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Limestone Investment ManagementLimestone is a specialist Emerging European equity fund manager based in Tallinn. The company was founded

in 2007 and is majority owned by its managers. We focus exclusively on delivering to our clients outstanding

investment performance. Our home region and investment universe, Central and Eastern Europe, is one of the

most dynamic investment markets in the world. Limestone is one of the very first New Europe based investment

managers that integrates the concepts of socially responsible investment and sustainable development into

fundamental research process as essential factors for long term performance and risk management.

Limestone New Europe Socially Responsible FundA Luxembourg domiciled, UCITS III compliant long-only equity fund that invests in Central and Eastern European

companies that offer good opportunities for capital appreciation and meet the Fund’s investment and social

criteria. The Fund invests in listed stocks of companies based or operating in New Europe – the new EU members

and membership candidates. A bottom-up fundamental research driven investment process is applied to construct

an actively managed high conviction portfolio. Portfolio companies are expected to comply or to actively pursue

compliance with international norms on Environmental, Social and Governance issues in accordance with the UN

Principles for Responsible Investment. Fund’s SRI approach is best characterized as ESG factor integration and

active engagement with minimal negative screening.

Limestone is a signatory to the United Nations Principles forResponsible Investment (UN PRI) and European SRI Transparency Code

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

InteractionTransparency

KnowledgeValue

InteractionTransparency

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The first two years of Limestone New Europe SRI Fund

were characterized by turbulent markets, investors torn

between extreme despair and desperate hope, and fund

managers in the middle trying to find the right balance.

We are grateful to our investors that have stayed with

us during these difficult times and proud to have been

able to protect their capital in full, which is something

that has been quite rare during this period.

The environment in which companies operate and

compete changes continuously. Nowhere else is this

so evident and self explanatory than in New Europe,

the region that went through complete structural

and socioeconomic change in the last twenty years.

Sustainable companies embrace this change by seizing

the opportunities and by managing the risks that such

developments pose to each industry. This is the natural

way of enhancing company’s competitive position and

positioning to deliver above average shareholder value.

As this book many times emphasizes, our investment

philosophy is not about rewarding the best companies

and leaving the rest to catch up on their own. We believe

that we make a real impact by investing in financially

attractive companies and helping them to improve their

environmental, social and governance practices. There

are quite a few out there in New Europe that already

have a conscious strive to be a responsible social citizen,

and have realised the benefits of being proactive in

responsible business practices. Some of them have

been mentioned in this book.

We like to think that the most important feature

that makes Limestone stand out from the crowd is

our research process. It is almost a paradigm that

money invested responsibly is associated with inferior

performance. We believe that the main reason behind

such a fundamentally flawed credence is the often

found detachment of fundamental analysis and active

portfolio management from the investment process and

replacing it with backward looking ratings; sometimes

called the “best in class” approach. Our Head of

Research gives a thorough account about his work on

this field and the results achieved.

Convergence, a term somewhat worn out over the last

decade, is alive and kicking and full of opportunities.

Our good friend Geoff Mazullo, who just might be the

one person that has had the most impact on corporate

governance development in CEE, kindly contributed

his personal account about convergence. We are also

proud to publish a thorough research paper on ESG

disclosure practices by our research partners GES

Investment Services, and introduce Bulgaria, one of

our favourite countries in the Balkans. Investing is not

about buying and selling stocks. It is about contributing

to and sharing the successes of people, companies and

countries. We sincerely hope this book will make an

interesting reading.

Limestone SRI Fund Yearbook 2010Two Years of Responsible Investing in New Europe

Dear Reader

It is about contributing to and sharing the successes of people, companies and countries.

Alvar RoosimaaCIOLimestone Investment Management

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Contents

Limestone New Europe Socially Responsible Fund

Investment Strategy and Market Update

Engagement Based Risk Management

Examples of our engagement activities

Why New Europe?

