1

Printed on CyclusPrint Recycled 2

Interaction Interaction Transparency Transparency Knowledge Knowledge Value Value

Limestone Investment Management
Limestone is a specialist Emerging European equity fund manager based in Tallinn. The company was founded in 2007 and is majority owned by its managers. We focus exclusively on delivering to our clients outstanding investment performance. Our home region and investment universe, Central and Eastern Europe, is one of the most dynamic investment markets in the world. Limestone is one of the very first New Europe based investment managers that integrates the concepts of socially responsible investment and sustainable development into fundamental research process as essential factors for long term performance and risk management.

Limestone New Europe Socially Responsible Fund

A Luxembourg domiciled, UCITS III compliant long-only equity fund that invests in Central and Eastern European companies that offer good opportunities for capital appreciation and meet the Funds investment and social criteria. The Fund invests in listed stocks of companies based or operating in New Europe the new EU members and membership candidates. A bottom-up fundamental research driven investment process is applied to construct an actively managed high conviction portfolio. Portfolio companies are expected to comply or to actively pursue compliance with international norms on Environmental, Social and Governance issues in accordance with the UN Principles for Responsible Investment. Funds SRI approach is best characterized as ESG factor integration and active engagement with minimal negative screening.

Limestone is a signatory to the United Nations Principles for Responsible Investment (UN PRI) and European SRI Transparency Code
The European SRI Transparency logo signifies that the Limestone commits to provide accurate, adequate and timely information to enable stakeholders, in particular consumers, to understand the Sustainable Responsible Investment (SRI) policies and practices relating to the fund. Detailed information about the European SRI Transparency Code can be found on www.eurosif.org, and information of the SRI policies and practices of the Limestone SRI Fund can be found at Limestone website. The Transparency Code are managed by Eurosif, an independent organisation. The European SRI Transparency Logo reflects the fund managers commitment as detailed above and should not be taken as an endorsement of any particular company, organisation or individual

Limestone SRI Fund Yearbook 2010

Dear Reader
The first two years of Limestone New Europe SRI Fund were characterized by turbulent markets, investors torn between extreme despair and desperate hope, and fund managers in the middle trying to find the right balance. We are grateful to our investors that have stayed with us during these difficult times and proud to have been able to protect their capital in full, which is something that has been quite rare during this period. The environment in which companies operate and compete changes continuously. Nowhere else is this so evident and self explanatory than in New Europe, the region that went through complete structural and socioeconomic change in the last twenty years. Sustainable companies embrace this change by seizing the opportunities and by managing the risks that such developments pose to each industry. This is the natural way of enhancing companys competitive position and positioning to deliver above average shareholder value. As this book many times emphasizes, our investment philosophy is not about rewarding the best companies and leaving the rest to catch up on their own. We believe that we make a real impact by investing in financially attractive companies and helping them to improve their environmental, social and governance practices. There are quite a few out there in New Europe that already have a conscious strive to be a responsible social citizen, and have realised the benefits of being proactive in responsible business practices. Some of them have been mentioned in this book. We like to think that the most important feature that makes Limestone stand out from the crowd is our research process. It is almost a paradigm that

Two Years of Responsible Investing in New Europe

money invested responsibly is associated with inferior performance. We believe that the main reason behind such a fundamentally flawed credence is the often found detachment of fundamental analysis and active portfolio management from the investment process and replacing it with backward looking ratings; sometimes called the best in class approach. Our Head of Research gives a thorough account about his work on this field and the results achieved.

It is about contributing to and sharing the successes of people, companies and countries.
Convergence, a term somewhat worn out over the last decade, is alive and kicking and full of opportunities. Our good friend Geoff Mazullo, who just might be the one person that has had the most impact on corporate governance development in CEE, kindly contributed his personal account about convergence. We are also proud to publish a thorough research paper on ESG disclosure practices by our research partners GES Investment Services, and introduce Bulgaria, one of our favourite countries in the Balkans. Investing is not about buying and selling stocks. It is about contributing to and sharing the successes of people, companies and countries. We sincerely hope this book will make an interesting reading.

Alvar Roosimaa CIO Limestone Investment Management

Contents
Limestone New Europe Socially Responsible Fund Investment Strategy and Market Update Engagement Based Risk Management Examples of our engagement activities Why New Europe? New Europe at the Crossroads Integration of Quantitative ESG Factors Into Valuation Models Investing At Limestone Clients Philosophy Approach Competitive Advantage Investment Process Convergence Some Critical Reflections from Within and Without Country Focus: Bulgaria Financial Markets and Corporate Governance Development and Prospects in Sustainable Development Companies in Focus ESG Reporting In CEE Has Catch-Up Room New Europe And Russia Rest of Europe Sector Analysis Contacts and Fund Terms 6 7 8 8 10 11 13 16 16 16 16 16 17 18 22 23 24 25 28 29 30 33 38

Limestone New Europe Socially Responsible Fund

Limestone New Europe SRI Fund is celebrating its second anniversary in August 2010. Launched in the wake of the worst financial crisis in modern history a few weeks before Lehman Brothers bankruptcy filing the fund was the first equity fund managed from New Europe to focus on socially responsible investing. The fund has been equally successful in pioneering in corporate social responsibility in New Europe and in protecting investors money. One of the very few equity funds in Eastern Europe, Limestone SRI Fund recorded positive performance for the period of two years from July 2008 to August 2010.

Investment Strategy and Market Update

Late into the crisis, New Europe is late into the recovery, too. Local markets severely lagged the rapid rise in GEM equities in 2009 and only started to close the gap in 1Q10. And then the European sovereign debt crisis started. In July 2010 The Stoxx Europe 600 Index was trading at about 11.5 times estimated 2010 earnings, near the lowest valuation in more than a year, according to Bloomberg data. Top 150 companies in Limestone New Europe research universe were trading at 9.1 and 7.6 times 2010 and 1011 earnings, respectively. The IMF has just revised its global growth outlook to 4.6 percent in 2010, reflecting a stronger-than-expected first half. Thats the biggest gain since 2007 and compares with April projection of 4.2 percent. packages in Southern Europe need not have significant direct economic impact on Emerging Europe, as Southern Europe is not an important export destination for CEE. Even more important is that the biggest three economies in the euro zone do not trade much with Souther Europe either. So, austerity in Spain, Greece or Portugal need not have any significant impact on Germany, France and Italy or other euro zone members. In turn, this is good news for Emerging Europe. While the fund does not have country or sector biases the different scale of different countries dictates that some markets will always have more opportunities to offer than smaller peers. Poland and Romania are the giants among New Europe countries and claim therefore proportionally more attention. Poland was the only major economy in Europe to avoid recession in 2009 due to its relatively low trade exposure, significant PLN depreciation, and timely fiscal stimulus. We expect Polish growth to continue to outperform the rest of the region in 2010. Despite the recent weakening of zloty has made life easier for many exporters we prefer companies that rely on local economy and consumers. Romania is much tougher case to crack. With all the potential from large population and recent EU accession, the lack of administrative capacity is at times utterly frustrating. On the other hand, there are many of companies with outstanding results and growth prospects, and occasionally very capable management. Romania the most overheated European economy in 2008 - landed hard, contracting over 7% in 2009, while the current account gap, exceeding 13% of GDP in mid2008, narrowed to just 4.8%. The adjustment makes

