Best Practice Environmental Social and Governance (ESG) Reporting

Transcription

1 Best Practice Environmental Social and Governance (ESG) Reporting Building on Report Leadership s publication Tomorrow s Reporting Today - November 2006

2 Report Leadership published Tomorrow s Reporting Today in November 2006 as a stimulus to further debate on the relevance and quality of current corporate reporting, and to develop simple, practical ways to improve narrative and financial reporting. The Report Leadership group encouraged feedback. In providing feedback, PricewaterhouseCoopers Australia has focused on the importance of environmental, social and governance (ESG) information in evaluating the long-term health of a business. Appreciating that superannuation funds and other long-term investors are looking for additional analysis, we have sought to enhance the Generico model by integrating and reporting on performance and future prospects in key ESG areas of business. If you would like to discuss this further, please contact: Nick Ridehalgh Scott G Williams Partner (Australia) Senior Manager (Australia) nick.ridehalgh@au.pwc.com scott.g.williams@au.pwc.com Note to the reader: The Generico ESG disclosures in this publication are not intended to be a full annual report; instead we envisage them being considered for inclusion and integrated as part of the full annual report. This ESG report should be read in conjunction with the original Report Leadership publication on

3 Contents 02 Background to this report 04 Modelling the future Background to this report Chief executive s statement 11 Our markets Chief executive s statement Our markets Generico - example report 13 Our group strategy Our group strategy Our delivery of value Our delivery of value Our accounts 24 Appendix 34 Glossary 36 Bases for calculation Our accounts 20-37

4 Explanatory Notes Background to this report This report builds on the Report Leadership publication Tomorrow s Reporting Today 1 and proposes that additional financial and narrative information about Generico s delivery of its environmental, social and governance (ESG) strategies both now and in the future be included in the annual report. For the purposes of this report, we consider ESG strategies to be strategically important activities undertaken by Generico to improve corporate governance, report and protect the societies and environment in which it operates, and in so doing enhance the company s reputation and overall performance. It represents in large part the intangible value of the company. Traditionally, ESG matters have been reported in a standalone sustainability report, if at all, with little alignment to the organisation s core strategy. Sustainability reports are also mainly in narrative form, without explanatory graphics, and include limited disclosure of the financial impacts of specific sustainability activities. (Some activities are hard to value given available data and/or complex externalities.) However, our global research tells us that the capital markets have been sceptical of governance, corporate social responsibility (CSR) and sustainability reports, and have not used the information to any great extent when completing their analysis and recommendations. It appears that while companies are providing additional information, they are not explaining its medium to long-term value effectively to their key stakeholders. We therefore produced this report to help those preparing corporate reports explain to key stakeholders the value of their company s ESG strategy and performance. Our proposed reporting framework, which builds on the Report Leadership publication, is based on four key principles: 1. Clear alignment to corporate strategy 2. Long-term targets and measurement of performance 3. Transparent reporting against ESG milestones 4. Quantification of returns from enhanced ESG reporting. In addition, we assume that certain standing data (governance framework, board and management committees, organisation charts, roles and responsibilities), together with much of the detail about ESG stories and key measures, will be provided on the company website. Maintaining the website throughout the year spreads the sustainability reporting load. In this report, we have not addressed the question of whether independent assurance is required over the information disclosed. 1

5 Explanatory Notes 1. Clear alignment to corporate strategy The chief executive s statement clearly explains why responsible and sustainable development of corporate resources is fundamental to the company s overall strategy. ESG factors are embedded in operations and in the business s key strategic drivers. Our markets details the challenges and successes facing the company in embedding ESG practices as strategic priorities. It focuses on the impact of changes to legislation, regulation and other market activities on the company s strategy and likely performance. 2. Long-term targets and measurement of performance Our group strategy provides a single point of reference for all ESG-related key performance indicators (KPIs). These indicators establish the clear link between strategic priorities and KPIs. (Some of the ESG measures have been extracted from the November 2006 report. However, in a comprehensive and integrated report, they would only be reported once.) The KPIs are developed based on independent and internal surveys, workshops and other research so as to address key stakeholder information needs. 3. Transparent reporting against ESG milestones Our delivery of value includes reporting and sensitivity analysis in relation to the assumptions which underpin our base-case scenario for the coming year. This base-case scenario is used to determine the targets included in our KPI reporting. 4. Quantification of returns from enhanced ESG reporting Our accounts includes quantification of the net savings from our enhanced sustainability reporting, benchmarking analysis and our total tax contribution reporting. An appendix to Our accounts includes a reference table of GRI G3 2 disclosures included in the report. GRI G3 disclosures that are not critical to this report, but are discussed on our website, are marked. Other disclosures that are still being researched and may be provided in future are referred to as future, and there are a few suggested disclosures which are not relevant to Generico. We do not endorse any specific indices or frameworks, and have designed this report simply to offer guidance in relation to integrated ESG reporting. Background to this report Chief executive s statement Our markets Our group strategy Our delivery of value Our accounts See glossary

