Report on Value Chain Responsible Management / 2015 ANNUAL REPORT

tions governed by Codes of Ethics regarding communication. 2015, FleetApp was launched, the application for transport pro- fessionals, available in Italian, English, German and Turkish Compliance free for Android and iOS, on Google Play and Apple Store. In just a few steps you can get all the information on the intended Also in 2015: use, available sizes and labelling values, technical specifica- no cases emerged of non-compliance with regulations or tions, tread design and peculiarities of each tyre in the Pirelli voluntary codes concerning marketing activities, includ- range as well as the Formula range, for the transport of per- ing advertising, promotion and sponsorship; sons and/or goods. The application also includes an integrated no significant final penalties were levied and/or paid relat- simulation tool that allows measuring of the possible fuel sav- ing to infringement of laws or regulations, including those ings through using tyres providing higher performance from relating to the supply and use of the Group’s products and/ an energy point of view. or services; Numerous exhibitions, events and initiatives in 2015 in which no cases emerged of non-compliance with regulations or Pirelli took part include: voluntary codes concerning information and labelling of the Commercial Vehicle Show, the largest exhibition on products/services; transport of goods by road ever held at the National Exhibi- no cases of non-compliance with regulations or voluntary tion Centre in Birmingham. codes concerning health and safety impacts of products/ Autopromotec 2015, the event dedicated to the world of auto- services during their life cycle; motive equipment and after market, now in its 26th edition, there were no documented complaints concerning both vi- where Pirelli was present with a large stand featuring tyres olation of privacy and/or the loss of consumers’ data; for car, motorcycle and truck lines. no sales of any of the products sold by Pirelli were not The “Driving Innovation 2015” event held at the suggestive banned or disputed. museum setting of Ca’ la Ghironda, near Bologna, and dur- ing which new products were presented for commercial Customer Information and Training transport: the new tyre for city buses MC:01 and XL range in various lines of the 01 series. 63 Pirelli provides information to customer-distributors and end the TRUCK DAYS event held between Stresa and Vizzola, customers on a continual basis. This information concerns both two days dedicated to tyres for industrial vehicles with the the product and related initiatives, and is disseminated in a -va participation of TEAM, purchasing group of German re- riety of ways, including online communication, and this is com- sellers, and Pirelli Deutschland. A hundred resellers and plemented by information distributed in hard copy format, as their fleet customers were invited to the event. On Pirelli’s well as the range of off-line and online training activities. -On testing circuit, wet braking, noise, comfort and wet handling line communication was strengthened in 2015: the revision of tests were conducted. A space for in-depth study was dedi- the websites and development on mobile devices increased the cated to the Cyberfleet functionalities. A unique opportunity number of hits to more than 9 million, confirming the growing to learn the latest news about products, innovations to -im trend of the use of online as a fundamental touchpoint in the prove performance, in addition to solutions for fleets. search/purchase of tyres. The role of customer services on -dig ital platforms is fundamental: “tyres for your car”, the product The training of Customers on the product even in 2015 was -in catalogue and dealer locator confirm that customers are increas- tense in all markets, both at the points of sale and at the Pirelli ingly well-informed and need clear and immediate responses to sites with visits to the factory, R&D laboratories, and simulations their search on the web, as well as in mobility through smart- of tyre performance. About 4,500 dealers from 17 countries vis- phones. 70% of total access to Pirelli websites comes from search ited the two plants in Settimo Torinese (Italy) and Izmit (Turkey) engines. In 2015, Pirelli also continued to inform its customers in addition to the circuit in Vizzola (Italy) and the R&D Centre in with a digital newsletter, Paddock News, whose main objective Milan. Information and training are therefore conducted with a is to provide an additional means of communication and contact 360º approach. with the trade, and which consists of an international edition, During the year, expansion continued of the online training coordinated centrally from headquarters, and local-language platform Tyre Campus “The Road to Success”, covering a total edition for each market in which Pirelli operates. Paddock News of 23 markets in 16 different languages. This platform aims features a gallery of new products and news from the Company to grow the international coverage of training activities - ex and its Business Units: Car, Motorcycle, Motorsport and Truck. ponentially, by means of a homogeneous approach. Product In terms of paper publications, the company magazines “Pirelli training is delivered in a highly engaging style and with a World” and, for Brazil, “Giro”, continue to play a key role. path leading towards the final goal of certification. Pirelli cer- As for online communication related to Industrial Tyres, in tifies all its dealers who complete the proposed product train- Report on Value Chain Responsible Management / 2015 ANNUAL REPORT