There are many very attractively valued companies in New Europe to choose from.
Assuming that global recovery does not grind to a halt, CEE has good chances to win over its fair share of emerging markets fund flows with attractive bottom up valuation levels. With all eyes on global top down developments, local returns will be dominated by company level business rebound. We are in the stock pickers market in its purest form. Top down view of the world on New Europe is improving, too. Fiscal discipline (especially if compared to Greece et al) and the drastic narrowing of trade gaps over the last 12-24 months is a reality. The fiscal austerity

local macroeconomic risks look to be tamed. The longterm convergence perspectives should start to dominate the markets as long as the global environment remains friendly. We remain positive that public administration manages to avoid big mistakes, which in itself would gradually improve outside perception towards Romania. Our investments in Romania will remain focused on local consumers and domestic business investments rather than the very volatile export sector. Rebounding out of the market bottom in March 2009 the fund was overweight in financials and early cyclical

industrials that were directly benefiting from the inventory replacement process. These were the most depressed sectors, especially banks with emerging market exposure and industrials in automotive sector. We turned more defensive in 1Q 2010 by cutting banks in the portfolio. During the spring our focus was turned to find deeply cyclical companies whose business had bottomed but not yet strongly rebounding. Industrials that managed to survive the crisis and cut costs to compensate for sales drop of sometimes more than 50%, will be the biggest winners of the new business cycle ahead of us.

Engagement Based Risk Management

The more we apply the principles of Responsible Investing in our investment activities the more we realise how much of this work is an essential risk management exercise. There is no other way to learn about, and thus mitigate the risks of, the governance quality than meeting managements face to face and asking all the questions that are usually not asked. Surprisingly often the initial surprise of the managers, when asked questions about social and governance issues, is replaced by delight and acknowledgement that nobody has ever asked before. Most of the successful companies, especially the newer ones established by the younger generation of entrepreneurs, are well aware of modern requirements for responsible corporate citizen, and right things are being done. It is just that as nobody has bothered to ask they have not seen the need to disclose. This is one of the unique advantages Limestone has: we ask and we learn more.

we ask more, we learn more.

Examples of our engagement activities Polish Chemicals Company
From the nature of its business, this company has several potential and important environmental and social risks: high energy and water consumption, emissions of pollutants to air and water, heavy industrial processes and hazardous substances pose important health and safety dangers. Although we did not indicate

any incidents, we saw that there is not nearly enough information on environmental, social and governance issues to feel comfortable to invest into this company that financially looked to us very attractive. We met at company headquarters with the CEO of the group and addressed our concerns. The CEO assured us that they take environmental issues very seriously and constant modernization of the facilities reduces environmental risks and ecological footprint constantly. Being a former state owned large industrial conglomerate, we were not expecting overly enthusiastic reception and immediate action from the company, but a reassurance that matters of concern are being acknowledged and dealt with. The investment turned out to be exceptionally successful, with the share price almost doubling in 2010.

Bulgarian Real Estate Developer

Based on our longstanding relationship with the company management we approached them with suggestions to focus on more disclosure of their activities in environmental and social areas. We felt that distinguishing itself from the competition by closing that information gap would potentially attract new investors, which in turn would positively influence company valuation. Being already sizeable investor, we were both interested in learning more about the company and seeing the gap between fair value and market price to narrow. Top management was very interested about the idea and as a start provided us a comprehensive list of social activities and pro-active environmental considerations of their real estate developments. A further step was to reorganize corporate website to focus more on ESG information, which is expected to be concluded by the end of 2010. Meanwhile, the flagship office development of the company was selected as a showcase of a green building by a renowned international consultancy.

within the portfolio holdings. Due to the wide spectrum of holdings in the company and their influence in Romanian corporate community, any initiative from the companys side could have real impact. The central concern and the major discount factor weighing on the companys market valuation was the lack of information about corporate governance; there was no information available on how the company handles central environmental issues. Also, we wanted to learn how much influence company would have in changing of discriminative shareholder rights rules in place as compared to legislative powers. The meeting took place in Bucharest, and the discussion was friendly and open. It was emphasized that management fully supports better transparency in ownership issues and the change of outdated rules, but is deadlocked by the law and current corporate code to initiate much change. To follow up, we received a note from COO saying our remarks meet companys intentions to improve governance procedures and our recommendations were of real help.

Polish Industrial Company

The company is engaged in the production and supply of aluminium and iron components for the automotive industry, being the largest supplier of its iron parts in Europe and it holds over one-quarter of the European market of the main aluminium based product. Operating in industry with relatively high environmental risk, we were keen to see the company to demonstrate how it manages ESG issues. The group, originally from Western Europe, has quite uneven reporting quality between its Western subsidiaries sites and Polish companys webpage. Our meeting with CFO was constructive. The company is gradually unifying its disclosure and reporting channels and investors should expect to see much more transparent and coherent ESG reporting in the nearest future. We were generally pleased with what we heard, especially that the level of their Western European reporting proves that there is administrative capacity and willingness to be transparent.

Romanian Holding Company

The main goal was to understand better and positively influence any change in corporate governance procedures, especially in shareholder rights and minority protection issues, which were the most pronounced problems. Also the implementation of a CSR policy that would focus on handling ESG matters

Why New Europe?

Our definition of New Europe covers countries previously under the influence or outright occupation of Soviet Russia that are now new European Union members or on the path to become members in the foreseeable future. New Europe countries, within borderless economic block, have more attractive investment climates than the old EU, through low unit labour costs, more flexible labour laws and in most cases lower tax rates on both corporate and personal income, but the countries have institutions, laws, and regulations that meet EU standards. New Europe has made significant progress in real economic convergence with Western Europe over the last decade. GDP per capita in 2010 reaches almost 60% of the EU-15 level on purchasing power parity basis, up from 45% in 2000, driven mostly by higher productivity growth. Temporarily stalled during the crisis, the catch-up with Euro area is to resume in 2010.

New Europe no longer has structural risks, and as such is a natural extension to core European investment strategies. Early adaptors to this idea are bound to add value to their mandates.

