset managers, as
evidenced by the 19% increase in PRI signatories. With the rise in the number of U.S.-based
asset owners and managers joining the PRI, including industry bellwether Vanguard with
over USD 3trn in assets under management, I expect ESG adoption to continue to gather
strength in the year ahead.
We also saw steady growth in ESG-associated assets under management in established
markets and across multiple asset classes. According to various published reports, U.S.domiciled assets under management using SRI strategies grew to USD 6.57trn in 2014, a
76% increase over 2012 levels. ESG integration in Europe and Australia grew by 38% and
51%, respectively. These are impressive statistics, given Europes and Australias early
adoption of ESG practices. Though U.S. institutional investors have been slower to embrace
ESG factors as an integral piece of the investment analysis process, I view these recent
milestones as ESG success indicators for the years to come.
Building on its tremendous growth in 2014, we believe the green bond market of USD
36.6bn will more than double in size in 2015. Forty-six percent of the market was driven by
corporates and municipalities last year, with a record corporate deal by GDF Suez, including
proceeds from its USD 3.4bn green bond (split into two bonds) earmarked for renewable
energy and energy efficiency projects.
Finally, I want to shine a spotlight on several important moves to strengthen regulatory
environments across several jurisdictions, which I believe will lead to more informed capital
markets and the continued push for ESG investment. Although it is difficult to see tangible
impact at this early juncture, I believe the U.K. Law Commissions report (in Fiduciary Duties
of Investment Intermediaries, July 2014) will serve to reinforce the concept that trustees
fiduciary duties encompass ESG. My optimism is high, in part, because a review of the
Stewardship Code, which received strong support in 2014 from the Chair of the Financial
Reporting Council, is on tap for later this year.
And, after years of discussion that seemed to span generations, Ontario (Canada) is making
changes to its Pensions Benefit Act that will require funds to reveal whether, and if so how,
ESG considerations are taken into account in investment policies. The amendment, which
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takes effect at the beginning of 2016, is already raising ESG awareness among small- and
medium-sized pension plans across the province.
Regulatory reform is evident in a variety of Asian countries as well. The Korean National
Assembly passed two RI-related pieces of legislation in late December, one focused on the
mandatory disclosure of ESG information by listed companies and the other on the National
Pension Service (the fourth-largest pension fund in the world), which now has legislative
clarity with respect to taking ESG issues into consideration. In Japan, more than 175 asset
managers, asset owners and other market participants have signed onto the Japanese
Stewardship Code, which was put in place by the Japanese Financial Services Agency (FSA)
in February 2014 to encourage institutional investors to engage with companies on their
sustainability practices.
Alas, it will not all be smooth sailing in the year ahead. Clearly, the political landscape means
sustainability issues generally, including ESG, will likely face increased scrutiny and
Congressional challenges in the U.S. There will be some tough going with a Republican
majority in Congress and James Inhofe, author of The Greatest Hoax: How the Global
Warming Conspiracy Threatens Your Future, as Chair of the Environment and Public Works
Committee.
First they ignore you, then they ridicule you, then they fight you, and then you win.
I also expect that our industry will face well-funded, better-organized and more ferocious
adversaries than in the past. I look to what happened in Australia at the end of last year as
the harbinger of things to come. As one might expect in a resource-focused economy, a
debate was ignited in response to several Australian institutions deciding to divest from
fossil fuels. Ill leave it to each of you to determine whether or not Rice Warners report
Analysis of Socially Responsible Investment Options1, undertaken at the behest of the
Minerals Council of Australia, provides insight like no other, as Rice Warner proclaims on
the first and last pages of the presentation.
However, the response to Australian National Universitys (ANU) decision to divest from
seven fossil fuel companies was unprecedented in its vitriol, as evidenced by Australian
Prime Minister Tony Abbotts comment that it was a stupid decision. Moreover, ASXlisted Sandfire Resources, one of the companies affected by ANUs decision, filed
proceedings in the Federal Court of Australia against CAER, an Australian-based ESG
research house. I expect that the phrase if you cant stand the heat, get out of the kitchen
will apply to all of us, as some critics will not just turn up the heat but will try to burn the
kitchen down entirely. In order to stare down these and other challenges, our ability to
muster a collaborative response will become increasingly important. The Sustainalytics
team, more than 200 strong globally, looks forward to working together with others in the
ESG industry to ensure that we continue building upon our collective successes throughout
2015 and beyond.
Michael Jantzi, Chief Executive Officer
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Contents
Executive Summary
5
5
2015 Macro View

Sustaining the unsustainable
9
9
2015 The Asian View

Modest growth, high vulnerability
27
27
10 for 2015
A platform for ESG analysis
33
33
DuPont
Sowing seeds for African growth?
35
35
Intel
Progress on conflict-free target could pay reputational dividend in 2015
38
38
GlaxoSmithKline (GSK)
Company looks to rebound from record bribery charge
41
41
LafargeHolcim
Proposed merger offers intriguing ESG opportunities
44
44
Lonmin
Results of Marikana Commission could create business risks
47
47
National Commercial Bank (NCB)

Playing the market for Shariah-compliant financial products
49
49
Telenor
Advanced ESG performer poised to succeed in risky environment
52
52
Petroleos Mexicanos (Pemex)

Competing in Mexicos freshly liberalised energy sector
55
55
The Coca-Cola Company (Coke)

Product diversification brings new ESG risks
59
59
Netflix
Questionable board practices at pivotal moment in companys evolution
62
62
Chartbook
65
Appendix
Report Parameters
Contributions
Glossary of Terms
Endnotes
66
66
66
66
67
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Executive Summary
Analysts
Key Takeaways
Dr. Hendrik Garz

Managing Director, Thematic Research
Macro picture short-term stability, but at what cost?
hendrik.garz@sustainalytics.com
Doug Morrow
Associate Director, Thematic Research
doug.morrow@sustainalytics.com
Thomas Hassl
Analyst, Thematic Research
thomas.hassl@sustainalytics.com
With the ECBs EUR 1.1trn quantitative easing programme, financial and economic
imbalances are aggravated, and the risk of a new financial crisis has increased.
The economic and social costs of a new financial crisis could outstrip those of the
last one and may trigger fundamental systemic discussions.
Investors do not have many options to hedge themselves, due to already existing
or newly emerging bubble situations in many asset classes.
The good news is that investors can expect that the situation, which is
unsustainable over the mid- to long term, will probably be sustained over the
short term.
The slump in oil prices might lead to a positive growth surprise, which, ironically,
may exacerbate systemic risk when put into the above context.
The oil price drop has further lowered the probability for achieving a multilateral
climate agreement at the COP21 conference in Paris in December.
Generating value at the asset selection level in a fundamentally unsustainable
market environment is more than challenging, but analysis through an ESG lens
may assist in this process.
Micro picture finding value through ESG?
We present 10 forward-looking company stories where ESG factors may have

material impacts over both the short and long run.
Our analysis supports a positive view of Intel, GlaxoSmithKline, Lafarge and
Holcim, Telenor and Pemex, with value drivers ranging from innovative
remuneration models and energy efficiency programmes, to human rights policies
and health and safety improvements.
We take a generally negative stance on DuPont, Lonmin, National Commercial
Bank, Coca-Cola and, to a lesser extent, Netflix, which faces important corporate
governance challenges despite beating analyst expectations for Q4 2014.
Our analysis can be used to supplement existing security selection models,
through tilting and other measures, or inform new investment strategies.
From asset allocation to asset selection

Forward-looking, scenario-based
approach
As the Danish physicist and Nobel laureate Niels Bohr once famously remarked,
prediction is very difficult, especially if its about the future. We could not agree
more. Hence, in this report we take the approach of discussing possible scenarios for
the global economy and their implications from an ESG perspective. In addition, we
provide a dedicated Asian view regarding the economic background and ESG trends in
the region.
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In the spirit of a top-down approach, we finally shift from the asset allocation focused
macro view to the asset selection micro view by presenting 10 company stories to
watch in 2015, taken from our core coverage universe of roughly 4,500 corporates. In
our view, all of these stories address key ESG issues that are likely to have a material
impact on companies from a business perspective. Our portfolio of ideas contains
stories from different regions and sectors and is well balanced, providing five stories
with a positive tilt and five with a negative tilt.
Macro View Sustaining the unsustainable

Is a new financial crisis looming on the
horizon?
Financial markets seem to be torn between hope and fear these days. Apparently, the
new historic highs for equity markets are not the result of conviction and confidence
on the part of investors, but rather appear to signal the lack of investment alternatives
and the hope of prolonged expansionary monetary policy. In this chapter we take a
look at the possible consequences of the recently announced quantitative easing (QE)
programme of the European Central Bank (ECB). We conclude that this programme is
trying to sustain the unsustainable, and that investors do not have many options to
hedge themselves, due to already existing and exacerbated or newly emerging bubble
situations in many asset classes. We also reflect on the possible default of Greece and
the risk of a breakup of the Eurozone becoming more tangible in 2015. Furthermore,
we elaborate on a contrarian, thought-provoking scenario that assumes an oil-priceinduced positive growth surprise and describe how this could eventually lead to a new
financial crisis with social unrest as a possible consequence.
Pondering the consequences of a lower

oil price world
Last but not least, we ponder the consequences of the new lower oil price world and
the current economic and political environment for the climate negotiations that will
culminate at the end of the year with the COP21 convention in Paris. We have doubts
that the odds are good to achieve an effective multilateral consensus. In the absence
of political leadership, we expect the focus to shift to companies and private
households, which will be moving ahead with climate-friendly technologies based on
economic self-interest.
Investment implications Some easy wins

As ESG analysts, we have neither the mandate nor the inclination to give
comprehensive investment recommendations. This is simply not our job and is done by
others. However, the macro picture we outlined above certainly has some obvious
implications at the strategic and tactical asset allocation level.
Dont divest from high-quality fixed
income instruments too early, and dont
overweight Oil & Gas or Banks
We draw four basic conclusions: (1) Investors are probably well advised not to divest
from high-quality fixed income instruments as long as there is hope that the QE
programme is going to work and uncertainties around Greece and the Ukraine conflict
prevail, despite the massive bond bubble they are sitting on. (2) The risk profile of
equities seems to be still attractive only if the oil price continues to show weakness and
as long as the crisis situations in Greece and the Ukraine do not completely get out of
control. (3) At the sector level it is clear that a low or even further-falling oil price and
a new financial crisis situation certainly do not invite investors to overweight Oil & Gas
and Banks in their portfolios. (4) Over the mid- to long term, the financial risks for
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10 for 2015
investors are high and cannot be fully hedged, due to the bubble situations that have
been emerging in many asset classes and the empirical fact that asset prices tend to be
positively correlated in down-market situations. Should markets turn into crisis mode
again, cash will certainly be king, but negative overnight rates may well become the
rule, not the exception.
The Asian View Modest growth, high vulnerability

Chinas soft landing and another round of
Abenomics
Overall, we do not expect Asia to become the worlds growth engine in 2015. Economic
momentum in China is likely to ease further due to continued structural reforms and
efforts to slow credit expansion. For Japan, we expect another round of Abenomics,
after the renewal of the prime ministers mandate in Decembers elections. A
continued aggressive monetary easing and fiscal stimulus will probably at least avoid
Japan drifting into the much-feared deflationary downward spiral. On the other hand,
growth in India is expected to recover further in 2015 from historically low rates in the
years before.
ESG perspective A mixed bag

With regard to these three countries ESG agendas, we expect a focus on bribery and
corruption (China and India), measures against anti-competitive corporate behaviours
(China), air pollution and water risk in India, and nuclear safety and the building up of
a renewable infrastructure in Japan. We also expect China and India to uphold the
principle of common but differentiated responsibility in international climate
negotiations. For Japan, we foresee that the new Stewardship Code will make listed
companies more active in incorporating ESG factors into their business practices.
10 for 2015 A platform for ESG analysis

The value-add of ESG analysis
If our global and Asia-specific macro views form the basis of our conviction for asset
allocation, the 10 for 2015 move further into the investment process and provide
insight into asset selection. Covering eight countries and ten industries, the 10 for 2015
consist of ten salient mainstream business stories where ESG factors can be shown to
be driving potentially material financial impacts. Our analysis exemplifies the type of
enhanced risk and opportunity identification that is increasingly being used by
investors to either supplement existing security selection models or inform new and
innovative standalone investment strategies. In the summaries below, we outline the
key findings of our assessment.
Impact
Negative
DuPont. We take a contrarian view and argue that the companys business model in
the African seed market may be misaligned with the needs of smallholder farmers. We
also suggest that DuPonts focus on a limited array of hybrid seeds could contribute to
biodiversity loss and Monsanto-type reputational risks for investors.
Impact
Positive
Intel. We present a favourable review of Intels plan to build a conflict-free supply

chain by 2016. While we question whether Intels customers will be willing to pay more
for conflict-free electronics, we are intrigued by the possibilities for brand building.
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Impact
Positive
GlaxoSmithKline. We acknowledge that groundbreaking changes to the companys

sales representative remuneration strategy may drag on short-term profitability, but
believe that they will help the company rebuild regulator and investor trust in the wake
of a record bribery charge in China.
Impact
Strongly positive
Lafarge and Holcim. We are bullish on the proposed merger of the worlds two largest
cement manufacturers, pointing to potential ESG synergies in energy and GHG
performance, as well as improved positioning in the growing market for sustainable
building materials.
Impact
Strongly negative
Lonmin. We analyse the companys exposure to the findings of the Marikana

Commission (expected in March 2015) and take a strongly negative stance, arguing that
the repercussions could range from reputational and brand effects to short-term
pressure on the companys share price.
Impact
Negative
National Commercial Bank (NCB). We review the opening of Saudi Arabias equity
markets to foreign investors (beginning in 2015) and NCBs attractiveness as a vehicle
to play the market for Shariah-compliant financial products and services. We highlight
risk factors related to NCBs governance and project finance activities.
Impact
Positive
Telenor. We find that the companys advanced ESG practices may provide a hedge
against country risk in Myanmar, and argue that the lessons learned could potentially
be leveraged in future expansion to emerging markets in Sub-Saharan Africa.
Impact
Positive
Pemex. While we question the extent to which the recent slump in oil prices may
discourage foreign investment in Mexicos newly liberalised energy sector, we argue
that interaction with the worlds oil majors may ultimately lead to improvements in
Pemexs health and safety performance and exposure to corruption issues.
Impact
Negative
Coca-Cola. We show that the companys recent entry into the energy drinks and milk
niches creates new and potentially under-appreciated ESG risk exposure. We gauge the
companys strategic awareness of these risks to be low, although we find some pockets
of optimism.
Impact
Negative
Netflix. We paint a picture of substantial shareholder discontent, pointing to corporate

governance challenges, including a non-responsive board of directors. We argue that
investors will be faced with a difficult choice if a takeover offer emerges in 2015, as
they have been largely rewarded to date for sticking with the boards strategy.
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2015 Macro View

Sustaining the unsustainable
Analyst(s)
Dr. Hendrik Garz
Doug Morrow
Financial markets seem to be torn between hope and fear these days. Apparently,
the new historic highs for equity markets are not the result of conviction and
confidence on the part of investors, but rather appear to signal the lack of investment
alternatives and the hope of prolonged expansionary monetary policy. In this chapter
we take a look at the possible consequences of the recently announced quantitative
easing (QE) programme of the European Central Bank (ECB). We conclude that this
programme is trying to sustain the unsustainable, and that investors do not have
many options to hedge themselves, due to already existing and exacerbated or newly
emerging bubble situations in many asset classes. We also reflect on the possible
default of Greece and the risk of a breakup of the Eurozone becoming more tangible
in 2015. Furthermore, we elaborate on a contrarian, thought-provoking scenario that
assumes an oil-price-induced positive growth surprise and describe how this could
eventually lead to a new financial crisis, with social unrest as a possible consequence.
Last but not least, we ponder the consequences of the new lower oil price world
and the current economic and political environment for the climate negotiations that
will culminate at the end of the year with the COP21 convention in Paris. We have
doubts that the odds are good to achieve an effective multilateral consensus. In the
absence of political leadership, we expect the focus to shift to companies and private
households, which will be moving ahead with climate-friendly technologies based on
economic self-interest.
The economy, the markets and ESG integration

ESG integration: From the macro to the
micro level
Our readers may ask why we, as ESG and Responsible Investment specialists, feel called
upon to comment and elaborate on the current situation of the economy and financial
markets. The answer is simple: it is our conviction that the integration of ESG factors
into investment decision making has to take place at all levels. It needs to start at the
macro level (the economy and the markets) to primarily inform allocation decisions at
the asset class and sector level, and trickle down to the micro level (the companies) to
provide additional insights at the asset selection level. But why talk about valuations
and interest rates? It is all about providing and understanding the context against
which the integration of ESG factors needs to be debated.
Scenario-based analysis and discussion
That said, we are aware that it would be beyond the scope of this note to provide a
detailed analysis of the economy, the markets and ESG integration. Hence, what we do
is discuss the main drivers and catalysts that can decisively move the economy and
markets in one direction or the other, and analyse the implications of such
developments from a social and environmental perspective. We do this in a scenariobased manner and spirit, with sufficient humbleness regarding our ability to make
predictions, especially if its about the future.
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We start by taking a look at the situation in Europe in light of the gigantic QE

programme of the ECB and the increased likelihood of a Greek default or haircut. We
then turn to the slump in oil prices and its implications from an economic and
environmental perspective.
Economic and Monetary Union The sick man of the

global economy
Quantitative easing The silver bullet to save the Euro?
Decision of the ECB has triggered a highly
controversial debate
The decision of the ECB (announced on 22 January) to flood the markets with liquidity
via a QE programme with a volume of more than EUR 1.1trn (EUR 60bn to be spent
every month from March 2015 to September 2016) has provoked controversial debates
among investors, economists and policy makers. Some observers consider the QE to be
the silver bullet to avoid deflation, to save the Euro and the Eurozone and to enable
Europe to positively contribute to global economic growth again. Others stress that the
programme wont do the job and will create new risks for financial markets and longterm economic prospects while threatening the political cohesion of the Eurozone and
the EU member states.
Why now?
The programme had already been promised by Mario Draghi in August 2013. Why has
the decision to implement the programme been made now? Is it the recent drop in
Eurozone inflation below zero? Or is it because of the snap elections in Greece, and the
worries about a jump in risk premia not only for Greek debt but also for Spain and
France?
Closing the gap Balance sheet volume of ECB and Fed (in local currency, indexed)*
Indexed (February 2008 = 100)
600
500
ECB Sep-2016f:
EUR 3,597bn
400
300
200
100
0
Fed
ECB
* f = forecast
Source: Bloomberg
Size of the Feds balance sheet has

quintupled since February 2008
The chart above shows the balance sheet volume (total assets) of the U.S. Federal
Reserve (Fed) and the ECB, reflecting the widening gap caused by the Feds QE
programme, launched to mitigate the consequences of the last financial crisis, over the
last couple of years. While the size of the Feds balance sheet has more than quintupled
since February 2008, the ECBs total assets have increased by just over 60%. With the
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ECBs announced programme the gap will shrink going forward. If volumes turn out to
match the sums that were announced (the ECB has of course the option to upward or
downward adjust), its balance sheet would grow to EUR 3.6trn, which implies an
increase of 365% compared to February 2008.
Eurozone M3 money supply increased by
30.6% since January 2007
Eurozone M3 money supply (in EUR bn)