New Europe at the Crossroads

Integration of Quantitative ESG Factors Into Valuation Models

Investing At Limestone

Clients

Philosophy

Approach

Competitive Advantage

Investment Process

Convergence – Some Critical Reflections from Within and Without

Country Focus: Bulgaria

Financial Markets and Corporate Governance

Development and Prospects in Sustainable Development

Companies in Focus

ESG Reporting In CEE Has Catch-Up Room

New Europe And Russia

Rest of Europe

Sector Analysis

Contacts and Fund Terms

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Limestone New Europe SRI Fund is celebrati ng its second anniversary in August 2010. Launched in the wake of the

worst fi nancial crisis in modern history – a few weeks before Lehman Brothers’ bankruptcy fi ling – the fund was the

fi rst equity fund managed from New Europe to focus on socially responsible investi ng. The fund has been equally

successful in pioneering in corporate social responsibility in New Europe and in protecti ng investors’ money. One of

the very few equity funds in Eastern Europe, Limestone SRI Fund recorded positi ve performance for the period of

two years from July 2008 to August 2010.

Limestone New Europe Socially Responsible Fund

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Investment Strategy and Market Update

Late into the crisis, New Europe is late into the recovery,

too. Local markets severely lagged the rapid rise in GEM

equities in 2009 and only started to close the gap in

1Q’10. And then the European sovereign debt crisis

started.

In July 2010 The Stoxx Europe 600 Index was trading

at about 11.5 times estimated 2010 earnings, near

the lowest valuation in more than a year, according to

Bloomberg data. Top 150 companies in Limestone New

Europe research universe were trading at 9.1 and 7.6

times 2010 and 1011 earnings, respectively. The IMF

has just revised its global growth outlook to 4.6 percent

in 2010, reflecting a stronger-than-expected first half.

That’s the biggest gain since 2007 and compares with

April projection of 4.2 percent.

Assuming that global recovery does not grind to a

halt, CEE has good chances to win over its fair share of

emerging markets’ fund flows with attractive bottom

up valuation levels. With all eyes on global top down

developments, local returns will be dominated by

company level business rebound. We are in the stock

pickers’ market in its purest form.

Top down view of the world on New Europe is improving,

too. Fiscal discipline (especially if compared to Greece

et al) and the drastic narrowing of trade gaps over

the last 12-24 months is a reality. The fiscal austerity

packages in Southern Europe need not have significant

direct economic impact on Emerging Europe, as

Southern Europe is not an important export destination

for CEE. Even more important is that the biggest three

economies in the euro zone do not trade much with

Souther Europe either. So, austerity in Spain, Greece

or Portugal need not have any significant impact on

Germany, France and Italy or other euro zone members.

In turn, this is good news for Emerging Europe.

While the fund does not have country or sector biases

the different scale of different countries dictates that

some markets will always have more opportunities

to offer than smaller peers. Poland and Romania are

the giants among New Europe countries and claim

therefore proportionally more attention. Poland was

the only major economy in Europe to avoid recession in

2009 due to its relatively low trade exposure, significant

PLN depreciation, and timely fiscal stimulus. We expect

Polish growth to continue to outperform the rest of

the region in 2010. Despite the recent weakening of

zloty has made life easier for many exporters we prefer

companies that rely on local economy and consumers.

Romania is much tougher case to crack. With all

the potential from large population and recent EU

accession, the lack of administrative capacity is at times

utterly frustrating. On the other hand, there are many

of companies with outstanding results and growth

prospects, and occasionally very capable management.

Romania – the most overheated European economy in

2008 - landed hard, contracting over 7% in 2009, while

the current account gap, exceeding 13% of GDP in mid-

2008, narrowed to just 4.8%. The adjustment makes

There are many very attractively valued companies in New Europe to choose from.

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local macroeconomic risks look to be tamed. The long-

term convergence perspectives should start to dominate

the markets as long as the global environment remains

friendly. We remain positive that public administration

manages to avoid big mistakes, which in itself would

gradually improve outside perception towards Romania.

Our investments in Romania will remain focused on

local consumers and domestic business investments

rather than the very volatile export sector.

Rebounding out of the market bottom in March 2009

the fund was overweight in financials and early cyclical

industrials that were directly benefiting from the

inventory replacement process. These were the most

depressed sectors, especially banks with emerging

market exposure and industrials in automotive sector.