10

New Europe at the Crossroads

If there is one certain lesson about New Europe to learn from the recent crisis it is that belonging into the EU framework works as a surprisingly strong safety net. From Latvia to Romania, any country that was perceived to be in trouble, received quick support from European Union structures, which in turn often led to a smoother and easier bargaining with IMF. The carrot and stick framework of EU integration is effective, and this gives additional credibility to the assumption of continuous convergence. The latter is critical to the general investment case of Central and Eastern Europe. markets. The consensus view is this should change. A strong global recovery from 2012 is likely to be fuelled by booming capital flows to emerging markets. Consensus also thinks that Central Europe is least likely to experience this boom. This is where we see the crossroads: will New Europe still be seen as part of emerging markets and if not, where will it fit in instead? There are already three euro zone members in New Europe from 2011 and the rest will follow soon. We have long been advocates for substituting the emerging market status with core-European extension. The feedback from institutional investors to this noble idea has been positive in principle but non-existent in practise. Limestone believes that the idea will start to feed through to European portfolio managers once risk appetite begins to grow again. Another recent development has been the weakening of Euro, blamed on Greece and other South-European heavily indebted economies. The most notable impact of this for New Europe is that globally the cheapest places to shop are Bulgaria and Poland as they have displaced Mexico and India. This is positive news for

There is strong long term consensual view out there that emerging markets are where we should put our savings.
There is strong long term consensual view out there that emerging markets are where we should put our savings. Yet the money has not yet followed the argument, as Western worlds pensions are according to most estimates still 90-95 percent invested in developed

11

the competitiveness of euro-linked CEE economies. The very core of the idea of convergence is that the free movement of capital within European Union is bound to benefit more competitive areas. Why not build a new factory across the border and save 60% on labour costs? If Germany can export itself out of the recession, New Europe is perfectly placed to gain from it. Between 2007 and 2013, the European Union invests close to 200 billion Euros in the Central and Eastern European member states via the Structural Funds and the Cohesion Fund. Widely perceived as manna from heaven, the investments are done by a myriad of individual programs, each with their own set of rules and target institutions. Injecting up to 4 percent of GDP into economies that are in a catch-up process will have significant macro-economic implications. After a recent change, all member states are encouraged to use up to 4 percent of the Regional Development Fund transfers for energy efficiency and renewable energy sources in housing. European Investment Bank (EIB), the EUs public bank that provides loans and co-finances projects in tandem with structural and cohesion funds, plans to

increase its lending in CEE countries energy, climate change and infrastructure sectors. Real income catch-up has temporarily stalled due to the global recession as New Europe suffered larger output declines than the Euro area. A healthy cyclical recovery in Europe will put CEE back on the catch-up track with regained momentum by 2011. The ability of Central European economies to leverage off of the Euro area recovery will be enhanced by a temporary drop in their relative unit labour costs which boosted export price competitiveness. FDI inflows, a long-term driver of convergence, should rebound with the cyclical global rebound.

There are already three euro zone members in New Europe from 2011 and the rest will follow soon.

EU transfers to new members as %GDP Source: European Commission

12

Integration of Quantitative ESG Factors Into Valuation Models

The single most important feature that makes Limestone stand out from the crowd is the structure of the research process. Right from the beginning of our activities in the field of socially responsible investments, it became obvious that the ratingbased portfolio management model does not work in emerging markets framework. Also in the developed world, the best-of-class investment products had started to backfire and investment community was growing uneasy with poor performance of SRI funds as compared to more conventional equity products. Sadly, it was almost a paradigm that money invested responsibly always had inferior performance. The main problem was detachment of fundamental analysis and active portfolio management from the investment process and replacing it with backward looking ratings. From this point we understood that while the company ratings and risk classifications are important in implementation of CSR factors to portfolio formation, they cannot be the basis for investment decision, instead they should serve as a complementary compliance tool to fundamental valuation. The more we learned about ESG principles the more certain we became that integration of soft factors with financial fundamentals should be the key issue and distinctive feature in our research framework. Integration of ESG factors to fundamentals has had various approaches over the years. There are numerous studies carried out on how the corporate responsibility affects market value, what are the key performance characteristics, and who can benefit most from it, yet quantitative application has so far been rare. Still, several studies have indicated that SRI rating has effect on companys beta and thereby its cost of capital. Therefore, adjustment of cost of capital is the practice that we wanted to follow in our integration of CSR to valuation models.

The main problem of many SRI funds is detachment of fundamental analysis from the investment process by replacing it with outsourced ratings.
Based on our knowledge of industry practices, and after acknowledging that there is very little public

13

information available on companies in our investment universe, it was clear that a new approach to address the issue was needed. As our fundamental valuation models utilise cost of equity based on country specific risk free rates with unified risk premium and industryspecific beta factors, adjusted by liquidity and leverage premiums, we took cost of equity as the main factor to be adjusted by ESG factors. As beta factor describes sector risk and it has several adjustment layers already attached to it in our model, as per dedicated analysts assessment, we did not regard it necessary to add an additional adjustment level. Accordingly, cost of equity is calculated by the following formula: Re = Rf + xRp + ESG Where Re is cost equity, Rf risk free rate and Rp universal equity market risk premium. ESG is the sum of basis points derived from the grades given in the ESG matrix.

cannot be too small. According to the selected scale of adjustment, the cost of equity can vary by 240 bps on scores from one to five. Given that the average cost of equity is 12%, the gap between best and worst ranking companies will be 9.6-14.4%, or about a third, which is obviously quite significant range that will have strong impact on estimated company value. The impact will be smaller for companies with high cost of equity, whether due to high risk free rate or beta, and higher for companies with lower cost of equity. In practice, this is the situation that we want to achieve, as in order to express higher upside, companies with higher risk profile need to show far better financial performance. On the top side of the companies, it is not so likely that companies operating on stable markets with low industry risk will have exceptionally poor ESG rating, although there are exceptions to this rule. Theoretically, the extra harsh outliers from industry practice should then be punished more strongly, which is quite fair that way. In practice, there are very few extreme cases with ratings with full set of max or min grades in each category. Companies that are regarded of high risk from fundamental perspectives, tend to have lower grades also on ESG level. It is unlikely that an analyst would assign a rating of 1 for environment and social issues and 3 for governance; company that neglects environmental or social issues cannot be regarded well governed. Therefore, the ratings have a tendency towards being uniform, without extreme ranges on the company level. From practical point of view, the impact of ESG assessment to valuation is in the range of 10-20% that will make significant difference in target prices, but will not influence the valuation level beyond reasonable limits. When assessing the ESG factors, we noticed that the rating levels of companies vary widely by different factors, with sector risk being the most informative. Lack of public information is and remains to be the main reason behind low ratings compared to similar companies on more developed markets. This makes the direct comparison of a particular company with Western European standards not very informative exercise. Therefore, our task is to provide the companies with

To include the assessment of the ESG factors to the above cost of equity calculation, we introduced an ESG matrix, where the analyst can rate each company by these three factors that together create an overall ESG score of the company. To make the building blocks simple, we introduced a rating score from 1-5, where the score of 3 will not ignite any changes to the cost of equity and each notch below or above adds or subtracts, respectively, basis points from cost of equity. Rating matrix is provided below:

Clearly, the scale of justified adjustment to cost of equity is debatable. From our calculations we regard the selected 20 bps per grade to be just about sufficient. As was pointed out in the beginning of the article, we want the integration tool to bring relevance to valuation process, and avoid the situation where ESG factors dominate over fundamental valuation. Therefore the adjustment cannot be overly large and prevail over other fundamentals. On the other hand, in order to make a difference, the change in ESG factors

14

ratings that reflect their position and quality relative to regional peers.