12,000
M3 in bn EUR
10,000
8,000
6,000
4,000
2,000
0
Jan 00
Jan 07
Jan 09
Nov 14
Source: ECB2
Quantitative easing: Concerns from a

sustainability perspective
We dont have a crystal ball to see and judge the ultimate effects of the ECBs QE
programme. But from a long-term economic sustainability perspective, we share some
of the major concerns. In particular we expect:
Inflating existing bubbles or creating new

ones
No positive stimulus for real investment activity: Why? To be brief, we answer

with an analogy heard on the trading floor: If you lead a horse to water, and the
water is one metre deep, and the horse doesnt drink, why should you expect it to
start drinking if you increase the water depth to 1.5 metres? M3 money supply in
the Eurozone has more than doubled from the beginning of the millennium and
increased by 30.6% from January 2007 (before the start of the financial crisis) to
November 2014 (see chart above). During the same period, Eurozone GDP rose
only by around 6% and credit volume to non-financial corporations and
households by around 12%.3
Learning curve/incentives: For countries in the Eurozone that struggle with
structural weaknesses and face the need for reform, the programme takes away
the immediate pressure to reform and hence sets the wrong incentives going
forward. Problems are not solved, but postponed to the future.
Another bailout package for the banking sector: Sovereign and corporate credit
risks are shifted from banks and other institutional investors to European
taxpayers. The agreed-upon requirements regarding credit quality and the 33%
cap at the country debt level limit the risk transfer, but are not sufficient when a
new crisis dynamic unfolds.
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Shouldnt we be more optimistic after the

positive experience with similar
programmes in the U.S. and U.K.?
ECBs independence is called into

question
Laying the foundation for the next

financial crisis
Bubbles: Since the additional liquidity will not flow into additional real investments
to a large extent, it will primarily further inflate existing bubbles or create new
ones. Equity markets, which soared after the announcement, and real estate are
obvious candidates for further inflation. Through the QE programme, the ECB is
paving the ground for a new financial crisis, which could potentially be enormously
destructive (from a financial, economic, political and societal perspective). Again,
the problem is not solved, but just postponed to the future, which is the opposite
of sustainable and responsible central bank policy.
It doesnt work in theory, but it works in practice

So what? one may ask. These are all theoretical considerations, and quantitative easing
has proven to work in the U.S. and U.K., so why not in Europe? Or to say it with Ben
Bernankes famous words, It doesnt work in theory, but it works in practice. We have
our doubts that such an attitude would be appropriate in the European context for
several reasons. First, we are not aware of any successful examples regarding the
impact of QE when applied against the background of structural weakness (see Japan).
Second, liquidity is not in short supply in the Eurozone anyway, and its not the lack of
liquidity that hinders banks to lend money to the real economy. And third, the situation
in the Eurozone is completely different due to the fact that it is a single currency room,
but not a single fiscal room, with very different national interests. The construction
fault that was made and deliberately accepted when the Euro was launched for political
reasons is now firing back and may eventually confirm the concerns of those
economists who opposed the introduction of the Euro at the beginning.
Different from the Fed, the ECB will also buy debt of lower credit quality, although it is
at least limited by minimum requirements and the rule not to buy debt from nations
under the umbrella of a financial assistance programme governed by the so-called
troika (the ECB, EU and International Monetary Fund (IMF)). It is certainly not a pure
coincidence that the dividing line in the ECB governing council is between those that
tend to struggle with their debt situation and a structural reform backlog and those
that have been traditionally viewed as stability anchors. The obvious influence of
national interests on the main decision-making body of the ECB, the governing council,
calls the banks independence, which is the single most important feature of its
credibility and power, into question.
The European flu Global contagion effects to be expected
Our conclusion is that the ECBs move is a very risky one economically and politically.
It provides no solution to the underlying structural problems in the Eurozone, but tries
to cover them over the short term at the expense of a much higher bill presented over
the long run. It prolongs the liquidity-driven rally on equity markets and helps to sustain
the unsustainable valuation levels on fixed income markets. The combination of
excessive liquidity and the lack of investment alternatives will propel an increasing
willingness of investors to take incalculable risks and may well lay the foundation for
the next financial crisis. A new crisis would certainly not be limited to Europe, but would
entail global contagion effects with consequences beyond the ones of the last crisis,
which has not even been fully digested yet.
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Greece An end with pain vs. pain without end

Likelihood of a Greek haircut or default
has jumped significantly of late
The debate around the sustainability of the situation in Greece has heated up again
with the announcement of snap elections that became necessary after the failure of
the presidency vote in the Greek parliament in December. With the victory of the
radical left party Syriza, whose leader has already announced his intention not to pay
back the Greek debt in full, the odds of Greece leaving the Eurozone have suddenly
jumped. Giving further credence to this view, German chancellor Merkel and other
European politicians publicly pondered the ramifications of Greece leaving the EU,
despite having vigorously refused this possibility at the outset of the debt crisis.
Whether this was just a trick to manipulate Greek voters, as Greek leftists suspect, has
become an academic question now, as the outcome of the elections is known.
Unforeseeable consequences of spillover

effects following a Eurozone exit of
Greece
It is clear, however, that national governments in Europe would have a hard time
explaining a haircut or default of Greece to investors, their taxpayers and voters.
Market turmoil and political unrest could certainly not be ruled out, and the pressure
on Greece to leave the Economic and Monetary Union (EMU), intended by
governments or not, would undoubtedly increase. Indeed, in itself the Grexit, as it is
frequently called in the press and on trading floors, would probably not be an
unmanageable challenge for the EMU and its other member states (though it certainly
could be for Greece). What makes it so risky are the unforeseeable consequences of
spillover effects that can be anticipated and that may eventually lead to a breakup of
the Eurozone and, even beyond that, have an influence on the future of the European
Union (for example, having the British referendum in 2016 in mind). Back to our
introductory thought, the QE programme of the ECB may well have been designed as
a hedge against the unfolding of such a scenario.
Oil price drop A double-edged sword for the global

economy
The oil price is back on investors radar
screens
No doubt, 2015 will be a challenging year for the global economy and financial markets
from both a fundamental and an ESG perspective. And there is one factor that could
play a pivotal role in the overall equation: neglected for quite some time, but back once
again on investors radar screens, is the oil price, probably the single most significant
factor with the potential to determine where economies and markets will be heading
in 2015 and beyond.
Quite spectacularly, the price for a barrel of crude oil (WTI) dropped from a 2014 high
of USD 101 to a low of USD 43.4 at the beginning of 2015 (-57%). Over the past 30
years, this period therefore belongs to the handful of examples (six, including the
current one, to be precise) where prices declined by 30% or more within a six-month
time frame. All of these episodes were related to major global events. The spectacular
drop in oil prices observed in 2008, for instance, overlapped with the financial crisis of
2007-2008.
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10 for 2015
120
2500
100
2000
80
1500
60
1000
S&P 500
Bloomberg Crude Oil Historical Price
Crude oil price history (19302014) The pendulum is swinging back
40
500
20
0
Crude Oil Price (nominal)
Crude Oil Price (real)
S&P 500
Source: Bloomberg
Oil price slump supports global growth,

but to what degree?
In principle, there is a lot of agreement among economists that lower oil prices help
the global economy via cost reduction and income effects and the reduction of
inflationary and fiscal pressures in oil-importing countries. This view already takes into
account that oil exporters will suffer from adverse shifts in real income and a slowdown
in economic activity.
As always, the disagreement arises when it comes to evaluating the net impact of a
single driver like the oil price for the overall picture, including concrete growth
forecasts. And, of course, the oil price slump entails risks as well, including the
Eurozone and/or Japan being eventually pushed into a deflationary spiral, or countries
with high oil export exposures facing significant capital outflows, currency
depreciations, rising credit spreads and financial market volatility.
Its all about expectations
Putting all of these pieces together into a single forecast is certainly a science, but it is
also an art, since the assumed transmission mechanisms are all based on assumptions
about how economic actors build expectations and accordingly adjust their behaviours.
Experience with cases in the past, like the effects of the 200708 financial crisis on
corporate and private households, should make us humble and also skeptical with
regard to consensus opinions, which often suffer from a conservatism bias.
Growth forecasts for 2015 Too conservative?

Contrarian view Boom and bust triggered by the slump in oil prices
What if? Taking a contrarian view
regarding the net effect of lower oil
prices
As already said above, the slump in oil prices entails both opportunities and risks. These
have already been discussed intensively by economists (see recent World Bank and IMF
publications).4,5 We do not want to repeat these discussions here, but try to add value
for our readers by discussing a scenario that has not been covered sufficiently so far
but may constitute an enormous risk for the global economy. By doing this, we
explicitly take a view that is contrarian to the current mainstream view, in that it
assumes a significant upward surprise in GDP growth in 2015 and hypothesises that
this in turn could trigger an overreaction of monetary policy makers, eventually leading
to a burst of the apparent bubble on bond markets.
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Reduction of the IMFs growth forecast

from 3.8 to 3.5%
10 for 2015
Mainstream expectations for economic growth in 2015

The current market consensus can probably be best described by the IMFs view that
the headwinds for global growth outweigh the positive impacts of lower oil prices,
which recently (19 January) led to a reduction in the Funds growth forecast for 2015
from 3.8 to 3.5%.6 The World Banks view, too, appears rather conservative (see table
below). It expects global growth to rise only moderately, to 3.0% in 2015, up from 2.6%
in 2014, acknowledging an overall positive net effect of the slump in oil prices, but also
stressing the dampening effect of lower oil and commodity prices for the growth
prospects of some exporting countries.7
Global economic outlook* Still too conservative for 2015?

Real GDP**
World
High income
United States
Euro Area
BRICS
Russia
India
China
Commodity Prices
Oil price
Non-oil commodity price index
* percentage change from previous year: e = estimate; f = forecast
** aggregate growth rates calculated using constant 2010 U.S. dollars GDP weights
2012
2013
2014e
2015f
2016f
2017f
2.4
1.4
2.3
-0.7
5.4
3.4
4.7
7.7
2.5
1.4
2.2
-0.4
5.4
1.3
5.0
7.7
2.6
1.8
2.4
0.8
5.0
0.7
5.6
7.4
3.0
2.2
3.2
1.1
5.1
-2.9
6.4
7.1
3.3
2.4
3.0
1.6
5.5
0.1
7.0
7.0
3.2
2.2
2.4
1.6
5.6
1.1
7.0
6.9
1.0
-8.6
-0.9
-7.2
-7.7
-3.6
-31.9
-1.1
4.9
0.2
4.7
0.3
Source: World Bank (2015)
Global stimulus of close to USD 2trn can

be expected
Upward growth surprise may still be an

underestimated scenario
Motivating an upward growth surprise

The starting point for our contrarian scenario is to get a handle on the overall size of
the oil price effect. For the U.S. alone, it is estimated that the oil price drop is equivalent
to a fiscal stimulus package of USD 200bn, despite the countrys resurgence as an oil
producer (see below).8 Globally, the effect is likely to be close to the estimated USD
2trn that was spent as a reaction to the global financial crisis of 20072008 by the G20
countries.9 The difference is that this stimulus was spread over a much longer period
of time, and its impact accordingly unfolded in an incremental fashion. The impact of
an oil price drop, on the other hand, has more of the characteristics of a liquidity shock,
although some indirect effects will take some time to unfold as well. Private
households and corporates more or less feel the effects of an oil price drop
immediately in their pockets, and, in light of the lack of attractive investment
opportunities, the windfall surplus may well end up in additional consumption and
higher wages, leading to another positive knock-on effect on growth. As a
consequence, a possible scenario is that current global GDP estimates for 2015 are
much too conservative.
Hence, in our view, a still-underestimated scenario is that of an upward growth surprise
in high-income countries, which may well become more and more tangible in the
course of the year. The consequence would be that the pressure on the Fed and ECB
to cease their strategy of flooding markets with liquidity and keeping rates at record
lows could mount dramatically and much sooner than expected. For the Fed this would
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certainly be less of a problem, since the direction of its policy is pointing towards a
gradual tightening anyway. The ECB, on the other hand, would be caught on the wrong
foot, after just having launched its massive QE programme, as we have discussed
above.
Perceived comfort may turn out to be
elusive
Of course, over the short term, the drop in fuel prices gives central bankers some relief,
since inflation rates have not only dropped significantly of late (in the Eurozone even
below zero in December) but can also be expected to have an inflation-reducing effect
in 2015. The World Bank expects an oil-price-induced reduction of between 0.4 and 0.9
percentage points.10
But is the oil price drop really a blessing for those who support a continuation of loose
monetary policy regimes? In our view, the currently perceived comfort may turn out to
be elusive, as soon as the deflationary effects of the oil price drop begin to peter out
and the base effect begins to kick in. If the downward trend in oil prices does not
continue, and prices stabilise in the range of USD 4050, this will be felt in Q4 at the
latest. The inflationary risks of stronger-than-expected economic growth will come to
the fore, and monetary policy hawks will break cover again.
Monetary policy dilemma Risking the burst of the bond market bubble
For us, it appears questionable whether central bankers will find a loophole out of the
dilemma they have manoeuvred themselves into over the last few years in response to
the global financial crisis. They now have to move on very thin ice. And the tricky thing
is that it is not about fundamentals; small rate hikes from the close-to-zero levels would
certainly not make real investments significantly less attractive. It is all about sudden
adjustments of expectations on financial markets and the last straw that may break
the camels back. And in our scenario, this last straw is assumed to be an unexpected
change in monetary policy stance, driven by an oil-price-induced positive growth
surprise.
The mother of all bubbles
Driven by the surplus of liquidity and historically low rates, bond and equity markets
have rallied impressively over the past few years. While equity markets have reached
valuation levels that are still considered acceptable or at least not out of the range from
a historical perspective, bond markets have reached close to all-time-high valuation
levels after a long and historically unprecedented rally since the 1980s. Some call it the
mother of all bubbles, which may not be exaggerated if we take the possible
consequences of a sudden deflation of bond prices into account.
Were not talking about irrational

exuberance here
When we talk about a bubble here, were not saying that it has been inflated by
irrational exuberance, to quote Alan Greenspan in his famous speech addressing the
valuation situation on equity markets at the beginning of the millennium. This time,
the story is admittedly different, since the rally is anchored in monetary policy and low
current interest rates. In that sense, valuations are certainly not irrational, but they are
nevertheless exposed to the risk of a significant change in expectations, comparable to
the one that triggered a jump in U.S. long-term rates of eight percentage points
between August 1977 and August 1981, i.e. within just four years (see overleaf chart).
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Fixed income markets The mother of all bubbles (18812015)

105
45
40
100
P/E Ratio
35
30
95
25
20
90
15
10
85
5
0
Inverse (indexed) interst rate
50
80
Price Earnings Ratio
Long-term Interest rate (inverse)
Source: Robert J. Shiller (2015) 11
A massive sell-off of bonds could trigger

substantial economic and social
upheavals
The burst of a bubble is inherently unpredictable. Nevertheless, we can comfortably

say that a positive growth surprise, like the one we described above, would certainly
increase the likelihood of a price collapse, not the least due to the mounting doubts
about the sustainability of monetary policy in general and the ECBs recent moves in
particular, as discussed above.
But what would be the consequences of a massive sell-off of bonds by institutional and
private investors? Would central banks be capable of leaning against this in their
function as lenders of last resort? In any case, the effort needed to prevent a systemic
breakdown would be enormous. The economic and social upheavals catalysed by the
sell-off would probably go much beyond the ones experienced as a consequence of the
last financial crisis, in which only a small segment of the market became toxic.
A double-edged sword for equity markets
Asset class rotation Will equities benefit from a bond sell-off?

For the equity markets, the situation is a double-edged sword. On the one hand, it can
be expected that the equity market would initially benefit strongly from shifts out of
fixed income securities. Valuations still seem reasonable and, as said, the drop in oil
prices will not only lead to significant cost reductions, particularly in the manufacturing
sector, but could also give a boost to private consumption. On the other hand, it is
foreseeable that a burst of the bond market bubble could have consequences at the
real economy level that would quickly backfire on equity markets. The experience with
the last financial crisis showed us that in situations like these, all actors in an economy
tend to fall into a wait-and-see mode, with the effect that companies start to downsize
their capacities and downward adjust their earnings expectations. Large-scale
redundancies, in turn, lead to reduced income expectations for private households in
other words, the classical downward spiral. Based on reduced growth expectations,
equity market valuations would very quickly look much less attractive. Over the last
few years, equities have rallied anyway, and investors will probably come to the
conclusion that there does not appear to be an attractive alternative.
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A further increase in cash balances to be

expected
But where will the excessive liquidity end up, if the money flows out of fixed income
but not into equities? Real assets could be the answer. Coming back to the
sustainability angle, the great transition of our economies, for example, undoubtedly
has enormous financing requirements that still need to be covered. However, this is
certainly not a solution for the short term. First, despite the abundant long-term
investment needs, investors complain that direct investment opportunities with a
reasonable risk-return profile are scarce. Second, in the case of a bursting bubble on
the financial markets, risk aversion will jump, and investors will have a strong
preference for liquidity. Hence, it is unlikely that the proceeds from the bond market
sell-off will end up in real asset markets over the short term. It is a safer bet that
companies, institutional investors and private households would want to further
increase their cash positions, which are already much above normal levels.
Transmission mechanism of monetary

policy is not working properly anymore
Corporates, for example, have already increased their cash balances dramatically since
2007, as the example in the chart below shows. This increase reflects conservative debt
policies and massive de-leveraging that took place after the last financial crisis. While
these efforts may have made corporates more resilient, they also signal the lack of
profitable real investment alternatives (including M&A), despite record-low financing
costs. This shows that the usual transmission mechanism of monetary policy is not
working properly. Furthermore, it has to be doubted whether central bank measures
such as charging negative rates for short-term deposits of large financial or nonfinancial institutions, as introduced by the ECB in 2014, for example will break
investors wait-and-see attitudes.
Excessive cash positions on corporate balance sheets* High resilience, lack of
opportunities
Cash position in USD bn
1,800
1,500
1,200
900
600
300
0
2007
2008
2009
2010
2011
2012
2013
Jun-14
* total U.S. non-financial corporate cash balances

Source: Moodys Investors Service (2014)12
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Sustaining the unsustainable Where do we go from here?

