ESG The most controversial Brazilian companies in 2013

February 2014

Authors

Cristóvão Alves, ESG Analyst Gustavo Pimentel, Head of Research and Advisory [email protected]

Informação Restrita – Política Corporativa de Segurança da Informação About About SITAWI 11th besthouse,2ndSRI analyst worldwide( – Specialists Finance Finance forGood . . . Extel ESG ESG in Risk Advisory - IRRI 2013IRRI focused Sustainable Management to ESG Responsible ) research Finance for banks : sector Investors and and PRIBrazil Network Chairof ESGIntegrationWG Responsible and IDB insurers thematic beyondBanking Investing Award 2011 2

© SITAWI Method About the research       Very High We ratedthe negative controversies of the impact as oncompaniesLow, Moderate, or High incompanies concerningESG (Environmental, Governance)Socialcontroversiesand the above of mentioned databaseThe isformednews by gathered national,regionallocalsources, in and media sample has Our subthemes theme each themes major accordingto its characteristics, and The Each occurrencewasa “controversy” named accordingtoclassification theGICS The companieswere groupedin controversies were was 2013 75 divided Braziliancompaniesthat Brazil arethe MSCI part of Index categorizedinto into respective 10 sectors five Communities Governance Customers Issues ESG Environment Workers Suppliers and 3

© SITAWI Themes andThemes subthemes considered relevant for Responsible Investors in Brazil and abroad Human Controversies Bargaining Contraventions Collective Supply Supply Chain abuse Union Union Other Other ILO rights & Communities expression and - Freedom Freedom of censorship Workers Suppliers Management Labor Labor and controversial Support Support to Supply regimes Conditions Workforce Health & Health Working Discrimination Employee Chain Chain Safety Diversity Customer Relations & Anticompetitive Marketing Customers Advertising Practices and Safety Product Quality Land UseLand Management & Biodiversity Products Impact ervices ervices Controversial Water Investments of and /S Governance Governance Structures Environment Toxic Operational Waste Hazardous Releases Spills (Non (Non Bribery Business Business ) and & Energy Ethics Fraud Climate Change 4 : and

© SITAWI context The Impact Rating was attributed based on the interpretation of facts and materiality in the Brazilian • • • • • • • • • The company’sThe fault cannot be proven Very low penalties Low impact / few people affected Company mentioned in the media punishment Controversies without predicted Impacts with widespread repercussion significant riskto company the Worst the of worst, penalties involving stakeholders Scandals with direct impacts on damagesLong run to the brand black black list inclusion in the slave labor Ex.Credit suspension due to factory Ex.Short strike in small Very Low High Moderate High • • • • • • • • • • • • • • NGO A campaign by an independent trusted money Fraud/bribery involving great amount of particularly egregious controversy that companythe is involved in a Media sources or haveNGOs indicated by Critics coalition NGOs of Highest level fines (above US$1M) large scale Negative impacts intensityhigh of and governmental agencies not Cases supported by special Negative impacts than less 50 on workers Mid Responsibility provennot Severe investigation pending by Critics NGO’s in the media High but impact, reversible and impact Moderate and social environmental mass mass layoffs Ex. Judicial action reverting damages for overtime pay Ex.Collective moral - level fines mitigable 5

© SITAWI Companies inthesample are part the MSCI Brazilof Index in 2013 • • • • • • • • • Financials Consumer • • • • • • • • Health Health Consumer Energy Dasa Amil BR BR BMFBovespa BB Banrisul OGPar Hypermarcas Ambev Pão de Açúcar BRF Kroton Hering Cyrela Anhanguera Properties Malls Foods Care Realty Staples Discretionary • • • • Itaú Unibanco Cielo Cetip Bradesco • • • • • • • • • • • Natura JBS Qualicorp Odontoprev PDG PDG MRV Engenharia RennerLojas Americanas Lojas Realty • • • • Sulamérica Santander Porto Seguro Multiplan • • • • • • • • • • Information Utilities • • • • Telecommunication Materials • • • Industrials Copasa CESP AESEletropaulo AESTietê CSN TOTVS Ecorodovias CCR Arteris ALL Tim Telefônica Technology • • • • • • • • • • • • MMX Marcopolo Gol Eletrobrás EDP CPFL • • • • • • Vale Suzano WEG TAM Multiplus • • • • Tractebel Light Eneva 6

© SITAWI Amount controversiesof by Theme and Impact Rating The theme “Customers” has the grater number of controversies, followed by “Workers and Suppliers” Workers Theme Communities Environment Governance Customers / Controversies Less Impact Total and Suppliers Rating Low 46 18 21 2 2 3 Moderate 89 25 10 34 9 9 High 35 19 6 0 5 5 Very 2 2 0 0 0 0 High Controversies More Total 172 51 11 16 18 74