6 Explanatory Notes Modelling the future The problem Fundamental elements of value creation are not being adequately addressed through the current corporate reporting framework. Specifically, current reporting does not provide all the information in strategic ESG areas that is required by investors to accurately model future company performance. Investors are left to find alternative sources of information and make their own assumptions. In other words, management may be leaving it up to other sources (competitors, employees, suppliers) to explain the company s ESG risks, mitigation strategies and upside opportunities. Good management of environmental, social and governance performance, together with reputation, stakeholder relationships and other intangibles, is fundamentally linked to long-term shareholder value. Westpac 2006 Stakeholder Impact Report, from the Chairman and CEO Traditionally, a company s financial statements represented an accurate assessment of the company s market value, with most of the value being represented by tangible assets included on the balance sheet. However, over the last 25 years there has been a shift in the underlying drivers of a company s market value. Recent estimates indicate that as much as 80% of a company s market value is now represented by intangibles and other future growth opportunities 3. This does not mean that the balance sheet should necessarily reflect enterprise value, but merely that management needs to more clearly explain the difference between its book and market value. Listed public companies are also required to make disclosures beyond financial information to fulfil statutory reporting obligations. This includes, in many territories, a review of operations (which are prepared to varying degrees of adequacy) as well as continuous disclosures 4 to the market of information which is not generally available but which a reasonable person would expect to have a material impact on the value of the company s shares. A narrow focus on historical financial reporting and financial metrics now needs to be supplemented with relevant and reliable ESG and other non-financial strategic KPIs to provide a more balanced snapshot of performance against strategy and future prospects. Clearly, there is a need for a more integrated and inclusive reporting framework. This report presents an analysis of the impact of a range of non-financial ESG indicators to help companies explain more clearly the impact of ESG performance in delivering strategy and creating value, both now and in the future In Australia, the Corporations Act 2001 s674 requires the continuous disclosure noted. Fines and penalties including up to five years imprisonment may be applied for breaches.

7 Explanatory Notes What investors want Based on a decade of research into what information the capital markets need, we are able to specify the information data sets required to make investment decisions. Our more recent global interviews of investors and analysts show an interesting divergence of views. There is almost universal agreement that the boilerplate governance report or a marketing-style CSR report adds no real value for analysts or investors when making decisions. That is not to say that analysts are not interested in governance and CSR matters they are but they either do not like the way it is presented, or do not understand how it has impacted on performance and how it can be quantified. They therefore use alternative sources to help them make decisions, if required. Clearly there is an opportunity for company management to explain the value of its ESG activities and help the markets better assess the company s overall performance and future prospects. ESG issues are being considered seriously by the capital markets. Major superannuation funds and fund managers are demanding broader-based reporting and analysis. In Europe, investors are paying a premium under the Enhanced Analytics Initiative 5 for analyst reports which cover a company s strategic non-financial performance and outlook more thoroughly. In addition, many investors and superannuation funds have signed up to the UN Principles for Responsible Investment 6, in effect demanding broader-based reporting on ESG matters as an important factor in the allocation of new funds. As superannuation funds grow, we will see more and more market focus on medium-term issues. Other drivers of change include governments and major companies requiring suppliers to demonstrate their ESG credentials before allowing them to tender; and in the tight global labour market we are seeing employees differentiate and choose between employers based on ESG performance and credibility in the market. In addition, consumers in the community are becoming more selective in which products and services they buy. As generations X and Y mature, the impact of these choices will be more visible. There is therefore a growing imperative to manage, monitor and report on ESG matters. 5 See glossary 6 See glossary Background to this report Chief executive s statement Our markets Our group strategy Our delivery of value Our accounts 20-37

8 Explanatory Notes Modelling the future continued So what ESG information should a company consider providing? A clear explanation of the company s ESG strategic priorities, integrated and aligned with the overall corporate strategy A clear explanation of the key measures of success for each ESG strategic priority, including shorter-term milestones where required KPIs for each ESG strategic priority for prior periods (trend line) and quantified targets for the future Summary of key risks and assumptions underpinning future outlook and a level of sensitivity analysis Quantification, where possible, of both the cost and the financial (and non-financial) benefits of implementation of the ESG strategy. (This will help the investor, for example, factor the impact of the ESG performance into their financial model or into their underlying risk assumptions.) More than just financial reporting For the reasons outlined above, companies need to assist the capital markets in understanding how ESG activities and performance is core to the company s overall strategic plan. The UN Principles for Responsible Investment provide a framework for investor decision making; however, there is currently no standardised framework for reporting the financial and non-financial information required. This report, building on the Report Leadership publication, aims to start the discussion on such an integrated framework. What we ve done to make it work Provided specific sections on ESG strategy, performance measurement, disclosure and reporting Included key measures for assessing value creation in relation to ESG Provided guidance on alternative scenarios and sensitivity analysis on key ESG non-financial measures, to help users model the future Applied consistent terminology and a forward-looking orientation (including disclosure of targets) Provided non-gaap non-financial KPIs and other information in line with global best practice reporting Quantified net savings from implementation of enhanced ESG strategy, where possible Compared performance to globally recognised indices where available.