Inflation, deflation or stagflation?
A litmus test for the resilience of the

banking sector and public budgets
The not-much-liked but obvious question is whether the excess liquidity that does not
find attractive investment opportunities will finally translate into an inflation of
consumer goods prices and then to the much feared inflation-wage spiral, triggering
even more significant steps of monetary tightening by the central banks. As a result,
we could face the dreaded combination of inflation and a stagnating economy over the
mid-term. But how likely is a stagflation scenario going forward? We certainly do not
want to bet on its impending emergence, just as we do not want to forecast the timing
of a bursting bond market bubble. We are aware that these are only scenarios, and
none of them has to materialise in 2015. And there are also scenarios that are much
more optimistic than the ones we discussed, with the one that can be characterised as
the maintenance of the current status quo, i.e. the sustaining of the unsustainable
current equilibrium, being the most likely one. But although the burst of the bubble
might well be postponed beyond 2015, we see many reasons to be seriously concerned
about the further development from a risk management perspective and hence view
the valuation levels achieved on equity markets with a healthy dose of skepticism.
A new debt crisis could spark enormous societal costs
A new financial crisis, triggered by a bond market crash, for example, would eventually
be a litmus test for the resilience of the banking sector and of public budgets globally.
As a consequence of the last financial crisis, national net debt levels have increased
over the last few years (in the U.S., from 50.4% of GDP in 2008 to an estimated 80.8%
in 2014; in the Eurozone, from 54.0% to 73.9%),13 albeit at a slower pace, due to the
historically low interest rates that dramatically lowered the costs of refinancing and
made debt levels appear more sustainable. This, however, may quickly prove to be
illusory, and a new round of bailouts may overstrain fiscal capacities.
But it is not only about the financial costs involved; the political and societal costs
would likely be high as well. The examples of Greece and Spain have shown that even
democratic/pluralistic societies can absorb economic shocks only to a certain extent
and only if a clear majority still believes that the consequences are fairly distributed
across societal groups. In cases like these, there could be a thin line between rescue
and complete failure, with the latter having far-reaching consequences for the idea of
a unified Europe, among other things.
Breakup of the Eurozone, and Britains

exit from the EU becomes a tangible
option
The economic and political tensions that the next financial crisis would instigate could
not only lead to a breakup of the Eurozone but could also exert pressure on politicians
in the U.K. to make the final step and leave the EU even before 2017, the year of the
scheduled referendum.
Oil price drop Mixed implications with regard to the goal

of decarbonising the global economy
In the spirit of the top-down approach, we hypothesise that the dramatic fall in oil
prices is a possible catalyst for shifts in the expectations of actors in the real economy
and financial markets, which could potentially lead to a boom and bust scenario with
high social costs. Undoubtedly, the lower oil price also has a significant impact on the
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debate around the decarbonisation of the global economy and global climate goals. Its
role, however, is double edged, with positive and negative effects at different levels
and winners and losers depending on the perspective.
Stranded assets debate Oil price shock helps to increase investors

sensitivity
U.S. oil production almost doubled over
the last five years, thanks to shale
High oil prices made investments in the exploitation of unconventional oil reserves
highly attractive over the last couple of years. In particular, the production of shale oil
in the U.S. soared and, with an overall oil production of now more than 9 million barrels
per day from just around 5 to 6 million just five years ago (see chart below), brought
the country back on the global map as a significant oil producer and even transformed
it into a net exporter.
10
160
140
120
100
80
6
60
40
20
DOE Crude Oil Domestic Field Production Data
WTIC crude oil price (USD)
Mn Barrels / day
The shale revolution Is the party over?
Crude Oil price
Source: Bloomberg
Financing situation of companies in the

shale industry has deteriorated
dramatically
A sustainable drop in oil prices below USD 50 would mean that investments in assets
linked to reserves with high production costs either become stranded (if capex made
already) or become unattractive going forward. For example, the International Energy
Agency (IEA) estimates that the average production cost for a barrel of oil produced
from North American shale reserves is USD 65. (We are aware of the differences in
available estimates, partly driven by the fact that some take transportation costs into
account, others not.) Producers may still be hedged, but these hedges will eventually
need to be rolled over, at which point producers will start to incur significant losses
with each barrel they get out of the ground. At current prices, only those producers
able to produce most efficiently will survive. Stock prices of shale oil producers have
already collapsed, and risk premia on bond markets have soared. The ability of these
companies to refinance their debt is at stake, and some banks have already pulled the
emergency break by refusing to provide fresh capital. Also, their suppliers are badly hit,
as the example of Schoeller-Bleckmann, an Austrian producer of drilling heads and
rods, shows.
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Indexed (January 2012 = 100)
Schoeller-Bleckmann Stock market performance (20122015)

160
150
140
130
120
110
100
90
80
70
Schoeller-Bleckmann
MSCI Europe Energy Sector Index

Source: Bloomberg
A good learning opportunity for

investors
We dont want to speculate here whether the oil price drop has been caused by a
strategy of OPEC countries to price unconventional oil reserves out of the market, or
whether the low-price environment is ultimately sustainable. But the situation, in any
case, shows what a burst of the often-cited carbon bubble could mean for investors.
Cynically, one could say that the current situation is a good learning opportunity for
them.
Oil production costs Global liquid supply cost curve (USD/bbl)
Source: Rystad Energy research and analysis14
The beginning of the end?
And for the shale industry itself? If the oil price remains at the current level sufficiently
long (6 months? 12 months?), it seems unavoidable that companies in the sector,
which are mostly heavily indebted, will start to default on their debt obligations, and
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this may well mean the demise of the industry for the foreseeable future. 15 The
appetite of investors to finance a comeback when oil prices swing back again to more
normal levels would certainly be limited, in light of the credible threat of OPEC to
repeat their punitive exercise once again. Surely, this scenario must sound like music
to the ears of environmental protagonists, who have long fought against fracking. On
the investors side, it will definitely strengthen the understanding of carbon bubble
risks, independent of the question of whether the outlined scenario will finally
materialise or not.
Removing adverse incentives Oil price drop provides an opportunity

to remove fossil fuel subsidies at low political cost
Fuel subsidies are estimated to make up
more than 2% of global GDP
Another positive-side aspect of the oil price drop is that it gives governments (mainly
in emerging, oil-exporting countries) more room to reduce fuel subsidies, killing two
birds with one stone: reducing the bias towards energy-intensive economic activity and
improving fiscal sustainability in times of sluggish growth and a tightening of monetary
policies. According to an IMF estimate, subsidies for petroleum products, electricity,
natural gas and coal reached USD 480bn in 2011 (0.7% of global GDP or 2% of total
government revenues) on a pre-tax basis.16 The total effect, taking the negative
externalities created into account, is even much higher (USD 1.9trn, amounting to 2.5%
of global GDP or 8% of total government revenues). A number of developing countries
provide large fuel subsidies, in some cases exceeding 5% of GDP.17
Several countries have already started

slashing subsidies significantly
The drop in oil prices now allows governments to reduce subsidies with little perceived
impact on consumer prices, lowering the political and social costs of such actions.
Several countries have already started slashing subsidies significantly in Q4 2014, like
Indonesia and India, for example. And there is much hope that others will follow in
2015. The resources released by lower fuel subsidies could either help to further
restore the fiscal resilience of these countries or be channeled to more sustainable
uses, like the improvement of critical infrastructure or investments in education.
Shrinking economic incentives to replace fossil fuels and the

(unavoidable?) failure of climate negotiations
The role of falling oil prices
With regard to the climate perspective in general, and the feasibility of global warming
caps in particular, the dramatic drop in oil prices also entails some negative effects.
First, it lowers the economic incentives to switch from fossil fuel based energy to
renewable energies, making it even more necessary that policy makers create a
regulated environment in which private actors are incentivised to move away from
climate-damaging energy sources. In itself, this is already a challenging situation, due
to the strongly diverging vested interests of the different parties involved, including
developed vs. emerging markets, and net energy producers vs. net energy consumers.
But with the economic and market scenario described above, the probability of a
meaningful and effective multilateral political agreement (with climate negotiations
culminating in the COP21 convention in Paris in December) is moving even closer to
zero.
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The end of climate policy endeavours at

the multilateral level
A failure of the Paris conference would probably also imply the end of climate policy
endeavours at the global level and would lead to a recalibration of expectations and
actions. Acceptance of the non-feasibility of the two-degree goal will probably cause a
significant shift in focus from: (1) mitigation to adaptation (companies and private
households preparing for an inevitable temperature increase); (2) a multilateral to a
national or regional perspective; and (3) a macro to a micro perspective. This does not
mean that the big transformation that climate change mitigation protagonists call for
will come to a complete halt. The energy transition in countries like Germany will
continue; weve no doubt about this. However, change will probably take much longer
than hoped for, at least as long as no game-changing technological breakthroughs
emerge unexpectedly.
Inconvenient implications for investors
The implications for investors are challenging and also inconvenient. For example, they
have to ask themselves even more intensely than before what a divestment from fossil
fuel sources means for their portfolios from a strategic perspective, i.e. beyond the
short-term advantage of being underweighted in Oil & Gas during periods of dropping
oil prices. Is there a critical level of oil prices that makes the tradeoff between risk and
return sufficiently attractive again to re-invest? Or at the geopolitical level, how
interested can the Western world be in a further decline in oil prices in light of the
challenging economic and political situation Russia has manoeuvred itself into? What
kind of reactions do we have to fear if economic pressures continue to increase in a
situation where Russian leaders feel cornered anyway? How will the West take this into
consideration while at the same time trying to credibly push for decarbonisation of the
global economy in Paris?
Decreasing carbon prices (EU ETS): Technical market failure or lack of conviction?
25
16
12
10
15
8
10
6
4
ICE CER Future Price
ICE EUA Future Price
14
20
2
0
ICE EUA Future
ICE CER Future
Source: Bloomberg
Climate action The recalibration of roles and expectations

The diminishing role of policy makers and
regulators
A failure in Paris would certainly not put an end to climate action, but investors need
to be prepared that change will be less driven by political consensus and regulatory
activity than previously thought. Rather, the responsibility for making climate-relevant
decisions will shift from the macro to the micro level, i.e. to companies and private
households. We expect this to have mainly two consequences. First, with the lack of
perceived government support, private economic actors will increasingly take the
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physical consequences of a changing climate into account when making fundamental

decisions about where they want to live or produce, i.e. the adaptation side of climate
change will gain in importance relative to the mitigation side. And second, the focus
will continue to be on technological solutions to curb emissions, but tests regarding
their cost competitiveness will become more critical than in the past.
More than ever, solutions have to be not
only cleaner but also cheaper
So the good news is that efforts to find cleaner but also cheaper alternatives to fossil
fuels will persist and continue to offer tremendous opportunities for investors.
However, we do not expect new national or regional windfall-type profit situations (e.g.
feed-in tariffs) to re-emerge. In the new political environment described above, the
time of non-market-induced gains would be over. New technologies will offer a
financial return to investors only if they are both cleaner and cheaper than fossil fuel
based solutions. In many sectors of the economy, alternative technologies are already
disrupting conventional patterns of energy use and consumption in the absence of any
meaningful multilateral climate agreement.
Can the failure of multilateral negotiations be compensated for with

national or regional carbon pricing initiatives?
Sixty carbon pricing systems in place or in
development globally
In a joint study by the World Bank and Ecofys published in 2013, 60 carbon pricing
systems were found to be in place or in development globally. This number is quite
impressive, and the progress made has raised hopes that carbon markets may have a
future, despite the EU Emissions Trading System (ETS) struggling in recent years with
prices at historic lows, and despite the prospect of a possible failure of multilateral
climate negotiations. The report highlights cap and trade systems in the EU, California,
Kazakhstan, New Zealand, Quebec, Japan and the U.S. (through the Regional
Greenhouse Gas Initiative), as well as South Korea, which launched the worlds secondlargest carbon market earlier this month. In addition, carbon taxes are cited in
Australia, British Columbia, Denmark, Finland, Ireland, Norway, South Africa, Sweden,
Switzerland and the U.K.
How effectively can these mechanisms be

coordinated?
Altogether, the carbon pricing mechanisms identified could cover up to 20% of global
emissions, which is certainly a material share. The core question now is how effectively
these mechanisms can be coordinated in order to sufficiently cap global emissions
before these reach important tipping points. The discussed linkages between the EU
and Australia and California and Quebec, and potentially the EU and China, certainly
have the potential to increase overall impact. However, as long as sufficient regulatory
arbitrage opportunities exist globally, the scope of these coordination efforts remains
limited in terms of impact. And hence, the main risk is that the progress made with
these incremental steps is probably much too slow when having a two-degree or even
a three-degree goal in mind.
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Map of existing, emerging and potential emissions trading schemes
Source: World Bank/Ecofys (2013)
Reducing irrational fears
The biggest merit of the diverse bottom-up initiatives from our point of view is that
they generate experience and knowledge about the function of carbon pricing
mechanisms. By doing this, they potentially help to reduce irrational fears about the
consequences of their introduction and thereby the resistance against more
comprehensive (ideally global) solutions.
Rounding out the picture

Catalysts for a more positive scenario
Too much gloom and doom? What could
a more positive scenario look like?
Taking a step back and looking at the scenarios we described above, we must ask the
question whether these are too negatively biased, too much doom and gloom? Our
intention was to discuss the (downside) risks that recent events engender against the
background of longer-term developments that seem to drive our economies more and
more away from a sustainable equilibrium. But ultimately, these are scenarios only,
and they describe only one possible logic of how the pieces of the puzzle might fit
together. We are humble-minded enough to understand that even a small number of
unanticipated events can dramatically change the overall picture or at least the
trajectory of the unfolding scenario. So, what could a more positive scenario look like?
The core of such a scenario would have to be a combination of: (1) a revival of global
economic growth; and (2) a slow deflating of the fixed income market bubble governed
by masterful and coordinated monetary policies.
25 | P a g e
January 2015
Prerequisites for a more positive

scenario: (1) steps towards a solution to
the Ukraine conflict; (2) no new
escalation of the Greek debt crisis
10 for 2015
In this optimistic scenario, global economic growth would be triggered by the fall in oil
price, but would probably help to stabilise oil prices going forward, improving the
outlook for oil-exporting countries as well. On the political front, a stabilised oil price
could help to find solutions with regard to the Ukraine conflict, by taking away domestic
political pressure from Russian leaders. This brings us to two further components of a
positive scenario that we would not consider necessary, but sufficient for a positive
market development. The first one is that a further manifestation of a cold war scenario
can be avoided and steps towards a normalisation of the relationship between the
West and Russia undertaken (e.g. including a drop of sanctions against Russia). And,
the second one is that the risk of a new escalation of the sovereign debt crisis triggered
by political changes in Greece does not materialise.
Investment implications Some easy wins

Increased likelihood of a new financial
crisis
As ESG analysts, we have neither the mandate nor the inclination to give
comprehensive investment recommendations. This is simply not our job and is done by
others. However, the macro picture we outlined above certainly has some obvious
implications at the strategic and tactical asset allocation level. To briefly repeat the
main points from our scenario analysis here: First, the QE programme of the ECB is
trying to sustain the unsustainable, increasing the likelihood of a new financial crisis,
with possibly far-reaching consequences. Second, we identified two straws that may
break the camels back, a default of Greece and/or an oil-price-fueled positive growth
surprise triggering an overreaction of monetary policy.
Dont divest from high-quality fixed

income instruments too early, and dont
overweight Oil & Gas and Banks
We draw four basic conclusions from this: (1) Investors are probably well advised not
to divest from high-quality fixed income instruments as long as there are hopes that
the QE programme is going to work and the uncertainties around Greece and the
Ukraine conflict prevail, despite the massive bond bubble they are sitting on. (2) The
risk profile of equities seems to be still attractive only if the oil price continues to show
weakness and as long as the crisis situations in Greece and the Ukraine do not
completely get out of control. (3) At the sector level it is clear that a low or even furtherfalling oil price and a new financial crisis situation certainly do not invite investors to
overweight Oil & Gas and Banks in their portfolios. (4) Over the mid- to long term, the
financial risks for investors are high and cannot be fully hedged, due to the bubble
situations that have been emerging in many asset classes and the empirical fact that
asset prices tend to be positively correlated in down-market situations. Should markets
turn into crisis mode again, cash will certainly be king, but negative overnight rates will
then be the rule, not the exception.
26 | P a g e
January 2015
10 for 2015
2015 The Asian View

Modest growth, high vulnerability
Analyst(s)*
Loic Dujardin
Director, Research Products
loic.dujardin@sustainalytics.com
Dr. Hendrik Garz

* With contributions from our Asian Research

team: Sun Xi (Senior Analyst, Research
Products), Hardik Sanjay Shah (Manager,
Research Products), Yumi Fujita (Manager
Research Products)
Overall, we do not expect Asia to become the worlds growth engine in 2015.
Economic momentum in China is likely to ease further due to continued structural
reforms and efforts to slow credit expansion. For Japan, we expect another round of
Abenomics, after the renewal of the prime ministers mandate in Decembers
elections. A continued aggressive monetary easing and fiscal stimulus will probably
at least avoid Japan drifting into the much-feared deflationary downward spiral. On
the other hand, growth in India is expected to recover further in 2015 from
historically low rates in the years before. With regard to these three countries ESG
agendas, we expect a focus on bribery and corruption (China and India), measures
against anti-competitive corporate behaviours (China), air pollution and water risk in
India, and nuclear safety and the building up of a renewable infrastructure in Japan.
We also expect China and India to uphold the principle of common but
differentiated responsibility in international climate negotiations. For Japan, we
foresee that the new Stewardship Code will make listed companies more active in
incorporating ESG factors into their business practices.
Oil price drop helps Japan and India

Economic activity is expected to remain
sluggish
Economic activity is expected to remain sluggish in Asia in 2015, according to World

Bank estimates (see table below), driven by a further easing of growth in China and a
Japanese economy that is still struggling to recover from the shock of the sales tax
increase in 2014 and continued fears of getting caught in a deflationary downward
spiral. India, on the other hand, is expected to lead a modest recovery in South Asia,
after growth in the region reached a ten-year low in 2014.
Economic Outlook (real GDP)* Asian growth will remain sluggish in 2015
World
High income
Japan
Developing countries
East Asia and Pacific
East Asia and Pacific excluding China
China
South Asia
South Asia excluding India
India
2012
2013
2014e
2015f
2016f
2017f
2.4
1.4
1.5
4.8
7.4
2.5
1.4
1.5
4.9
7.2
6.3
7.7
5.0
5.3
7.7
4.9
5.1
4.7
5.7
5.0
2.6
1.8
0.2
4.4
6.9
4.6
7.4
5.5
5.8
5.6
3.0
2.2
1.2
4.8
6.7
5.2
7.1
6.1
5.7
6.4
3.3
2.4
1.6
5.3
6.7
5.4
7.0
6.6
5.8
7.0
3.2
2.2
1.2
5.4
6.7
5.5
6.9
6.8
5.9
7.0
* percentage change yoy; e=estimate; f=forecast

Source: World Bank, 2015
Financial market volatility is one of the

most significant risks to the region
The drop in oil prices and overall soft commodity prices is a double-edged sword for
the region, with net exporters suffering and net importers benefitting. The oil price
situation will certainly help reduce energy bills for Japan, whose energy costs have
strongly increased after the shutdown of its nuclear power plants, and India, which may
additionally benefit from further reductions in fuel subsidies (see p. 22). Some of the
most significant risks for the region are contagion effects, originating from a new
27 | P a g e
January 2015
10 for 2015
financial crisis with high market volatility and a surge in risk aversion among global
investors. If the risk scenario discussed in the previous chapter should become a reality,
Asian markets would certainly not be isolated from that, but may disproportionately
suffer.
Focus on China, India and Japan
In the following, we briefly look at the three main determinants of economic growth in
the region, with China and India on the emerging market side and Japan on the highincome side, and the challenges these countries are facing (including the ESG
perspective).
China Gradual slowdown of momentum continues

Moving further away from a governmentbacked growth model
China will experience a further easing of growth from 7.4 to 7.1%, according to World
Bank estimates, as a result of continued structural reforms and further efforts to slow
credit expansion. The government will move further away from a growth model based
on government-backed investment in infrastructure and heavy industries to supporting
strategic emerging industries such as energy-saving and environmental protection,
new-generation information technology and high-end equipment manufacturing. In
the rest of the East Asia-Pacific region, growth is expected to strengthen to 5.2% in
2015, partly offsetting Chinas slowdown.
Credit growth in China (credit in % of GDP)* Further efforts to slow expansion to
be expected
35
Private households
19
152
Non-financial corporate
100
55
General government
37
0
20
40
2013
60
80
100
120
140
160
2007
* data are for credit from the financial system to the government and the private sector
Governments reform eagerness still high

Cooling down the property market,
deepening the rural land and financial
reforms
The Xi-Li administration is expected to push some key reforms in 2015. First, a
nationwide property tax is to be gradually implemented, in order to further cool down
the property market and also deepen the rural land and financial market reforms
(interest rate and exchange rate liberalisation) so as to release more market potential.
Second, the government is also aiming for more free-trade agreements such as the
Regional Comprehensive Economic Partnership with Japan, South Korea, Australia,
India, New Zealand and ASEAN countries. However, ongoing tensions with
28 | P a g e
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10 for 2015
neighbouring countries over maritime claims may impact trade negotiations. And,
third, the anti-corruption campaign launched in 2013 will continue, and those
disgraced ex-leaders such as Zhou Yongkang, Xu Caihou and Ling Jihua are expected to
face public trials this year. In that context, media censorship may also be further
tightened.
ESG agenda Focus on bribery and corruption and climate change

