1 | 26

10 Companies to Watch in 2014Hendrik Garz (Ed.)

January 2014

About Sustainalytics

Copyright ©2014 Sustainalytics. All rights reserved. No part of this publication may be reproduced in any manner without the expressed written consent of Sustainalytics.

Nothing contained in this publication shall be construed as to make a representation or warranty, express or implied, regarding the advisability to invest in or include companies in investable universes and/or portfolios.

The information on which this publication is based on reflects the situation as on the date of its elaboration. Such information has – fully or partially – been derived from third parties and is therefore subject to continuous modification. Sustainalytics observes the greatest possible care in using information and drafting publications but cannot guarantee that the publication is accurate and/or complete and, therefore, assumes no responsibility for errors or omissions.

Sustainalytics will not accept any liability for damage arising from the use of this publication. Sustainalytics will not accept any form of liability for the substance of the publications, notifications or communications drafted by Sustainalytics vis-à-vis any legal entities and/or natural persons who have taken cognisance of such publications, notifications or communications in any way.

EditorDr. Hendrik Garz, Director Thematic Researchhendrik.garz@sustainalytics.com

Sustainalyticswww.sustainalytics.com

For general enquiries:contact@sustainalytics.com

Sustainalytics supports investors around the world with the development and implementation of responsible investment strategies. The firm partners with institutional investors, pension plans, and asset managers that integrate environmental, social and governance information and assessments into their investment decisions.

Headquartered in Amsterdam, Sustainalytics has offices in Boston, Bucharest, Frankfurt, London, Paris, Singapore, Timisoara and Toronto, and representatives in Bogotá, Brussels, Copenhagen, New York City and San Francisco. The firm has 150 staff members, including more than 80 analysts with varied multidisciplinary expertise and thorough understanding of more than 40 industries. In 2012 and 2013, Sustainalytics was voted best independent sustainable and responsible investment research firm in the Thomson Reuters Extel’s IRRI survey.

Table of Contents

About Sustainalytics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Foreword. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Adani Enterprises Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Anadarko Petroleum Corporation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Bendigo and Adelaide Bank Limited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Canadian Natural Resources Limited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Corbion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

G4S plc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Ranbaxy Laboratories Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Smithfield Foods Inc. & Shuanghui International Holding. . . . . . . . . . . . . . . . . . . . . . . . . . 19

Sector Special - Telco Services Sector & Data Privacy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Thales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Glossary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

4 | 26

ForewordMichael Jantzi - CEO Sustainalytics

The consensus seems to be that 2014 should be a good year for investors, as a widespread economic recovery appears to be taking hold. That’s not to suggest that everything is rosy. Commentators have highlighted a variety of risks, including political uncertainty in the Middle East, as well as across some key emerging economies (elections loom in India, Indonesia and Brazil), and in developed regions like the EU (parliamentary elections in May) and the United States, where Congressional elections will be held in November.

But as the Blackrock Investment Institute noted in its December 2013 publication Squeezing Out More Juice: 2014 Investment Outlook, “[o]bvious investment risks are few; hidden ones are plentiful.” And that’s what responsible investment is all about – identifying those “hidden” risks (and opportunities). As an industry we dig deeper to expose issues, look farther onto the horizon to identify brewing storm clouds, and ask more questions to reveal opportunities. Responsible investors embrace challenges as we seek to understand as much as we can about the securities we’re investing in to better assess the risk/reward equation.

Sustainalytics’ job is to provide leading-edge analysis based on a company’s exposure to environmental, social and governance (ESG) issues and the firm’s level of preparedness to manage those risks. More recently, our clients have been asking for additional insights from our analysts, understanding that Sustainalytics’ talented team of 150 people around the globe has much to offer with respect to their outlook on the companies they follow. We’ve been listening and will introduce a variety of innovations throughout 2014.

Ten Companies to Watch in 2014 is but one step in that direction. Sustainalytics’ aim is to focus on those ESG dynamics that are expected to change our assessment and the market’s view of a company going forward. Herein you will find examples of companies facing risks across a range of ESG issues that should be on every investor’s radar screen. Whether it’s an emerging market company facing risks in a developed market (Adani), concerns about an energy firm despite operating in a robust domestic industry (Anadarko), a well-meaning entity exposed to an on-going real estate bubble (Bendigo and Adelaide Bank) or a business that has prospered due to government outsourcing now facing risks due, in part, to changing political winds (G4S), our hope is that the information in these pages provides you with something new and valuable.

These stories also reflect the necessity for companies to refine their mindsets – to integrate ESG parameters into their strategies in ways that drive competitive differentiation and growth. Some companies already have this mindset, as underscored by Corbion and Thales, which highlights the competitive advantage possible by operating ahead of the regulatory curve.

Ultimately, the point of publishing Ten Companies to Watch in 2014 is to help you make more informed, and hopefully, better decisions. I’d be interested to know how close we’ve come to meeting that objective. Although the good stuff is always nice to hear, I especially invite your critiques and suggestions for improvement. I promise that your feedback will inform our efforts throughout the year.

Michael Jantzi CEOSustainalytics

5 | 26

Relative Position

Industry Laggard

Catalysts in 2014Adani Enterprises may be able to start construction of the Carmichael thermal coal mine complex in 2014. The public consultation phase of the Supplementary Environmental Impact Statement is closing on 20 December 2013. Australian public authorities are expected to hand down their final decision in Q1 2014.

BackgroundAdani Enterprises has submitted a proposal to develop the Carmichael thermal coal mine complex in the remote Galilee Coal Basin in central Queensland, Australia. The company also has plans to construct 500 km of rail infrastructure from the mine to the coast, which will cross agricultural land and flood plains, and to develop a highly contentious coal export terminal through the iconic UNESCO World Heritage-listed Great Barrier Reef. While the project faces strong criticism from the Institute for Energy Economics and Financial Analysis (IEEFA) and Greenpeace, the company remains committed to it. With a production rate peaking at 60 million tons per annum, Adani estimates that the operational life of the mine will be approximately 90 years, which will allow the company to extract most of the coal resources.