We expect our research approach to markedly improve the risk adjusted return of Limestone New Europe SRI Fund and differentiate us from the competition.
Over the next few years the convergence of New Europe to Western Europe is set to continue. We expect also the level of CSR awareness and relative grade level of companies in our universe to converge with that of Western peers. The difference between the ratings given by our analysts and that of thirdparty consultants is expected to decrease. After the short period of our operations, during which we have promoted the importance of CSR in New Europe, some significant improvements have already happened, and more information on these issues has appeared on corporate websites in Eastern Europe. Certainly, there are also other aspects at work when constructing an SRI portfolio. For example, despite similarly good governance of a bank and an oil company, it is reasonable to assume that the oil company will have lower environmental rating due to significantly higher sector environmental risk.

Disregard of fundamental valuation and applied ESG valuation overlay, we are always careful when investing in companies with extremely low scores in one or more category. In addition to fundamental framework there remain other considerations, especially our clients preferences. We feel more comfortable with the portfolio that is not concentrated in high risk sectors, although from negative screening point of view they are acceptable. All in all, the integration of ESG framework to fundamental valuation models through adjustment of cost of equity provides us with a superior additional tool to assess the risk level that is translated into actual numbers. Over time, we expect this to markedly improve the risk-adjusted return of Limestone New Europe SRI Fund and differentiate us from the rest.

15

Investing At Limestone
Clients
Our sole purpose of existence is earning investors excellent investment returns. Alignment of interests with our clients is the cornerstone of our operational structure. In investing, we respond to the values and aspirations of our investors by seeking to engage in dialogue with companies to both better understand, as well as help shape them in ways that favour sustainable and responsible practices. Mostly because we know that this contributes to better investment returns for our investors. At the same time it is the response that we get from the companies that shapes our understanding and helps us to further develop each and every investment case.

Approach
We invest in financially attractive companies that are open to proactive approach to social responsibility issues. We believe that such companies exhibit higher management quality, better stakeholder relations, greater resilience to economic shocks and lesser risk to any loss of market reputation. In turn these companies attract lower risk premiums relative to peers and consequently achieve a higher valuation and outperformance over the long term.

Competitive Advantage
Limestone is combining its fund managers excellent investment track record in Emerging Europe with innovative research approach integrating ESG factors into fundamental company valuation. We are the first investment company in Emerging Europe to focus on sustainability. Our in-house valuation database contains comprehensive information about a wide universe of companies mostly unknown to general investment public. Our investment performance from the first two years of operations is firmly on top of the peer group ranking.

Philosophy
We believe that equity markets, with regard to individual companies and instruments, have a tendency toward efficiency over longer periods of time. Especially in emerging markets, lacking or asymmetrical information along with limited transparency causes widely fluctuating perceptions in risk and value. Consequent pricing inefficiencies can be uncovered and exploited by bottom-up fundamental research driven active portfolio management. Our funds aim is to deliver excellent returns by investing in companies doing business in New Europe that have the willingness and potential to contribute and best adapt to the shift to a more sustainable society.

16

Investment Process
Total Universe Quantitative screening: liquidity, market cap, free float 1,000+ companies

Investable Universe Sector based classification. Information gathering by dedicated analysts. Compliance check. Qualitative screening

400 companies

400

300

Special situations

Target prices 300

Investable universe

Financial forecasts Excess return and justified multiple models

In depth DCF models for out of ordinary and high conviction opportunities

Factors

Sector outlook Market position Strategic development Management quality Economic environment, etc.

Comparative valuation level Profitability Multiples and return on capital comparison Growth-adjusted multiples

DCF models

Excess return and justified multiple models

Focus list

Financial Forecasts

Comparative analysis

Fundamental analysis

Target price

Sources

Public sources Risk Rating by GES Management meetings Third-party research

International and local peer group information Inter-sector comparison

Management information Analyst forecasts Cost of capital

Qualitative factors: liquidity, market and sector sentiment, SRI

17

Convergence Some Critical Reflections from Within and Without

Geoffrey Mazullo
The ten plus two new member states of the European Union (EU) are as diverse as the 15 old member states. Any analysis of financial sector convergence within the enlarged EU must begin with certain parameters. What is exactly meant by convergence? Does convergence mean a race to the bottom or to the top? Which aspects of the financial sector are converging? What is the mean? And how long is too long? will do on January 2, 2011. In fields such as corporate governance and pension reform, several of the new member states were forerunners, implementing corporate governance codes and establishing private pension schemes before many old EU member states. Prior to and even during the current financial crisis, several new member states, notably Poland, continue to grow, quarter after quarter. Thus, all in all, the various indicators briefly outlined here evidence convergence similar to processes experienced in earlier EU expansions. Portugal and Spain took decades to converge, whereas Austria, Finland and Sweden integrated more quickly. Thus, for the sake of argument, let us agree that convergence of the ten plus two is moving forward, in broad terms in not dissimilar fashion to the convergence of Portugal and Spain as well as perhaps Ireland, but not necessarily Austria, Finland and Sweden. In corporate social responsibility (CSR), disclosure of economic, social and governance (ESG) indicators by listed companies, and socially responsible investment

The twelve new member states of the European Union are as diverse as the fifteen old member states.
In a number of areas, such as GDP, purchasing power parity (PPP) and rural/urban income divide, the process of convergence in almost all of the 12 new member states will take decades. In other areas however, and in certain countries, convergence has proceeded rapidly. Slovenia and Slovakia have adopted the Euro; Estonia

18

(SRI) the convergence process among the ten plus two new member states is also extremely diverse. In my opinion, corporate governance was the common denominator and remains a if not the primary driver behind ESG reporting in the new member states. Beginning in 2002, corporate governance reforms were implemented across CEE. By 2009 a corporate governance code had come into force in each of the ten CEE countries that became new EU member states in 2004 and 2007. In each of these countries, the local stock exchange played a major role in drafting and implementing the corporate governance code. Whereas reporting on environmental and social indicators varies widely among CEE blue-chip companies, the implementation of a corporate governance code in each country led to incremental and sustainable increases in reporting on governance indicators over time. Reporting on social indicators has improved over the past decade; however, there is no strong driver. The United Nations Global Compact (UN GC) has played a positive role in several new member states. However, only recently has a more rigorous and standardized approach to reporting on progress been visible. EU directives play a minor role. In this area, convergence simply might take longer. Environmental reporting is the weakest of the three elements; in several new member states there is little if any meaningful reporting. Apart from relatively recent EU initiatives, there has been no major driver. International initiatives such as CERES or the Carbon Disclosure Project have had little if any impact in the new member states. It is still relatively rare to find time-series data on fundamental indicators such as energy and water use. Nevertheless, the convergence process has recently gathered steam, demonstrated, for example, from surveys conducted by the Partners for Financial Stability (PFS) Program from 2003-2009. Disclosure (by the ten largest listed companies in the 12 new member states and Croatia) of information on environmental considerations in supply chain management increased in the annual report to 24%, from 19% in April 2009 and on company websites to 39%, from 30% in April 2009. Despite recent progress,

convergence may take the longest here. CSR is a much broader concept and here I will allow myself one sweeping generalization. Unfortunately, to many in the new member states, as in the old member states and many other jurisdictions, CSR is simply philanthropy. Management and board members at many listed companies either misunderstand or ignore that CSR is actually about internal processes and how these create internal processes create internal benefits, which in turn translate into external benefits for shareholders and stakeholders. This misconception remains a barrier to a useful discussion about CSR. Convergence is part of the solution, since over time a more holistic appreciation of and approach towards CSR have developed in many Western European countries.