Companies expected to face more probes
and tightened regulations
Chinas anti-graft battles are likely to widen in 2015. More companies, especially
foreign and state-owned enterprises, are expected to face more frequent probes and
tightened regulations. The recently initiated anti-monopoly campaign will continue,
and foreign firms involved in malpractices such as price fixing are at much higher risk
than their local peers.
To address climate change, China has pledged to ensure that carbon emissions peak in
2030 and also to increase the share of non-fossil fuels energy consumption to around
20% by 2030. However, as a developing country, China will continue to uphold the
principle of common but differentiated responsibility in future climate change
negotiations. In the wake of the 2015 climate change summit in Paris, China has called
for raised ambitions from rich countries on pre-2020 emissions cuts.
India Easing supply constraints and reduced vulnerability

to financial market volatility
Growth in India is expected to continue its recovery from 5.6% in 2014 to 6.4% in 2015
according to World Bank estimates, benefitting from improvements in supply-side
constraints and certainly also from an increased fiscal flexibility due to the sharp drop
in oil prices, further cutting fuel subsidies (see p. 22) and helping to reduce the
countrys current account deficit.
Indias current account deficit Improved outlook due to sharp oil price drop
2000-2010
2011
2012
2013
2014e
2015f
2016f
2017f
-1.5
-1.6
-1.6
0.0
Percentage share of nominal GDP
Lower oil price increases fiscal flexibility

and lowers current account deficit
-1.0
-0.8
-1.3
-2.0
-2.5
-3.0
-4.0
-3.4
-5.0
-5.0
-6.0
29 | P a g e
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10 for 2015
Removing hurdles for foreign direct investments

Lack of domestic funds to invest in
growing infrastructure needs
In 2015, prime minister Modis government will face the daunting task of reviving the
economy along with improving the ease of doing business in India (the country ranks
142nd out of 189 countries in World Banks ease of doing business rankings18) by
implementing structural reforms. Lacking domestic funds to invest in growing
infrastructure needs of the country, the government will have to take necessary steps
to attract foreign direct investment (FDI) like delicensing, deregulation, stable tax
regimes and faster project approvals. While some initiatives, like toning down the
Environment Impact Assessment (EIA) guidelines to alleviate the green hurdle and
easing the FDI norms in certain strategic sectors, have been taken, most experts feel
that it is going to be a long road towards making India the easiest place to do
business,19 a goal announced by Modi at the recently concluded Vibrant Gujarat 2015
investment summit, where Indian and global companies have pledged to invest USD
400bn20 in Gujarat. Although the initial responses to the governments reforms agenda
have been positive, tackling corruption is one of the major bottlenecks facing the
government, as the country ranks 85th out of 175 countries in the 2014 Corruption
Perceptions Index.21
Indias World Bank doing business ranking Still a lot to do
Resolving Insolvency
137
Enforcing Contracts
186
Trading Across Borders
126
Paying Taxes
156
Protecting Minority Investors
Getting Credit
36
Registering Property
121
Getting Electricity
137
Dealing with Construction Permits
184
Starting a Business
158
Ease of Doing Business Rank
142
0
50
100
150
200
Source: World Bank (2014) 22
Promoting India as a manufacturing

destination
Indias economic growth in the recent past has failed to have the necessary impact on
job creation. With this in mind, Modi has launched the Make in India campaign23 in
order to promote India as a destination for manufacturing to global corporates. The
government has set a deadline of April 2016 for implementing the long-awaited goods
and services tax (GST) that will simplify taxes while broadening the tax base, leading to
an increase in internal trade.24
30 | P a g e
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10 for 2015
ESG agenda Pollution, water risks, and bribery and corruption

Initial steps to limit vehicular emissions
As per a recent World Health Organization (WHO) report, 13 of the 20 most polluted
cities in the world are in India, with its capital New Delhi sitting on top of this infamous
list.25 The government has taken initial steps to limit vehicular emissions, like banning
vehicles more than 15 years old, but the countrys rapidly growing vehicle numbers will
continue to pose a major threat in 2015.
According to the World Resource Institutes,26 a majority of the country faces high
baseline water stress. With an economy that is heavily dependent on agriculture,
efficient water use will continue to remain a key success factor both for the
agribusinesses and for the industries highly exposed to water risk, like power
generation, mining and steel production. The governments goal of providing improved
access to clean water and sanitation for all by 2019 will lead to stronger regulations
against water pollution due to industrial effluent discharges in 2015.
Impetus towards transparency
Since the Modi government has come to power, there has been an impetus towards
transparency and a crackdown on corruption and black money. However, it will take a
few years to change the countrys mindset, and tackling corruption, which is ingrained
in Indias business culture, is one of the biggest challenges facing the Modi government
in 2015.
Japan More Abenomics to come

Struggling to bounce back from a rise in
the sales tax in 2014
In 2015, the growth rate should reach a meagre 1.2%, according to World Bank
estimates, as the Japanese economy continues its struggle to bounce back from a rise
in the sales tax in 2014. The role of the significantly lower oil price is double edged. On
the one hand, the country benefits strongly from the reduced energy bill. On the other
hand, it puts the central banks strategy at risk to fuel the inflation expectations of
economic actors and financial markets. Hence, more Abenomics the so-called
three-part economic plan defined by Mr. Abe, comprising fiscal spending, monetary
easing and structural reforms can be expected going forward in order to tackle the
recession-hit economy.
The main uncertainty in 2015 is whether Mr. Abe will use his mandate, renewed in
December 2014, to implement the necessary structural reforms. The long-debated
reforms of the two-tier labor market and of the inefficient agriculture sector could
boost confidence in the Japanese economy significantly and can be seen as
prerequisites for more sustainable growth for the medium to long term.
Rising geopolitical tensions:

Strengthening ties with allies
In order to mitigate the rising geopolitical tensions with China, Japan is likely to seek a
further strengthening of economic ties with its major trading partners, especially the
U.S. and other Asia-Pacific countries, via free trade agreements. Steps towards a TransPacific Partnership would certainly be welcomed by Japan.
31 | P a g e
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10 for 2015
Japan (Nominal) retail sales
Indexed (January 2012 = 100)
115
111
107
103
99
95
Seasonal Adjusted Retail Sales
Source: Bloomberg
ESG agenda Revival of nuclear energy (?) and the Stewardship Code
Government aims to reopen two nuclear
reactors in response to increased energy
bill
Since the countrys nuclear reactors were shut down following the Fukushima disaster,
Japan has been heavily relying on imported natural gas and coal to power the country.
Facing an increasing energy bill, the Japanese government aims to reopen two reactors
in 2015 and has already started examining the eligibility of reopening other ones,
despite strong public opposition. The plunge in oil prices, however, will probably not
induce the government to reconsider its plans at this time, since oil-fueled plants are
old and more expensive to operate relative to coal- and LNG-powered ones.27
Investors should closely monitor how the government and the countrys nine utilities
companies, which operate all of the nuclear plants in the country, will ensure effective
implementation of stronger operational policies and be held accountable for the local
communities safety. In the long run, we expect to see growth in large-scale renewable
energy production in the country, especially since access to part of the energy market,
which has been dominated by the nine domestic players, will be opened up to outside
players in April 2016.
We expect listed companies to become

more active in incorporating ESG factors
into their business practices
The Japanese Stewardship Code was put in place by the Japanese Financial Services
Agency (FSA) in March 2014. As of December 2014, more than 175 institutional
investors and proxy voting advisory firms have become signatories, a number that is
expected to grow in 2015. Although not legally binding, the Stewardship Code
encourages investors to take into consideration non-financials in their investment
decisions. As a result, we expect Japans listed companies to become more active in
incorporating ESG factors into their business practices and to improve on
communicating such practices with investors in 2015.
32 | P a g e
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10 for 2015
10 for 2015
A platform for ESG analysis
Analyst(s)
Doug Morrow
Dr. Hendrik Garz

Drawn from our coverage universe of 4,500 global stocks, the 10 for 2015 consist of
ten major business stories that will unfold over the next year. The stories are salient
and thought provoking, and are likely to be heavily followed in mainstream media.
But beyond their financial relevance, the 10 for 2015 also share a connection to ESG
factors. Indeed, the stories demonstrate that analysing business events and
corporate decision making through an ESG lens can reveal risks and opportunities
that are difficult to capture in conventional valuation models. The ultimate impact of
these risks and opportunities on both corporate financial and share price
performance is difficult to gauge, but in many cases the link to materiality can
scarcely be doubted. In any case, it is not often said these days that less information
is better. From this epistemic perspective, the 10 for 2015 offer unique company
analysis and potentially actionable insights for investors.
Stories from the field

Like any other year, 2015 will give us a variety of eye-opening business events. The
macro trends identified in the chapter above, including the recent fall in oil prices, the
slowdown in Chinas economic growth and the potential end of the great 30-year bond
rally, are sure to provoke consequential business and financial events in the months
ahead.
The 10 for 2015 are likely to be followed
by mainstream media
In the pages that follow, we analyse ten business stories that are likely to be included
in those that grab mainstream headlines in 2015. The stories include one of the largest
proposed mergers in the history of the global construction industry (Lafarge and
Holcim), where we find hidden and potentially material synergies in energy
management and product development. We discuss the second-largest IPO of 2014
(Saudi Arabias National Commercial Bank), the opening of Saudi Arabias equity
markets to foreign investors and the rise of Shariah-compliant financial products. In a
story on Telenor, we assess the companys recent entry into Myanmar, one of the
worlds last Internet and cellphone holdouts.
Focusing on the pharmaceuticals industry, we find upside potential in a
groundbreaking remuneration model for pharmaceutical sales representatives
recently introduced by GlaxoSmithKline. And to leverage our growing expertise in
corporate governance, we evaluate the effect of questionable board practices at
Netflix, one of the darlings of the Nasdaq.
Our ten stories include enhanced risk and

opportunity identification
What makes the 10 for 2015 unique is that, in addition to displaying genuinely
intriguing business characteristics, they also reveal the potential value-add of ESG
analysis. Without exception, the ten vignettes discuss risk and opportunity drivers that
are difficult to identify using traditional financial tools and analysis. We do not expect
that all of the ESG-driven risks and opportunities we have uncovered will necessarily
come to influence companies share prices. Stock prices are obviously multifactorial,
33 | P a g e
January 2015
10 for 2015
and the signal from even momentous ESG risks and opportunities can sometimes be
drowned out by other factors.
Our stories offer insight into asset
selection
At the same time, the 10 for 2015 exemplify the type of robust and comprehensive
analysis that is increasingly being used by asset managers to either supplement existing
security selection procedures or construct long-term, standalone investment
strategies. Indeed, if our Macro View (p. 9) offers a prescription for asset allocation,
the 10 for 2015 deliver insight into asset selection.
Our analysis supports a positive view of

Intel, GSK, Lafarge and Holcim, Pemex,
and Telenor
For instance, we argued that forces coalescing at the macro level do not currently invite
an overweighting of the Oil & Gas and Banks sectors within an investors equity
allocation. We also found that investors would be well advised to keep their highquality bonds (despite the obvious temptation to sell). Layering our findings from the
10 for 2015 on top of these recommendations, investors might consider taking a closer
look at Intel, GSK, Lafarge and Holcim and Telenor. At the same time, we see negative
ESG-driven financial impacts at DuPont, Lonmin, National Commercial Bank, CocaCola and Netflix. Investors can participate in Pemex, which we reviewed favourably,
only through the companys debt offerings.
Summary of the 10 for 2015

Company
Country
Industry
Theme
DuPont
United States
Chemicals
Expanding into the African seed market
Intel
United States
Semiconductors &
Semiconductor Equipment
Conflict-free electronics
GSK
United Kingdom
Pharmaceuticals
Sweeping changes in response to record bribery charge
Lafarge and Holcim
France and Switzerland
Construction Materials
Possible ESG synergies in merger of cement giants
Lonmin
South Africa
Metals & Mining
Findings of Marikana Commission create business risks
National Commercial Bank Saudi Arabia
Banks
The market for Shariah-compliant financial products
Telenor
Norway
Diversified
Telecommunication Services
Operational risk and opportunities in Myanmar
Pemex
Mexico
Oil, Gas & Consumable Fuels
Competing in Mexico's liberalised energy sector
Coca Cola
United States
Beverages
Diversification into energy drinks and milk products
Netflix
United States
Internet and Catalog Retail
Questionable board practices raise shareholder concern

Source: Sustainalytics
34 | P a g e
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10 for 2015
DuPont
Sowing seeds for African growth?
Impact
Negative
57
Overall ESG Score

Average Performer
(87th out of 157 peers)
Highest Controversy Level

Emissions, Effluents and
Waste
Key investor takeaways:
Domicile: United States

Industry: Chemicals
Ticker: NYSE: DD
ISIN: US2635341090
Employees: 64,000
MCap (USD m): 67,266*
* as of Dec. 31/2014
DuPont is theoretically well positioned to improve food security in sub-Saharan

Africa, where an estimated 240m people lack adequate food resources.
DuPonts business model may be misaligned with the needs of smallholder
farmers, which could negatively affect the companys rate of market capture.
DuPonts focus on a limited array of hybrid seeds could contribute to biodiversity
loss and Monsanto-type reputational risks for investors.
Overview
Stock price performance
DuPont vs. S&P 500, 20092014
350
300
Indexed
250
200
150
DuPont
100
S&P500
50
Source: Bloomberg
ESG performance Peer analysis

Peers
BASF
Dow Chemical
DuPont
LyondellBasell Industries
Monsanto
Scores
Env
Soc
65
82
60
55
54
50
51
69
48
60
Overall
75
64
57
62
55
Gov
82
78
72
69
58
Fundamentals Peer analysis

Peers
BASF
Dow Chemical
DuPont
LyondellBasell Industries
Monsanto
ROE *
19
12
33
n.a.
18
P/E ** P/E (2015e)

15
13
15
14
19
17
9
10
24
17
*Five year average in %, **Continuous operations
Source: Bloomberg
Analysts
Deniz Horzum
Analyst, Research Products
deniz.horzum@sustainalytics.com
Doug Morrow
DuPont is betting big on Africa. In 2013, the companys agricultural research subsidiary,
DuPont Pioneer, acquired South Africas Pannar Seed, one of the largest field crop seed
producers in Africa. The acquisition, one of the biggest transactions in DuPonts history,
dramatically improved the companys position in the African seed market. This market
is increasingly seen by U.S. and European seed companies as an important growth
opportunity, as grain yields in Africa are about one fifth of those currently achieved in
developed markets. Demand for improved agricultural productivity is rising across
Africa as a result of rapid population growth and the declining stock of arable land due
to urbanisation, particularly in Sub-Saharan Africa.
While the fundamentals of the deal seem to make sense for DuPont, we are skeptical
about the companys claims that the acquisition will enable them to improve Africas
food security. Taking a contrarian view, we find that aspects of the deal may expose
DuPont shareholders to long-term downside risk, on the back of challenges related to
potential biodiversity loss and DuPonts generally weak policy stance on genetic
engineering.
Acquiring Pannar Seed

In 2013 DuPont Pioneer completed the acquisition of Pannar Seed, an experienced
South African seed company. The deal provided three key advantages for DuPont
Pioneer in the context of the African seed market. First, DuPont gained access to
Pannars extensive product portfolio, which increased DuPont Pioneers maize seed
varieties in Kenya and Tanzania by more than threefold. DuPont Pioneer also acquired
other varieties in Pannars crop portfolio, including wheat, sunflower, sorghum,
soybean and dry bean seeds.
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10 for 2015
DuPont Pioneer: Distribution Channels

Pre- and Post-Acquisition
Second, DuPont acquired Pannars extensive genetic library of the above-mentioned

varieties germplasm, which is well adapted to the tropical and sub-tropical agroecological zones. DuPont Pioneer could theoretically combine these technologies with
its existing genetic library to develop new and improved seed varieties for the SubSaharan Africa market. Finally, as shown in the graphic to the left, the acquisition
increased DuPonts Pioneers distribution channels across Africa from eight to 25
countries.
Food security: Capturing the smallholder farm market

While the acquisition has boosted DuPont Pioneers reach and competitiveness, it
remains to be seen if the company can make a lasting impact on continental food
security. Food security is intimately tied to Africas smallholder farmers, which provide
an estimated 80% of Africas food supply. Smallholder farmers typically farm less than
two hectares of land, often earn less than USD 1.25 per day and are largely
economically marginalised.
Source: Pannar and DuPont Pioneer28
While DuPont Pioneer has the necessary tools to reach this large but historically
underserved market niche, we expect a steep learning curve and revenue capture that
may proceed more slowly than expected. The challenge stems from a misalignment
between the existing farming practices of smallholders, which have traditionally
planted open pollinating crops, and DuPont Pioneers products, which are hybrid and
genetically modified seeds that have to be repurchased annually. DuPont Pioneer
recognises that even incremental increases in the cost of farming may be difficult for
this market to absorb and is exploring different types of pricing solutions. But the
companys calculus that increased costs to farmers will be more than offset by
productivity gains may not be enough to sway the market. Even in the face of an
ostensible yield benefit, some smallholder farmers may be reluctant to switch to hybrid
seeds due to their familiarity with long-standing local farming practices.
Biodiversity loss?
G.1.4.5 Genetic Engineering Policy,
Chemicals Industry
Weak Strong
policy policy
5%
General 3%
statement
3%
No policy
90%
In addition to the challenges of effectively penetrating the smallholder farmer market,

DuPont Pioneers business strategy may result in biodiversity loss. We are not
suggesting that a decline in biodiversity is preordained, but it is a legitimate and
distinctly plausible outcome that has hitherto received little attention in financial
media. The loss of regional biodiversity is a risk because of DuPonts focus to date on a
limited array of hybrid seeds, which contrasts with the diverse range of local seed
varieties that smallholder farmers in Sub-Saharan Africa have been planting for
centuries. A comprehensive transition away from traditional seeds in favour of a
narrower range of hybrid seeds could result in biodiversity loss, which could in turn
attract the type of negative media attention that Monsanto has received in recent years
for its involvement with genetically modified organisms (GMOs).
The implications of these events are difficult to forecast, but they could create
reputational difficulties for DuPont and downside risk for shareholders. Compounding
these difficulties is our assessment that DuPonts approach for managing risks around
genetic engineering and GMOs trails industry best practice. As shown in the graph on
36 | P a g e
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10 for 2015
the previous page, DuPont is one of two companies in the industry with a weak policy
on genetic engineering, characterised by the absence of detailed measures to reduce
societal and environmental risks related to genetically engineered products. Six
industry peers, including Syngenta, BASF and Dow Chemical, take a stronger stance that
demonstrates greater risk awareness. DuPonts weak policy may be preferable to no
policy at all, but in our view there is room for improvement in the companys approach
for managing business risks related to genetic engineering.
Challenges on the horizon

Impact
Negative
Overall, we take a moderately negative view of DuPont in the context of its acquisition
of Pannar Seed and the possible long-term financial effects. While the acquisition has
undoubtedly improved DuPonts positioning in the growing African seed market, we
are concerned that the companys business model may conflict with the needs of
smallholder farmers. Moreover, the possibility that DuPonts operations could lead to
biodiversity loss and attract Monsanto-type reputational risks cannot be completely
discounted.
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Intel
Progress on conflict-free target could pay reputational dividend in 2015
Impact
Positive
86

Industry: Semiconductors & Semiconductor
Equipment
Ticker: NASDAQ: INTC
ISIN: US4581401001
Employees: 105,600
MCap (USD m): 176,235*
* as of Dec. 31/2014
Overall ESG Score

Industry Leader
(1st out of 103 peers)

Anti-Competitive Practices;
Emissions, Effluents and
Waste
Key investor takeaways
Intels audacious plan to build a conflict-free supply chain by 2016 creates a

unique opportunity for brand building.
Intel is well positioned to capitalise on consumers growing awareness of conflict
minerals and any upsurge in demand for so-called ethical electronics.
Intels long history of advanced ESG positioning mitigates downside risks
associated with possible criticism of conflict-free minerals.
Overview
Intel vs. Nasdaq, 20092014
350
Indexed
300
250
200
150
Intel
Nasdaq
100
50
Source: Bloomberg
The Democratic Republic of Congo (DRC) is an abundant supplier of minerals that

have wide application in the global electronics industry. DRC produces approximately
half of the worlds supply of tantalum as well as significant amounts of tungsten, tin
and gold. Deposits of these minerals are concentrated in the countrys eastern
provinces, which, like other parts of the country, have witnessed a state of civil war
since the mid-1990s. Many mines located throughout the DRC are controlled by
militia groups, which use proceeds from the sale of so-called conflict minerals to
perpetuate regional hostilities, human rights abuses and conditions of forced labour.