We turned more defensive in 1Q 2010 by cutting banks

in the portfolio. During the spring our focus was turned

to find deeply cyclical companies whose business had

bottomed but not yet strongly rebounding. Industrials

that managed to survive the crisis and cut costs to

compensate for sales drop of sometimes more than

50%, will be the biggest winners of the new business

cycle ahead of us.

The more we apply the principles of Responsible

Investing in our investment activities the more we

realise how much of this work is an essential risk

management exercise. There is no other way to learn

about, and thus mitigate the risks of, the governance

quality than meeting managements face to face and

asking all the questions that are usually not asked.

Surprisingly often the initial surprise of the managers,

when asked questions about social and governance

issues, is replaced by delight and acknowledgement

“that nobody has ever asked before”. Most of the

successful companies, especially the newer ones

established by the younger generation of entrepreneurs,

are well aware of modern requirements for responsible

corporate citizen, and right things are being done. It

is just that as nobody has bothered to ask they have

not seen the need to disclose. This is one of the unique

advantages Limestone has: we ask and we learn more.

Examples of our engagement activities

Polish Chemicals CompanyFrom the nature of its business, this company has

several potential and important environmental and

social risks: high energy and water consumption,

emissions of pollutants to air and water, heavy industrial

processes and hazardous substances pose important

health and safety dangers. Although we did not indicate

Engagement Based Risk Management

we ask more, we learn more.

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any incidents, we saw that there is not nearly enough

information on environmental, social and governance

issues to feel comfortable to invest into this company

that financially looked to us very attractive. We met at

company headquarters with the CEO of the group and

addressed our concerns. The CEO assured us that they

take environmental issues very seriously and constant

modernization of the facilities reduces environmental

risks and ecological footprint constantly. Being a former

state owned large industrial conglomerate, we were not

expecting overly enthusiastic reception and immediate

action from the company, but a reassurance that matters

of concern are being acknowledged and dealt with. The

investment turned out to be exceptionally successful,

with the share price almost doubling in 2010.

Bulgarian Real Estate DeveloperBased on our longstanding relationship with the

company management we approached them with

suggestions to focus on more disclosure of their

activities in environmental and social areas. We felt that

distinguishing itself from the competition by closing that

information gap would potentially attract new investors,

which in turn would positively influence company

valuation. Being already sizeable investor, we were

both interested in learning more about the company

and seeing the gap between fair value and market price

to narrow. Top management was very interested about

the idea and as a start provided us a comprehensive

list of social activities and pro-active environmental

considerations of their real estate developments. A

further step was to reorganize corporate website to

focus more on ESG information, which is expected to be

concluded by the end of 2010. Meanwhile, the flagship

office development of the company was selected

as a showcase of a green building by a renowned

international consultancy.

Romanian Holding CompanyThe main goal was to understand better and positively

influence any change in corporate governance

procedures, especially in shareholder rights and

minority protection issues, which were the most

pronounced problems. Also the implementation of a

CSR policy that would focus on handling ESG matters

within the portfolio holdings. Due to the wide spectrum

of holdings in the company and their influence in

Romanian corporate community, any initiative from

the company’s side could have real impact. The central

concern and the major discount factor weighing

on the company’s market valuation was the lack of

information about corporate governance; there was

no information available on how the company handles

central environmental issues. Also, we wanted to learn

how much influence company would have in changing

of discriminative shareholder rights’ rules in place as

compared to legislative powers. The meeting took

place in Bucharest, and the discussion was friendly

and open. It was emphasized that management fully

supports better transparency in ownership issues and

the change of outdated rules, but is deadlocked by the

law and current corporate code to initiate much change.

To follow up, we received a note from COO saying

our remarks meet company’s intentions to improve

governance procedures and our recommendations

were of “real help”.

Polish Industrial CompanyThe company is engaged in the production and supply

of aluminium and iron components for the automotive

industry, being the largest supplier of its iron parts in

Europe and it holds over one-quarter of the European

market of the main aluminium based product. Operating

in industry with relatively high environmental risk, we

were keen to see the company to demonstrate how it

manages ESG issues. The group, originally from Western

Europe, has quite uneven reporting quality between

its Western subsidiaries’ sites and Polish company’s

webpage. Our meeting with CFO was constructive.