Unfortunately, to many in the new member states, as in the old member states and many other jurisdictions, CSR is simply philanthropy.
In the field of SRI, convergence has really just begun. Similar to the challenge with CSR, the major problem is a misconception about what SRI is. Many reduce SRI to either negative stock selection (no alcohol, gambling, nuclear energy or tobacco) or a do-good and lose money paradigm, neither of which are accurate. Furthermore, the social in SRI is problematic for some constituencies in former Socialist countries. Despite the many obstacles, some of which are similar to those in the old member states, there are several recent positive developments, such as the establishment of SRI funds and the launch of at least two SRI indices in the region (the Respect Index in Warsaw and the CE RIU in Vienna). Moving forward, both internal and external factors will foster convergence. External or global drivers include: a growing consciousness of the competitive imperative of Brazil, Russia, India and China (BRIC) as well as other emerging markets; the emergence of Extensible Business Reporting Language (XBRL) as a new reporting

19

language; including both financial and extra-financial data; the launch of Global Reporting Initiative (GRI) as a standard for extra-financial reporting; increased public and regulatory scrutiny of the impact of climate change on corporate performance; increasing consumer interest in fair trade, organic food and sustainability; the growth of SRI globally; .the United Nations Principles for Responsible Investment (UNPRI); and seismic developments in national legislation on ESG issues, including mandated gender equality in boards (Norway) and mandated CSR reporting by listed companies, stateowned companies and financial institutions (Denmark as of 2010). Internal factors include: a growing awareness among financial elites of the importance of ESG to corporate profitability and sustainability; the development of a cadre of talented and internationally-astute investor relations professionals, ongoing information technology (IT) advances; and slow but growing pressure from consumer, investors, the media, the public-at-large and regulators about ESG issues. At the outset of the financial crisis, the financial press offered dire predictions for the new member states, chastising them en bloc for their poor financial, lending and monetary policies. This was ironic, given that the

crisis was born not in CEE, but elsewhere, and triggered by the US sub-prime mortgage debacle and the collapse of totally unregulated Icelandic banks. The blanket criticism was also undeserved to a certain extent, since several countries, notably Poland, had years earlier instituted restrictions on foreign-currency denominated mortgage loans. In any case, convergence has continued, despite the current crisis. Recent developments in Greece, Ireland and Spain demonstrate that the old member states remain quite diverse. Tigers, whether Celtic or Iberian, are just as susceptible to crises as other animals. The ten plus two new member states are also heterogeneous. Nevertheless, when viewed both from within and without a broad range of indicators evidence that convergence within the enlarged EU is well underway. This bodes well for the development of a pan-European SRI universe.

Viewed both from within and without a broad range of indicators evidence that convergence within the enlarged EU is well underway.

Geoffrey Mazullo is Principal of Emerging Markets ESG (www. emergingmarketsesg. net) and Adjunct Professor of the School of American Law (SAL) in Gdansk and in Wroclaw, Poland. He is Chair of the Baltic Market Awards Committee, an initiative of the Riga, Tallinn and Vilnius NASDAQ OMX Stock Exchanges to promote excellence

in investor relations. From 2001-2009 he directed the PFS Program (www.pfsprogram.org), a regional financial sector development project co-financed by USAID and East-West Management Institute. Previously he worked as a corporate governance analyst with IRRC and ISS. Since the mid-1990s he has been directly involved in a number of corporate governance initiatives across CEE. Since 2001 he has increasingly focused on ESG reporting by listed companies in emerging markets, postulating that rigorous analysis and detailed reporting on ESG indicators bring internal benefits to the company and external benefits to its shareholders and stakeholders.

20

Bulgaria
21

Country Focus: Bulgaria

Republic of Bulgaria is a country in the Balkans in southeastern Europe, bordering Romania to the north along the River Danube, Serbia and the Republic of Macedonia to the west, and Greece and Turkey to the south. The Black Sea defines the extent of the country to the east. With a territory of 110,994 square kilometres, Bulgaria ranks as the 16th-largest country in Europe. Several mountainous areas define the landscape, including the highest peak in the Balkan region, Musala. In contrast, the Danubian plain in the north and the Upper Thracian Plain in the south are low and agriculturally very fertile regions. Bulgarias capital city and largest settlement is Sofia, with a permanent population slightly short of 1.5m people, out of almost 8m total for the country. The emergence of a unified Bulgarian national identity and state dates back to the 7th century AD. The First Bulgarian Empire (681 1018) at times covered most of the Balkans and eventually became a cultural hub for the Slavs in the Middle Ages. In the 15th century Bulgarian territories came under Ottoman rule for nearly five centuries. Bulgaria regained its full sovereignty in 1908. After World War II it became a communist state and was a part of the Eastern Bloc until the fall of the Berlin Wall lead to a transition to parliamentary democracy and free-market capitalism. A member of the European Union, NATO, and the World Trade Organization, Bulgaria has a high Human Development Index of 0.84, ranking 61st in the world in 2009.