9 Generico Annual Report 2007 Chief executive s statement Our markets Our group strategy Our delivery of value Our accounts 20-37

10 Generico Annual Report 2007

11 Generico Annual Report Generico example report ESG extracts to be aligned with and integrated into a single Generico performance report In this section we address these key points: Chief executive statement Our markets Our group strategy Our delivery of value Our accounts Background to this report Chief executive s statement Our markets Note to the reader: The Generico ESG disclosures in this publication are not intended to be a full annual report; instead we envisage them being considered for inclusion and integrated as part of the full annual report. This ESG report should be read in conjunction with the original Report Leadership publication on Our group strategy Our delivery of value Our accounts 20-37

12 10 Generico Annual Report 2007 Chief executive s statement Environmental, social and governance (ESG) factors are core to our business strategy. We place great importance on their value, and manage our corporate ESG responsibilities as part of our daily business operations. In this report we explain how we do that and what we have achieved this year. We have established key performance indicators that we use to track our performance in relation to ESG matters (see Our group strategy). We continue to reduce our greenhouse gas (GHG) footprint, taking out a further 8,000t CO 2 -e this year as we strive towards our 2020 target. At this stage we are behind in our reduction plan by 1,000t C02-e, but are putting plans in place to rectify the overall position by the end of this year. In addition, to ensure we are performing in line with if not better than our industry peers, we have conducted detailed benchmarking on our sustainability and corporate responsibility performance, and I am delighted to report that we are tracking well (see Our accounts). We comply with all legal and regulatory obligations, but in order to make investment decisions we focus on options which provide a positive return to our shareholders (as well as a positive impact on our reputation with other stakeholders) in the short to medium term. In Our accounts we have quantified the expected net savings arising from our ESG activities planned for 2008, as well as the other expected benefits. Overall, we expect our ESG strategy to provide an additional net return of 5%. Finally, in Our accounts we report our total tax contribution, which is a comprehensive and transparent measure of the total tax we have paid and collected this year. We have also included benchmarking of our total tax rate and total tax contribution by component against country, regional and global benchmarks. Again, I am pleased to report that we are at or near best practice in most measures. In preparing this report we have used the UN Global Compact principles 7 as our guidance for managing ESG issues across the business, and the Global Reporting Initiative (GRI) G3 draft reporting guidance as our reference point for disclosure. 7 See Glossary

13 Generico Annual Report Our markets Key points Climate change risk analysis completed in accordance with the Global Framework for Climate Risk Disclosures ESG Board sub-committee established headed by the Chairman and supported by an ESG expert Challenges and success factors We face the challenge of remaining best-in-class in relation to the information we report to our stakeholders. While the majority of ESG requirements remain voluntary, Generico intends to become a full signatory to the UN Global Compact and the Carbon Disclosure Project by 31 December 2008, and has already commenced the process of ensuring that our ESG disclosures comply with the GRI G3 draft reporting guidance. Legislation We have registered with the Department of Industry, Tourism and Resources to comply with the requirements of the Energy Efficiencies Opportunities Act 2006 (the Act) 8. Our energy usage in the last calendar year exceeded 0.5 PJ 9 ; we are currently drafting an assessment and reporting schedule to cover the first five-year reporting cycle. We are confident that our rigorous assessment of energy saving opportunities will lead to significant energy savings and allow us to meet the strict energy reduction KPI we have set ourselves for future years to This effort will be co-ordinated by an ESG subcommittee, as described on our website environment/eeo. Background to this report Chief executive s statement Our markets Our group strategy It was pleasing to note that we incurred no fines or penalties for legal or regulatory breaches. Environment Despite increasing public pressure on organisations to reduce carbon emissions, reduce waste and protect our water supplies, there has been no significant new legislation or regulation affecting us in However, we are undertaking voluntary measures to remain best-in-class in all these important environmental areas, including our recent decision to be carbon-neutral by December 2009 (see KPIs for current performance in each of these areas in Our group strategy). In our approach to climate change and emissions management and reporting, we have followed the guidance of the Global Framework for Climate Risk Disclosures 10 (which is supported by the Carbon Disclosure Project annual survey results). Our delivery of value Our accounts Note: This is Australian legislation. Companies will need to tailor this section in line with their local legislation 9 PJ = Petajoule (1000 trillion joules of energy), equivalent to 30,000 MWh 10 See glossary