At 10 billion tons, the Carmichael mine is considered the largest single coal tenement in the world and the vast coal-rich region is an untapped resource. Although India is the world’s third largest exporter of coal, Indian companies are increasingly exploring coal mining opportunities abroad. Despite Adani’s commitment, the Carmichael project has raised concerns about its environmental impact as well as its economic feasibility.

Despite already dealing with a high level of debt (USD 12 billion at the group level), the company plans to fund this project by significantly increasing its financial leverage (by USD 10 billion). The negative outlook for the coal market has already notably increased the company’s risk profile. The pursuit of the Carmichael project further exposes Adani to significant business risks, in particular financial distress.

The potential environmental consequences of the project can be considered highly material. Development of the Carmichael mine complex could have serious negative effects on the local flora and fauna, result in increased frequency of natural hazards (such as rising temperatures, severe flooding and water evaporation), and potentially cause damage to the Great Barrier Reef (however, the company disputes this last point citing that the coal mine complex will be located some 300 km away from the reef).

OutlookGiven Adani’s negative track record on similar projects (e.g., in Mundra, India), we have strong doubts about the company’s preparedness and its ability to adequately manage the challenges of this project and its potentially material environmental impacts.

Adani Enterprises LtdThe “Big Gamble” May Begin

Industry: Industrials

Domicile: India

Ticker: BSE:512599

ISIN: INE423A01024

Sedol: B01VRK0

45Overall ESG Score

Industry Laggard39

outof 39

Maria Luiza MihuAnalystIndustrials

Outlook

Negative

(Market cap avg $6358 million) Score

Barloworld Ltd. 83

SIG plc 78

Travis Perkins plc 69

Emeco Holdings Limited 67

Itochu Corp. 66

Top Performing Peers

Industry LeadIndustrials

Wilco van HeterenDirectorwilco.vanheteren@sustainalytics.com

6 | 26

Coal Traded (million MT)

Source: Adani Annual Report

10.2

2008

18.728.8 33.5 35.7

46.5

200

2009 2010 2011 2012 2013 2020

7 | 26

Relative Position

Industry Laggard

A Story for 2014On December 12, 2013, a Manhattan bankruptcy court ruled that Anadarko Petroleum and its newly-acquired subsidiary Kerr-McGee acted with “intent to hinder and delay” when Kerr-McGee spun off Tronox, the paint materials and specialty chemicals company that later went bankrupt. The court also found Anadarko liable for billions of dollars in environmental clean up costs. The court has yet to rule on the actual value of the liability, but stated that it will be between USD 5.15 billion and 14.7 billion. At the high end this would amount to more than one-third of Anadarko’s market capitalisation. The company had previously stated that it did not anticipate a ruling any greater than USD 1.4 billion. On December 13, the market reacted to the announcement of the ruling with a share price drop of around 8%. The final ruling on damages is expected in 2014. Hence, further negative surprises for investors cannot be ruled out. Anadarko has stated that it would appeal the ruling.

BackgroundThe USD 25 billion lawsuit was launched by the credit holders of Tronox Limited, a former subsidiary of the oil exploration and production company Kerr-McGee Corporation. In an attempt to make itself more attractive to buyers, Kerr-McGee spun off Tronox in 2005. In addition to Tronox’s titanium-related sites, the deal also included liabilities from other areas of the business, notably radioactive waste sites from the uranium segment of the business, among others. Kerr-McGee sold all of its shares in Tronox by March 2006, and, three months later, was itself purchased by Anadarko Petroleum Corporation for USD 16.5 billion, plus the assumption of 2.6 billion in debt.

Tronox declared bankruptcy in 2009, leaving a massive environmental legacy, and its shareholders launched a lawsuit against Kerr-McGee and its new owner, Anadarko. The plaintiffs allege that Kerr-McGee intentionally underestimated the size of the environmental liabilities, excluding some sites altogether, and grossly underestimating others. When Tronox exited bankruptcy protection, it ceded much of its interest in the lawsuit to state and federal regulators. Hence, the U.S. government became a major creditor and joined the suit in an attempt to attain funds to remediate some of the sites.

OutlookGiven that the company has stated that it did not anticipate a ruling greater than USD 1.4 billion, the bankruptcy court ruling could pose a major disruption to Anadarko’s cash flow. Furthermore, the company may still incur additional expenses related to the 2010 Deepwater Horizon disaster, as Anadarko had a 25% stake in the project.

The ruling provides strong support to the allegations that Anadarko and Kerr-McGee concealed material information about environmental liabilities during the divestiture. Sustainalytics’ 2014 outlook for Anadarko is negative, due to the company’s pattern of business ethics controversies (related to underpayment of royalties and breach of contracts) and its overall poor ESG (environmental, social, and governance) performance (ranking 155 of 170 companies in the Sustainalytics’ energy universe).

Anadarko Petroleum CorporationMind the Gap

Industry: Energy

Domicile: United States

Ticker: NYSE:APC

ISIN: US0325111070

Sedol: 2032380

46Overall ESG Score

Industry Laggard

155outof 170

Luke RaftisAnalystEnergy

Outlook

Negative

(Market cap avg $20829 million) Score

Repsol YPF SA 79

Statoil ASA 77

Suncor Energy Inc. 76

Cairn Energy plc 76

Tullow Oil plc 76

Top Performing Peers

Industry LeadEnergy

Alberto Serna MartinAssociate Analystalberto.serna@sustainalytics.com

8 | 26

Source: Anadarko, annual report 2012

17

2013

Anadarko’s Environmental Liabilities (Millions)The following is a summary of the Company’s obligations at December 31, 2013

Obl

igati

ons

by p

erio

d

144

46

81

2014-2015 2016-2017 2018and beyond

Total

Anadarko’s Profits & Losses (Millions)

2012 2011 2010Income (loss) before income taxes $3,565 ($3,424) $1,641

Exploration expense $1,946 $1,076 $974

DD&A $3,964 $3,830 $3,714

Impairments $389 $1,774 $216

Deepwater horizon settlement and related costs 1 $18 $3,930 $15

Algeria exceptional profits tax settlement 1 ($1,797) - -

Tronox-related contingent loss 1 ($250) $250 ($95)

Interest expense $742 $839 $855

Unrealized (gains) losses on derivatives, net 1 $377 $616 ($114)

Realized (gains) losses on other derivatives, net 1 $66 $59 -

Less net income attributable to noncontrolling interests $54 $81 $60

Consolidated Adjusted EBITDAX $8,966 $8,869 $7,146

Source: Anadarko, annual report 2012

Year ended December 31

1 In the first quarter of 2012, the Company revised the definition of Adjusted EBITDAX to exclude Algeria exceptional profits tax settlement, Tronox-related contingent loss, and realized (gains) losses on other derivatives, net. Prior periods have been adjusted to reflect this change.