Peers
Overall
Intel
86
STMicroelectronics
86
United Microelectronics Corp
85
ASML
80
Advanced Micro Devices
79
Scores
Env
Soc
83
89
89
88
88
86
76
85
81
84
Gov
87
79
77
79
71

ROE *
Peers
Intel
22
STMicroelectronics
7
United Microelectronics Corp
5
ASML
27
Advanced Micro Devices
-62
P/E ** P/E (2015e)

16
14
18
21
28
16
29
25
23
22
Intel is one of many global electronics companies whose products contain minerals
originating in DRC, but it is distinguished by sweeping efforts to eliminate conflict
minerals from its supply chain. In a recent speech, Intel CEO Brian Krzanich indicated
that Intel will strive to make all of its products conflict free by 2016.
Although we are not convinced that consumers will necessarily pay more for conflictfree electronics, we see upside potential in Intels ahead-of-the-curve conflict
minerals strategy. The major risk that we can discern that Intels process for
determining conflict-free products is found to lack credibility is mitigated by NGO
collaboration and the companys history of strong ESG performance.
Source: Bloomberg
Analysts
Bowen Gu
bowen.gu@sustainalytics.com
Doug Morrow
Conflict minerals
Conflict minerals may not be a part of most investors lexicon, but in the global
electronics industry the phrase is driving a virtually unprecedented examination of
corporate supply chains. Much of the momentum stems from the 2010 U.S. DoddFrank Act and a follow-up directive published in 2012 by the U.S. Securities and
Exchange Commission that requires companies listed in the U.S. to disclose the extent
to which their products contain tantalum, tungsten, tin or gold mined in the DRC and
38 | P a g e
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10 for 2015
nine surrounding countries. The rule does not prohibit the use of conflict minerals by
U.S. companies; it rather seeks to improve transparency and catalyse voluntary
corporate efforts to switch to conflict-free suppliers. Conflict-free products are
functional equivalents to regular or non-conflict-free electronics, but they are
distinguished by a verification that their component parts do not come from mines
controlled by militia groups in the DRC.
S.2.1.3 Conflict Minerals Policy,

Semiconductor Industry
Broad scope
12%
Limited
scope
8%
No system
58%
No formal
system
22%
Intel: A conflict minerals timeline
Intel has staked out a commanding leadership position on the conflict minerals issue.
It was the first semiconductor company to establish an internal conflict minerals
team, which it set up in 2008 (two years before the U.S. Dodd-Frank Act). The
company built a comprehensive bottom-up system to trace the minerals used in its
products, including the smelters and refiners that sit at the beginning of its supply
chain. Moreover, as shown in the graph to the left, Intel is one of only two
semiconductor companies (out of a global universe of 113) that have developed a
comprehensive conflict minerals policy. Intel also played a lead role in setting up
independent auditing and certification protocols, including the Conflict-Free Sourcing
Initiative, which offers a widely used third-party audit to validate a smelters conflictfree status.
These efforts allowed Intel to make the claim in early 2014 that all of its
microprocessors were conflict free. Building off of this achievement, the company
declared in September 2014 that it would move to expand the conflict-free
designation to all product lines, including motherboards, chipsets and servers, by the
end of 2016.
Impact on company value

We are bullish on Intels conflict minerals strategy and believe that even measured
progress against the companys audacious product-wide conflict-free goal could
generate both reputational and bottom-line benefits, with concomitant gains for
shareholders going forward. While we are skeptical that Intels key customers, which
include Hewlett Packard, Dell and Lenovo, will be willing to pay more for conflict-free
products the electronics industry is strongly price motivated Intel has succeeded
in raising consumer awareness about conflict minerals and is well positioned to
capitalise on any upsurge in demand for so-called ethical electronics.
Intels investment in systems and
procedures could lower compliance costs
From a more technical standpoint, the systems that Intel has built over the past six
years to investigate conflict minerals in its supply chain could potentially be leveraged
in other traceability regimes, thereby reducing compliance costs. The EU, for instance,
is currently reviewing a conflict minerals proposal similar to U.S. Dodd-Frank that
could have implications for Intel.
Open sourcing its intellectual property could

offer benefits
There is a final quality to Intels conflict minerals strategy which, in our view, has not
been fully priced into the companys store of reputational capital. This relates to
Intels proposed decision to open source its methods for supply chain investigation
and verification. This move, which could help reduce Dodd-Frank and SEC compliance
39 | P a g e
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10 for 2015
costs for small and mid-sized U.S. electronics companies, would be a progressive
expression of Intels commitment to the conflict minerals issue.
One major risk is the possible lack of
credibility
Taking a critical view, one could argue that Intel might be exposed to reputational and
brand risk if its process for identifying conflict-free minerals were found to lack
credibility. If, for instance, some of the companys conflict-free microprocessors were
found through audit procedures to contain minerals from militia-controlled mines in
DRC, the company would likely face blowback from certain stakeholders. We think
this is a remote possibility although not an entirely unimaginable one, given the
complexity of the companys supply chain and continued changes in the DRCs longrunning civil war.
Reputational fallout would be limited
In our view, the reputational fallout from such an occurrence would be strongly
mitigated by a number of factors. The first is Intels exceptional overall ESG
positioning. Intel is currently the number one ranked semiconductor company in
Sustainalytics coverage universe, which speaks to the companys genuine
commitment to address ESG risk through well-intentioned environmental, social and
governance policies. The second is the collaborative effort that characterises Intels
involvement in the conflict minerals issue. Intel works alongside established NGOs,
including the Electronic Industry Citizenship Coalition, Global e-Sustainability
Initiative Extractives Working Group, the Solutions for Hope project and the ConflictFree Sourcing Initiative, which are responsible for third-party certifications.
Industry leading position creates value

Impact
Positive
We expect that Intels forward-looking conflict minerals strategy will ultimately have
a positive impact on the companys financial performance. While Intels target to
make all of its products conflict free by 2016 is clearly ambitious even the companys
CEO puts their chance of success at 75% we believe the companys pioneering
efforts on an issue of obvious industry and humanitarian importance will have
positive reputational and brand effects. It is still unclear if customers may be willing
to pay more for conflict-free electronics we are skeptical about this claim but Intel
would be ideally positioned to capitalise on a consumer trend towards ethical
electronics, should one materialise.
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GlaxoSmithKline (GSK)
Company looks to rebound from record bribery charge
Impact
Positive
72
Overall ESG Score

Outperformer

Bribery and Corruption
Domicile: United Kingdom

Industry: Pharmaceuticals
Ticker: LSE: GSK
ISIN: GB0009252882
Employees: 99,000
MCap (USD m): 106,341*
* as of Dec. 31/2014
After paying USD 490m over bribery charges in 2014, GSK now faces financial
penalties from ongoing bribery investigations in the U.K. and the U.S.
In early 2015 GSK is expected to report on progress made to substantial changes
in its marketing and sales remuneration practices.
We expect GSKs strong management of its bribery and corruption exposure to
lead to an improvement in the companys controversy ranking by mid-2016.
Overview
GSK vs. FTSE 100, 20092014
190
Indexed
170
150
130
110
90
GlaxoSmithKline
FTSE 100
70
50
Source: Bloomberg

Peers
Novo Nordisk A/S
Sanofi
Merck & Co Inc
GSK
Gilead Sciences
Overall
78
78
78
72
63
Scores
Env
Soc
82
75
82
81
82
75
80
69
51
71
Gov
81
70
79
69
61

Peers
Novo Nordisk A/S
Sanofi
Merck & Co Inc
GSK
Gilead Sciences
ROE *
47
10
19
61
41
P/E ** P/E (2015e)

29
25
21
15
18
18
14
15
18
10
Source: Bloomberg
Analysts
Teodora Blidaru
Associate Analyst, Governance Research
teodora.blidaru@sustainalytics.com
Doug Morrow
In September 2014, a Chinese court fined GSK CNY 3bn (USD 490m), the largest
corporate fine in Chinas history, in connection with bribery charges. GSK and five
executives were found guilty of masterminding a kickback scheme to artificially boost
the use and sale of GSK medicines. GSK promptly admitted its guilt and paid the fine
through cash resources. The company also issued a formal apology to the Chinese
people and committed to become a model for reform in Chinas healthcare industry.
Reports in mainstream media, including the BBC and The Wall Street Journal, have
rightly focused on the lapses in GSKs compliance procedures and continued
investigations carried out by U.S. and U.K. authorities. But relatively little attention
has been paid to the substantive changes in GSKs marketing and sales remuneration
practices that were announced by management in early 2014, or the extent to which
they may be expected to curb future ethical lapses. In our view, these changes could
help GSK rebuild investor and regulator trust in the wake of its recent reputational
fallout. Though the announced policy modifications are not without disadvantages,
they could be beneficial in reducing the companys exposure to future legal,
reputational and financial risks in connection to bribery and corruption issues.
Bribery in China and elsewhere

After a 15-month investigation carried out by the Chinese Ministry of Public Security,
GSK was found guilty in September 2014 of bribing non-government personnel. The
court fined GSK CNY 3bn (USD 490m), or 5.6% of the companys reported revenue in
Q3 2014. Evidence presented during the trial indicated that bribery was committed
by a wide range of GSK employees, including sales representatives, area managers
and country directors. The scheme involved the payment of lecture fees and travel
expenses for doctors to prescribe GSK medicines from as far back as 2007, as well as
the bribery of professional medical associations to promote the endorsement and use
41 | P a g e
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10 for 2015
of GSK products. Incentivising the prescription of medicine through monetary

rewards instead of the medicines demonstrated health effects may negatively
impact access to lower-cost, more affordable medication, and it may negatively
impact patient health. The record fine came on the back of similar allegations of
bribery against GSK officials in Lebanon, Jordan, Poland, Iraq and the United Arab
Emirates. Against this backdrop, the companys sales practices are currently under
investigation by the U.K. Serious Fraud Office, while the U.S. Department of Justice is
probing GSK over possible breaches of the U.S. Foreign Corrupt Practices Act.
Changes in remuneration could signal new direction

GSK continues to attract considerable negative media attention as a result of its past
and present bribery allegations across emerging markets. Still, important changes
announced by GSK to its marketing and sales remuneration practices in 2014 have
received comparatively little attention in mainstream media.
New remuneration scheme for sales
representatives
The first significant change involves a new remuneration scheme for the companys
sales representatives. Under the revised programme, GSK compensates sales and
marketing professionals based on their knowledge of improving patient care and on
their contribution to general business performance. GSK has not announced details
about how this policy works in practice, and obvious questions remain about
performance metrics. But the spirit of the new regime contrasts sharply with the
dominant industry model, where compensation is correlated with prescriptionrelated targets. Already in effect across GSKs U.S. operations, the new policy is
expected to be rolled out globally in 2015.
Similarly, GSK announced in 2014 that it would end its practice of remunerating
doctors and other healthcare professionals for attending conferences or speaking
about GSK products to audiences who can influence drug prescriptions. GSK expects
to completely phase out this policy by early 2016, thereby distancing itself from
improperly influenced healthcare personnel.
Demonstrating leadership
Remediation time for severe bribery and
corruption controversies, 20082014
Average duration of
controversy
Mode duration of
controversy
10
15
20
25
Months
Source: Sustainalytics Global Compact Compliance Service
It is simply too early to say if these innovations will help GSK reduce its exposure to
future bribery and corruption cases or recover lost reputational capital from the
incident in China. Policies alone are often insufficient for reshaping corporate
behaviours. However, our analysis of remediation time for companies caught up in
severe bribery and corruption controversies suggests that active, well-prepared
companies typically manoeuvre their way out of such controversies within 1218
months from the events onset (through remediation practices including new policy,
programme and compliance developments). In light of GSKs proactive response to
the China bribery incident, our analysis suggests that GSK could clear the
controversy by mid-2016.
GSKs recently announced strategic revisions are among the most far-reaching anticorruption measures taken to date in the global pharmaceuticals industry. While
more information is needed about the oversight mechanisms that will support policy
42 | P a g e
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changes, the company demonstrates unequivocal leadership on the issue of

pharmaceutical bribery and corruption incidents. Indeed, GSK was the first
pharmaceutical company to take the critical step of dissociating the pay of its sales
representatives from the number of prescriptions issued (in the U.S. market). While
GSKs new policies may impact short-term revenues, as GSKs sales force may be less
financially incentivised to sell the companys products under the new remuneration
model, these policies offer longer-term reputational benefits and may soon be copied
by other industry players.
A bellwether year for GSK investors

Impact
Positive
We expect 2015 to be a bellwether year for GSK and GSK investors, as the first
progress reports about implementation of the announced policy changes are
expected. Successful implementation of these policies could directly contribute to the
companys rebuilding of customer, regulator and investor trust and ultimately to its
growth prospects, particularly in emerging markets. Our outlook is tempered by the
recognition that the announced changes may put pressure on short-term margins and
by the possibility that GSK will encounter operational difficulties in rolling out its
revised remuneration policy globally.
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LafargeHolcim
Proposed merger offers intriguing ESG opportunities

Impact
Strongly positive
69
9
Overall ESG Score

Average performer

Health and Safety
Domicile: France**
Industry: Construction Materials
Ticker: ENXTPA: LG
ISIN: FR0000120537
Employees: 64,000
MCap (USD m): 19,946*
* as of Dec. 31/2014
** all characteristics refer to Lafarge
LafargeHolcims board, which is likely to include strategic shareholder

representation, can draw upon a diverse pool of skilled directors.
Lafarge and Holcim have a strikingly similar approach to ESG management,
which bodes well for short-term integration.
The merger could result in an upgrade of energy and GHG performance and
improved positioning in the growing market for sustainable building materials.
Overview
Lafarge vs. CAC 40, 20092014
250
Indexed
200
150
LaFarge
CAC 40
100
50
Source: Bloomberg

Peers
Cemex, S.A.B de C.V.
CRH plc
Holcim
Lafarge
Siam Cement Public Co Ltd
Overall
76
72
69
69
68
Scores
Env
Soc
73
72
76
60
75
56
75
57
77
52
Gov
86
82
78
74
78

Peers
Cemex, S.A.B de C.V.
CRH plc
Holcim
Lafarge
Siam Cement Public Co Ltd
ROE *
-7
5
6
4
21
P/E ** P/E (2015e)

n.a.
211
51
19
17
14
42
20
18
14
Source: Bloomberg
Analysts
Andrada Nitoiu
andrada.nitoiu@sustainalytics.com
Doug Morrow
In April 2014, Lafarge and Holcim, the worlds two largest cement manufacturers by
revenue, announced their intention to merge. The deal, which has received clearance
from the European Commission but still hinges on approval in other jurisdictions and
the successful divestment of overlapping businesses, is expected to be completed by
mid-2015. The prospective merger has been generally celebrated by investors, with
shareholders standing to benefit from an estimated USD 1.9bn in annual cost savings,
including USD 475m from improved purchasing power with suppliers. While the
fundamentals of the merger have been widely discussed and analysed, important
questions remain about how LafargeHolcim will be governed, and whether ESG
synergies between the two companies can be captured. Our analysis on these fronts
provides further support that the merger offers long-term benefits for shareholders.
The merger Creating a cement giant

The merger of France-based Lafarge and Switzerland-based Holcim would create the
worlds largest cement manufacturer, with an estimated manufacturing capacity of
427 million tonnes a year, nearly double the capacity of the next-largest industry
player (Chinas state-owned Anhui Conch Cement Company). Lafarge and Holcim are
in the process of divesting business units with collective revenue of approximately
USD 6bn in order to satisfy merger conditions imposed by regulators in 15
jurisdictions, including the EU, Brazil and India. Completion of the merger will also
require a successful public exchange offering and approval by Holcims shareholders
in Q2 2015. LafargeHolcim would employ an estimated 136,000 people and have
operations in 90 countries, including 17 developed markets and 73 emerging markets.
Company disclosures suggest that no country will account for more than 10% of
LafargeHolcims consolidated revenue.
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Leveraging complementary board-level strengths

Will strategic shareholders accept reduced
representation?
While Lafarge and Holcim announced the composition of the new entitys executive
board on 23 December 2014, the composition of the board of directors has not been
fully disclosed. It has been reported that Holcims existing Chairman, Dr. Wolfgang
Reitzle, will serve as Chairman of the new entity, while Bruno Lafont, Lafarges current
CEO and Chairman, will serve as CEO and Executive Director on the board of
LafargeHolcim. While the remaining board members are likely to be drawn from the
existing pool of Lafarge and Holcim directors, we expect that each companys
strategic shareholders will have representation on the new board. (Frere and
Schmidheiny have a 20% stake in Lafarge and Holcim, respectively, while NNS and
Eurocement own 1011% of Lafarge and Holcim, respectively.) However, it remains
to be seen whether the strategic shareholders will accept reduced representation on
the combined board.
Combining diversity, industry experience,

independence and attractive skill sets
The combined board may also leverage the strengths of each companys existing pool
of directors. In our view, Lafarges board benefits from superior gender and national
diversity as well as industry experience, while Holcims board is more independent
and offers an attractive mix of skill sets. Depending on the selected mix of directors,
LafargeHolcims board could potentially capture the board-level strengths of both
founding companies, with implied long-term governance benefits.
Highly compatible ESG strategies should help integration

ESG integration an often under-analysed
dimension in merger processes
As ESG strategies are increasingly embedded in companies overarching business

plans, incompatible ESG visions in the context of an M&A deal can create a drag on
managements integration efforts. In the case of Lafarge and Holcim, however, we
find highly complementary ESG policies and a strikingly similar performance track
record. Perhaps more importantly for shareholders, from a tactical standpoint, we
see two key opportunities for performance upgrades from the merger.
Energy and GHGs Merger makes long-term performance benefits

possible
A performance gap on energy use?
Both Lafarge and Holcim have developed advanced programmes to manage energy
use and GHG emissions, and neither company can be said to be strategically unaware
of the benefits of energy efficiency. Careful analysis of the companies energy profiles,
however, suggests that Holcim enjoys a moderate efficiency advantage. Holcim uses
approximately 3,500 megajoules of energy per tonne of clinker (the main ingredient
in cement) compared to 4,860 for Lafarge. We put at least part of this performance
gap down to Holcims innovative waste-for-fuel, kiln efficiency and equipment
upgrade practices, as well as its new energy management module, which improves
energy use optimisation. It is of course difficult to say which companys
environmental management system will prevail in the post-merger world, but any
improvement in Lafarges energy management as a result of best practice transfer
could possibly lead to a reduction in overall operating expenses. Energy is among the
most significant costs in the cement industry, typically occupying 1230% of a
45 | P a g e
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companys total operating spend, and even modest improvements in energy practices
can have material impacts on profitability.
Forced divestment could reduce EU ETS
exposure
In addition to possible energy cost reductions, LafargeHolcim may potentially benefit

from reduced exposure to the European Union Emissions Trading Scheme (EU ETS)
through divestments that are required for regulatory approval of the merger.
According to documents filed with the European Commission, Lafarge will sell its
cement plants in Germany and Romania and most of its business units in the U.K,
while Holcim will sell its cement plants in Slovakia, operating assets in Hungary, the
Czech Republic and Spain, and most of its plants in France. We estimate these
divestments could reduce the companys emissions by as much as 8.2m tonnes of CO2
eq. (additional emissions reductions are expected from announced divestments in
other countries, including Canada and Brazil). Since the bulk of these emissions are
produced by installations covered by the EU ETS, LafargeHolcim is likely to face a
change in permit allocation and risk exposure to the regime. The effects of these
changes on the companys profit and loss statement could be on the upside or
downside, but with fewer covered installations it is possible that LafargeHolcim could
face lower EU ETS compliance costs than Lafarge and Holcim did as separate entities.
Product development Gaining clout