14 12 Generico Annual Report 2007 Our markets continued To date we have produced: a climate change statement an emissions management statement a strategic, physical and regulatory risks of climate change analysis. Our environmental charter, policies, procedures and responsibilities, as well as detailed explanations of our various activities during the year, are available on our website Social Despite no significant changes to the law in 2007, recent litigation has demonstrated the potential cost (not only financial, but also in terms of corporate and executive reputation) of poorly performing OH&S systems, processes and controls. Compared to our competitors, we remain in the lowest national quartile for Days Lost Through Injury 11, and are continually striving to improve. In Our group strategy, we have continued to train our people in anti-corruption policies to further protect our customers and community from, in particular, inappropriate business arrangements. We have also continued to provide significant support to our local communities through the gift of time, money and resources. Our social charter, policies, procedures and responsibilities, as well as detailed explanations of our various activities during the year, are available on our website Governance We comply with the principles outlined by the ASX Governance Council 12. We have contributed several public submissions to recent government enquiries, in which we have advocated increasing the level of transparency currently provided through the corporate reporting framework. During 2007, the Generico board established an ESG subcommittee headed by the Chairman and supported by an ESG expert. Details about our organisational structure, governance framework, board and board committees (including relevant charters, policies, procedures and accountabilities) are available on our website 11 Reported in the Generico 2007 Annual Report, p21 12 Refer to the guidance issued by the relevant regulatory body in your country/territory; for example the ASX Governance Council Best Practice Recommendations in Australia; the London Stock Exchange Combined Code on Corporate Governance in the UK

15 Generico Annual Report Our group strategy Key points 8,000t CO2-e reduction in greenhouse gas emissions, not quite on track to 2020 target but remediation plan in place Continued increase in recycled input material at 29% Employee retention slipped with turnover at 28% Strategy progress statement To implement our strategy successfully, we need to measure our progress in meeting its objectives. To be able to do that we need to establish and monitor key performance indicators. Responsibility for developing and implementing the key ESG performance indicators has been delegated by the board ESG sub-committee to the ESG management team. To indicate the level of importance placed on this role by the board, the head of the ESG management team is an executive whose remuneration is linked to achieving operational objectives. Within the existing corporate governance framework and in accordance with the board s overarching corporate strategy, the board ESG sub-committee and ESG management team develop and implement the ESG strategic priorities and set the relevant KPIs. These strategic priorities and KPIs are formulated based on independent and internal research including: independent employee surveys independent customer surveys in-house workshops with key stakeholders, including NGOs, customers, community representatives, employees and others. We also survey institutional and retail shareholders to ensure we understand and provide the information they need to make their decisions. Our KPIs for each ESG priority are listed in the table overleaf. It details the specific ESG metric targeted, measures of our performance to date, and our targets for 2008 (and beyond where applicable). We also list potential challenges to success and the action that we are taking to overcome them. Background to this report Chief executive s statement Our markets Our group strategy Our delivery of value Our accounts 20-37

16 14 Generico Annual Report 2007 Strategic priority Key performance indicators Metrics Definition/source Market competitiveness Developing nextgeneration products Health, safety and environmental impacts of new products Percentage of new products assessed for improvements in relation to life cycle, health, safety and environmental impact Meeting the expectations of our customers Risk of corruption reviews Percentage of employees trained in Generico s anti-corruption policies and procedures Operational excellence Financial impact of climate change Total greenhouse gas emissions across all business units, including emissions from energy usage, vehicle fleet, air travel and materials consumption (for basis of calculation refer to glossary) Financial impact of energy and water consumption Energy consumption is based on total energy consumption across all business units per FTE Total water usage is the aggregate water usage based on data provided by our water suppliers in each operational territory Financial impact of materials usage Two metrics are used: 1. Weight of total materials used in production 2. % of materials used that are recycled input materials Employee retention (turnover %) Calculated using the formula: (# staff leaving/average headcount)*100 Indirect economic impact on communities Total community investment expenditure, including employee volunteering, in-kind support and community impact assessment on operations