© SITAWI Controversies by Theme and Imp Governance, Environment and Customers showed controversies with higher negative impact High High 26% Governance 31% Moderate Customers 46% 13% Low Moderate Low 28% 56% act Workers Rating High Moderate 49% 12% Very High and 4% Suppliers Low 35% High Moderate Environment 82% Communities 28% Moderate 56% Low 17% Low 18%

© SITAWI The The most common subthemes ESG Controversies      strikes andsome casesworking relatedtopoorconditions. WorkersSuppliers: and Controversiesinvolvingsalarynegotiations, inresulting Communities:Most cases regardingviolationof rightssafety and the Antitrust Agency(CADE) Governance:.Majorityof controversies concerningdebttaxproblems and with Environment: ToxicSpillsand Releases comprehendsmost of cases someof advertisement casesfalse Customers: Majorproblems related to poorquality services, unduecharging and

© SITAWI Ranking Ranking sectorsof with higher incidence Sectors that deal with customers are more exposed to controversies accidents, non Materials: Energy: Utilities - - (water and electricity): 30% 48% - - 50% 31% of casesrelated toEnvironment todue problems oil with spills - of casesconcerningWorkersof Suppliersand as overtimepay, protestsfor wageshigher and etc. paymentbenefits and illegalof outsourcing of controversiesof Workerswith and Suppliers,mostly duetoexposure occupational to involving environmental matters,generally soil and air contamination Telecommunication Telecommunication Financials 17% 26% - Main cases Customers in ( Health Care Health Utilities 14% 4% Industrials 5% Consumer Discretionary Consumer Energy 13% Materials Consumer Staples Consumer 9% 7% 5% 34%) and and Workers and Suppliers ( - - Financials - - Telecommunication 44% 73% and and Workers problemsMajor Customerswith services guards and unavailability of waiting in lack queues,of bank Problemsinvolving excessive of high of casesinvolving customers : - impact impact cases 30% : ) 10

© SITAWI Ranking Ranking sectorsof with higher incidence Sectors that deal with customers are more exposed to Industrials: medicaldenial casesof agency) of and services some Care:Health Discretionary Consumer - - - Most casesinvolving technical accidents (transportation)and strikes - The controversiesThe “Moderate”or wererated as“Low” Majority of controversies Majority arerelated Customers theme tothe ( In In 2013 Telecommunication Telecommunication Financials , some health health plan operatorssome , had operationsits (regulatoryby ANS the suspended 17% Services : 26% - - - 67% Cases related Cases toslavery Controversies forfinancing practicingor slave ( labor Health Care Health of cases Utilities 14% 4% Industrials i nvolving Workers; Consumer Discretionary Consumer 5% Energy 13% Materials Consumer Staples Consumer 9% 5% 7% - like were labor rated “VeryHigh” impact or as“High” controversies workinghours and safety, products quality and - “Moderate” Suppliers Staples Consumer - - Main Main problemsregarding health All All cases wereorrated as“Low” 64% 87,5% involving Workers and 30% ) ) : 11

© SITAWI Ranking Ranking sectorsof with largest number controversies,of by Impact Rating of total and severe controversies Although the Telecommunication sector has only three companies, it presented the largest number GICS Sector/ImpactGICS Telecommunication Consumer Staples Consumer Discretionary Health CareHealth Industrials Consumer Financials Materials Utilities Energy Rating Total Controversies Less Low 10 10 46 3 3 2 5 4 5 4 Moderate 89 15 12 17 21 2 5 3 7 7 High 35 20 1 0 1 0 5 3 2 3 VeryHigh 2 0 0 2 0 0 0 0 0 0 Controversies More Total 172 12 16 23 24 30 45 6 8 8 12

© SITAWI Ranking Ranking “ Very * The High” High” Consumer Discretionary (8) of Telecommunication (45) number Consumer Staples (12) sectors impact Health Care (6) Financials (30) Materials (16) within Industrials (8) Utilities (24) Energy (23) by the cases Impact parenthesis 0 only Rating* indicates happened 5 the Very High 10 amount in Consumer of 15 controversies High Moderate 20 Discretionary in each 25 sector Low 30 (Real Estate 35 ) 40 45 50 13