Disproportionately benefitting from the
rising demand for energy-efficient products
The second opportunity is in product development. Demand for buildings with

improved energy efficiency is rising as energy costs and GHG emissions are becoming
increasingly material concerns for property developers, building owners and tenants.
Both Lafarge and Holcim have been actively targeting this niche for some time. Over
11% of Lafarges 2013 sales came from energy-efficient concrete products, including
Aether, Thermedia 0.3 and Hydromedia. For its part, Holcim offers various sustainable
concrete products, including Thermicimo and Bardon ICFCrete. The new companys
estimated annual R&D budget of USD 240m, by some margin the largest in the
industry, would set the stage for continued product innovation and increased capture
of the rapidly growing market for energy-efficient building products. According to the
World Business Council for Sustainable Development (WBCSD), buildings account for
40% of total global energy demand and offer significant potential for achieving costeffective GHG emission reductions.
Good ESG fit improves odds of successful integration

Impact
Strongly positive
The announced merger of Lafarge and Holcim was one of the marquee corporate
actions of 2014. Our analysis of the deal from an ESG standpoint reveals a number of
potential benefits, including attractive prospects for board membership, energy and
GHG improvements and expanded product innovation. As with other mega
mergers, we raise the invariable concern that a clash of cultures could drag on the
new entitys short-term results. But the similar ESG profiles of Lafarge and Holcim
bode well for long-term integration.
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Lonmin
Results of Marikana Commission could create business risks
Impact
Strongly negative
78
Overall ESG Score

Industry Leader
(3rd out of 78 peers)

Labour Relations
Domicile: United Kingdom

Industry: Metals & Mining
Ticker: LSE: LMI
ISIN: GB0031192486
Employees: 15,610
MCap (USD m): 1,647*
* as of Dec. 31/2014
Lonmin is likely to be strongly criticised in the Marikana Commission of Inquirys

final report, which will be completed in March 2015.
The risk of industrial action in the wake of the Commissions ruling is low, as
Lonmin and its majority union are fresh from signing a new three-year deal.
The Commission could recommend the criminal prosecution of Lonmin directors
and executives, which could put short-term pressure on Lonmin stock.
Overview
Lonmin vs. FTSE 250, 20092014
300
Indexed
250
200
150
Lonmin
FTSE 250
100
50
Source: Bloomberg

Peers
Anglo American Platinum Ltd
Lonmin
Impala Platinum Holdings
Norilsk Nickel
Vale SA
Overall
79
78
77
48
70
Scores
Env
Soc
84
73
82
70
77
73
36
55
83
61
Gov
80
85
82
53
66

ROE *
Peers
Anglo American Platinum Ltd
13
Lonmin
4
Impala Platinum Holdings
8
Norilsk Nickel
25
Vale SA
20
P/E ** P/E (2015e)

8
11
n.a.
13
88
n.a.
n.a.
6
n.a.
12
Source: Bloomberg
Analysts
Kate Marshall
kate.marshall@sustainalytics.com
Doug Morrow
The Marikana Commission of Inquiry, set up to investigate the Marikana miners

strike of August 2012 and the tragic chain of events that led to the shooting death of
34 Lonmin employees, will deliver its final report in March 2015. We would rather not
speculate on where or how the Commission will assign blame for the incident, but it
seems unlikely that Lonmin will emerge unscathed. While we think the risk of
industrial action by Lonmins majority union, the Association of Mineworkers and
Construction Union (AMCU), is unlikely, the public release of the Commissions final
report could have material business impacts for Lonmin and could possibly put the
companys share price under short-term pressure. Lonmins otherwise favourable
ESG performance the company has the third-highest Sustainalytics rating out of a
universe of 78 precious metals firms could be used to deflect possible stakeholder
criticisms in the wake of the Commissions report, although the extent to which this
approach could mitigate reputational damage is unclear.
The Marikana massacre

In August 2012, 3,000 Lonmin employees launched a wildcat strike at Lonmins
Marikana mine over wage concerns. After negotiations stalled, tensions between
striking workers, Lonmin security and the South African Police Service (SAPS) rapidly
escalated. On 16 August, SAPS opened fire on a group of strikers, killing 34 and
injuring 78. Dubbed the Marikana massacre, the incident remains the single most
lethal use of force by South African police since the apartheid era. The South African
government quickly established the Marikana Commission of Inquiry (The
Commission) in September 2012 to investigate the incident and determine police,
worker and company culpability. The Commission subsequently reviewed evidence
from 56 witnesses, including Lonmin executives, South African police and union
47 | P a g e
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officials. Arguments were completed in November 2014, and the Commissions final
report will be delivered in March 2015.
Impact on Lonmin
The extent to which Lonmin was complicit in the Marikana massacre is one of the
major questions before the Commission, but an analysis of the testimony presented
suggests that Lonmin will almost certainly be heavily criticised. There is some
evidence to show collusion between Lonmin and SAPS, as the testimony of numerous
witnesses suggests the company had pre-existing knowledge of SAPSs plan to engage
striking workers with gunfire. The Commission has also heard demands for at least
two past Lonmin board members and six Lonmin executives to be prosecuted as
accomplices to murder.
We foresee potentially long-lasting effects
on Lonmins brand
If the Commissions report criticises Lonmin but stops short of recommending a

criminal investigation of Lonmin directors and executives, we would expect to see
negative and potentially long-lasting impacts on Lonmins brand and social licence to
operate. While some commentators have pointed to the possibility that the
Commissions report will inflame union tensions, we think the risk of industrial action
by Lonmins majority union, the AMCU, is distinctly unlikely. Lonmin and the AMCU
signed a new three-year agreement in June 2014, following a highly damaging fivemonth strike reported to have cost Lonmin employees USD 930m in lost earnings and
Lonmin USD 2bn in lost revenue.
Potential short-term pressure on share price
If, on the other hand, the Commissions report takes a stronger view and points to
collusion between Lonmin and SAPS, we would expect to see short-term pressure on
Lonmins share price as a result of the increased risk of the prosecution of Lonmin
executives in both criminal and civil courts. In this scenario we would also expect
longer-term negative reputational effects and challenges to the companys brand.
While the Commissions findings will not impact the market price of platinum,
probably the single most important driver of the companys share price, the
recommendation of criminal prosecution could also negatively affect Lonmins ability
to recruit top talent, particularly in executive management.
Short-term pressures
Impact
Strongly negative
While Lonmin is likely to be strongly criticised in the Marikana Commissions final

report, all bets are off concerning the criminal prosecution of Lonmin directors and
senior executives. If the Marikana Commission finds Lonmin culpable, we expect to
see a variety of negative business impacts and short-term reactionary pressure on the
companys shares, as we saw when the 2014 platinum strike began. In this case, one
might expect Lonmin to play up its otherwise strong ESG credentials, which include
comparatively advanced health and safety programmes, community strategies and
employee development policies, to deflect challenges to its social licence to operate.
The success of this strategy will depend in part on the severity of the Commissions
findings and recommendations.
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National Commercial Bank (NCB)

Playing the market for Shariah-compliant financial products
Impact
Negative
60
Overall ESG Score

Average Performer

Domicile: Saudi Arabia

Industry: Banks
Ticker: SASE: 1180
ISIN: SA13L050IE10
Employees: 7,331
MCap (USD m): 29,955*
* as of Dec. 31/2014
The opening of Saudi Arabia to foreign investors could be one of the landmark
developments in the global investment landscape in 2015.
NCB represents a unique opportunity for investors to play the rapidly growing
market for Shariah-compliant financial products and services.
NCB is exposed to a variety of ESG-related risks that could ultimately dampen
the companys competitiveness and discourage interest among some investors.
Overview
Peers
CaixaBank, S.A.
Credit Agricole S.A.
National Commercial Bank
China CITIC Bank Corp Ltd
BOC Hong Kong Holdings Ltd
Overall
81
77
60
58
57
Scores
Env
Soc
81
90
84
75
49
73
47
61
58
65
Gov
73
74
57
64
48

ROE *
Peers
CaixaBank, S.A.
n.a.
Credit Agricole S.A.
7
National Commercial Bank
17
China CITIC Bank Corp Ltd
18
BOC Hong Kong Holdings Ltd
14
P/E ** P/E (2015e)

33
15
10
9
n.a.
11
4
5
12
10
Source: Bloomberg
The National Commercial Bank (NCB) is the largest bank by assets in Saudi Arabia. The
company recently went public, with a 25% stake sold in a USD 6bn IPO in November
2014. While shares in NCBs IPO were restricted to Saudi Arabian retail investors, the
company will be available to global asset managers when Saudi Arabia opens its
equity markets to foreigners for the first time in 2015. For investors looking to play
the rapidly growing global market for Shariah-compliant financial products and
services, NCB stands out as a unique investment vehicle. However, NCBs
attractiveness is tempered by the companys exposure to several ESG risks, its modest
ESG policy framework and concerns related to NCBs governance structure.
NCB and the opening of the Saudi Arabian market

Formed in 1953, NCB transitioned from a general partnership to a joint stock
company in 1997, with the Saudi Arabian government becoming a majority
shareholder in 1999. Following in the footsteps of Saudi Arabias 11 other banks, NCB
elected to go public in November 2014. A 25% stake in NCB raised USD 6bn, making
it the largest-ever offering in the Arab markets and the second-largest IPO of the year
globally, trailing only Alibaba, which raised USD 25bn.
Analysts
Emily Lambert
Junior Analyst, Research Products
emily.lambert@sustainalytics.com
Doug Morrow
NCB is distinguished from other financial institutions trading in Saudi Arabia by its
strategic focus on Islamic banking. Partly due to criticisms levied against the bank
from religious scholars in the wake of its IPO, NCB announced its intention in
November 2014 to become a fully Islamic bank within the next five years. This
directive essentially translates to a focus on Shariah-compliant financial products and
services. Demand for Shariah-compliant banking, credit and investment products is
rising across the Islamic world as customers move to align their religious beliefs with
their banking practices. According to Ernst & Young, Islamic banking assets in highgrowth markets are expected to grow at a compound annual growth rate of nearly
49 | P a g e
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Actual and Forecasted Growth in Islamic

Finance Assets in Six High-Growth
Countries
1,800
1,600
1,400
USD m
1,200
1,000
800
600
400
200
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Actual
Forecast
Source: Ernst & Young29
20% between 2013 and 2018. While critics point to high conversion costs and forced
divestments NCB recently disclosed that it would need to divest about USD 38bn in
assets in order to become Shariah-compliant the fundamentals of the market for
Shariah-compliant financial products are attractive.
While shares in NCBs IPO were restricted to Saudi Arabian retail investors, the
company will soon be available to foreign investors as Saudi Arabia moves to liberalise
its capital markets in 2015. With an initial focus on qualified foreign financial
institutions, foreign asset managers are expected to be able to buy securities trading
on Saudi Arabias only stock exchange, the Tadawul Exchange, in the first half of 2015.
Non-resident investors can currently access these securities through equity swaps,
mutual funds and exchange traded funds, but direct ownership is prohibited.
While we do not wish to overemphasise the implications of this development, it is
clear that the opening of Saudi Arabia could potentially be one of the landmark
developments in the global investment landscape in 2015. According to Reuters, the
Tadawul Exchange has a market capitalisation of approximately USD 430bn (about
the same as all other Persian Gulf markets combined) and includes about 160 listed
companies, ranging from blue chips to speciality chemical firms.
ESG Risks Majority government ownership, business

ethics and project finance
Ownership of NCB
Pre-IPO
69%
Post-IPO
10%
44%
0%
20%
10%
40%
10%
60%
21%
36%
80%
100%
Gov't - Public Investment Fund

Gov't - General Organisation for Social Insurance
While NCB could attract significant interest from foreign investors once Saudi Arabias
financial markets are opened in early 2015, an analysis of the companys risk profile
from an ESG standpoint gives rise to areas of legitimate concern. While some of these
risks are shared by financial sector peers in the Saudi Arabian market, investors
should understand that these risks could put pressure on NCBs competitiveness
going forward.
Gov't - Public Pension Agency

Public
Source: NCB Prospectus30
NCB has been accused of funnelling money

to al-Qaeda
The first concern relates to governance. Even after its IPO, NCB is still nearly 65%
owned by various organs of the Saudi Arabian government, including a public
investment fund, a public pension agency and the General Organisation for Social
Insurance. Moreover, of NCBs nine directors, two directors and the chair of the board
represent governmental organisations. The high involvement of the Saudi
government in the companys ownership and oversight may undermine the
companys ability to act independently. NCB is at risk of being too strongly tied to
governmental aims, and may have to balance priorities of appeasing such aims with
its financial performance and strategic development. Additionally, the concerns of
minority shareholders may not be heard as the government ultimately controls the
outcome of any shareholder votes.
Second, NCB has been accused of funnelling money through Islamic charities to alQaeda and of previously holding a controlling stake in the Bank of Credit and
Commerce International, known for money laundering and fraudulent activities. In
June 2014, the U.S. Supreme Court dismissed a case brought by the families and
estates of victims of the September 11 attacks against NCB, as the case lacked direct
50 | P a g e
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10 for 2015
evidentiary support and did not demonstrate a firm financial link to Osama bin Laden.
Ongoing business ethics risks related to corruption, money laundering and terrorist
financing are a product of the companys geographic operating region. Although NCB
has a money laundering policy, it does not report any outcomes of its practices or
details of policy implementation. This gap may leave the company vulnerable to
terrorism financing, an increasingly material risk in light of recent acts of terrorism.
NCB has not signed the Equator Principles
NCB also faces risks in its lending activities. The bank has not signed on to the Equator
Principles, an accord to encourage companies to integrate ESG-related factors in
project finance decisions, despite reporting that it considers such factors in its project
finance practices. The companys exposure to ESG issues is high due to loan provisions
for major non-government infrastructure and industrial projects, such as
independent power projects, a petrochemical factory and a chemical facility. Without
a firm commitment to assimilate ESG issues in its lending process, or additional
disclosure regarding its consideration of these risks, the company remains highly
exposed to ESG risks through the financing of high impact and environmentally
intensive projects.
ESG concerns weigh on growth prospects

Impact
Negative
NCB is likely to pique the interest of foreign investors looking for exposure to Saudi
Arabia and the regional market for Shariah-compliant financial products and services.
The company is poised for growth, as it recently announced its conversion to become
a fully Islamic bank, and is well established in Turkey and Saudi Arabia, two countries
with strong projections in the demand for Shariah-compliant offerings. The
attractiveness of NCB as an investment opportunity, however, is moderated by NCBs
significant ESG risk exposure and its generally underdeveloped ESG policy framework.
The companys close ties to the Saudi government, coupled with its alleged
involvement in terrorist financing and risky project finance activities could discourage
the participation of some investors.
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Telenor
Advanced ESG performer poised to succeed in risky environment
Impact
Positive
73
Domicile: Norway
Industry: Diversified Telecommunication
Services
Ticker: OB: TEL
ISIN: NO0010063308
Employees: 33,399
MCap (USD m): 34,431*
* as of Dec. 31/2014
Overall ESG Score

Outperformer

Telenor started the rollout of its mobile phone service in Myanmar in September
2014, with the company anticipating EBITDA breakeven by early 2017.
Telenors advanced ESG policies and practices may provide a hedge against
country and operational risks in Myanmar.
The lessons learned by Telenor from its Myanmar project could potentially be
leveraged in future expansion to other emerging markets.
Overview
Telenor vs. Stoxx 600 Europe, 20092014
350
Normalized price
300
250
200
150
Telenor
Stoxx 600 Europe
100
50
Source: Bloomberg

Peers
Deutsche Telekom AG
Orange
Telenor ASA
Sprint Corp
Teliasonera AB
Overall
81
75
73
71
70
Scores
Env
Soc
84
79
84
68
79
66
89
60
75
62
Gov
80
78
78
71
79

Peers
Deutsche Telekom AG
Orange
Telenor ASA
Sprint Corp
Teliasonera AB
ROE *
8
12
14
n.a.
17
P/E ** P/E (2015e)

24
21
21
15
22
16
n.a.
n.a.
n.a.
13
Source: Bloomberg
Analysts
Kyuwon Kim
kyuwon.kim@sustainalytics.com
Doug Morrow
Following the end of military rule in 2011, Myanmar began a process of political, social
and economic reform and started to open its borders to foreign investment. As part
of this initiative, Myanmar invited international telecom companies in January 2013
to bid on a contract to develop the countrys mobile phone infrastructure. With one
of the lowest mobile penetration rates in the world (11%) and less than 1% of its
population connected to the Internet, Myanmars telecom sector offers substantial
growth potential. However, the risks of doing business in Myanmar are myriad and
stem from the countrys history of military rule, relatively immature regimes
regarding data privacy rights and the threat of corruption. Telenor, which launched
its mobile service in Myanmar in September 2014, is highly exposed to these risk
categories.
While the potential for these risks to adversely affect Telenors financial performance
should not be ignored by investors, our analysis suggests the companys
comprehensive ESG management systems should mitigate the bulk of its risk
exposure. Perhaps more importantly from a revenue growth standpoint, the lessons
learned by Telenor from its challenging Myanmar operation could potentially be
leveraged in other emerging markets. While many Western companies continue to
adopt a wait-and-see attitude regarding Myanmar, Telenors experience in the
country, while not without challenges, is likely to pay dividends for patient investors.
Opening of Myanmar Awarding mobile phone contracts

As part of its process of market liberalisation, Myanmar invited foreign telecom
companies in January 2013 to participate in the auction for two telecommunication
licences. Telenor and Qatars Ooredoo were selected as winning candidates from a
pool of 91 interested companies. Telenor launched its mobile service in Myanmar in
September 2014 and targets EBITDA breakeven by January 2017. The opportunity
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stems from Myanmars mobile penetration rate of 11% and Internet penetration rate
of 1%, among the lowest in the world. Myanmar has a population of 53 million people
and, according to the Asian Development Bank, its economy is expected to grow by
7.8% in 2015. Telenor aims to offer a coverage area that spans 90% of the country
and to establish 100,000 retail stores by 2019.
Internet user penetration
Internet user penetration in selected

countries, 2012
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Source: ITU31
Mobile phones per 100 inhabitants
Mobile phone penetration in selected

countries, 2012
200
180
160
140
120
100
80
60
40
20
0
Source: ITU32
ESG risks in Myanmar Corruption and data privacy

While the growth potential of Myanmars telecom sector is obvious, the ESG risks that
Telenor is likely to face in executing this opportunity are considerable. The first set of
risks stems from the countrys 50-year history of military rule. While Myanmar began
implementing democratic reforms in 2011, corruption and bribery are endemic, and
the risk of government interference is high. In addition to the business case, Telenor
is balancing these risk factors against the opportunity to improve Myanmars
connectivity and narrow the countrys digital divide, which has been shown to
support democratic development.
From a telecom standpoint, Myanmar has immature regimes regarding data privacy
rights. The government has yet to make its expectations clear in terms of the extent
of compliance it expects from telecom companies regarding requests for network
shutdown or for data to support law enforcements surveillance activities. If Telenor
ultimately adheres to government requests for network shutdowns, the company
may potentially be seen as complicit in violating civilians right to free expression.
Government-ordered network shutdowns may also affect Telenors revenues, as the
company would presumably be unable to offer services during these periods.
Myanmars history of military rule combined with the immature privacy
infrastructure heightens the possibility that the government may abuse its powers to
conduct mass surveillance on its citizens. If Telenor plays a role in aiding the
governments mass surveillance activities, the company could face eroding levels of
customer trust and the potential loss of subscribers. The government is expected to
finalise its telecom laws in 2015, and we should have a clearer idea at that point about
Telenors exposure to these risks.
Telenors extensive ESG strategy Hedging risk