This case is notable as it is the first major case where failure to disclose an environmental liability is likely to result in a major settlement. It has set an important precedent in relation to the tactic of spinning off environmental liabilities, and will likely lead investors to exercise better due diligence to avoid such pitfalls in the future. It may even lead to greater demand for more environmental disclosure overall.

9 | 26

Relative Position

Average Performer

A Story for 2014“In an era when traditional conservative banking is valued, our value proposition – that we understand that our financial success can only follow the prosperity of our customers and their communities – is compelling.” Robert Johanson, Chairman, annual report 2012

We believe this proposition may face a litmus test in 2014 due to the increasingly shaky outlook for the Australian housing market. Throughout 2013, experts have pointed to signs of an emerging price bubble, fueled in part by the Australian central bank, which recently lowered the interest rate to an historic 2.5%, and by foreign investors. During 2013, house prices have shown much stronger growth than the 3.4% average seen over the past 10 years. From January to October, house prices in Sydney increased 13%, while prices in Melbourne followed a similar trend.

Bendigo and Adelaide (B&A), and its Community Bank franchise, weathered the 2008 financial crisis well, since their business model (local focus, abstinence from the securitization market) insulated them from the systemic repercussions of the crisis. A possible burst of a homegrown house price bubble would place considerably more stress on the bank and its “sustainable bank business model”. The litmus test will be how resilient B&A’s P&L will be in this kind of environment compared to the four large Australian banks (National Australia Bank, Commonwealth Bank, Westpac, Australian and New Zealand Bank).

Background15 years ago Bendigo Bank (now merged with Adelaide Bank to create B&A) started the Community Bank programme in response to the closure of dozens of bank branches in rural Australia. Spearheaded by community leaders and local investors, Community Bank branches are essentially franchises of B&A. Community Bank branches pay a fee to B&A for back end support and infrastructure, in addition to splitting the margin income. The branch is then mandated to invest a certain percentage of that income in community projects, such as programmes that provide services to the elderly and sports programmes for children. Despite allegations of mismanagement and poor performance over the past few years, to date there are 280 Community Bank branches, AUD 80 million (USD 70 million) invested in communities, and AUD 24 million (USD 21 million) paid in dividends.

The Community Bank model is notable for its revision of what a bank can be for a community. While addressing financial inclusion and responsible lending by virtue of its rural locations and local focus, the model of community banking addresses a larger issue. In light of the recent financial crisis, which was born out of a disconnect between financial products and the health of the underlying assets, a community bank reestablishes and redefines that connection. It provides a local vehicle for investors and redistributes bank profits directly to the community through loans to and deposits by community members.

OutlookA number of factors will affect how the Community Bank branches manage a downturn in property prices. Its operating model, investing in local properties and retaining those loans on its books, prevents the banks from investing surplus cash in mortgage products. However,

Bendigo and Adelaide Bank LimitedLitmus Test for the Resilience of a Community Bank’s Business Model

Industry: Financials

Domicile: Australia

Ticker: ASX:BEN

ISIN: AU000000BEN6

Sedol: 6091280

52Overall ESG Score

Average Performer

116outof 277

Sophia BurressJunior AnalystFinancials

Outlook

Negative

(Market cap avg $17100 million) Score

Westpac Banking Corporation 80

DNB ASA 80

Banco Santander (Brasil) S.A. 80

Skandinaviska Enskilda Banken AB 77

National Australia Bank Limited 76

Top Performing Peers

Industry LeadFinancials

Claudia VolkAssociate Directorclaudia.volk@sustainalytics.com

10 | 26

Historical Funding Mix (for FY ending June 2013)

8%

Dec-11

15%

77%

8%13%

80%

9% 11%

80%

10% 12%

78%

Jun-12 Dec-12 Jun-13

Source: Bendigo and Adelaide, annual report 2013

Securitization RetailWholesale

Loan Portfolio by Security (for FY ending June 2013)

69.1% Residential mortgages

25.0% Commercial

mortgage

3.8% Listed securities

& managed funds1.6% Unsecured

0.5% Other

Securitization RetailWholesale

Source: Bendigo and Adelaide, annual report 2013

any downturn in local property values or general economic slowing will stress the bank. In contrast to most financial institutions, Community Bank branches may not have the expertise and personnel to steer it through hard times. Previous accusations of mismanagement may gain traction if the bank does not efficiently address these problems.

11 | 26

Relative Position

Average Performer

A Story for 2014Since May 2013, Canadian Natural Resources Limited (CNRL) has been attempting to identify the source of underground bitumen seepages at its Primrose and Wolf Lake operations in Alberta.

Preliminary tests indicated that groundwater in the area was likely contaminated, and the Alberta regulator ordered the company to undertake further testing. Federal officials have announced plans to conduct a separate investigation into the unusual bitumen spill. The company has estimated clean up costs of USD 37.8 million, however, the groundwater contamination could potentially result in substantial additional remediation costs. The company could also face lawsuits from nearby residents or sanctions as a result of the federal investigation, all of which could play out in the coming year.

BackgroundCNRL operates a series of cyclic steam stimulation wells in which steam is injected into wells over a period of weeks in order to mobilise cold bitumen. The bitumen is then pumped out through the same well bore.