ing successfully. The certified dealer status is then indicated er, in addition to the web page present in 10 countries world- in the dealer locator and on a plaque placed at the point of sale. wide, a page dedicated to bikers has been active on Facebook This way, consumers can be aware of which dealers are the since 2012, with 270,000 fans and content posted in 14 differ- most knowledgeable and qualified on the technical features ent countries in the relevant local languages. There has been and benefits of all the products of the Pirelli range. The plat- very positive feedback, over the years, from the activation form dissemination project is well advanced; in 2016, it is -ex of the Metzeler Maps, the Ridexperience blog and “Answers” pected to complete its extension to other markets, introducing feature that involves the users on the site. To maintain active new technical and commercial topics. relationships with consumers, the @metzelermoto channel Also in order to support the product trainers in the markets in on Twitter and YouTube was also created some time ago. For classroom training to the trade, a library of technical content the Pirelli Moto brand, a presence on Facebook is important, was developed for classroom courses and the instrument “Tyre with more than 300,000 fans connected and content posted in Campus Houses”, which aims to concretely demonstrate the many countries in the world, and special attention is dedicated characteristics of Pirelli tyres, the raw materials used for their to Asian countries where Pirelli is developing its social media manufacturing and the differences between the different tread. presence. The Diablo Super Biker mobile application is also of With these tools, Pirelli trainers around the world have concrete great importance, currently accounting for more than 350,000 and innovative support that allows customers to personally un- downloads, and is greatly appreciated by the biker commu- derstand and verify the key characteristics and advanced- tech nity. For this App, there will be an update in early 2016 with nology of Pirelli products. additional improvements (greater precision in calculating data thanks to new algorithms, detection of weather and road sur- Listening and Exchanging Ideas as Sources face conditions, direct links to social media and the possibility for Continuous Improvement of sharing sessions). In general, the CRM project occupies a priority position in the Business Unit, considering the biker Customer relationships are managed by Pirelli principally community as a group of product enthusiasts. through two channels: Also in 2015, the end customer direct listening activity contin- the sales organisation operating in the territory, which has ued through the Brand Tracking survey in the Top Ten Mar- 64 direct contact with the network of customers and which, kets of Pirelli (Italy, Germany, Spain, France, United Kingdom, thanks to advanced information management systems, can Brazil, China, United States, Turkey and Russia). The ongoing process and respond onsite to all the information require- changes made to this study over the years have made it -pos ments of the interlocutor; the sales structure is receives -on sible to refine and improve the precision of business insights going training on product and commercial issues through into the brand role, image profile and characteristics of the the contribution of the Commercial Academy, one of the 10 different touchpoints that influence the end customer’s pur- Pirelli training Academies dedicated to the continuous de- chase decision. velopment and updating of skills of the entire sales network. Pirelli also monitors its competitive position and its brand the Pirelli Tyre Contact Centers, 32 worldwide with more image among end users through the detection of Key Perfor- than 150 employees, performing business operations in IT mance Indicators (KPI) such as Top of Mind, Brand Awareness support and order management (inbound), telemarketing and Brand Consideration. The 2015 survey has confirmed the and teleselling (outbound). position of Pirelli as one of the Top Two best recognised tyre brands in Italy, Germany, Spain and the United Kingdom. In It- In addition to traditional channels, 2015 saw Pirelli achieve aly, Pirelli has also confirmed its leadership in terms of Brand a significant rise internationally in user engagement through Consideration. Outside Europe, Pirelli in Brazil was confirmed Social Media channels, most notably Facebook and Twitter. in first place for each brand KPI; in China, Pirelli was -con The Global Facebook Page dedicated to the brand reached firmed in third place as the best-known brand and in second more than 1,143,297 followers and the Motorsport page about place as a brand considered for purchase; Russia recorded 362,500 in addition to another two Twitter accounts: Pirelli increasing values of brand consideration, which have moved (94,400 followers) and Pirelli Motorsport (65,700 followers). Pirelli up to fourth place. In general, in all countries, the per- The Company is also present on Instagram where, at the end formance of Pirelli proves to be even more positive regarding of 2015, it proposed a successful initiative related to the launch the key target premium with the values of all indicators being of the Calendar, which collected more than 33,800 followers. higher than the more general targets of car owners: in China YouTube and Google Plus have also been confirmed as funda- in particular, we are in first place for brand consideration for mental assets for the activation of special ad hoc projects. As this target. There are two reference documents for brand po- for the Motorcycle Business Unit, we reserve a mention for the sitioning. One is the Brand Pyramid, which summarises the digital projects of the Metzeler and Pirelli brands. For Metzel- values, personality and distinctive features of the Brand. The Report on Value Chain Responsible Management / 2015 ANNUAL REPORT

other is the Brand Key, a work scheme created with the aim of Quality and Product Certification giving unity to product communication in terms of emotional benefits, functional benefits, reason to believe, differential ele- ISO 9001: since 1970, the Group has had its own Quality ments, target of reference. Management System introduced gradually at all production In 2015, the Tyre Talk project also continued: a listening pro- centres and, since 1993, Pirelli has obtained certification of ject for trade customers, truly innovative for the tyre industry, its quality system under the ISO 9001 standard. Today 100% based on an innovative web-based research platform, which of Pirelli facilities are certified with ISO 9001:2008, as are can now count on the participation of more than 850 members the activities at the logistics hub in Manresa, Spain. In 2015, in seven markets that form a select panel of partners-custom- the new Motorcycle Plant in Indonesia also obtained the ISO ers, able to contribute to the understanding of the market dy- 9001:2008 certification. namics, the development of new marketing