We are cautiously optimistic about Telenors
ability to mitigate country risk in Myanmar
Myanmar is undoubtedly a complex and challenging business environment, and the

business risks facing newcomers such as Telenor are substantial. However, we are
cautiously optimistic about Telenors prospects for managing these risks. Prior to
entering Myanmar, Telenor conducted a Human Rights Impact Assessment and
publicly engaged with stakeholders, including NGOs such as Human Rights Watch.
Through these engagement initiatives, Telenor has clearly communicated to investors
that it is strongly committed to engaging in ongoing dialogue about human rights to
support its agenda of mitigating reputational and operational risks.
The company is also a founding member of the Telecommunications Industry
Dialogue, a multi-stakeholder initiative charged with protecting users rights to
privacy and free expression. Telecom operators are obliged to follow the terms of
53 | P a g e
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10 for 2015
their licences, which typically limit recourse to protect user privacy or freedom of
expression in the face of government data and network requests. Telenor also has a
strong human rights policy that explicitly commits the company to respecting users
privacy rights. This policy applies to all of the companys business segments, including
its Myanmar operations.
Telenor learning valuable on-the-ground
lessons that could be exported
While many Western companies, particularly U.S. firms, continue to sit on the
sidelines, pointing to sporadic episodes of violence as evidence of the countrys still
nascent transition to democracy, Telenor is learning valuable on-the-ground lessons
that could potentially be exploited in other markets. The global telecom industry is
increasingly looking to emerging markets with low mobile penetration rates as future
growth opportunities. These markets, including Sub-Saharan African countries that
have similar political and social challenges to Myanmar, could attract considerable
interest going forward, and Telenor may be positioned ahead of its competitors.
A good year ahead

Impact
Positive
The finalisation of the countrys telecom laws in 2015 will clarify the Myanmar
governments expectation of Telenor as it relates to network shutdowns or data
requests to support surveillance activities. We gauge Telenors strategic awareness
of these risks to be high, and we expect the company will have a successful year of
operations in Myanmar. We in turn expect positive impacts on the companys longterm financial performance and increased opportunity in other emerging markets,
particularly in Sub-Saharan Africa.
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Petroleos Mexicanos (Pemex)

Competing in Mexicos freshly liberalised energy sector
Impact
Positive
56
Overall ESG Score

Average Performer

Health and Safety
Domicile: Mexico
Industry: Oil, Gas & Consumable Fuels
Ticker: N/A
ISIN: SUST569474F2
Employees: 155,000
MCap (USD m): N/A
Foreign oil and gas companies will soon be able to tap Mexicos long-isolated
energy sector, with the first round of bids expected by June 2015.
Pemex will need to quickly attract capital and rapidly modernise in order to
compete against, and partner with, foreign firms.
An ESG catch-up process will also be required to bring Pemex in line with global
industry norms, with priority issues found in Health and Safety and Corruption.
Overview
Peers
Pemex
Statoil
Rosneft
Royal Dutch Shell
Exxon Mobil
Overall
56
82
53
71
65
Scores
Env
Soc
57
43
72
83
51
51
55
75
51
73
Gov
76
93
61
85
69

Peers
Statoil
Royal Dutch Shell
Exxon Mobil
Pemex
Rosneft
ROE *
19
13
22
n.a.
17
P/E ** P/E (2015e)

n.a.
15
13
13
11
18
n.a.
n.a.
n.a.
5
The Mexican state has used Pemex since 1938 to exercise a state monopoly in the
production of hydrocarbons from Mexican soil. As a state-owned company, Pemex
has had to give away large parts of its revenue stream to the Mexican government.
This situation is set to change as Mexico moves to reform its energy market. Beginning
in 2015, foreign investors will be able to bid on oil and gas exploration and production
assets, effectively ending Pemexs 77-year monopoly. At the same time, controls on
Pemex have been relaxed, with the company enjoying more autonomy over its
revenues. As Pemex looks to stay relevant and participate with Western integrated
oil majors in joint ventures, we expect that a rapid catch-up process will be
necessary in terms of both technological modernisation and ESG management.
Source: Bloomberg
Reform in Mexicos energy sector Here comes the foreign

investment?
In December 2013, in an unprecedented move, the Mexican government enacted a
constitutional reform to allow foreign companies to enter the Mexican energy
market. The rationale for the reform was to promote technology transfer and boost
the countrys falling oil production, which declined from 3.8 million barrels per day in
2004 to 2.9 million barrels a day in 2014.
Analysts
Alberto Serna Martin
Senior Analyst, Research Products
alberto.serna@sustainalytics.com
Doug Morrow
In an interrelated development, the reform also included a new fiscal regime for
Pemex, which had been unable to make key technological investments and keep pace
with industry trends due to heavy revenue and tax controls. As one illustration, in
2012, Pemex paid USD 69.4bn in taxes on USD 69.6bn in pre-tax profits, for a tax rate
of 99.7%. This compares to a tax rate of 69% for PDVSA, Venezuelas state-owned oil
company, 25% for Brazils Petrobras and 31% for Royal Dutch Shell. Under the new
regime, Pemex will still have to pay an adjustable dividend to the government, but
profit sharing taxes are lowered (from 72% to 65% of the spot oil price), and other
55 | P a g e
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cost deductions are capped. Moreover, Pemex will have autonomy to allocate profits
without the authorisation of the Ministry of Finance.
Foreign oil companies to complete first
round of bidding by June 2015
These measures will improve Pemexs ability to compete against, and partner with,
foreign oil companies, which are expected to complete the first round of bidding on
contracts offered by the Mexican government in June 2015. Early indications are that
ExxonMobil, Shell, BP, Repsol and Pacific Rubiales will be submitting proposals.
Pemex CEO Emilio Lozoya recently argued that USD 60bn in annual investment will
be needed to realise Mexicos oil and gas potential, which is more than twice the
investment (USD 24bn) made by Pemex in 2012. Increased participation by foreign oil
companies which Mexico is clearly expecting will likely instigate a catch-up process
in terms of modernisation and investment at Pemex.
The slump in oil prices may affect foreign

investment
Of course, a continued slump in oil prices may threaten this situation. As we observe
in our Macro View (p. 9), a sustainable drop in oil prices below USD 50 could mean
that investments in assets linked to reserves with high production costs become
stranded (if capex made already) or become unattractive going forward. While much
of Mexicos current production is conventional some estimates put average
production costs at Mexicos existing fields as low as USD 10 per barrel future
production consists of onshore shale reserves and high-cost deepwater projects in
the Gulf of Mexico. Massive technological investment will be required to exploit these
assets. And even among Mexicos existing fields, production is slowing and costs are
climbing, and enhanced recovery techniques are increasingly required.
In summary, the recent drop in oil prices may have modest effects on Pemexs oil
output over the short run, but it could discourage future foreign investment (one of
the core objectives of Mexicos energy sector reform) and put pressure on mid- and
long-term Pemex revenues. The bond market has certainly reacted to this concern,
with the yield on ten-year Pemex bonds climbing to 4.8% in December 2014, up from
3.8% the month before, as investors demand extra yield to hold Pemex debt.
Implications of foreign investment An ESG perspective

Interaction with foreign oil companies could
catalyse ESG improvements at Pemex
The forthcoming (if potentially delayed) entry of foreign oil companies into Mexicos
energy sector could instigate a wave of modernisation at Pemex. But among the
benefits we see from this interaction are the possibility of substantive improvements
in Pemexs ESG strategy and performance.
Strategic awareness about the long-term financial benefits of advanced ESG
management is high in the Oil and Gas industry, and this contrasts sharply with
Pemexs generally lacklustre (although far from terrible) ESG performance. From a
competitive standpoint, we expect Pemex will need to shore up its performance in
order to attract foreign companies in possible joint ventures. Based on our
assessment of Pemexs ESG profile, we expect the companys initial efforts will
concentrate on two key areas.
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Health and Safety Interaction leads to benefits?

Pemex has long struggled with health and
safety issues
Pemex has a poor track record of injuries and fatalities among its employees and
contractors as result of explosions in the mid- and downstream segments. A total of
65 people (including employees, contractors and residents of adjacent communities)
were killed in three separate incidents between 2010 and 2014, a level well above
industry norms. The company remains under investigation by the Mexican Attorney
General Office for these infractions. While part of the challenge is Mexicos ageing
refinery and pipeline network, the lack of strong corporate policies and programmes
on health and safety and Pemexs generally flawed safety culture are problematic.
It is difficult to overstate the emphasis being placed right now on employee health
and safety by the worlds integrated majors. Especially since the Deepwater Horizon
spill of 2010, oil companies have been targeting health and safety performance as a
top-level operational priority. It is of course unclear how heavily foreign oil companies
will weight Pemexs poor health and safety track record in their joint venture decision
making, but these partnerships could potentially transfer valuable health and safety
knowledge that Pemex could ultimately apply at its troubled mid- and downstream
segments.
Pemex is taking some steps to improve its

health and safety performance
Recent evidence confirms that Pemex is moving in this direction. Management

recently implemented a pipeline integrity management plan and revised its
contractor management practices. Additionally, Pemex has increased its interaction
with Federal authorities and local communities to start addressing illegal tapping,
which has caused numerous pipeline explosions at Pemex in the past. Key questions
remain about how these plans and initiatives will be monitored and financed, but
ultimately we think that Pemexs increased interaction with foreign oil companies will
be a boon for its long-term health and safety performance.
Corruption Lingering issues, but improvements expected

For years, Sustainalytics research has shown that Pemex has suffered reputational
and financial consequences from corruption, particularly in the procurement and
marketing segments of its business. In 2014, an investigation into Pemexs
procurement practices by Mexicos Ministry of Public Administration found
irregularities in nine contracts with a combined value of USD 410m. Various company
officers have also been accused of fraud and embezzlement. Estimates indicate that
one of every three Mexico-related foreign bribery enforcement actions by the U.S.
authorities involves improper payments to Pemex officials.
It remains to be seen how Pemexs legacy
will affect its competitiveness in Mexicos
liberalised energy market
While many of the corruption allegations before Pemex have not been proved in
court, the companys overall exposure to the issue is high. Pemex may have a policy
on bribery and corruption, but it is obvious that it is not closely followed or strictly
enforced. The extent to which the companys 77-year legacy as a government-owned
monopoly and the rash of corruption challenges may affect its competitiveness going
forward is difficult to predict, but we expect it could cause short-term friction with
potential foreign partners. Having said that, we expect that Pemexs performance in
this area will improve over the long run, in much the same way that we expect to see
57 | P a g e
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long-term gains in the companys health and safety performance. Mexicos energy
sector reform brings 50 anti-corruption-related changes, strengthens Pemexs
corporate governance and gives the company budgetary independence to hire talent.
A new board structure with seven independent directors (up from the current five)
could also foster an improvement in internal policies and controls in the area of
combatting bribery and corruption.
Will Pemex remake itself?

Impact
Positive
The extent to which foreign investment in Mexicos freshly liberalised energy sector
may be delayed or put off entirely from the recent decline in oil prices remains to be
seen. We will be in a better position to assess this trend in June 2015, when bids for
the first round of contracts are expected to be completed. Eventual interaction with
the worlds oil majors, particularly in a joint venture structure, is likely to transfer
important ESG benefits to Pemex, which would, in our view, improve the companys
long-term competitiveness and financial performance. We expect initial upgrades in
corporate health and safety and corruption issues. These developments could serve
as a precursor to a more substantive ESG overhaul, which would likely be necessary
before Pemex could follow in the footsteps of former state-owned oil companies such
as Ecopetrol and Statoil that ultimately went public.
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The Coca-Cola Company (Coke)

Product diversification brings new ESG risks
Impact
Negative
73
Overall ESG Score

Outperformer

Water Use

Industry: Beverages
Ticker: NYSE:KO
ISIN: US1912161007
Employees: 130,600
MCap (USD m): 186,286*
* as of Dec. 31/2014
The companys recent expansion spree is primarily an attempt to diversify

profits in the face of growing regulatory risk over cola and high-sugar drinks.
Cokes minority stake in Monster Beverage Corporation exposes the company to
reputational risks from growing health concerns over energy drinks.
Cokes decision to diversify into the high-end milk product niche puts a new set
of ESG issues onto the companys radar, including animal husbandry risks.
Overview
Coca-Cola vs. S&P 500, 20092014
300
Normalized price
250
200
150
Coca Cola
S&P500
100
50
Source: Bloomberg

Peers
PepsiCo, Inc.
Nestle S.A.
Coca-Cola
Anheuser-Busch InBev
Philip Morris Int'l, Inc.
Overall
77
75
73
70
64
Scores
Env
Soc
76
76
79
69
65
79
71
70
68
60
Gov
82
78
74
68
65

Peers
PepsiCo, Inc.
Nestle S.A.
Coca-Cola
Anheuser-Busch InBev
Philip Morris Int'l, Inc.
ROE *
33
17
29
17
n.a.
P/E ** P/E (2015e)

21
20
18
19
22
21
23
21
21
17
Source: Bloomberg
Analysts
Larysa Metanchuk
Associate Analyst, Research Products
larysa.metanchuk@sustainalytics.com
Doug Morrow
Coke is no stranger to product diversification. The company offers over 500 brands
globally beyond its namesake cola beverage, including flavoured tea (Nestea), sports
beverages (Powerade), fruit drinks (Fruitopia), orange juice (Minute Maid) and water
(Dasani). However, Cokes recent push into the energy drinks segment and, beginning
in 2015, the high-end milk market exposes the company to an entirely new set of ESG
issues and business drivers. Over time, this exposure could lead to increased
reputational risks and litigation costs. While Coke is a historically strong ESG
performer, we question the extent to which management is aware of these risks and
managements ability to mitigate the companys downside exposure.
The path to diversification Moving beyond cola

Coke long ago began the process of diversifying its product lineup, adding Fanta and
Sprite to its soft drink line in 1941 and 1961, respectively. Responding to rising
customer interest in healthy beverages, Coke entered the non-carbonated drink
market in the 1990s, launching Powerade and Fruitopia. Due to growing societal
concern over obesity and the emergence of policies discouraging the consumption of
sugary beverages, Coke has been further pushed into unconventional brands and
markets in recent years. Mexicos soda tax, which took effect in January 2014,
increased the cost of sugary beverages in the country by one Mexican peso (eight U.S.
cents) per litre. The tax led to a 6% decline in Cokes revenues in Mexico for the first
half of 2014 compared to the same period in 2013. In a similar move, municipal
authorities in Berkeley, California passed the first soda tax in U.S. history in November
2014. The measure will add a one cent per ounce tax on sugar-sweetened beverages
and flavoured drinks.
59 | P a g e
January 2015
Coke would be highly exposed to concerted

policy action on this front
10 for 2015
It is too early to say if these policies are a harbinger of things to come, but Coke, with
approximately 70% of its global sales coming from sparkling beverages, would be
highly exposed to concerted policy action on this front. It is against this backdrop that
Cokes recent moves into the energy drink and milk segments should be viewed.
Indeed, with the company reporting a 2% decline in consolidated year-to-date
revenue in its most recent communication with shareholders (10-Q for Q3 2014), the
company will increasingly rely on these new products to meet its company-wide goal
of doubling company revenue by 2020. While the rationale for Cokes latest round of
diversification makes sense from a fundamentals standpoint, our analysis of the
companys strategy reveals a series of ESG risk exposures that merit attention.
Monster Beverage Health concerns over energy drinks

Monster Beverage Corporation is the
lowest-ranked company in the Food
Products industry
In August 2014, Coke acquired a 17% stake in Monster Beverage Corporation for USD
2.15bn. The deal significantly expanded Cokes presence in the energy drinks niche,
which the company had originally entered in 2004 through its Fuze Beverage
subsidiary. Energy drinks typically contain large amounts of caffeine or taurine and
are marketed as being able to boost customer energy and alertness. While Cokes
investment in Monster Beverage Corporation solidifies the companys interest in the
energy drinks market, it also exposes the company to reputational risks from growing
health concerns about energy drink products. In 2012 the U.S. Food and Drug
Administration (FDA) began investigating five deaths possibly linked to Monster
Energy, the flagship product of Monster Beverage Corporation. While the FDA
ultimately backed down from regulation, instead issuing non-binding guidance
documents in January 2014 following pressure from the U.S. Congress, the risk of
future policy action cannot be ruled out. At least one country, Lithuania, has taken
concrete steps to prohibit the sale of energy drinks to minors, for example.
Coke has not disclosed a strategy to manage

risks around energy drinks
It seems unfathomable that management could be unaware of the reputational or

regulatory risks surrounding energy drinks, but Coke did not disclose any particular
strategy or programme to mitigate these risks in its most recent communication with
shareholders (10-Q for Q3 2014) or, even more surprisingly, in its latest (2013)
Sustainability Report. While this may be a function of Cokes minority stake in
Monster Beverage Corporation, Cokes 17% interest is sufficiently strong to transfer
reputational risk, although one imagines Coke itself would only be indirectly affected
by a sudden regulatory crackdown on energy drinks.
Fairlife Coke enters the premium milk market

Through a joint venture formed with dairy co-op Select Milk Producers in 2012, Coke
launched a line of premium milk products across the U.S. in December 2014. Called
Fairlife, the milk products are lactose free and reportedly offer 50% more protein
and 30% more calcium than standard milk, with half the sugar. Early indications are
that Fairlife products will retail for 65 cents more per quart than conventional milk.
60 | P a g e
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10 for 2015
U.S. milk and cream consumption

270
260
250
240
230
220
210
200
190
180
170
1975
1979
1983
1987
1991
1995
1999
2003
2007 2010 2013
Pounds per capita
Source: U.S. Department of Agriculture 33
At a November 2014 press conference, Coke executives said the company expects
that Fairlife will rain money, pointing to the fragmented nature of the U.S. milk
industry and the absence of brand name recognition. Coke may deliver on this
promise, but trends in U.S. dairy consumption since the 1970s are far from
favourable. Per capita consumption of milk and cream in the U.S. dropped from 261
pounds in 1975 to 189 pounds in 2013. The weight of Cokes marketing machinery
and sterling brand may be successful in arresting this trend, but we see other reasons
to be concerned about Cokes latest diversification effort. Cokes investment in
Fairlife exposes the company to a host of new ESG issues with which the company
has little to no experience. These include animal welfare issues, such as growth
hormones and access to pasture, and the environmental impacts of animal husbandry
(including runoff to groundwater and CO2 emissions). To Cokes credit, the Fairlife
website offers sections on animal care and traceability, but the disclosures lack depth
and are, in any case, not part of Cokes reporting structure. We have doubts that
Fairlifes limited ESG systems will be able to manage attendant controversies and risks
once the product hits scale.
ESG exposures add up

Impact
Negative
Overall, we take a negative view of Coke in the context of the ESG risks that
accompany its recent investments in the energy drinks and premium milk markets.
The impact that this risk exposure could potentially have on Cokes financial
performance is of course difficult to estimate, but we do not believe the exposure is
trivial. An analysis of the companys latest financial and sustainability disclosures
demonstrates generally poor strategic awareness around the growing health
concerns of energy drinks, and the multitude of ESG challenges embedded in
commercial dairy farming. Public attention towards animal welfare has never been
higher, and the spotlight that will soon fall on Coke will illuminate the companys lack
of policies and oversight mechanisms in this area. Overall, we have doubts that the
companys recent expansion spree is a strategic decision to harness the global trend
towards wellness and health. More pragmatically, we see it as an attempt to diversify
profits in the face of growing challenges to the companys mainstay cola business.
61 | P a g e
January 2015
10 for 2015
Netflix
Questionable board practices at pivotal moment in companys evolution
Impact
Negative
43
Overall ESG Score

Industry Laggard

Basic Labour Standards and
Privacy

Industry: Internet & Catalog Retail
Ticker: NasdaqGS:NFLX
ISIN: US64110L1061
Employees: 2,000
MCap (USD m): 21,013*
* as of Dec. 31/2014
Takeover rumours have chased the company, and stock price volatility provides
ongoing opportunities for potential acquirers.
Substantial takeover defences remain in place, disempowering shareholders in
the face of a possible hostile offer.
Investors have repeatedly opposed the companys takeover defences and will
likely wish to hold directors accountable for ignoring shareholders.
Overview
Netflix vs. Nasdaq, 20092014
1450
Normalized price
1250
1050
850
Netflix
Nasdaq
650
450
250
50
Source: Bloomberg