The company had reportedly been using exceptionally high volumes of steam to liquefy underground bitumen, which then began seeping to the surface at six different locations, several kilometers apart (see map on next page). It is unknown whether the leaks are due to a well bore failure or a fracturing of the cap rock which is supposed to contain the bitumen below water tables. CNRL claims that seepages are originating from a series of abandoned wells in the area. Regulators have ordered the draining of two lakes to find and stop the sources of the leaks. This is not the first leak to occur at CNRL’s Primrose operation. A similar, but much smaller leak, occurred at the site in 2009, and even though cause of the seepage was not determined, the site was allowed to continue operating. The 2013 seepages continued throughout the summer, and by mid-September the clean up efforts had recovered 10,300 barrels of bitumen from lakes, forests and wetlands.

The vast majority of Canadian oil sands reserves (80%) are too deep to be extracted by mining operations and must be brought up by other in situ methods, such as the cyclic steam stimulation method employed by CNRL. Critics have pointed out that in such methods there is little to no regulation of factors such as steam volumes and pressures, and that incidents such as this one demonstrate the need for better oversight.

OutlookThe scale of this incident is significant, given the likely groundwater contamination and the fact that federal regulators saw the need to get involved. In order to avoid further sanctions CNRL will have to convince regulators that the risk of reoccurrence is minimal. This may be a difficult task since the company has had similar events in the past and was recently involved in other major safety and environmental incidents. Hence, our outlook for CNRL in 2014 is negative. We will watch out for the company’s ability/capacity to (1) effectively remediate the sites, (2) identify the cause of the seepages, and (3) develop procedures which effectively integrate a precautionary approach going forward as possible catalysts for change.

Canadian Natural Resources LimitedDisaster in Slow Motion

Industry: Energy

Domicile: Canada

Ticker: TSX:CNQ

ISIN: CA1363851017

Sedol: 2171573

55Overall ESG Score

Average Performer

74outof 170

Luke RaftisAnalystEnergy

Outlook

Negative

(Market cap avg $20829 million) Score

Repsol YPF SA 79

Statoil ASA 77

Suncor Energy Inc. 76

Cairn Energy plc 76

Tullow Oil plc 76

Top Performing Peers

Industry LeadEnergy

Alberto Serna MartinAssociate Analystalberto.serna@sustainalytics.com

12 | 26

Source: Pembina Institute, 2013

CrossreadsThis spill also brings up a number of other issues that may threaten the future of in situ extraction, namely: liability from operating near abandoned wells; potential regulation; and technical questions about steaming procedures, rock strength, and well bore integrity. Substantial changes in any of these areas could alter the financial picture for oil companies, as safely extractable reserves could be reduced and costs could increase. These are both key factors as Canadian oil sands crude is already among the most expensive oil in the world to extract. These issues would affect the sector as a whole, though CNRL has greater exposure due to its use of extremely high volumes of steam in its operations.

Distances Between Four Bitumen Blowouts at Cold Lake, Alberta

13 | 26

Relative Position

Average Performer

A Story for 2014Corbion is set to greatly benefit from the strong growth of the bioplastics market in 2014 and beyond. European Bioplastics, an association with 70 member companies in the European Union, has estimated that compared to 2011, the global market for bioplastics will more than quadruple by 2016 (see graph below). By 2020 the bioplastics market segment is expected to make up more than 25% of the global plastics industry. This growth will be supported and fueled by the political and regulatory environment in the medium- to long-term. Although we do not expect any specific regulatory measures to be introduced soon, the market will continue to benefit from, among other things, the European Commission’s objective to achieve a “resource efficient recycling society” as laid out in the EU Waste Framework Directive, and the U.S. Government’s Federal Farm Bill Energy Title 9 (which urges federal agencies to buy bioplastic items).

Corbion has demonstrated that it is well-positioned to tackle the growing demand in the bioplastics industry with innovative and sustainable solutions. For example, the company has developed a new lactic acid production process which requires significantly less auxiliary products, resulting in a more sustainable bioplastics production process. Corbion has also worked with other major bioplastics producers to innovate sustainable solutions. The company partnered with BASF to establish a new lactic acid process which replaces traditional agricultural raw materials with non-food raw materials, thus avoiding interference with the food value chain.

BackgroundCorbion was founded in 1919 under the name CSM (Centrale Suiker Maatschappij) and for decades focused on the market for bakery products. In 2012, the company sold its bakery supplies business, and in 2013 changed its name into Corbion to reflect its movement into the bio-based market. It now operates two international product divisions: bio-based food ingredients through its subsidiary Corbion Caravan (80% of operations); and bio-based chemicals and polymers through its subsidiary Corbion Purac (20% of operations).

With its two product divisions the company aims to address the environmental and social megatrends of resource scarcity, population growth, and food security. Corbion is well-prepared to gain market share in both the bio-based and conventional chemicals and food ingredients segments through innovative product offerings in these areas (e.g., new fermentation technologies to reduce sodium while enhancing the salty taste of products and bioplastics). Since the demand for more socially and environmentally sustainable products is steadily growing, the company may also financially benefit from an increasing willingness-to-pay among its customers.

OutlookFrom an environmental, social and financial impact assessment perspective, the outlook for Corbion is clearly positive. With respect to product management, the company is moving in the right direction. Corbion implements a cradle-to-cradle approach when developing new products, it conducts life cycle assessments that consider social and environmental aspects,

CorbionA Sustainable Momentum Play

Industry: Food, Beverage & Tobacco

Domicile: Netherlands

Ticker: ENXTAM:CSM

ISIN: NL0010583399

Sedol: 5799949

58Overall ESG Score

Average Performer

80outof 155

Sonja SiewerthAnalystChemicals

Outlook

Positive

(Market cap avg $17569 million) Score

Coca-Cola Icecek A.S. 79

Campbell Soup Co. 79

Coca-Cola FEMSA S.A.B de C.V. 78

Grupo Nutresa SA 77

BRF - Brasil Foods S.A. 77

Top Performing Peers

Industry LeadChemicals

Stephanie LeNguyenManagerstephanie.lenguyen@sustainalytics.com

14 | 26

Source: European Bioplastics (December 2013)

Global Production Capacities of Bioplastics

2010 2011 2012 ... 2017

1,0161,161

1,395

6,185

674

342675

486

791

604

5,185

1,000

Biobased/Non-biodegradable Biodegradable Biobased/

Non-biodegradableTotal capacity

1,00

0 m

etric

t

and it develops products to address environmental and social megatrends (e.g., bio-based food ingredients to enhance products shelf life and safety, and bio-based, toxicologically and environmentally safe paints). The company also promotes a holistic approach to sustainability management, credibly claiming that sustainability is anchored in its corporate governance, is integrated into its strategy and is addressed within its entire value chain.