22

Source: ING

Financial Markets and Corporate Governance

Classified by the World Bank as an upper-middleincome economy, Bulgaria ranks as the lowest-income member state of the European Union. The financial crisis hit the economy hard and neighbouring Greeces fiscal problems are having impact to Bulgarias recovery. Political stability, relatively good fiscal position, and low unemployment give hope to rebound in 2011 and income level resumes sustainable convergence to core EU standards. the main priorities of BSE, as listed on Exchanges web site, is Corporate Governance. Bulgaria is one of few countries in emerging markets that have introduced requirement for listed companies that have a dedicated Investor Relations Director. Corporate governance code was introduced and enforced in 2006. Limestone met in Sofia with Ivan Takev, the Executive Director of BSE to enquire about the official view as well as personal opinion about ESG issues in Bulgaria and prospects for sustainable investing. According to Mr Takev, the introduction of IR Directors and the Code has made a visible difference in quality of communication with the top tier companies but more wide-spread acknowledgement of the benefits of enhanced transparency has been delayed by the economic crisis. Associations of IR Directors promote quality of investor communication through training and various events, but the importance of IR as a corporate function varies greatly. Investor activism is still very limited. Markets small scale and illiquidity is a major issue delaying

Bulgaria is today the lowest income EU member state, by definition having the most to gain from future convergence
Bulgaria Stock Exchange was set up in 1997 to strengthen the public acknowledgment of the capital market as a source of funding for the local business and an essential tool in the Bulgarian economy. One of

23

any development, especially now that international investors have become extremely risk averse. Stock Exchange has historically been more active in promoting Bulgaria as investment target, but with rather modest success. In June 2010 the National Corporate Governance Committee together with BSE decided to launch a project for calculating an index of the companies with

good corporate governance. The detailed methodology will be developed by the Exchange. The date of launching the index is expected to commence at the end of the third quarter of 2010. The index basis is expected to be formed by companies that have pledged to follow the principles of Corporate Governance Code. Thus far the only equity benchmark in New Europe to consider ESG factors is Warsaw Stock Exchange launched RESPECT.

Development and Prospects in Sustainable Development

Bulgaria has the highest energy consumption per unit of GDP in Europe. Limestone team met with Evgeny Angelov, Deputy Minister of Economy, Energy and Tourism over dinner to discuss energy efficiency and other development issues that the Government must tackle at these economically distressed times. According to Mr Angelov, the country is planning several initiatives to promote energy efficiency. For example, the Government has launched a program in the amount of EUR 200 million to support projects that will yield smaller consumption of energy. Currently the issue is debated with the EU, as the planned support measures of half the cost of the project are considered too high and could be seen as state subsidies. Also, support for and promotion of green energy projects is scheduled, but efficiency improvement remains a key topic, as more active introduction of green energy projects does not mitigate the high level of consumption. As a verification of what Mr Angelov had told us, in late June 2010 US based Clean Energy and Power, Inc. announced exclusive negotiations to acquire a controlling stake in a 3 megawatt solar project in Bulgaria. The recent announcement by Bulgaria and European Energy Commission to approve the details of a solar program which will last for the next several years included a 25-year guaranteed off-take price (purchase price by the utility). According to CEP CEO, the boom in European solar development is continuing and the next country to lead these efforts is Bulgaria with some of the highest sun-hours per year in Europe.

24

Companies in Focus
Industrial Holding Bulgaria
IHBL is a former privatization fund transferred into a holding of a group of maritime and machine building businesses. Main business lines are lathes, shipbuilding, port operation, and river cruises. The holding takes an active role in its subsidiaries, providing managerial expertise, financial optimization, and control. Limestone took interest in the company when our research base indicated severely distressed valuation levels. The reasons for market pessimism were also clear, as IHBL is a deeply cyclical company that typically struggles during economic downturns. The principal products and services IHBL is deriving its business from are shipbuilding and maritime services. The range of 10k-56k DWT vessels are constructed partly as eco-ships in JV with Finnish global industry leader Wrtsila and partly under licence from highly efficient Mitsubishi ship design. IHBL also operates two Black Sea seaports. Promising business development is expansions of own fleet of vessels from current two to five by 2013. With in-house chartering service under development, a well integrated business model should ensure rich margins and rapidly growing volume when business cycle turns. The machine building arm of the company is the biggest producer and exporter of universal lathes in the country. A connection to renewable energy comes from the production of hydro plant turbines. IHBL can be described as one of the corporate social responsibility pioneers in Bulgaria. It was the first public company to start CSR reporting in 2006 and its corporate web-site has devoted an unusually high share to Social Responsibility and Corporate Governance. CEO Georgi Momtchilov told us during our latest meeting that he is personally a great fan of Socially Responsible Investing and has been systematically enforcing corporate social responsibility in IHBL. Company has developed outstanding reporting practices concerning almost all the aspects of company and its stakeholders, including labour policies and unions, safety and quality, environment and sustainability, etc. IHBL has been constantly shortlisted among the best employers in the country and has a strive to be a good citizen of the country and community, according to Mr Momtchilov.

25

Sopharma
Sopharma is the largest pharmaceuticals producer in Bulgaria with an aspiration to become a strong regional player. Company was privatized in 2000, after which there has been constant investment in modernization and growth. For most of its products Sopharma has a closed production cycle, as it produces both the pharmaceutical substances and ready to use products. Today more than half of the production is exported, mainly to Russia, Poland and Ukraine. 25% of product volume is original drugs and 75% generics. Supporting companys success has been its proactive approach to distribution consolidation. Sopharma Trading is the largest drugs distribution company in Bulgaria, with hitech equipped distribution centres. Todays Sopharma is a modern state of the art equipped drugs producer and distributor with considerable local market power. The investment case for Limestone has evolved over the years since we first met with the charismatic CEO and largest shareholder of the company Mr Donev back in 2005. It was always a case of considerable potential but too highly priced until now. The market slump has taken its toll from everywhere and Sopharma valuation has become attractive for us. Sopharma has been growing sales and profitability throughout the financial crisis, despite even the ambitious investment program. Sector risk is low and exports to East, if supported by the amount of expertise and brand awareness that Sopharma has developed over the decades, have massive potential.

There are several noteworthy things about Sopharma with regard to ESG issues. It is perceived in Bulgaria as one of the most transparent public companies. Companys facilities apply to highest environmental and energy efficiency standards and considerable effort has been put on workers safety issues. Sopharma is currently supporting five larger social initiatives, including continuous campaigns to promote health education and support of no-smoking movement (with one of the latest successful product launches being a quit smoking drug). One traditional social initiative is the construction or renovation of one large public playground for children every year. Sopharma is active in communities where it is an influential employer; good example is the development of local social infrastructure in Triar village, including postal facilities and medical service point. Subsidiary Sopharma Property is developing the first green residential buildings in the country. We were truly impressed with Sopharmas awareness of CSR issues and clear commitment to constant improvement of reporting.

Bulgarian Real Estate Fund REIT

Bulgarian Real Estate Fund (BREF) is close-ended real estate investment trust. Incorporated in October 2004, it is among the first REITs to take advantage of one of the most advanced and accommodative REITs legislation in Europe. Today, BREF is among the largest

26

REITs in Bulgaria with a solid track record of creating value for its investors. BREF specializes in commercial development, strategic property acquisitions and investments in strategic asset plays, like farmland. In 2008, BREF completed one full cycle of business activity: from acquisition of investment plots, through planning and development, to exiting projects just in time to escape the crisis. Limestone interest with BREF goes back to the launch of the REIT six years ago, when the team was among the few international investors in Bulgaria at that time. Over the years the connection to BREF management has stayed good and trust in their abilities has grown constantly, especially during the last two years when BREF has managed the extremely difficult markets exceptionally well. Limestone research indicates BREF to be one of the most attractive asset plays in the region. The legal requirement for REITs to pay out 90% of realized gains as yearly dividends assures that for shareholders value is unlocked continuously, especially now that investment cycle is ending.