17 Generico Annual Report Performance Potential challenges/response GRI reference New products assessed for life cycle impacts (%) target 70 Employees trained in anti-corruption policies and procedures (%) target 70 Total GHG emissions ( 000 tonnes) *08 target 2020 target Disappointing product performance resulting from unsafe or environmentally unfriendly product development Focus on three key areas in product R&D: Minimise emissions resulting from production Develop low-emission products Work with customers to reduce their footprint Reputational impact on key stakeholders and exposure to monetary fines and nonmonetary sanctions Roll out training to all employees Regular communication on progress to stakeholders Loss of comparative advantage Physical and risk analysis of climate change impacts Comprehensive program of GHG emission reduction Carbon neutral by 2009 Climate change physical and financial risk analysis Review of supply chain EN26, PR1 S02, S03 EN3, EN4, EN8 Background to this report Chief executive s statement Our markets Energy consumption (MWh per FTE) *08 target 2020 target Total water usage (gigalitres) Total water usage (gigalitres) *08 target Weight of total materials ( 000 tonnes) Recycled input materials (%) Employee retention (%) *08 target Exposure to increasingly volatile world energy and water markets Progressive switch to accredited renewable energy sources Investment in energy-efficient production technology Water recycling plants operational by 2009 Reputational and financial impact of inefficient production Operational focus on materials reduction Work with supply chain to increase recycled input Packaging Reduction Program (PRP) Loss of skilled operators ORTS incentive scheme EC2, EN16, EN17 EN1, EN2 LA2 Our group strategy Our delivery of value *08 target 25 Community investment expenditure (% of pre-tax profit) Positive community contribution and stakeholder engagement Invest in employee volunteering schemes Develop community partnership Expand strategic charitable giving programs Generico Foundation EC8, EC9, S01 Our accounts target 1.2 * = Financial impact of FY08 potential savings described in Our accounts

18 16 Generico Annual Report 2007 Our delivery of value Key points Market competitiveness increase in extreme weather events is driving growth in maritime safety products Operational effectiveness continued focus on emissions reduction and responsible use of water and other natural resources continues to drive down costs How do we measure value creation? Traditional financial measures take into account some elements of the value we have created as a company, but fail to take into account important non-financial returns. For this reason, in order to assess Generico s performance in creating non-financial value, we have quantified the returns from implementing strategies relating to sustainable business development and the management of ESG challenges. Modelling the future ESG reporting We believe the action we are taking is making our business increasingly robust and, as a result, our vulnerability to unexpected events should diminish over time. We intend to publish sensitivity tables each year so that investors and other stakeholders can track the potential impacts of deviations from our strategic plan. In these sensitivity tables we highlight key elements in our strategic priorities that have the greatest impact on our performance. For each element we assess the financial impact of best-case and worst-case variations from our base-case assumptions. The assumptions underpinning our base case represent a conservative assessment of the opportunities for growth in both revenue and gross profit, and are used to determine the targets included in this report.

19 Generico Annual Report Market competitiveness Base case Reduce customer churn rate by 10% through increased focus on life cycle assessments of health, safety and environmental impacts of products with a 15% increase in the number of new products, assessed for impacts, and publication of results - Increase training in anti-corruption policies and procedures to improve brand reputation and meet target of winning 30% of contracts currently out for tender - Declining growth in boat sales, offset by increased market focus on maritime risks arising from climate change; extreme weather events to increase market penetration by 10% Best case Customer churn rate reduced by 20% through successful market awareness campaign on life cycle assessments of health, safety and environmental impacts - Company s strategic focus on sustainable development and transparent reporting of ESG issues results in significant increase in brand reputation, driving wins on 40% of contracts currently out for tender - Boat sales in key North American market stabilise as household wealth outlook remains positive. Company s strategic focus on addressing climate change risks results in 20% increase in market penetration Worst case Customer churn remains steady with no discernible change in purchasing trends arising from company s improvements in relation to assessments of life cycle impacts of new products - 10% of contracts out for tender won and market penetration levels decline by 10% as boat sales in all markets continue to decline Market share Revenue growth Change in Financial impact assumption (for FY08 only) +/- 1% +/- $5m (Revenue): +/-$2m (Gross profit) +/- 7% +/- $8m (Revenue): +/-$3m (Gross profit) A 1% rise or fall in market share, or a 7% rise or fall in revenue growth assumptions impact on revenue by +/- $5m and +/-$8m respectively. Related impact on gross profit would be +/-$2m and +/-$3m. Background to this report Chief executive s statement Our markets Our group strategy Our delivery of value Our accounts 20-37

20 18 Generico Annual Report 2007 Delivery of value continued Operational effectiveness Base case % reduction in GHG emissions using 2000 as the base year for comparison - Reduction in energy usage of 8,000 MWh per year - Water usage reduced by 200 gigalitres per year - Reduce materials waste by 2,000 tonnes per year from redesigning production processes to drive reduced materials recycling cost - Reduction in employee turnover of 3% driven by active promotion of company ESG activity and resultant employee satisfaction Best case % reduction in GHG emissions (25% above base case) with efficiency break-throughs implemented, especially in production and transport emissions - Energy efficiency maximised by bringing all pipeline R&D improvements into full production environment, resulting in additional 25% reduction in energy usage above base case - Water usage reduction 25% greater than base case as a result of comprehensive water infrastructure assessment completed ahead of schedule - Materials waste from production significantly reduced driving additional 25% reduction below base case - Reduction in employee turnover of 5%, as ESG activities capture employee imagination and drive increased participation Worst case GHG emissions reduction plans are implemented across only half the organisation - Complications with implementation of recommended R&D improvements drives 50% less energy usage and materials waste reduction than base case - Reductions in water usage only reach 50% of base case - Reduction in employee turnover of 1%, as little change experienced from ESG activities Operating margin Change in Financial impact assumption (for FY2008 only) +/- 25% +/- $7m (Revenue): +/- $3m (Gross profit) A 25% rise or fall in operating margin improvement assumptions would have a +/-$7m impact on revenue and a +/-$3m impact on gross profit.