levers and business opportunities. Through constant search, contact and collection ISO/TS 16949: In 1999 the Group obtained certification for its of feedback which includes the innovative and transparent -in Quality Management System in compliance with ISO/TS 16949 volvement of customers in various types of surveys and online and it has since maintained compliance with the standard as forums, studies are conducted on various marketing issues currently applicable. All plants, whether new or acquired, that such as: the launch of new products, the management promo- are suppliers of the automotive sector have obtained or contin- tional activities or materials at points of sale, the management ue to maintain this quality certification. of F1-related activities, the evaluation of the Pirelli B2B por- tal and the knowledge of approved tyres. The key issue is to ISO/IEC 17025: Since 1993 the Materials and Experimentation collect the opinion of customers on the behaviour of end con- Laboratory of the Group and since 1996 the Experimentation sumers, not only at the points of sale, but also in relation to the Laboratory of Pirelli Pneus (Latin America) hold the Quali- purchase process, the perception of the brand and product, the ty Management System, and have been accredited under the use of the labels introduced by the new European legislation, ISO/IEC 17025 standard. This system is maintained in accord- service expectations related to tyre change. ance with the standard in force and the ability of the laborato- In 2015, Pirelli also conducted the biennial survey on satis- ries to perform accredited tests is evaluated annually. The labs 65 faction of its trade customers in the car tyre business. As in participate in proficiency tests organised by the International previous years, the Dealer Satisfaction Survey aims to detect Standard Organisation, by ETRTO or by international circuits the level of satisfaction of its customer base during the various organised by auto manufacturers. Specifically in regard to car stages of company-customer interaction and to promote action tyres, the focus on quality is confirmed by Pirelli’s supremacy plans to improve customers’ perception of the performance of in numerous product tests. It is also guaranteed by its collab- Pirelli with respect to its main competitors in the various are- oration on product development and experimentation with the as investigated (Product, Quality, Logistics, Sales & Marketing, most prestigious partners (auto manufacturers, specialised Customer Service). The 2015 survey focused on 7 countries magazines, driving schools, etc.). (Italy, Germany, UK, China, Brazil, USA, Turkey) with a total of about 2,500 interviews. In the UK, the US and Brazil, the Product Certifications that allow the sale of products on var- interviews conducted at each point of sale in blind form (i.e. ious markets in compliance with the regulations in force in on behalf of the research institute and not of Pirelli) included each country are kept regularly up to date. The main product in-depth interviews conducted with the main Key Customers certifications secured by the Pirelli Group concern the mar- on behalf of Pirelli. This has made it possible to obtain timely kets of EMEA (Europe, Middle East and Africa), NAFTA (North and wholly transparent feedback, which is useful for defining America Free Trade Agreement), Brazil, Argentina, Uruguay, targeted action plans for our principal partners. In terms of China, Taiwan, India, Indonesia and South Korea and involve overall satisfaction, on a scale of 0-100 (Completely satisfied = all Pirelli plants. These certifications call for annual audits by 100; Very satisfied = 75; Somewhat satisfied = 50; Not very sat- ministerial bodies in the countries in question or organisa- isfied = 25; Not at all satisfied = 0), Pirelli is the best player in tions delegated by them, which verify the compliance of the Italy, UK and USA, and shows a performance comparable with product at the certified plant. that of its main competitors in Germany while in Brazil, China and Turkey, the scores on the direct distributors are > 75 up Focus on Human Health to the maximum of 85 in Brazil. The percentage of completely/ and the Environment very satisfied customers is on average above 75%. All raw materials and auxiliary products are carefully test- ed before they can be used in Group operating units. These tests seek to identify potentially unacceptable risks to human Report on Value Chain Responsible Management / 2015 ANNUAL REPORT

health and/or the environment. This assessment is performed In the Truck Business, Pirelli designs and sells high-per- on a centralised basis and carried out in all countries where formance products in terms of safety and fuel savings. The Pirelli operates, taking account not only of the requirements Serie01 tyres are comparable to best of our competitors in imposed by European regulations concerning the management energy efficiency (rolling resistance) and best-in-class in of hazardous substances, but also know-how currently availa- terms of wet grip. In terms of safety, special mention should ble worldwide (specifications, databases, etc.). There is ongoing be made of the tyres in the W:01 line as well as the TR:01 II monitoring of producers and suppliers of raw materials used and TH:01 tyres, which, having passed the test imposed by by the Group, particularly with regard to the registration pro- European regulations, feature the 3PMSF mark on their side- cesses of these substances by producers/distributors/import- wall. Regarding transportation of goods, a special mention is ers and in compliance with Regulation CE REACH 1907/2006. deserved by H:01 XL tyres which, thanks to the increased load index, can count on superior strength and integrity even in Product Safety, Performance the event of heavy use. In passenger transport, where safety and Eco-Sustainability and comfort play a key role, 2014 saw the launch of the H:01 Coach line, aimed at equipping long-haul passenger vehicles The commitment of Pirelli to the development of products that on motorways or trunk roads, and 2015 saw the launch of the are increasingly focused on combining eco- sustainability MC:01 line, aimed at equipping passenger vehicles on urban and safety has led to renewal of its product lines. Compared and suburban routes. The range of Pirelli products