Peers
Target Corp
Macy's Inc
Fast Retailing Co Ltd
Rakuten
Netflix
Overall
66
65
61
45
43
Scores
Env
Soc
60
66
53
74
54
72
39
46
37
39
Gov
74
65
55
51
57

Peers
Target Corp
Macy's Inc
Fast Retailing Co Ltd
Rakuten
Netflix
ROE *
17
20
20
15
34
P/E ** P/E (2015e)

26
17
15
13
40
34
43
28
90
59
Source: Bloomberg
Analyst
Gary Hewitt
Director, Governance Research
gary.hewitt@sustainalytics.com
Netflix has largely redefined itself in the past half-decade, from a technology company
that mailed DVDs, to a full-fledged Internet television network that operates an
industry-leading media streaming platform, distributing both licensed and original
content to more than 50 million subscribers worldwide. As such it has pivoted from a
technology company with a web platform and a major capability in DVD warehouse
logistics, to a media company that competes not only with other streaming providers
(e.g. Google/YouTube, Apple, Amazon) but also with traditional media companies as
content producers (e.g. 21st Century Fox, Disney), media redistributors (e.g. Starz)
and, of course, the very telecommunications providers that are Netflixs conduit to
customers homes (e.g. Comcast).
This competitive landscape itself is undergoing significant change. For example, the
merger of Comcast/NBC Universal/Time Warner brought together a cable provider,
media distributor and cable company, while Amazon has echoed Netflixs move into
both content creation and media streaming. Netflixs business position is buffeted on
all sides by these changes. The company relies on media partners to license the bulk
of its content but simultaneously competes with these companies as a content
producer itself. Netflixs content travels on fibre optic cables owned in many cases by
its competitors, which has yielded fierce public disputes highlighting the practical
meaning of net neutrality.
Netflix would be a tempting takeover target regardless of these shifts. It has a strong
brand, solid strategy and generally strong execution over time. Each of the usual
technology giant suspects (Apple, Amazon, Google, Facebook) have been rumoured
acquirers, but its pivot into the media space has expanded the range of possible
acquirers to cable companies (AT&T, Verizon, Comcast) and media giants (Fox,
Viacom, Disney). Its valuation has been volatile, based on shifting investor enthusiasm
62 | P a g e
January 2015
10 for 2015
regarding subscriber growth rates, providing regular buying opportunities for

potential acquirers.
Corporate governance challenges

Ill-fated 2011 plan to spin off DVD business
and price increases cost customers and
halved stock price
The companys strategic direction towards streaming culminated in 2011 with an illfated decision to raise prices (to reflect increasing content costs) and spin off the DVDmailing business into a separate entity, Quixster. Customers and the markets reacted
poorly, to say the least, with a (temporary) loss of subscribers and a 50% stock price
decline. To its credit, Netflix quickly admitted its misstep and retracted the plan.
The depressed stock price provided a short-term opportunity for Carl Icahns
investment vehicles to accumulate a substantial stake in Netflix, which he intended
to use to press for a sale of the company. Netflix countered with a short-term poison
pill, further supported by the companys substantial takeover defences, including a
classified board, supermajority voting provisions, the inability to remove directors
without cause and the ability of the board to unilaterally amend bylaws and expand
the board. While Icahn predictably blasted the pill as a corporate governance
travesty, it was likely the right thing to do at the time and gave the board space during
a period where the stock was depressed. Icahn subsequently concluded that the
company should not be sold, and later liquidated his position (at considerable profit).
The pill has since expired though the board can reinstitute it quickly if desired.
The Quixster fiasco and precipitous 2011 stock price decline have yielded significant
and ongoing discontent among shareholders regarding Netflixs corporate
governance. Shareholders have, not surprisingly, focused in large part on takeover
defences. Majority-approved shareholder proposals since 2012 include:
Netflix has not responded to a variety of

majority-approved shareholder proposals
Reed Hastings continues to serve as both

CEO and Chairman
repealing the classified board, approved by an overwhelming (over 75%) majority

in each of the 2012, 2013 and 2014 annual meetings;
establishing the right of shareholders to call a special meeting, approved by a
narrow (53%) majority in 2012;
providing for a majority voting standard for directors, approved by overwhelming
majorities (over 80%) in 2013 and 2014;
removing supermajority vote requirements, approved by supermajorities (over
75%) in both 2011 and 2013; and
providing for shareholder approval of poison pills, approved by an 80% majority
in 2014.
Proposals to separate the CEO and Chairman positions had mixed results, passing
with a comfortable 73% majority at the 2013 annual meeting but falling short at 47%
in 2014. Beyond these, in 2013 a confidential voting proposal received 38% support
in 2013, with only a proxy access proposal failing to gain any traction with 4% support.
At no time has Netflix made a meaningful response to these majority-approved
proposals, which in turn has yielded significant and repeated votes against directors
beginning in 2013. All three directors in 2013 were opposed by nearly half (48%) of
votes, with one failing to get majority support. In 2014 both independent nominees
63 | P a g e
January 2015
10 for 2015
received more than 40% opposition, and even CEO Reed Hastings garnered 25%
opposition, an unusual result for a sitting CEO.
A picture of shareholder discontent
Together, these results paint a picture of substantial shareholder discontent with

governance practices and specifically practices connected to takeover defences:
classified boards; supermajority voting standards; and plurality voting for directors.
Every proposal to dismantle these has been overwhelmingly approved, even during a
time when the company was subject to an activist campaign.
The future: Fundamental questions for shareholders

Impact
Negative
While premature, the Quixster spinoff has

largely played out
This history raises two basic questions for shareholders. First, did the board play the
right role as CEO and Chairman Hastings led Netflix to a separation plan so quickly
and roundly rejected by customers and the market? Second, does the companys
reaction to Icahns challenge signify board entrenchment, or does it signify a need for
time to let the companys long-term strategy play out?
The latter question seems more straightforward to answer. The Quixster spinoff may
have been premature, but it has effectively played out regardless: the products have
been split, and DVD mailing now comprises less than 20% of company revenue. Even
Icahn came to agree with the strategy, dropping the call to sell and holding the
company through its 20132014 run-up (largely exiting before the late 2014 decline).
On the other hand, the boards response to shareholder challenges has been to ignore
them and leave investors disempowered. To its credit, the company has clearly
articulated its strategy to investors. But specific concerns notably, three consecutive
80% resolutions to declassify the board have been ignored to date, leaving
shareholders potentially unable to benefit from takeover interest in the firm.
Recent board additions bring retail and

international experience
Board constitution has improved as of late. Two new additions in Leslie Kilgore (2010),
who comes with retail experience, and Ann Mather (2012), with both media and
international experience, reflect Netflixs evolution from a technology company to a
broader consumer media play. It appears unlikely, however, that this board will shift
its corporate governance approach, which will be a complicated affair if a takeover
attempt or activist situation mounts.
If no takeover offer emerges, we expect some annual-meeting fireworks: directors
will face down shareholders angry with three consecutive years of ignoring a
shareholder proposal. Netflix is also likely to receive a proxy access shareholder
proposal as part of NY City Comptroller Scott Stringers 2015 campaign, which may
get more traction after another year of board recalcitrance.
Shareholders will face a difficult choice if a

takeover offer comes to fruition
If a takeover offer does emerge, shareholders face a difficult choice. Investors have
been rewarded (so far, for the most part) for sticking with the boards strategy. The
board has corrected missteps in the past and has diversified to align with the
companys strategic evolution. Yet the board has also removed shareholders ability
to even respond to an offer and has repeatedly waived off accountability.
64 | P a g e
January 2015
10 for 2015
Chartbook
Universe analysed:
Updated:
Source company data:
Source financial data:
Global Sustainalytics coverage

20 January 2015
Capital IQ
Bloomberg
Company Overview
Sustainalytics Rating
Company
Industry
Country
Impact
Total
YOY
Environment
Social
Governance
DuPont
Chemicals
United States
Negative
Intel
Semiconductors &
Semiconductor Equipment
57
2.5%
54
50
72
United States
Positive
86
-0.1%
83
88
87
GSK
Pharmaceuticals
United Kingdom
Positive
72
-2.0%
80
69
69
Lafarge
France
Strongly positive
69
11.9%
75
57
74
Lonmin
Metals & Mining
United Kingdom
Strongly negative
78
-1.6%
82
70
85
NCB
Banks
Saudi Arabia
Negative
60
n.a.
49
73
57
Telenor
Diversified Telecommunication
Norway
Services
Positive
73
-0.4%
79
66
78
Pemex
Oil, Gas & Consumable Fuels
Mexico
Positive
56
32.7%
57
43
76
Coke
Beverages
United States
Negative
73
11.5%
65
79
74
Netflix
Internet & Catalog Retail
United States
Negative
43
-0.5%
37
39
57
Peer group analysis

Financials
100
90
90
80
86
60
60
60
57
50
69
61
57
100
70
78
72
70
73
60
56
58
59
56
60
73
60
61
50
51
43
40
ROE (%)
Rating Score
80
120
30
80
40
60
30
40
20
20
10
20
10
-10
-20
DuPont
Intel
GSK
Max
Lafarge
Lonmin
Min
Company
NCB
Telenor
Pemex
Coke
Netflix
P/E Ratio
Sustainalytics Rating Score
-20
DuPont
Intel
GSK
Lafarge Lonmin
Industry average
Company
ROE (%)
Company
Avg
NCB
Telenor
Industry average
Pemex
Coke
Netflix
P/E ratio
Total Return (%) (-1y)

P/E
Company
Avg
Company
Company
Industry
Company
Avg
Score
E
Company
Industry
DuPont
Chemicals
57
60
54
50
72
Negative
DuPont
Chemicals
21.3
19.4
21.7
-0.6
18.6
23.7
Negative
Intel
S&SE
86
60
83
88
87
Positive
Intel
S&SE
20.3
9.3
49.7
12.1
15.9
18.7
Positive
GSK
Pharmaceuticals
72
57
80
69
69
Positive
GSK
Pharmaceuticals
76.0
31.7
-4.8
15.7
17.0
29.8
Positive
Lafarge
69
61
75
57
74
Strongly positive
Lafarge
3.3
-2.5
10.6
23.3
34.8
65.2
Strongly positive
Lonmin
Metals & Mining
78
58
82
70
85
Strongly negative
Lonmin
Metals & Mining
-10.5
-3.1
-44.3
-0.7
n.a.
298.6
Strongly negative
NCB
Banks
60
56
49
73
57
Negative
NCB
Banks
20.3
9.7
n.a.
-6.7
13.2
19.9
Negative
Telenor
DTS
73
60
79
66
78
Positive
Telenor
DTS
15.7
16.0
22.3
18.0
23.0
38.1
Positive
Pemex
O,G&CF
56
59
57
43
76
Positive
Pemex
O,G&CF
n.a.
n.a.
n.a.
-3.7
n.a.
11.9
Positive
Coke
Beverages
73
61
65
79
74
Negative
Coke
Beverages
23.9
24.2
12.6
10.0
22.0
42.6
Negative
Netflix
I&CR
16.7
14.0
25.0
-0.6
96.3
262.0
Negative
Netflix
I&CR
43
51
37
39
57
Impact
Negative
Impact
Avg
* Semiconductors & Semiconductor Equipment, ** Diversified Telecommunication Services,

*** Oil, Gas & Consumable Fuels, **** Internet & Catalog Retail
65 | P a g e
January 2015
10 for 2015
Appendix
Report Parameters
R EFERENCE U NIVERSE
Global Sustainalytics coverage
U PDATE F INANCIAL & ESG DATA
20 January 2015, company data sourced from Capital IQ, financial data from Bloomberg
P UBLICATION DATE
30 January 2015
Contributions
T HEMATIC R ESEARCH TEAM
Dr. Hendrik Garz (Managing Director), Doug Morrow (Associate Director), Dr. Niamh OSullivan (Associate
Analyst), Thomas Hassl (Analyst), Madere Olivar (Editor)
A SIAN R ESEARCH TEAM
Loic Dujardin (Director), Sun Xi (Senior Analyst), Hardik Sanjay Shah (Manager), Yumi Fujita (Manager)
I NDUSTRY R ESEARCH T EAMS
Deniz Horzum (Analyst), Bowen Gu (Analyst), Andrada Nitoiu (Analyst), Kate Marshall (Analyst), Emily
Lambert (Junior Analyst), Kyuwon Kim (Analyst), Alberto Serna Martin (Senior Analyst), Larysa Metanchuk
(Associate Analyst)
G OVERNANCE R ESEARCH TEAM
Gary Hewitt (Director), Teodora Blidaru (Associate Analyst)
Glossary of Terms
Collection of observation points reflecting the controversial behaviour of a company regarding environment,
social and governance issues. A controversy is measured by the associated controversy indicator, which is
defined at the sub-theme level. Controversies are rated from Category 0 (no controversy) to Category 5
(severe). Each controversy indicator consists of a bundle of event indicators.
I MPACT
The expected directional impact of the event analysed on the company's long-term financial performance.
Categories include: strongly positive; positive; negative; and strongly negative.
OVERALL ESG S CORE
Evaluates a companys overall ESG performance on a scale of 0100, based on generic and sector-specific
ESG indicators that are grouped in three (ESG) themes and four dimensions (Disclosure, Preparedness,
Qualitative Performance and Qualitative Performance), derived by multiplying the raw scores for the
relevant indicators with their respective weights.
R ELATIVE P OSITION
Classification of companies into five distinct performance groups, based on a companys score (overall ESG
score, theme score or dimension score), according to its relative position within the reference universe,
assuming a normal distribution of the scores:
# companies in % of universe
CONTROVERSY
68%
11%
5%
0%
5%
11%
16%
84%
5%
95%
performance score in % of relevant score range

Industry Laggard
Outperformer
Underperformer
Industry Leader
Average Perfomer
100%
Industry Leader:
Outperformer:
Average Performer:
Underperformer:
Industry Laggard:
Within the top 5% of the reference universe;

Within the top 5% to 16% of the reference universe;
Within the mid-range 16% to 84% of the reference universe;
Within the bottom 5% and 16% of the reference universe;
Within the bottom 5% of the reference universe.
66 | P a g e
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10 for 2015
Endnotes
1
Rice, Michael (2014), Analysis of socially responsible investment options, Rice Warner, accessed (21.1.15) at:
http://www.minerals.org.au/file_upload/files/presentations/Rice_Warner_Actuaries_Analysis_of_SRI_options_FINAL1.pdf
European Central Bank (2014), Monetary developments in the euro area, ECB, accessed (21.1.15) at:
https://www.ecb.europa.eu/press/pr/stats/md/html/index.en.html
Ibid.
World Bank (2015), Global Economic Prospects: Having Fiscal Space and Using It, World Bank, accessed at (21.1.15) at:
http://www.worldbank.org/en/publication/global-economic-prospects
International Monetary Fund (2015), World Economic Outlook Update, IMF, accessed (21.1.05) at:
http://www.imf.org/external/pubs/ft/weo/2015/update/01/pdf/0115.pdf
Ibid.
World Bank (2015), op.cit.
Belvedere, M.J. (2015), Roger Altman: Oil Collapse Like $200 B Stimulus, CNBC, accessed (21.1.15) at:
http://www.cnbc.com/id/102333077#
International Institute for Labour Studies (2010), A Review of Global Fiscal Stimulus, IILS, accessed at (21.1.15) at:
http://www.ilo.org/wcmsp5/groups/public/---dgreports/---inst/documents/publication/wcms_194175.pdf
10
11
Shiller, R. (n.d.), Online Data Robert Shiller, Yale School of Economics, accessed (21.1.15) at:
http://www.econ.yale.edu/~shiller/data.htm
12
Moodys (2014), Moodys: US non-financial corporates cash pile moves up on back of economic expansion, Moodys, accessed
(21.1.15) at: https://www.moodys.com/research/Moodys-US-non-financial-corporates-cash-pile-moves-up-on-PR_310846?WT.mc_id=AM~WWFob29fRmluYW5jZTQyX1NCX1JhdGluZyBOZXdzX0FsbF9Fbmc%3D~20141020_PR_310846
13
International Monetary Fund (2014), World Economic Outlook: Recovery Strengthens, Remains Uneven, April 2014, IMF,
accessed (21.1.15) at: http://www.imf.org/external/Pubs/ft/weo/2014/01/pdf/text.pdf
14
A series of defaults in this area would also be a drag for the U.S. junk bond market, on which bonds of companies in the shale
industry have a significant share. Also, regional banks partly have high stakes in the industry
15
Nysveen, P.M. (2015), 2015 Will Be Extraordinarily Tough for Oil Companies, Rystad Energy, accessed (21.1.15) at:
http://www.rystadenergy.com/AboutUs/NewsCenter/PressReleases/2015-will-be-extraordinarily-tough-for-oil-companies
16
International Monetary Fund (2013), Energy Subsidy Reform: Lessons and Implications, IMF, accessed (21.1.15) at:
https://www.imf.org/external/np/pp/eng/2013/012813.pdf
17
18
World Bank Group (2014), Doing Business: Measuring Business Regulations, World Bank Group, accessed (21.1.15) at:
http://www.doingbusiness.org/rankings
67 | P a g e
January 2015
10 for 2015
19
AFP (2015), Long tough road to make India easiest place for business, hindustantimes, accessed at (21.1.15) at:
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29
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33
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68 | P a g e
Thematic Research

Sustainalytics: 10 For 2015 Full Report

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Sustainalytics: 10 For 2015 Full Report

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Thematic Research

Dr. Hendrik Garz, Doug Morrow

Michael Jantzi, Chief Executive Officer

2015 Macro View

2015 The Asian View

National Commercial Bank (NCB)

Petroleos Mexicanos (Pemex)

The Coca-Cola Company (Coke)

Dr. Hendrik Garz

Macro picture short-term stability, but at what cost?

Micro picture finding value through ESG?

We present 10 forward-looking company stories where ESG factors may have

From asset allocation to asset selection

Macro View Sustaining the unsustainable

Pondering the consequences of a lower

Investment implications Some easy wins

The Asian View Modest growth, high vulnerability

ESG perspective A mixed bag

10 for 2015 A platform for ESG analysis

Intel. We present a favourable review of Intels plan to build a conflict-free supply

GlaxoSmithKline. We acknowledge that groundbreaking changes to the companys

Lonmin. We analyse the companys exposure to the findings of the Marikana

Netflix. We paint a picture of substantial shareholder discontent, pointing to corporate

2015 Macro View

The economy, the markets and ESG integration

Scenario-based analysis and discussion

We start by taking a look at the situation in Europe in light of the gigantic QE

Economic and Monetary Union The sick man of the

Indexed (February 2008 = 100)

Size of the Feds balance sheet has

Eurozone M3 money supply (in EUR bn)

Quantitative easing: Concerns from a

Inflating existing bubbles or creating new

No positive stimulus for real investment activity: Why? To be brief, we answer

Shouldnt we be more optimistic after the

ECBs independence is called into

Laying the foundation for the next

It doesnt work in theory, but it works in practice

Greece An end with pain vs. pain without end

Unforeseeable consequences of spillover

Oil price drop A double-edged sword for the global

Bloomberg Crude Oil Historical Price

Crude oil price history (19302014) The pendulum is swinging back

Crude Oil Price (nominal)

Crude Oil Price (real)

Oil price slump supports global growth,

Its all about expectations

Growth forecasts for 2015 Too conservative?

Reduction of the IMFs growth forecast

Mainstream expectations for economic growth in 2015

Global economic outlook* Still too conservative for 2015?

Source: World Bank (2015)

Global stimulus of close to USD 2trn can

Upward growth surprise may still be an

Motivating an upward growth surprise

The mother of all bubbles

Were not talking about irrational

Fixed income markets The mother of all bubbles (18812015)

Inverse (indexed) interst rate

Price Earnings Ratio

Long-term Interest rate (inverse)

Source: Robert J. Shiller (2015) 11

A massive sell-off of bonds could trigger