21 Generico Annual Report Ongoing activities Market competitiveness and operational effectiveness are both significantly impacted by the sustainability of our business practices. We have developed KPIs, with support from our key stakeholders (Our group strategy), to assess our performance in embedding such practices throughout our organisation. We have also begun the journey towards full transparent reporting and disclosure of our performance in addressing the key ESG challenges facing us now and in the future. Our ongoing activities are focused on improving our reporting to stakeholders to ensure that we comply, as appropriate for a company of our size and complexity, with the following voluntary global initiatives: - UN Global Compact Communication of Progress - Global Reporting Initiative G3 draft reporting guidance (certain disclosures are considered not relevant (NR) for Generico; others are disclosed on the company website () or being considered for future reporting (future)). To evaluate the consistency of our approach to ESG measurement, reporting and disclosure against both international and local best practice, we are participants in and benchmark our performance against the following 13 : - Dow Jones Sustainability Index (DJSI) - FTSE4 Good Index - Governance Metrics International - Corporate Responsibility Index (CRI) - Climate Leaders Index (output of the Carbon Disclosure Project surveys). Our performance against the DJSI and CRI benchmarks is provided in the Our accounts section. Our focus remains on ensuring that our reporting to stakeholders is transparent and enables informed investment decision making. Background to this report Chief executive s statement Our markets Our group strategy Our delivery of value Refer to the glossary for details of these benchmarks Our accounts 20-37

22 20 Generico Annual Report 2007 Our accounts Key performance indicators Metrics Financial impact of climate change (GHG emissions) Scenario FY08 capital expenditure Carbon price (per tonne) Target carbon reduction by FY08 (tonnes) Annual saving Annual OPEX Net annual saving Nonfinancial impact Best Base $60,000 $60,000 $12 $12 12,500 10,000 $150,000 $120,000 -$38,000 -$38,000 $112,000 $82,000 Reputation Regulatory risk Worst $60,000 $12 5,000 $60,000 -$38,000 $22,000 Employee engagement Source: Carbon price refer to glossary Metrics Financial impact of energy and water consumption (energy usage) Scenario FY08 capital expenditure Wholesale electricity price (per MWh) Target energy usage reduction by FY08 (MWh) Annual saving Annual OPEX Net annual saving Best $275,000 $40 10,000 $400,000 -$180,000 $220,000 Base $275,000 $40 8,000 $320,000 -$180,000 $140,000 Worst $275,000 $40 4,000 $160,000 -$180,000 -$20,000 Source: Metrics Financial impact of energy and water consumption (water usage) Scenario FY08 capital expenditure Retail water price (per GL) Target water usage reduction by FY08 (GL) Annual saving Annual OPEX Net annual saving Best $93,000 $1, $300,000 -$127,500 $172,500 Base $93,000 $1, $240,000 -$127,500 $112,500 Worst $93,000 $1, $120,000 -$127,500 -$7,500 Source: Key points Forecast additional net savings of 5% resulting from 2008 ESG strategy Continued focus on non-financial opportunities arising from transparent ESG reporting Net savings from ESG strategy In order to understand the financial implications of our ESG strategy for FY08 and beyond, we have attempted to quantify the implications of our strategic actions by setting out the capital cost in year 1 (FY08) and the ongoing indicative annual saving and operating cost based on the FY08 currency values (i.e. undiscounted). The basis of our calculation 14 and our sources are also included to enable external verification. We have not factored in cost benefits from any future ESG activities or other non-financial benefits (i.e. brand, reputation). Nonfinancial impact Reputation Supply chain Employee engagement Nonfinancial impact Reputation Supply chain Employee engagement 14 Our basis of calculation is provided in the glossary