An improved communication about its environmental, social and governance related policies and programmes could trigger positive momentum in Corbion’s sustainability rankings, making the company much more appealing to best-in-class investors moving forward.

15 | 26

Relative Position

Average Performer

A Story for 2013Lurching from one crisis to another since its mishandling of the 2012 Olympic security contract, G4S is now the subject of dual investigations whose revelations and potentially severe consequences could keep the company in the news well into 2014. Moreover, recent revelations that G4S did not pay any UK corporate taxes in FY 2012, despite the country’s historic austerity measures and the company’s dependence on government contracts for almost one-quarter of its revenues, could not have come at a worse time for the company or the political allies of privatization.

BackgroundG4S exemplifies a case where structural flaws inherent to companies in the private prison and immigration sector are magnified by the G4S’s rapid growth. These issues are then compounded by the company’s reluctance to make the investments necessary to adequately address the subsequent risk.

In the past G4S has been involved in several controversial events, but checked by its management systems and internal controls, seemed relatively robust, at least compared to its peers. That changed when G4S mismanaged its security contract for the 2012 Olympics. The ensuing fallout drew an unprecedented level of both public and official attention to the company in the UK. Several months on, during this atmosphere of heightened scrutiny, claims emerged that G4S, through its contract to electronically tag offenders, had perpetrated a multi-million pound fraud against the British government. In November 2013, officials in the UK announced a criminal investigation into G4S’s alleged tagging fraud. In October 2013, an inspection of G4S’s Oakwood prison revealed that the facility scored below par in all areas assessed. The inspectors also found high levels of violence and self-harm among inmates and clear evidence of illicit drug and alcohol use, as well as a level of employee compliance with inmates that bordered on collusion. The company is also under investigation by South African authorities following the release of a video showing G4S staff using electroshocks and forcibly injecting prisoners with drugs (later reported to be dangerous anti-psychotics) to quell them.

G4S is at a tipping point. The widening investigations in the UK are fueling a political shift against the company. As well, the investigation in South Africa threatens G4S’s retention of a contract to run one of the world’s largest private prisons. Not only are the company’s brand, reputation, and the credibility of its services at stake, but so too is its social license to operate.

OutlookIn 2014 G4S’s position is unlikely to improve. Its recent mass cull of management, including its CEO, will no doubt allow the company to claim it has made major changes. However, the management shift fails to address the underlying issues at play. The nature of private prison/immigration detention contracts leads to an incentive structure in which service quality, inmate safety and rehabilitation, inmate recidivism rates, and the appropriate handling of complex immigration matters are not prioritized. Unless G4S is willing to make adequate expenditures on inmate rehabilitation, employee training, employee supervision, acceptable staffing levels, as well as more robust internal controls, its entanglement in such controversies will likely continue.

G4S plcAt a Tipping Point

Industry: Commercial & Professional Services

Domicile: United Kingdom

Ticker: LSE:GFS

ISIN: GB00B01FLG62

Sedol: B01FLG6

64Overall ESG Score

Average Performer28

outof 99

Alex Read-BrownAssociate AnalystReal Estate & Commercial and Professional Services

Outlook

Negative

(Market cap avg $3640 million) Score

G4S plc 64

Securitas AB 60

Serco Group Plc 59

The GEO Group, Inc 49

Corrections Corporation of America 42

Global Peers

Industry LeadCommercial & Professional Services

Loïc DujardinDirectorloic.dujardin@sustainalytics.com

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CrossreadsG4S’s string of high-profile incidents has potentially dealt a blow to the practice of outsourcing public correctional and immigration services in the UK. Despite the UK government’s claims about the benefits and efficiency of outsourcing public services, G4S has served as an example to the contrary. From the killing of a refugee by its staff, to security at the Olympics, to electronic tagging of offenders, to the management of Oakwood prison, G4S has supplied ample ammunition to opponents of this outsourcing trend. As such, we might be watching the first pebbles of an avalanche of political and public sentiment against firms like G4S in the UK.

Source: G4S, annual report 2012

4,325

5,116 5,2645,498

6,007

2008 2009 2010 2011 2012

Turnover* - Secure Solutions (million GBP)

4% Consumers

5% Ports and airports

5% Leisure and tourism

6% Retail

3% Transport and logistics

9% Private energy and utilities

9% Financial Institutions

27% Government

32% Major corporates and industrials

G4S - 2012 Secure Solutions by Customer Type

Source: G4S, annual report 2012

*2011 and 2012 at constant (2012) exchange rates excluding the Olympic Games contract and adjusted for divestments and discontinued businesses; 2008–2010 as reported adjusted for divestment of US Government Solutions

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Relative Position

Industry Laggard

Catalysts in 2014European and Australian regulators are currently assessing whether or not to ban drug imports from Ranbaxy Laboratories Limited. A negative assessment from these authorities would have grave repercussions for the company, severely restricting the markets that Ranbaxy can export to.

The company also faces significant business risk in emerging markets. As a generics producer, Ranbaxy has a strong focus on emerging markets, from which it derives nearly half of its sales. Many developing and emerging markets are highly dependent on inexpensive drug supplies from Indian generics producers like Ranbaxy. For example, Ranbaxy sells its products in 47 African countries, whose populations may therefore have been exposed to defective and potentially dangerous Ranbaxy drugs. Regulatory authorities in these markets often neither have the willingness nor the capacity to thoroughly assess product quality and safety and/or impose punitive measures. However, some emerging markets will likely develop such regulatory capacity in the near future and may start to act more rigorously to protect their populations from adulterated drugs.