offered for with the previous generation, this guarantees significant re- efficient and sustainable mobility in the freight and passenger ductions in parameters like rolling resistance, braking on transport sector is rounded off by a series of solutions, among surfaces with low grip and the use of increasingly innovative which the CyberFleetTM. This system automatically measures materials. tyre pressure and temperature under operating conditions, In 2015, the Pirelli product range for the Car, SUV and Van thereby reducing fleet operating costs and making it possible segment recorded a further improvement in the average level to reduce fuel consumption costs by simultaneously maxim- of grading concerning the performance of increasingly inno- ising efficiency in tyre maintenance and pressure control op- vative materials designed to reduce rolling resistance, and erations. All of these features offer significant advantages in 66 terms of a reduction in CO emissions and therefore beneficial therefore the reduction of CO2 emissions, as well as increas- 2 ingly effective wet braking which contributes to road safety. effects from a reduced environmental impact and improved At the beginning of 2015, Cinturato AllSeason was launched road safety standards. Greater or lower tyre pressure than for the European market, the first “Total Mobility” product by what is recommended by the manufacturer leads to a higher Pirelli, capable of guaranteeing safe mobility during all sea- rolling resistance, irregular wear and tear, difficulty in con- sons of the year even on snow-covered road surfaces, combined trolling the vehicle and lengthening of the braking distance, with the innovative Seal Inside technology, a key contribution all factors which have a negative impact fuel consumption, to driving safety thanks to the technology of sealing the holes tyre life and driving safety. To date, CyberFleetTM is used by generated by foreign bodies that allows avoiding risky stop- 180 fleets in the world, with a total of about 150 million km pages for a possible tyre change and potentially dangerous travelled, using through the dedicated application. situations due to rapid tyre deflation. High-performance tyres are also manufactured with vegeta- For the Nordic markets, the Pirelli Ice Zero FR was introduced ble raw materials such as rice husks, an inedible substance on the market, a new generation of studless winter tyres for which is renewable and, above all, not taken from the food extreme climates, suitable for driving even on icy surfaces. Ice chain, from which silica, the essential component in making Zero FR is particularly attentive to environmental and safety a tyre, is obtained. This type of silica is used in both high issues not only with regard to the improvements in terms of performance products and also low rolling resistance tyres, reducing rolling resistance, braking distances on wet, snowy the product lines that reduce fuel consumption through lower or icy surfaces, but also as an innovative solution for urban heating of the tyre during operation. In general, the use of mobility, where the studded tyre is increasingly being banned silica in tyres has an impact on road safety because it pro- as it is a source of deterioration of the road surface. vides better wet grip and guarantees high performance levels. For South American markets, a new product line was launched Rice husk silica makes it possible to produce tyres that are dedicated to changeover and tuning called Cinturato P1 plus. more environmentally friendly: the silica is extracted from the This product has been designed to combine a high level of per- waste vegetable matter with a lower use of fossil fuel energy, formance on both dry and wet roads, as requested by consum- resulting in significant environmental and cost benefits in a ers who want to customise their vehicles, with the adoption of global ecological approach from the production chain through new construction solutions capable of reducing the weight of to the finished product. Further information on the eco-sus- tainability of Pirelli products can be seen in the paragraphs the tyre to reduce rolling resistance and CO2 emissions. Report on Value Chain Responsible Management / 2015 ANNUAL REPORT

of this report dedicated to the Environment. OUR SUPPLIERS For long-term reduction of CO2 emissions, Pirelli is committed to using products with low environmental impact developing the first high-performance UHP tyre with innovative materials that As provided in the Values and Code of Ethics of Pirelli, suppli- contain natural rubber from the guayule tree. This set of tyres ers and external collaborators play a fundamental role in im- was mounted on no less than a latest generation Maserati Ghibli proving the firm’s overall competitiveness. While seeking the that put this new compound to the test on the tracks of Vizzola keenest competitive edge, the Group bases its relations with and Balocco. It was a result of the agreement between Pirel- suppliers and outside workers on fairness, impartiality and en- li and Versalis (Eni) signed in 2013 for the exclusive supply of suring equal opportunities for all parties concerned. In its turn, natural guayule rubber to manufacture these tyres. Two years the “Social Responsibility Policy for Occupational Health, Safe- later, Pirelli researchers were able to study the characteristics ty and Rights, and Environment” specifies that the Group’s sus- of this new rubber in order to adapt the project to road use. tainable development strategies require, among other things, a commitment to continuous improvement in issues of the en- Awards vironment, occupational health and safety connected with its activities, abiding firmly by and supporting the content of the In 2015, Pirelli received several awards from its customers Declaration of Universal Human Rights, the Declaration of the that acknowledged not only the high quality and performance International Labour Organisation on Fundamental Principles of Pirelli brand products, but also the high level of attention and Rights at Work, the Rio Declaration on the Environment that the Group pays to product sustainability. and Development and the United Nations Convention against In April, for the second consecutive year, Pirelli won the “JD Corruption. Likewise, the Policy lays down that Pirelli is com- Power Original