When Limestone considered BREF as an investment for SRI Fund back in 2009, the team engaged with the company with a primary goal to encourage the management to be more transparent in ESG reporting and CSR issues. The response was positive, and the team was provided a detailed account of social and environmental activities that BREF had initiated over the years. In 2010 the company is due to launch a new website with extended focus on ESG reporting. Kambanite Business Centre, an office building completed in 2009 that represents the main asset of the REIT, was in 2009 selected as a regional case study for the holistic design strategy and installed technologies that opt at the energy efficiency. The study, called The Potential for Green Building in Southeast Europe was conducted by Colliers International. During this study, 64 buildings in six different countries were audited in search of examples of existing good practices for sustainable design, technologies, and practices.

27

ESG Reporting In CEE Has Catch-Up Room

Martin Pitura, GES Investment Services The study
GES Investment Services has performed a ESG comparison on blue chip indices in all major European countries including New Europe. A total of 746 companies have been assessed according to GES Risk Rating criteria. Altogether a total of twenty-nine indices were analysed each of them comprising approximately of the largest companies by market six-forty1 capitalization on each market. 2

The analysis process

The environmental analysis is based on international standards for environmental management and industryspecific key indicators for environmental performance. The human rights analysis is based on UN Universal Declaration of Human Rights, UN Convention on the Rights of the Child and ILO Core Labour Conventions. The corporate governance analysis is based on the OECD Guidelines for Good Corporate Governance. The analysis of each specific company is based on official company documents, dialogue with companies, information from non-governmental organizations, the media and GES partners.

What is ges risk rating?

The GES Risk Rating is an analysis of risks in the companies methods of dealing with the environment, human rights and corporate governance. The analysis is based on international norms on Environmental, Social and Governance (ESG) issues in accordance with the UN Principles for Responsible Investments (PRI). It evaluates both the companies present status and readiness for the future.

Rating
In this assessment, the companies obtain a rating (from 0-3) for each of the areas environment, human rights and corporate governance. A low score indicates no information or total failure and a high score indicates

1 2

With the exception of the FTSE 100 index where the 100 largest companies are taken into account. In addition to the blue chip indices we have also included the RESPECT Index (a Polish CSR Index) and mWIG40 index from Poland (Index of forty midsized polish companies).

28

that the company has management systems and routines in place in order to secure that a particular program is carried out, performance data is published and preferably also verified by a third party. Altogether the rating shows the companys ability to deal with the general risks that concern the type of activity and to comply with international norms and procedures. The result show the average performance of a company on each of the indices in this assessment.

We will present the result for the three E, S and G pillars separately and jointly, where we use equal weight for each of the tree pillars in the analysis. We start with New Europe and after that we will incorporate rest of Europe to find out how New Europe performs compared to major indices in Europe. Finally we will investigate the differences of ESG performance between industries, as classified by Global Industry Classification Standard (GICS)

New Europe And Russia

A total of twelve indices were analysed in New Europe, covering markets in the Baltic countries, Poland, Czech Republic, Russia, Hungary, Slovenia, Croatia, Bulgaria, Romania and Republic of Serbia. With regard to ESG reporting in New Europe the analysis shows that the best performing pillar is the Corporate Governance pillar, followed by the Environmental and Social pillars, with a quite large gap between Corporate Governance pillar and the other two pillars. Best performers on Corporate Governance are companies present on the WIG 20 in Poland, the PX index in Czech Republic and the mWIG 40 Index in

29

Poland. If we would only concentrate on blue chip indices and exclude the mWIG40 index, then the BUX index from Hungary would make third place. If we include the RESPECT index then it would be the number one performing index with regards to Corporate Governance in New Europe. Noteworthy is that all except for one company from the mentioned indices above publish information on Corporate Governance. Laggards in New Europe are the CROBEX 25, BET-XT 25 and BELEX 15 from Croatia, Romania and Serbia respectively. The OMX Russia 15 index is also the top performer on the Social pillar in New Europe, followed by the PX 14 and WIG 20 indices, with laggards being indices from

Romania, Bulgaria (SOFIX 20) and Serbia, not taking mWIG 40 into account. Noteworthy is that a total of 9 companies (18%) among the three top performing indices in the Social pillar did not report anything on social issues. If we consider the three pillars jointly then this comparison shows that the best ESG performer in New Europe is the PX index, followed by the OMX Russia 15 and WIG 20 indices. If we were to take the Polish RESPECT index into consideration then that index would be the number one performing ESG index in New Europe, with indices from Bulgaria, Romania and Serbia being the laggards.

Rest of Europe
A total of seventeen indices were analysed in rest of Europe, covering markets in Sweden, Norway, Finland, Denmark, Germany, The Netherlands, Belgium, Germany, France, Great Britain, Ireland, Portugal, Spain, Italy, Greece, Turkey3 , Switzerland and Austria. When adding rest of Europe to the analysis, and looking at the three ESG pillars independently the findings from New Europe in one sense repeats itself. As before, the
3

best performing pillar is the Corporate Governance pillar, followed by the Environmental and Social pillars, however now company preparedness and performance generally being on a much higher level for all three pillars. Best performers on Corporate Governance are companies present on the FTSE 100 index in Great Britain, the SLI 30 index in Switzerland and the AEX

Turkey, although not part of Europe has also been analyzed.

30

25 index in the Netherlands. Noteworthy is that all companies from the mentioned indices above publish information on Corporate Governance. Laggards are indices from Italy (FTSE MIB Index 40), Greece (ATHEX 20) and Turkey (ISE 30). The OMX Stockholm 30 index is the top performer on the Environmental pillar, followed by the CAC 40 and the DAX 30 index in Germany. Noteworthy is that all companies from the mentioned indices above publish information on Environmental issues. The OMX Stockholm 30 index is also the top performer on the Social pillar in the examined group of companies, followed by the CAC 40 index in France and the IBEX 35 Index in Spain. Noteworthy is that one company (1%) among the three top performing indices in the Social pillar did not report anything on social issues. The top Corporate Governance, Social and Environmental performers in New Europe fall behind the more developed countries in Europe when extending the universe. Being the leader in New Europe, WIG 20 ranks fourteenth place among Corporate Governance

performers in Europe. If we would take the RESPECT index into account then it would make eleventh place in Europe, just slightly better than the DAX Index from Germany and the PSI Index from Portugal. The OMX Russia 15, being the leader on Social and Environmental pillars in New Europe, ranks fifteenth on Social and fourteenth on Environmental in when incorporating rest of Europe into the analysis. If we sum up all the E, S and G pillars and create a separate ESG pillar where all the parts have equal weights we come up with the findings below. We have identified five clusters of ESG performance in Europe. There is a group of markets in Europe which clearly are the ESG leaders in Europe, with Swedish OMX 30 as the top performer, followed by CAC 40, AEX 25, FTSE 100 and DAX 30. These indexes are all part of the first cluster. The second cluster comprises companies that still have ESG performance on a relatively high level, including for example OMX Oslo 20, OMX Copenhagen 20, however not reaching the top ESG performers in Europe.