BackgroundRanbaxy is the culprit in the most egregious drug quality and safety scandal of the past few years. The company paid a USD 500 million fine in 2012 for gross violations of good manufacturing practices to U.S. regulators, the largest fine ever imposed for drug quality and safety issues. Furthermore, the company admitted to submitting fraudulent testing data to the U.S. Food and Drug Administration (FDA). The violations primarily took place at two of Ranbaxy’s Indian plants, from which imports to the U.S. have been banned since 2007. The FDA imposed an import ban on a third Ranbaxy plant in September this year, which has impeded several planned product launches and caused a drop in U.S. sales.

OutlookIn the near future, Ranbaxy’s priority should be to convince the FDA and other regulators that the risk of future violations is minimal. The onus is now on Ranbaxy to prove that it can step up to the plate and become a trustworthy supplier of medicines. The business case to improve its quality control is compelling, but we are not yet convinced that Ranbaxy will stop cutting corners.

Hence, our outlook for 2014 is negative, especially considering that these issues have been ongoing since 2006. Although the company has improved its internal quality systems, we would like to see evidence of external quality certifications in 2014. If one takes overall environmental, social and governance (ESG) disclosure as a proxy, Ranbaxy’s extremely poor ESG disclosure (ranking 126 out of 127 within Sustainalytics’ pharmaceutical universe) does not point to a strong ability to manage product quality and safety issues effectively in 2014.

CrossreadsIt is not just the future of Ranbaxy that hangs in the balance, but also that of its parent company Daiichi Sankyo. Daiichi bought a majority stake in Ranbaxy in 2008. As an innovator

Ranbaxy Laboratories LtdCutting Corners

Industry: Pharmaceuticals

Domicile: India

Ticker: BSE:500359

ISIN: INE015A01028

Sedol: B0CMCH4

42Overall ESG Score

Industry Laggard

126outof 127

Hazel GoedhartAssociate Analyst, Industry LeadPharmaceuticalshazel.goedhart@sustainalytics.com

Outlook

Negative

(Market cap avg $21934 million) Score

Agilent Technologies Inc. 79

Johnson & Johnson 77

Merck KGaA 77

Novo Nordisk A/S 76

Novartis AG 75

Top Performing Peers

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Ranbaxy’s geographical sales breakdown for FY2012 (in USD million)

Region/ Business FY2012

North America 1,011

India + Sri Lanka 409

Eastern Europe + CIS 250

Western Europe 178

Asia-Pacific + Middle East 107

Africa 177

Latin America 41

Active Pharmaceutical Ingredients + Others 138

Total 2,312

Daiichi Sankyo sales per segment Q2 2013 (in JPY billion)

Region Q2 2013

Daiichi Sankyo Group 428.4

Japan 260.6

North America 104.6

Europe 39.6

Other regions 23.5

Ranbaxy Group 88.0

Total Net Sales 516.4

Source: Daiichi Sankyo

Source: Ranbaxy

in the Japanese pharmaceutical industry, Daiichi itself sells products primarily in Japan, but relies on Ranbaxy for low-cost manufacturing and successful entry into emerging markets. Ranbaxy constitutes 17% of Daiichi group sales; hence, Daiichi has a strong incentive to get its subsidiary on track. Providing guidance to its daughter company’s management will be a key success factor in turning Ranbaxy around. However, despite making several attempts, Daiichi has not managed to resolve the situation thus far.

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Relative Position

Outperformer

Smithfield Foods Inc. & Shuanghui International HoldingsLicense to Operate at Risk

73Overall ESG Score

Outperformer

19outof 158

Jungho ParkAnalystFood, Beverage & Tobacco

Outlook

Positive

A story for 2014The acquisition of Smithfield Foods by Shuanghui International Holdings Ltd. has increased concerns about food safety both in the U.S. and China. We believe these concerns may be exaggerated and that the merger will actually be a catalyst for the company moving up the learning curve and becoming an attractive target for responsible investors.

In November 2013, Shuanghui announced its plan to launch an IPO on the Hong Kong Stock Exchange in the second quarter of 2014. Investors should keep an eye on Shuanghui’s intentions to implement Smithfield’s food safety and quality control management systems and to incorporate sustainability management in its operations.

BackgroundThis deal, valued at USD 7.1 billion, is the biggest-ever Chinese takeover of a U.S. company to date. With this acquisition, Shuanghui is attempting to meet the rapidly growing demand for pork products in China. It will increase Shuanghui’s market share and production capacity through the introduction of the U.S. model of commercial farming. In China, currently 51% of hog farms raise between 50 and 3,000 heads and a hog farm has more than 3,000 heads in inventory is categorised as commercial farms, which account for about 20% of China’s herd.

OutlookWe expect Smithfield’s superior food safety and quality management system to help Shuanghui produce higher quality pork products and attain higher market prices. Following Shuanghui’s food scandal relating to pork tainted with clenbuterol in China, Shuanghui improved its product quality monitoring and audit programmes, but still lags behind Smithfield considerably. We therefore take Shuanghui’s announcement that it is keeping Smithfield’s management as well as its Food Safety Council, (which consists of senior-level, cross-functional professionals) as a positive indication of the company’s commitment to continued food safety. Recently, Smithfield has shown its commitment to improving practices, by phasing out the use a controversial drug (Ractopamine) in hog raising.

In 2013, Smithfield earned Global Food Safety Initiative (GFSI) certification for all of its relevant facilities in 2013. We expect that Shuanghui will aim to obtain GFSI certification for its facilities in China as well. Improvements at Shuanghui could encourage other hog producers to benchmark the company’s practices, and lead to a rise in overall food safety standards and management systems across the entire Chinese hog industry.

More generally, Shuanghui may also benefit from Smithfield’s introduction of a more comprehensive sustainability management approach, again, putting the company well ahead of its peers in China.