Equipment Award” in the Performance Sport mitted to establishing and maintaining active the procedures category; Pirelli was thus confirmed as the first choice for necessary for assessing and selecting suppliers and sub-sup- North American car manufacturers operating in the premium pliers on the basis of their level of social and environmental sector; also significant was the second place obtained in the responsibility. Sustainable management of the supply chain is Luxury category. thus set out in the Pirelli Quality Policy, in addition to being the 67 In June, Ford gave the “Green Pillar Award” to Pirelli, recognis- subject of the Green Sourcing Policy. The Policies mentioned ing not only the company’s commitment to sustainability but are available in many languages on the Pirelli website (Sus- also its ability to supply high-performance and quality tyres. tainability Section), to which the reader is referred for more In July CNH Industrial awarded Pirelli the “2015 Supplier of details and full text. the Year Award”. Two projects led Pirelli to this success: the construction of a biomass plant in Brazil able to ensure not Supply Chain Sustainable Management only energy savings but also a reduction in CO2 emissions and System the project in collaboration with the natural rubber processor Kirana Megatara aimed at supporting farmers and their fam- Provisioning processes and partnership relations with sup- ilies through lessons on responsible cultivation practices with pliers are guided by Pirelli’s Purchase Department and by rubber trees and scholarships. specialists present in the various affiliates worldwide. Respon- In November 2015, Pirelli received the “Quality Through Ex- sible management that is integrated in economic, social, envi- cellence Award” from Volvo for the Chinese factory in Yang- ronmental and governance terms characterises the relations zhou; this award is given to the best supplier of tyres based on between Pirelli and its suppliers. The “quality” of firms that the high quality and performance of the product. provide goods and services is also a fundamental element in In December, the Pirelli plant in Voronezh, Russia, received realising Pirelli premium strategy. The Model of Sustainable the “Ford Q1 Award”, the prestigious certification given by Management of the Pirelli supply chain was verified by a third Ford to suppliers that succeed in reaching high quality prod- party through a high-level method of verification, in accord- uct standards. ance with the AA1000 Assurance Standard (2008) in 2011, in 2013, in 2014 and in 2015, as can be seen in the letter of attesta- Road Safety Culture and International tion of the Sustainability Reports for the years mentioned. The Initiatives social, environmental and business ethics that are the respon- sibilities of a Pirelli supplier are assessed together with the International initiatives and commitments are discussed in the economic and product or service quality to be supplied, right paragraphs “Company initiatives for the External Community”. from the assessment at potential supplier stage. Analysis of ESG performance (Environment, Social Governance) then continues through the qualification stage of the future supplier pre-an- Report on Value Chain Responsible Management / 2015 ANNUAL REPORT

alysed at the assessment phase, and then is “contractualised” During a first assessment of possible offers for goods or ser- though the Sustainability Clauses included in every contract. vices in the marketplace, a buyer who has been adequately Verification of the supplier’s sustainability performance at the trained is able to gain a first impression of possible abidance post-contract stage is achieved through third-party audits. In or violation by/of the requirements of the product and ESG as- September 2014 on the institutional Pirelli website a “Suppli- pects by the potential supplier. This allows any who are clear- ers Areas” (Pirelli.com/suppliers) was released, a new section ly in possible breach of Pirelli expectations to be eliminated dedicated to the world of supply. It is accessible to current and from the roster of potential suppliers. Pirelli asks suppliers potential Pirelli suppliers, as well as anyone with an interest in who gain access to the qualification stage to use the portal knowing the management model adopted by the Firm in the ar- available in their local language. By accessing it, the supplier eas of purchases of goods and services around the world. This views and simultaneously accepts the Pirelli economic, social, new channel of communication aims at the utmost clarity and environment and business ethics policies. This first step fore- sharing of Values, Guidelines and standards adopted by Pire- sees filling out a questionnaire concerning evidence of ESG lli in relations with suppliers and set out via the publication wherein a number of questions are “invalidating”, i.e. an in- of support documentation such as, for example, the Supplier adequate response will prevent the qualification from being Handbook. In 2015 the initiative was also promoted at a single processed favourably, since these are minimum requirements industrial country level and the release is underway. for becoming a Pirelli supplier. These questions require the potential supplier to attest that its firm: The ESG Elements Analysed during checks workers’ ages before hiring them, and it ascer- Suppliers Assessment, Selection, tains that all of its employees satisfy the minimum legal Qualification and Audit Phases working age; uses workers provided with a written labour contract and Pirelli uses the same ESG performance approach throughout who work on a voluntary basis exclusively; the entire process of interactions with the supplier, although abides by workers’ rights of freedom of association and in different ways among them, consistently with the intensi- participation in trade-union activities; ty of the interactions characterising the specific procedural pays wages that meet the minimum legal standards; 68 steps. Beginning with the assessment stage, Pirelli suppliers manages disciplinary practices, if any, abiding by the law; are evaluated against the management model and perfor- abides by and applies legislative/contract provisions in the mances, based on their awareness, in matters of: matter of work schedules, overtime and rest periods. human