© SITAWI Ranking Ranking sectorsof with largest number controversiesof Excluding the Theme “Customers”, Telecommunication is no longer the most controversial sector GICS Sector/Theme GICS Telecommunication Consumer Discretionary Health CareHealth Industrials Consumer Financials Materials Utilities Energy Total Staples Controversies Less Customers 74 19 34 5 3 1 4 0 0 7 Environment 18 0 2 0 1 5 7 3 0 0 Governance 16 1 0 1 0 2 3 3 1 5 Community 11 0 1 0 0 0 2 4 4 0 Suppliers Workers and 53 11 0 2 6 7 9 7 6 6 Controversies More Total 172 12 16 23 24 30 45 6 8 8 Total minus Customers 98 16 23 17 21 11 1 5 7 8 14

© SITAWI Most controversial companies (top 15) Due to the Regulatory Agency pressure, OI leads the most controversial companies list (3) Itau Unibanco (4) Petrobras (22) Santander (5) (8) Bradesco (6) TIM (15) Light (4) MRV (3) Amil (6) Vale (4) CSN (5) BB (12) OI (28) JBS (6) 0% • • • • • InFebruary, valuethe of penalties for services landline Fined Several forpenalties network coverage, broadbandinternet and poor services quality 80% Companywithhighest the number of controversies in of of controversies are relatedto 5% US$1.8 MM for non 10% - compliance thewith targetsANATEL (regulatoryagency) established Oi Customers suffered summedup US$ 18.6 MM (Source: 15% 2013 20% 25% Exame )

© SITAWI Companies with more controversies, by Impact Rating MRV and CSN Lojas Americanas (3) Itau Unibanco (4) Petrobras (22) Santander (5) Eletrobrás (8) Bradesco (6) MRV(3) TIM (15) Light (4) Amil (6) Vale (4) CSN (5) BB (12) OI (28) JBS (6) rise rise in the 0 ranking 5 due due to more severe controversies Very High 10 High Moderate 15 Low 20 25 30

© SITAWI 5 companies with more controversies ineach Theme more than one Theme Petrobras

Workers and Communities Governance Environment Suppliers Customers Lojas Americanas (4), TIM (4), OI (3) and OI (3)and TIM(4), (4), All Logistica Eletrobrás Eletrobrás Eletrobrás Petrobras Petrobras Petrobras Petrobras Bradesco Sabesp Amil Amil Vale CSN TIM TIM TIM TIM JBS BB BB OI Oi Oi 0 1 1 1 1 1 1 1 1 2 2 2 2 2 3 3 3 Eletrobrás 4 4 5 5 5 7 (3) are(3) among the top 5 most controversial companies in 9 10 11 11 15 20 22 25

© SITAWI Most controversial companies in each Theme (complete list) ESG Controversies

Customers Itau Unibanco Sul America Eletropaulo Souza Cruz Santander Eletrobras Bradesco MRV Light TAM Amil Vale GOL TIM CCR BRF JBS BB OI 0 1 1 1 1 1 1 1 1 2 2 2 2 3 3 4 5 5 10 9 11 15 20 22 25

Workers and Suppliers Lojas Americanas Pão de Açucar Telefonica Santander Eletrobras Petrobras Bradesco Embraer Banrisul Duratex Gerdau Suzano AmBev CEMIG Klabin Copel MRV CPFL CSN TIM JBS Oi 0 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 3 3 4 5 6 8 10 11 12

© SITAWI Most controversial companies in each Theme (complete list) ESG Controversies

Communities Governance Environment AES AES Eletropaulo Itau Unibanco Itau Unibanco Itau Anhanguera All Logística All Logistica Telefonica Santander Eletrobrás Eletrobrás Eletrobrás Petrobras Petrobras Petrobras Bradesco Suzano AmBev Sabesp Sabesp OGPar MMX Eneva Eneva Light CPFL Amil Vale Vale CSN TIM TIM BB Oi 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 3 3 4 4 5 6 7 7 8 © SITAWI Companies with more controversies, by sector of companies57% inthe sample presented controversial cases in 2013

Telecommu Materials Energy Utilities Financials nication Sul America Eletropaulo Santander Telefonica Eletrobras Petrobras Bradesco Banrisul Duratex Gerdau Suzano Sabesp CEMIG OGPar Klabin Eneva Copel MMX Light CPFL Vale CSN Itau TIM BB OI 0 1 1 1 1 1 1 2 2 2 2 2 2 2 2 3 4 4 4 5 5 5 6 8 10 12 15 15 20 22 25 28 30