Industry: Food, Beverage & Tobacco

Domicile: United States

ISIN: US8322481081

Sedol: 2816238

(Market cap avg $16882 million) Score

Royal Wessanen NV 73

Smithfield Foods Inc. 73

Bacardi & Company Limited 61

Cargill, Incorporated 59

Asian Bamboo AG 58

Top Performing Peers

Industry LeadFood, Beverage & Tobacco

Laurence LoubieresSenior Analystlaurence.loubieres@sustainalytics.com

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60,000

75

50,000

40,000

30,000

20,000

10,000

0

1377 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11

1,000

Met

ric T

on (C

arca

ss W

eigh

t Bas

is)

Year

U.S.

China

Source: USDA, Foreign Agricultural Service

Total Pork Consumption in China and the U.S.

Pork Segment Adjusted Operating Profit 2007-2012 (in millions)*

Packaged MeatsFresh Pork

$219

$449$483

$573

$753

$624

$$$ Total Pork

Source: Smithfield Food, annual report 2012

* Results reported by fiscal year and represent management’s estimated allocation of total Pork segment results. Fiscal 2009 and 2010 results adjusted for restructuring and impairment charges.

21 | 26

A Story for 2014The focus on privacy will not subside in 2014 and concern about how uncertainty in data handling affects reputation and bottom line results will grow. In late 2013, shareholders at both Verizon and AT&T have tabled resolutions asking for transparency on customer privacy. With more and more consumer data being collected from an ever-growing number of media, devices, and platforms, we expect the topic to become an area of much more intense stakeholder activism going forward.

Data protection is a critical expectation among consumers, and one that will become more prominent as the debate on privacy and state surveillance continues in the public domain. A company that is perceived as being transparent and honest about user rights may succeed in differentiating itself from its competitors in a fundamental way and managing reputational risk. BackgroundIn June 2013, Edward Snowden began revealing details of government surveillance programs in the U.S. and U.K., garnering broad media attention and bringing the issue of data privacy and security into sharp focus. In the U.S., Verizon and AT&T were named as companies required by law to provide confidential customer data to the U.S. National Security Agency (NSA). Similarly, in the U.K., several telecom companies reportedly allowed the U.K. Government Communications Headquarters (GCHQ) to access customer data. By and large, the response from the companies named was lacking, with notable failures to respond quickly or to provide clarity on their relationships with these surveillance programs.

The amount of user data being communicated and gathered is growing at an exponential rate making data privacy and security an increasingly critical issue for telecom companies. In our assessment of the industry’s key environmental, social and governance (ESG) issues, data privacy and security is ranked No. 1 from both a stakeholder and business perspective (see chart below). Privacy and freedom of expression are human rights and free, open communication is critical in maintaining these rights.

Before signing onto an online or mobile service, consumers are typically required to accept user agreements that detail how their data can and will be used. However, consumers often accept the terms without reading or fully understanding them. The emerging risk is the vast uncertainty regarding how this data might be used and whether it can truly be kept secure. Revelations that telecom companies freely shared this data has eroded the trust that is implicit in the relationships between these companies and their customers. A strong reputation as a customer-focused company is something that can be elusive and difficult to repair once damaged. However, the telecom sector now has an opportunity to be more open about how customer data is used and regain consumer confidence through transparency.

OutlookKey stakeholders are calling for disclosure. In November 2013, shareholder resolutions were filed with AT&T and Verizon asking the companies to report the number of government requests received and the number of customers whose data had been disclosed to the

Sector SpecialTelco Services Sector & Data PrivacyTime to Catch Up

Matthew BargAssociate Analyst, Industry LeadMediacommatthew.barg@sustainalytics.com

85Overall ESG ScoreMagyar Telekom

Outlook

Negative

(Market cap avg $16882 million) Score

Vodafone Group plc 81

Verizon Communications Inc. 65

AT&T, Inc. 64

China Mobile Limited 59

America Movil S.A.B. de C.V. 50

Performance of Select Global Peers

Industry Leader

Overall ESG ScoreOrascom Telecom

Industry Laggard38

22 | 26

Company Corporate Headquarters

Alcatel-Lucent France

AT&T United States

Millicom Luxembourg

Nokia Solutions and Networks Finland

Orange France

Telefonica Spain

Telenor Group Norway

TeliaSonera Sweden

Vodafone United Kingdom

Source: The Telecommunications Industry Dialogue on Freedom of Expression and Privacy, Dec. 2013

Membership of the Telecommunications Industry Dialogue

government. In response, AT&T suggested that the resolution be excluded from the ballot at the spring AGM because its dealings with the NSA were a matter for management, not shareholders. Verizon questioned the shareholder’s authority to file the proposal. Nevertheless, shortly after pushing back on the shareholder proposals, both companies made public commitments to publish semi-annual transparency reports on law enforcement requests. The extent to which this information will be disclosed remains to be seen, but both companies have hedged against providing clarity on the number of requests made under classified national security requests.

In October 2013, AT&T became the first non-EU signatory of the Telecommunications Industry Dialogue (ID) on Freedom of Expression and Privacy. It is noted that the company became a signatory after it was publicly linked to surveillance programs. However, it is also the first from this group to publicly commit to a transparency report. While broad participation among U.S.-based peers has been absent thus far, continued focus on privacy by media, consumers, civil society, and governments should inspire more interest in joining the ID or a similar initiative.

Based on Sustainalytics current assessment of their ESG performance, those telecom services companies that are engaged members of the ID (see table) are showing the most leadership in preparing for risks related to violations of privacy and free expression; however, notwithstanding AT&T and Verizon’s recent commitments, there is not yet an example from the telecom sector of clear reporting on law enforcement data requests. Nevertheless, the sophistication level of the discussion surrounding privacy and surveillance issues, for instance within Vodafone’s or Telenor’s reporting, is increasing. Sector leaders are beginning to show that consideration of human rights and data privacy overlap in many respects.