rights compliance with a focus on: ban of child labour; Depending on the goods categories in respect of which the sup- non-discrimination; plier has initiated the qualification procedure, a particularly ban of forced or compulsory labour; detailed questionnaire has to be filled out in which the supplier protection of freedom of association and free bargaining; is asked: to attach quality, environmental and health and safety certifications; to document their approach to responsible man- respect for the rights of indigenous populations and the agement by attaching their Policies and Codes; to provide data local community; disclosing the rate of accidents at work; to attest the compliance rejection of corporal punishment, mental and physical co- with labour laws as set forth above and to disclose the existence ercion, and verbal abuse; of any pending lawsuit. Filling out the questionnaire is one of abidance by laws and industrial standards on working the essential conditions required for qualification. The rating hours and insurance that wages are sufficient to meet relative to ESG elements has an incidence of 33% in the final workers’ basic needs; rating of candidate suppliers. The portal has additionally been monitoring performances in occupational health and safe- developed to support communications, awareness and training ty and targets of improvement; campaigns being carried out for suppliers where sustainability zero tolerance for any type of corruption in any form or is an essential part. With regard to the contractual stage, from way, in any jurisdiction; 2008 the Sustainability Clauses have been included system- assessing and reducing the environmental impact of their atically in contracts and orders for purchases of goods and/ own products and services throughout their entire life cycle; or services and/or works, both with private suppliers and the responsible use of environmental resources in view of con- public administration (or bodies/companies controlled by the tinuous improvement; latter) or NGOs all over the world. capability of imposing the foregoing principles, values and policies to any subcontractors and sub-suppliers, regularly monitoring their actual compliance with this obligation. Report on Value Chain Responsible Management / 2015 ANNUAL REPORT

In particular, the clauses: bility Policy for Occupational Health, Safety and Rights, and call for awareness, on the part of suppliers, of the princi- Environment” of the Group can be reported in total confiden- ples, commitments and values contained in Pirelli’s Sus- tiality. In 2015 no Whistleblowing report was received signed tainability documents, i.e. “Values and the Code of Ethics”, by a supplier. It is objectively impossible to confirm that there the “Code of Conduct” (anti-corruption) and the “Social were, in absolute terms, no further reports from external stake- Responsibility Policy for Occupational Health, Safety and holders received, as a number of reports were anonymous, as Rights, and Environment” published and accessible on the specified in the section “Group Procedure for reporting – Whis- web, which enshrine the principles on the basis of which tleblowing”, which can be referred to for further details. More- Pirelli manages its activities and contractual or non-con- over, there is no evidence of Whistleblowing reports in regard tractual relations with third parties; to violations by suppliers used by the Group. require Suppliers to confirm their commitment to: Each contract for purchase bears the name of the contact- buy not using or supporting the use of child and forced labour; er so that the person in question has at all times a corporate ensuring equal opportunity, freedom of association and channel available for any feedback. According to the matter promotion of the development of each individual; concerned, a contact buyer will then deal with the right per- opposing the use of corporal punishment, mental or son/function. physical coercion, or verbal abuse; The supplier is monitored by using the Vendor Rating pro- complying with the laws and industry standards -con cedure, aimed at defining the quality level of suppliers, the cerning working hours and ensuring that wages are quality of the commercial relationship, the technical-scientif- sufficient to cover workers’ basic needs; ic collaboration and performance in relation to occupational establishing and maintaining appropriate procedures safety, the environment, and social responsibility through on- to evaluate and select suppliers and sub-suppliers site audits and the periodic monitoring of the progress of the based on their commitments to social and environ- actions set down in any improvement plans signed with the mental responsibility; supplier. The Vendor rating results are reviewed annually and not tolerating any type or corruption in any form or le- commented by Purchase Department at meetings organised gal jurisdiction, even where such practices are allowed, with suppliers so as to identify any corrective actions or- im tolerated, or not subject to prosecution; provements needed in performance. The Vendor Rating covers 69 assessing and reducing the environmental impact of all the goods and geographical purchasing areas and is uti- their own products and services throughout their en- lized as an integral part of commercial negotiations. tire life cycle; using resources responsibly with the aim of achieving Materiality of ESG Impacts sustainable growth that respect the environment and along the Supply Chain the rights of future generations; imposing the aforesaid principles, values and polices upon Pirelli governs its sustainability by using a materiality analysis. any subcontractors and sub-suppliers and overseeing on a In environmental terms, the materiality of supply chain -im regular basis their actual abidance by these obligations; pacts is prevalent in the category of raw materials and the use of water in natural rubber transformation processes. specifying that Pirelli reserves the right to verify at any Social impacts (human and labour rights in particular) are ev- time through audits, either directly or through third par- idenced on the other hand in all categories of purchases with ties, that fulfilment of the obligations assumed by the sup- reference to suppliers operating in countries considered more plier (more details see below, in the