31

The third cluster comprises indices with a little less than average ESG performance in Europe, including the ATX 20, ISEQ 20, ATHEX 20 from Old Europe and RESPECT, PX 14, OMX Russia 15 and WIG 20 from New Europe. The fourth cluster comprise below average ESG performers in Europe, including BUX 13 in Hungary, SBITOP 6 from Slovenia, mWIG 40, OMX Baltic 10, comprising companies from Latvia, Estonia and Litvia

and finally the ISE 30 in Turkey. The gap between the third and fourth cluster is however quite small especially for the indices from Hungary and Slovenia. The fifth cluster comprises are the clear laggards in Europe with regards to ESG preparedness and performance comprising of the blue chip indices from Croatia, Bulgaria, Romania and Republic Serbia.

32

Sector Analysis
When we assess the outcome of the sector analysis in New Europe we can see that Telecommunication Services are best performers on Corporate Governance, followed by Utilities and Consumer Discretionary, with Industrials, Health Care and Information Technology being the laggards. Energy, Utilities and Telecommunication Services are best performers with regards to the Environmental pillar, with Industrials, Consumer Discretionary and Financials as laggards. Noteworthy is that the laggards present very little information on its Environmental preparedness and performance.

33

Telecommunication Services, Energy and Utilities are best performers with regard to the Social Pillar, with Consumer Discretionary, Industrials and Health Care being the laggards. Again the laggard presents very little information on its Social preparedness and performance.

If we create only one ESG pillar for New Europe, then the outcome shows that the leading ESG industry is Telecommunication Services, followed by Energy and Utilities. Laggards in New Europe are Health Care, Industrials and Information Technology.

When we incorporate rest of Europe in our analysis we can see that Telecommunication Services are best performers on Corporate Governance, followed by Utilities and Consumer Discretionary, however one can conclude that there is not a huge difference in performance between industries.

Utilities, Telecommunication Services and Materials are best performers with regards to the Environmental pillar, with Industrials, Consumer Discretionary and Financials as laggards. Utilities, Information Technology and Telecommunication

34

Services are best performers with regard to the Social Pillar, with Health Care, Materials and Financials as the laggards. If we create only one ESG pillar for whole Europe, then the outcome shows that the leading ESG industries are

Utilities, Telecommunication Services, and Information Technology. Laggards are Europe are Health Care, Industrials and Financials. Noteworthy is that when we look at the analysis for the whole Europe the difference between ESG performance between the industries is not that big as compared with New Europe.

Conclusion
When looking at the analysis above one can draw the conclusion that the Corporate Governance pillar in some indexes in New Europe is quite competitive. The difference between the best performing index in Europe, the FTSE 100 and the best performing indexes in New Europe, the WIG 20 and RESPECT indexes is not that large. The difference between Environmental and Social performance between New Europe and rest of Europe is however quite large. This is something that New Europe is working on and the improvement during the last ten years has been quite good. Our opinion is that the current leaders in New Europe were on the same level ten years ago as the current laggards in Europe are today. We would suggest that New Europe is moving forward with regards to ESG reporting. More and more companies in New Europe are realising the value of ESG reporting to potential investors. Although being laggards, and distanced by the top performing indexes in Europe, one can see that indices from New Europe are close to catching up on ESG reporting with indices coming from Portugal, Austria, Ireland. The Polish RESPECT index even slightly exceeds the Greek Athex 20 index. We expect to see for the coming years that companies from New Europe continue to improve their ESG reporting, which will make them more attractive for investors.

35

European SRI Transparency Code

Section 1. Basic Details Company & fund
Limestone Investment Management Limestone New Europe SRI Fund www.limestonefunds.eu Large cap Mid cap Small cap Blend Private equity .. Capitailisatin Geographic LU0373664472 Equity Bonds Mixed Thematic Structured products Money market ..

Focus

EMU Europe North America Asia/Pacific Emerging Markets Em.Europe ex-Russia..

Environment Social Governance Particular Sector: .. SRI

Section 2. ESG Investment Criteria

Section 3. Research process Best-in-Class Screening Norms-based Screening Thematic Screening Ethical Screening Engagement ESG Integration

Research Team Advisory Committee Audit Process Stakeholder consultation Update Research Disclosure

Internal Yes Internal audit Yes

External

Both No

External audit No

The assessment of issuers is updated every 3 months Do you disclose the analysis results of individual issuers? Never Sometimes Always

Section 4. Evaluation and implementation

Selection Process Selection Implementation Portfolio Disclosure Divestment Notice

Internal

External

Both

How are the research results integrated in the investment process? Restricted investment universe Over/underweight recommendations Do you disclose the portfolio holdings? No Partly Are investors informed about divestments on ESG grounds? No Regularly Are companies informed about divestments on ESG grounds? No Regularly

Other Active Fundamental Value Based Selection Completely Always Always

Section 5. Engagement Approach

Do you have such a policy? Yes If yes, who undertakes engagement? Internal team External team If yes, which engagement methods do you use? Proxy voting Co-filling shareholders resolution Collaborative engagement Filling shareholders resolutions If yes, do you disclosure the results? No Regularly No Both Direct engagement conducted publicly Direct engagement conducted privately Always

Section 6. Voting Policy

Do you have such a policy? Yes If yes, do you disclose your voting practices/decisions? No Regularly If yes, do you fill resolutions? No Regularly No Always Often

The European SRI Transparency logo signifies that Limestone commits to provide accurate, adequate and timely information to enable stakeholders, in particular consumers, to understand the Sustainable Responsible Investment (SRI) policies and practices relating to the fund. Detailed information about the European SRI Transparency Code can be found on www.eurosif.org, and information of the SRI policies and practices of the The European SRI Transparency Logo reflects the fund managers commitment as detailed above and should not be taken as an endorsement of any particular company, organisation or individual.

36

Contacts and Fund Terms

Name: Fund Domicile: Base Currency: Fund Launch Date: Investment Manager: Fund Manager: Benchmark: Quotation: Liquidity: Management Fee: Administrator: Custodian: Auditor: Legal: ISIN: Bloomberg: Lipper ID: Contacts:

Limestone Fund - New Europe Socially Responsible

Fund - New Europe Socially Responsible Fund Luxembourg, SICAV, UCITS EUR 31.07.2008 Limestone Investment Management Alvar Roosimaa Stoxx EU Enlarged TMI Daily Daily 1.25% institutional 2.50% retail Krediettrust Luxembourg S.A. Kredietbank Luxembourg S.A. Deloitte S.A. Arendt & Medernach LU0373664472 LIMNESR LX 68021312 Paavo Pld paavo.pold@limestonefunds Telephone +372 712 0851, Fax: +372 628 2370, Skype: paavopold

37

For notes

38

39

40