23 Generico Annual Report Metrics Scenario FY08 capital expenditure Recycling cost (per tonne) Target waste for recycling reduction by FY08 (tonnes) Annual saving Annual OPEX Net annual saving Financial impact of materials usage (waste recycling) Best Base Worst $76,000 $76,000 $76,000 $150 $150 $150 2,500 2,000 1,000 $375,000 $300,000 $150,000 -$108,000 -$108,000 -$108,000 $267,000 $192,000 $42,000 Source: Refer to calculations/recycling for details Metrics Employee retention Scenario FY08 capital expenditure Average recruitment cost (per employee) Turnover reduction target by FY08 (turnover) Annual saving Annual OPEX Net annual saving Best Nil $35,000 5% $1,531,250 -$250,000 $1,281,250 Base Nil $35,000 3% $918,750 -$250,000 $668,750 Worst Nil $35,000 1% $306,250 -$250,000 $56,250 Source: Annual Report p23 & p31 Metrics Scenario FY08 capital expenditure ($ 000) Reported pre-tax profit ($ 000) Annual saving ($ 000) Annual OPEX ($ 000) Net annual saving ($ 000) TOTAL Best $444 $26,005 $2,756 -$704 $2,053 8% Base $444 $26,005 $1,899 -$704 $1,195 5% Worst $444 $26,005 $796 -$704 $93 0% Nonfinancial impact Reputation Employee engagement Nonfinancial impact Recruitment % of pre-tax profit The strategic KPIs outlined in Our group strategy all impact on the ESG performance of Generico year on year. If we implement our strategy and achieve our targets, Generico will experience certain intangible but important non-financial benefits including: Reputation Reputation is a key component of Generico s brand value. Although not specifically valued, any activity enhancing reputation will anecdotally enhance corporate value. Regulatory risk Tight management of regulated activities (such as emissions) prevents fines and penalties which damage reputation. Employee engagement Activities undertaken by the company which engage the full cooperation of the work force tend to drive productivity and effort, thereby improving output and returns. Background to this report Chief executive s statement Our markets Our group strategy Our delivery of value Supply chain Reduction in usage of scarce resources, while working with key suppliers, cuts costs and improves working relationships, thereby enhancing results. Recruitment Good retention rates usually mean an engaged workforce a place people enjoy working at. As this becomes known, the company receives more applications and recruitment is comparatively easier and less costly. Our accounts 20-37

24 22 Generico Annual Report 2007 Our accounts continued Total sustainability score Environment score Total Tax Rate 19 benchmarking analysis 100% 80% 60% 40% 20% 0% Social score Economic score All companies Light manufacturing sector Generico Overall Integration of sustainability Management practice Corporate strategy Performance and impact 0% 20% 40% 60% 80% 100% All companies Light manufacturing sector Generico Generico 2007 UK average OECD average Global average Other taxes (Customs duties, excise duties, GST/VAT) Employment taxes (FBT, Payroll) Corporate income tax Benchmarking analyses Sustainability benchmarking Generico takes part in the annual assessments of the Dow Jones Sustainability Indexes. These are global indexes which track the financial performance of the leading sustainabilitydriven companies worldwide 15. As can be seen in the table, Generico is above or at best practice level for all companies and for all light manufacturing companies. Our economic score is below market, and management is focusing on this in line with our strategic priority to be even more competitive and to tighten our operations. We are aiming to further improve our economic score by the end of FY08. Further detail on the indexes is available at Corporate responsibility benchmarking Generico is a participant in the Corporate Responsibility Index. This index is a benchmarking tool to enhance the capacity of the business to develop, measure and communicate best practice in the field of corporate responsibility 16. Generico is above market on all corporate responsibility measures, and intends to remain at this level for FY08. Total Tax Contribution (TTC) TTC 17 is a globally accepted methodology which we have adopted to accurately report our contribution to the community through all forms of business tax. It identifies all direct and indirect business taxes paid by a company as well as those collected on behalf of the government. Although TTC is not a traditional GRI disclosure and is not a key ESG metric for us, we believe it is an important measure of our total contribution to the tax system and the markets in which we operate. TTC makes it easier for us to identify all taxes paid and collected, highlights potential areas of risk, and allows us to communicate to our stakeholders on our overall tax contribution. It also enables us to benchmark our tax contribution against industry, regional and international averages. The World Bank is using the TTC methodology in its annual global survey of 175 countries, which will provide a global reference point for survey participants The latest World Bank and PricewaterhouseCoopers Global Total Tax Contribution report is Paying Taxes: The Global Picture. The report is available at 19 See glossary

25 Generico Annual Report What is our Total Tax Contribution? Our TTC is the direct and indirect taxes paid by the company, as well as those collected on behalf of the Government. Importantly, TTC makes it easier for the company to identify all the taxes paid and collected, highlights potential areas of risk and allow us to communicate holistically on our overall tax contribution to our stakeholders. As represented in the table below, our TTC includes an additional 29.4% (2006: 29.6%) of taxes other than the corporate income tax expense reported in our financial statements. Total Tax Contribution for Generico 2007 ( 000) 2006 ( 000) Capital Corporate income tax 7,399 6,013 Irrecoverable GST People Fringe benefits taxes Payroll taxes 1, Products Customs duties Excise duties Total 10,479 8,543 Tax rate % 60% 50% 40% 30% 20% 10% 0% TTC for Generico Payroll tax FBT Generico 2007 Generico 2006 UK average Irrecoverable GST Other business taxes OECD average Global average Corporate Tax Background to this report Chief executive s statement Our markets Our group strategy Our delivery of value Our accounts 20-37