following paragraph). at risk as compared to others from the standpoint of compli- ance with domestic and international labour legislation. The Sustainability Clauses have been translated into 24 lan- There are many activities involving suppliers put in place by guages so as to ensure maximum clarity and transparency the Company from the viewpoint of creating environmental and towards suppliers in terms of the contractual obligations they social value that are inseparably tied to the creation of shared assume, not only in relations with the company itself, but also economic value. This is the case of numerous agreements the in relations with their own suppliers. With a view of utmost firm has reached with strategic suppliers for the development assurance, suppliers of the Pirelli Group have the Whistleblow- of innovative materials with low environmental impact which ing Reporting Procedure ([email protected]) at their disposal, are described in detail in the section on “Research and Devel- expressly indicated in the Clauses and by means of which any opment of Raw materials” in this report. Equally, Pirelli sup- breach or suspected breach they discern in relations with Pire- ports initiatives in support of social development within the lli referring to the contents of the “Values and Code of Ethics”, value chain extending to the second and third tier of the supply “Code of Conduct” (anti-corruption) and the “Social Responsi- chain. This latter is the case of the partnership between Pirelli Report on Value Chain Responsible Management / 2015 ANNUAL REPORT

and one of its natural rubber suppliers in Indonesia aimed at The external auditors carry out the verification on the basis of supporting the welfare of smallholders of plantations who are a checklist of parameters of sustainability deriving from the the second or third tier in Pirelli Supply chain (Pirelli does not Pirelli Code of Ethics, the SA8000® standard (a tool of refer- purchase from plantations but from Transformers or dealers ence officially adopted by the Group for managing social re- who in turn purchase from plantations). sponsibility since 2004) and the “Social Responsibility Policy Both the sustainability of natural rubber and the management for Occupational Health, Safety and Rights, and Environment” of criticalities that may arise beyond a direct relationship with of the Pirelli Group (consistent with the areas of social, envi- a Supplier (second/third tier of the chain) represent one of the ronmental and governance sustainability dictated by the -Unit main challenges for responsible management of the supply ed Nations Global Compact). Third-party audits, each of which chain. For this purpose, sector cooperation is an essential ele- lasts on average 2-3 days in the field, include interviews with ment for meeting this responsibility effectively. workers, management and trade-union representatives. Between the end of 2009 and the start of 2010, 72 audits were Audits by Third Parties carried out; between the end of 2010 and the start of 2011, a further 56 were completed; in the second half of 2012, 62 Since 2009, every year and with joint activities by the Group’s new audits were commenced on suppliers of raw materials, Risk, Governance, Sustainability and Purchases functions, machinery, logistics and services which concluded in 2013. In buyers and local Sustainability Mangers are asked to identify 2014, 78 audits were performed and in 2015 a further 93 au- a list of suppliers who, on the basis of the findings of proper dits were begun on suppliers in all the categories mentioned, Risk Assessment, are felt to be in need of an audit by a third including potential suppliers of raw materials. In most cases party at the time of the Annual Audit Campaign. the 2015 audits involved Pirelli Tyre suppliers operating in The “criticality” of the supplier guides the choice, and this may countries where the Company is present with industrial plan, be so since: i.e. Brazil, Argentina, Egypt, China, Romania, Russia, Turkey, the supplier is bound to Pirelli by multi-year contracts; Mexico and the United States, or countries from which Pirelli the replacement of the supplier may be complex; purchases raw materials, such as Indonesia, Malaysia, Thai- news of ESG risk events is received; land, South Korea and Taiwan. Among the western countries 70 the economic burden of the purchase is significant and for where the Group operates, audits were carried out on Pirel- this reason an on-site verification of the supplier’s compli- li Tyre suppliers in Italy, UK, Germany, France, Sweden, the ance with Pirelli ESG expectations, signed by the supplier Czech Republic and the Netherlands. at the contractual stage, is advised, via a third party audit On the basis of audit findings, where deemed necessary and commissioned by Pirelli; adequate, and given also the specific corrective actions -sug the supplier operates in a country at ESG risk; gested by the independent Auditor, the supplier signs a recov- the supplier has not yet undergone an ESG audit by Pirelli or ery plan aimed at preventing, mitigating or remedying any special criticalities have been detected in previous audits; non-compliances found. The plan foresees specific actions to there is information, a perception or doubt concerning be implemented by precise deadlines in addition to clear iden- possible breaches regarding social, environmental and/or tification of the responsible for the actions at the supplier site business ethics responsibilities. and the follow-up method (documentary or in situ) that will be followed by the Auditor to verify resolution of the non-compli- In 2015 a preliminary sustainability Audit was introduced, ances detected during the Audit. The process of monitoring that is at the quality/approval stage, for all potential new the implementation status of suppliers’ recovery plans is dual: suppliers and/or implantation of raw material. Through these on the one hand the third-party Auditor verifies the status of Audits, which are carried out by third parties, the level of implementation of the recovery plan, and on the other Internal compliance of the potential supplier is checked against the Audit Department of the Group verifies the adequacy of man- main domestic and international regulations in Labour, Envi- agement and alignment of the corresponding local functions ronment