Health Care Industrials Consumer Discretionary Consumer Staples Lojas Americanas Pão de Açúcar Lojas Renner All Logistica Anhanguera SouzaCruz Embraer AmBev MRV TAM Amil GOL CCR BRF JBS 0 1 1 1 1 1 1 1 1 2 2 2 2 3 3 3 3 4 5 6 6 6 7 © SITAWI Most controversial companies ESG Controversies • • Cases involvingCases employeeshealthandsafety, massdismissal andoccupational fatalities Fined • US$4.1 MM Occupationalfatality due to a 8 meters drop resultingin for exposingits employees to unhealthyconditionsin state the of • • • • • Fined CAIXA suspendedcredit to MRV afterthe inclusionin the black list of slave labor (laterresumed) list of slave labor from Ministry theof Labor Those casesare relatedto slavery 2 3 controversies rated as “VeryHigh” controversies in • • • • US$3.05MM Confirmation of a power outagesoccurred betweenand20032009 ANEEL (regulatoryagency) in the state of All cases receiveda Low or Moderate rating Maincontroversies Customerswith ( • 83% 2013 of of cases involvingWorkers andSuppliers for slavery US$1.01MM - like working conditionsinAmericana, SP - like working conditionsandthe companyinclusion in black the fine in the state of US$454,000 37,5% Mato Rondônia ) related) to power outages penalty Grosso Alagoas applieda due to poor services quality US$6.81 MM penalty forpenalty

© SITAWI The JusticeCourt in the state of Most controversial companies ESG Controversies . • • • • • Maranhão Workers went on strike Fined Fines andlitigations regarding oil spills Several mobilizations demandingwage readjustment,profit overtimesharingand pay TheWorkers theme andSuppliers is responsible for most of the controversies • • • • securityofficers Banco layoffs moraland harassment Workers andSuppliers controversies ( Lack of guardsin bank branches High incidence of excess waiting in bank lines US$MM 1.81 applieda • do • Maincontroversies relatedto the Theme Customers • Brasil Fined 13% US$ MM27.8 was fined over oil in the statespill of Paraná in 2000 US$4.3 MM of of controversies involvingfalse advertising 3 times • US$ 2.8 MM for overtime pay in 67% fine for interruptions of services over excess of interruptedcalls (16%) due toservices poor quality (29%) 16% andSantander was fined ) involving) precarious working conditions,mass (29%) Bacia de Campos US$636,000 (48%) for lack of

© SITAWI • Most controversial companies ESG The suspensionof operations ManagedCareproviders sufferedin were2013 the maincontroversies Controversies • Fined US$ 820,000for refusing treatmentto customer who suffered hearta attack • • • • • • Onlycompany inHealth Care sector thatpresented controversies in Fined US$ state560,000in the of Paraná for the ATMbeing depositout of service service Fined US$ 773,000for lack of guardsin bank branches the majorproblems Lack of guardsin bank branches,excessive waitingtime in queuesandwere poor services quality Majority of controversies relatedtotheme the Customers ( • • • • • Controversies rated or “Moderate” as “Low” Factory constructionin suspended Volta Redonda for non toxic waste in VoltaRedonda (State of ) Fined 80% 20% 5 • controversies registeredin in the Theme Environment of themrated impactas “High” Majority Majority of controversies are relatedto the Customers theme US$16MM byINEA andSecretariat of Environmentthe of Rio de JaneiroState for releasing 2013 67% - payment of a ) 2013 1.05MM indemnity

© SITAWI Lojas Americanas (3) Companies with more controversies, by Theme (top 15) ESG Itau Unibanco (4) Petrobras (22) Santander (5) Eletrobras (8) Controversies Bradesco (6) TIM (15) Amil(6) Light (4) MRV (3) Vale (4) CSN (5) BB (12) Oi (28) JBS (6) 0% 17% 10% Customers 25% 33% 38% 40% 20% Evironment 50% 30% 67% Governance 73% 9% 75% 25% 75% 79% 40% 83% 9% Communities 100% 20% 50% 13% 83% 60% 25% Workers and Suppliers 67% 13% 70% 50% 17% 50% 7% 8% 40% 80% 7% 11% 25% 25% 25% 20% 90% 17% 17% 17% 13% 11% 100%

© SITAWI house, house, contact SITAWI To havetoaccess detailsof the study or to know more about Brazil’s premierESG research . . . Intelligenceon Brazil’s ecosystem Responsible Investment Brazil Complete profile of controversies by or sector company - focused sector or thematic ESG sectoror ESG focused studies thematic Av Head of Research and Head ofResearchand Advisory Ataulfo gpimentel@ Gustavo Pimentel Rio de Janeiro +55 21 2247 de Paiva sitawi.net , 658, 658, , 1136 - RJ grupo 401 25

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