26 24 Generico Annual Report 2007 Appendix G3 Indicator Reference Table The table lists all the GRI indicators and is a single point of reference for subjects and data in this report and in the Report Leadership document, with cross referencing to the indicators. For further detail and full descriptions of all indicators go to Key to GRI indicator status C GRI Core indicator A GRI Additional indicator AR 2007 Generico Annual Report On Generico website - not critical to this report NR Not relevant to the organisation Full Partial Future GRI requirement fully complied with in the current report GRI requirement partially complied with in the current report GRI requirement is not part of current core strategy; to be addressed in future periods Strategy and analysis Full Partial Future Ref 1.1 Chief Executive s statement Description of key impacts, risks and opportunities 9, AR16 Organisational profile 2.1 Name of the organisation AR Intro 2.2 Primary brands and products AR2 2.3 Operational structure of the organisation, including main divisions and operating companies AR2 2.4 Location of organisation s headquarters AR2 2.5 Number of countries where the organisation operates (and names of countries with either major operations or that are specifically relevant to the ESG issues covered in the report, where applicable) 2.6 Nature of ownership and legal form 2.7 Markets served (including geographic breakdown, sectors served and types of customers) 2.8 Scale of the reporting organisation, including: number of employees, net revenues, total capitalisation broken down in terms of equity and debt, quantity of products (or services) provided, total assets, beneficial ownership (including identity and percentage of ownership of largest shareholder) breakdowns by country/region of the following: - sales/revenues by countries/regions that make up 5% or more of total revenues - costs by countries/regions that make up 5% or more of total revenues - employees AR2 AR3 AR26, AR34, AR58-59, AR64

27 Generico Annual Report Significant changes during the report period regarding size, structure or ownership including: the location of, or changes in, operations, including facility openings, closings and expansions changes in the capital structure and other capital information, maintenance and alteration operations Full Partial Future Ref AR3, AR Awards received in the reporting period Report parameters Report profile 3.1 Reporting period for information provided AR Date of the most recent report First report 3.3 Reporting cycle Annual 3.4 Contact point for questions regarding the report and its contents Report scope and boundary 3.5 Process for defining content, including: defining materiality prioritising topics within the report identifying stakeholders the organisation expects to use the report 3.6 Boundary of the report (e.g. countries, divisions, subsidiaries, leased facilities, joint ventures, suppliers) 3.7 State any specific limitations on the scope of the report 3.8 Basis for reporting on joint ventures, subsidiaries, leased facilities, outsourced operations and other entities that can significantly affect comparability from period to period and/or between organisations 3.9 Data measurement techniques and the bases of calculations, including assumptions and techniques underlying estimations applied to the compilation of indicators and other information in the report 3.10 Explanation of the effect of any re-statements of information provided in earlier reports and the reasons for such re-statements 3.11 Significant changes from previous reporting periods in the scope, boundary or measurement method applied in the report NR NR Whole org. covered N/A N/A N/A N/A Background to this report Chief executive s statement Our markets Our group strategy Our delivery of value Our accounts 20-37

28 26 Generico Annual Report 2007 Appendix continued GR content index 3.12 Table identifying the location of the Standard Disclosures in the report, identify the page numbers or web links where the following can be found: strategy and analysis organisational profile report parameters governance, commitments and engagement disclosure of management approach, per category core performance indicators any GRI additional indicators and any sector supplement indicators included in the report Assurance 3.13 Policy and current practice with regard to seeking external assurance for the report. If not included in the assurance report accompanying the report, explain the scope and basis of any external assurance provided. Also explain the relationship between the reporting organisation and the external assurance provider Governance, commitments and engagement Governance 4.1 Governance structure of the organisation, including committees under the highest governance body responsible for specific tasks, such as setting strategy or organisational oversight 4.2 Indicate whether the Chair of the highest governance body is an executive officer 4.3 For organisations that have a unitary board structure, state the number of members of the highest governance body that are independent and/or nonexecutive members 4.4 Mechanisms for shareholders and employees to provide recommendations or direction to the highest governance body 4.5 Linkage between compensation for members of the highest governance body, senior managers and executives, and the organisation s performance 4.6 Processes in place for the highest governance body to ensure conflicts of interest are avoided 4.7 Process for determining qualifications and expertise of the members of the highest governance body for guiding the organisation s strategy on economic, environmental and social topics Full Partial Future Ref , AR22 NR