and business ethics. (Sustainability and Purchases). Methodologically, a team made up of Sustainability Department On the basis of the results of the audits carried out in 2015 and and Purchases Department of the Group defines Guidelines for as compared to 2014, the number of non-compliances record- selecting suppliers to undergo auditing, supporting the corre- ed in absolute terms fell by approximately 40%, whereas the sponding local functions who operationally manage the pro- average number of non-compliances per supplier dropped by cess. Purchasing Directors and Sustainability Managers who around 45%. The non-compliances recorded are linked to pro- coordinate the auditing activity locally are adequately trained cesses of health and safety management, the use of overtime, and made aware of the audit subject and method by the corre- the improper implementation of Environmental Management sponding central functions, i.e. Sustainability and Purchases. Systems and the lack of adequate oversight by the Supplier of Report on Value Chain Responsible Management / 2015 ANNUAL REPORT

the sustainability of its own supply chain. published on the website www.pirelli.com, thus making them There were no cases of supplier relations being terminated available to Pirelli suppliers and to other stakeholders. In due to the findings from audits. In rare cases, agreements with addition to explaining the arrangements of the Pirelli Green suppliers considered inadequate or at risk during the scouting Sourcing system, it also contains the KPIs for assessing these stage were not concluded. suppliers’ Green Performance. In China, Mexico, the United States, Russia and Italy, by-invitation seminars have been held Group “Green Sourcing” Policy at Pirelli offices on the Green Sourcing Guidelines for local suppliers so as to inform and receive direct feedback on the As at December 2012 Pirelli drew up and issued the “Green way they work. Again from the standpoint of informing and Sourcing” Policy with the aim of stimulating and incentivis- disseminating the Pirelli Green Sourcing Policy and the Green ing environmental awareness along the entire supply chain Purchasing Guidelines among stakeholders, in 2015 Pirelli ad- and encouraging choices that might reduce the impact on the ditionally accepted to contribute to activities of the Luigi -Boc environment of the goods and services supplied to Pirelli. The coni Business University (Milan, Italy) concerning Circular Green Sourcing Policy implementation system was defined in Economy models through a Degree Thesis using Pirelli as a 2013, both inside Pirelli and in relationships with the suppli- “case-study” and aimed at bringing out the potential or the ers. It is organised as follows: Circular Economy in the tyre industry. publication of a Green Sourcing Manual, an internal doc- Additionally, in 2015 Pirelli developed an IT platform to sup- ument containing operational Guidelines aimed at direct- port the launch of a campaign to measure the Green Perfor- ing the activities of Pirelli functions involved in the Green mance of Pirelli Suppliers through an electronic question- Sourcing process; naire to be filled out online, a campaign whose implementation publication of the Green Purchasing Guidelines, a docu- is planned for 2016. ment intended for Pirelli suppliers as part of the supply Pirelli has also been invited to share its “Green” approach at agreement and based on the Green Sourcing Manual con- the Future Tire Conference 2016 (May 24 – 25, 2016, Essen, taining the KPIs (Key Performance Indicators) for assess- Germany) during the “Future Factories and Supply Chain Fo- ing the Green Performance of these suppliers; rum” session with a presentation titled “Green sourcing in the 71 integration of Green Performance in the traditional pro- tire supply chain”. cess of measuring supplier performance (vendor rating). CDP Supply Chain The Pirelli Green Sourcing Manual defines four areas of Green Sourcing: Materials, Capex, Opex and Logistics. Inter- For years Pirelli has participated in CDP Investor and, at the departmental working parties comprised of Purchasing, R&D, request of customers, in the CDP Supply Chain. Implementing Quality, HSE and Sustainability, analysed the Green Sourcing its Green Sourcing Policy since 2014, Pirelli has in turn de- process associated with the merchandise categories falling cided to extend the request for CDP assessment to its own key within the four areas mentioned above. Green Engineering suppliers at Group level, identified in accordance with criteria Guidelines were defined for the Materials and Capex areas, of environmental and economic materiality. The CDP Supply where the design component (conceived in-house) is material Chain allows Pirelli to monitor Scope 3 emissions from its sup- to the Pirelli core business. For the Opex and Logistic are- ply chain and ensures adequate awareness of supplier firms as characterised by goods categories in respect of which the in terms of climate change to identify and activate all possible design component is not equally significant, Green Operating opportunities for reducing emissions of climate-altering gas- Guidelines have been defined by referring to internationally es. In 2015, which was the second year of programme report- recognised best practices. ing, the excellent participation of Pirelli’s suppliers was con- So, the Green Sourcing Manual is a unique document that con- firmed; they responded to the assessment earning a disclosure tains: score higher than the global average of the panel of suppliers the general part on Green Sourcing issues; responding to the CDP. This analysis has shown that, thanks the Green Engineering Guidelines (Materials, Capex); to actions taken to reduce emissions by Pirelli suppliers, in the Green Operating Guidelines (Opex, Logistics). 2015 atmospheric emissions of more than 51 million tons of

equivalent CO2 were avoided, thus allowing economic savings The Green Sourcing Manual will also be adopted by the Pirelli estimated at 149 million dollars. Training Academy for training purposes by the functions in- Pirelli was the first firm among tyre producers to introduce volved in the Green Sourcing process. the CDP Supply Chain officially to its supply chain. In 2014 and on the basis of the Guidelines of the Green Sourc- ing Manual, the Pirelli Green Purchasing Guidelines were