CrossreadsThe issue of government surveillance presents a considerable reputational risk for much of the information communication technology value chain, in particular Internet service providers. Notably, some of the sector’s leading companies have published reports disclosing as much information as they are permitted to and have sued the U.S. government for the right to provide greater transparency to their stakeholders with respect to surveillance requests. Microsoft, Google, Yahoo!, Facebook, Twitter, LinkedIn, and AOL, under an initiative called the Global Government Surveillance Reform, are also asking the U.S. government to use greater discretion in how it applies its powers to survey communications. U.S. telcos remain absent from these particular initiatives. The belief that companies are sincere in their attempts to respect privacy is a crucial aspect of reputation management. By pushing for greater disclosure on the use of customer data, tech companies are showing an interest in maintaining consumer trust and, in turn, defending their bottom lines.

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Supply Chain

Health & SafetyHumanCapital

Civil & Political RightsJournalism Ethics

Sustainable Products & Services

Products/Service Quality & Safety

Physical Climate Change

Data Privacy & Security

Sust

aina

bilit

y Im

pact

Business Impact

Sustainalytics’ Key ESG Issues for the Telecom Services Industry

Source: Sustainalytics

Data Privacy and Security Policy

Human Rights Policy

30% Disclosed data privacy policy and related systems

42% Evidence of a policy Statement

28% No evidence of a

formal policy

13% Company has a strong policy

15% Company has a weak policy

63% Company does not

disclose a policy

9% No evidence

of a policy

Energy Use and GHG Emissions

Source: Sustainalytics

Source: Sustainalytics

HighMediumLow

Low

Med

ium

High

24 | 26

Relative Position

Outperformer

Catalysts in 2014The UN Arms Trade Treaty (ATT) will enter into force after it has been ratified, accepted, or approved by at least 50 signatory states. Currently, the treaty has been signed by 115 states and has been ratified or accepted by nine states. If the current momentum continues, the treaty may become effective in late 2014.

Commencement of the ATT would change the regulatory environment for aerospace and defense companies substantially, despite considerable uncertainty about enforcement and the actual shape of national legislations. In any case, the adoption of the ATT points toward a trend of stricter export controls within the industry.

Thales’ early adaptation to a changing regulatory environment and the proactive promotion of a “global level playing field” puts the company clearly ahead of the curve. BackgroundArms export control is an emerging industry issue given the impending ratification of the ATT. Within the context of business ethics, Thales has identified export control violations as one of its major business risks.

Arms export control has long been considered a national affair. Many countries have passed their own arms export control legislation in order to protect their national security and to fight the proliferation of weapons of mass destruction. As a result, many different national control mechanisms co-exist. With the globalisation of arms production and the emergence of new threats, there is a risk that such national laws will become less effective and less relevant. For this reason, Thales supported the development of a global legal framework. The company was also extensively involved in the concerted effort by industry associations (e.g., AeroSpace & Defence Industries Association of Europe) to ensure that manufacturers’ voices were heard during the UN ATT negotiations.

OutlookOur outlook for Thales is positive because the company (1) is exceptionally transparent in its disclosure compared its industry peers; (2) has a corporate export control policy that can be considered best practice; and (3) has established a system of authorization and penalties to ensure compliance, as well as training, audits, and other methods that are geared towards continuous improvement.

Based on our analysis, Thales is well-prepared to manage the challenges of a more restrictive arms control environment. The company’s high level of preparedness, together with its constructive engagement in the ATT negotiation process, gives it a competitive advantage over other aerospace and defence companies (such as BAE, EADS, and Rolls-Royce). Specifically, Thales’ efforts to increase its own transparency may appeal to, and ultimately attract orders from, governments in democratic countries.

ThalesAhead of the Curve

Industry: Industrials

Domicile: France

Ticker: ENXTPA:HO

ISIN: FR0000121329

Sedol: 4162791

71Overall ESG Score

Outperformer

6outof 36

Dominique JustAnalystTransportation

Outlook

Positive

(Market cap avg $16882 million) Score

QinetiQ Group Plc 81

Embraer SA 78

Bombardier, Inc. 77

European Aeronautic Defence and 73

Thales 71

Top Performing Peers

Industry LeadTransportation

Arne Philipp KlugSenior Analystarne.klug@sustainalytics.com

25 | 26

Source: Thales annual report, 2012

7,150

2011

Defence & Security - More Than Half of Thales’ Business

€ m

illio

n

5,953

111

13,214

6,806

5,71274

701

13,293

7,179

5,682

16713,028

5,953

7,166

98941

14,158

499 504

286

392

0

79

€ m

illio

n

Orders

2012 2011 2012 Defence & Security

Aerospace& Transport DCNS

Sales

Defence & Security

Aerospace & Transport

Others

DCNS

28% France

8% United Kingdom

25% Rest of Europe

10% North America

7% Australia &

New Zealand

22% Asia, Middle East &

rest of the world

Defence & Security - Significant Business Outside Western Democracies

30% France

11%United Kingdom

25%Rest of Europe

10%North

America

5%Australia &

New Zealand

19% Asia, Middle East & rest of the world

Orders by Destination 2012 Sales by Destination 2012

Source: Thales annual report, 2012

Glossary

OutlookA forecast of how an event rating is expected to change over the next 12 months.

• Negative: The issue is likely to deteriorate within the next 12 months, leading to a downgraded rating of the corresponding indicators.

• Positive: The issue is likely to improve within the next 12 months, leading to an upgraded rating of the corresponding event indicator.

• Neutral: In the next 12 months, we do not have any specific expectations about a change in our evaluation of impact in any particular direction.

Overall ESG ScoreAssessment of a company’s overall ESG preparedness and performance. These scores depend on Sustainalytics’ default weight matrix and reference universe/industry (based on GICS classification).

Relative PositionThe company’s score is:

• Industry Leader: within the top 5% in the industry.• Outperformer: within the top 5% to 16% of its industry.• Average Performer: within the mid-range 16% to 84% for its industry.• Underperformer: within the bottom 5% and 16% of its industry.• Industry Laggard: within the bottom 5% of the industry.

Top Performing PeersTop scoring companies within the same industry.

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