The company is gradually unifying its disclosure and

reporting channels and investors should expect to see

much more transparent and coherent ESG reporting

in the nearest future. We were generally pleased with

what we heard, especially that the level of their Western

European reporting proves that there is administrative

capacity and willingness to be transparent.

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Our defi niti on of New Europe covers countries

previously under the infl uence or outright occupati on

of Soviet Russia that are now new European Union

members or on the path to become members in the

foreseeable future. New Europe countries, within

borderless economic block, have more att racti ve

investment climates than the old EU, through low unit

labour costs, more fl exible labour laws and in most

cases lower tax rates on both corporate and personal

income, but the countries have insti tuti ons, laws, and

regulati ons that meet EU standards. New Europe has

made signifi cant progress in real economic convergence

with Western Europe over the last decade. GDP per

capita in 2010 reaches almost 60% of the EU-15 level

on purchasing power parity basis, up from 45% in

2000, driven mostly by higher producti vity growth.

Temporarily stalled during the crisis, the catch-up with

Euro area is to resume in 2010.

Why New Europe?

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

11

If there is one certain lesson about New Europe to

learn from the recent crisis it is that belonging into the

EU framework works as a surprisingly strong safety

net. From Latvia to Romania, any country that was

perceived to be in trouble, received quick support from

European Union structures, which in turn oft en led to

a smoother and easier bargaining with IMF. The carrot

and sti ck framework of EU integrati on is eff ecti ve, and

this gives additi onal credibility to the assumpti on of

conti nuous convergence. The latt er is criti cal to the

general investment case of Central and Eastern Europe.

There is strong long term consensual view out there that

emerging markets are where we should put our savings.

Yet the money has not yet followed the argument,

as Western world’s pensions are according to most

esti mates sti ll 90-95 percent invested in developed

markets. The consensus view is this should change. A

strong global recovery from 2012 is likely to be fuelled

by booming capital fl ows to emerging markets.

Consensus also thinks that Central Europe is least

likely to experience this boom. This is where we see

the crossroads: will New Europe sti ll be seen as part

of emerging markets and if not, where will it fi t in

instead? There are already three euro zone members

in New Europe from 2011 and the rest will follow soon.

We have long been advocates for substi tuti ng the

emerging market status with core-European extension.

The feedback from insti tuti onal investors to this noble

idea has been positi ve in principle but non-existent in

practi se. Limestone believes that the idea will start to

feed through to European portf olio managers once risk

appeti te begins to grow again.

Another recent development has been the weakening

of Euro, blamed on Greece and other South-European

heavily indebted economies. The most notable impact

of this for New Europe is that globally the cheapest

places to shop are Bulgaria and Poland as they have

displaced Mexico and India. This is positi ve news for

New Europe at the Crossroads

There is strong long term consensual view out there that emerging markets are where we should put our savings.

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the competi ti veness of euro-linked CEE economies. The

very core of the idea of convergence is that the free

movement of capital within European Union is bound

to benefi t more competi ti ve areas. Why not build a

new factory across the border and save 60% on labour

costs? If Germany can export itself out of the recession,

New Europe is perfectly placed to gain from it.

Between 2007 and 2013, the European Union invests

close to 200 billion Euros in the Central and Eastern

European member states via the Structural Funds and

the Cohesion Fund. Widely perceived as “manna from

heaven”, the investments are done by a myriad of

individual programs, each with their own set of rules

and target insti tuti ons. Injecti ng up to 4 percent of GDP

into economies that are in a catch-up process will have

signifi cant macro-economic implicati ons. Aft er a recent

change, all member states are encouraged to use up to

4 percent of the Regional Development Fund transfers

for energy effi ciency and renewable energy sources

in housing. European Investment Bank (EIB), the EU’s

public bank that provides loans and co-fi nances projects

in tandem with structural and cohesion funds, plans to

increase its lending in CEE countries’ energy, climate

change and infrastructure sectors.

Real income catch-up has temporarily stalled due to

the global recession as New Europe suff ered larger

output declines than the Euro area. A healthy cyclical

recovery in Europe will put CEE back on the catch-up

track with regained momentum by 2011. The ability of

Central European economies to leverage off of the Euro

area recovery will be enhanced by a temporary drop in

their relati ve unit labour costs which boosted export

price competi ti veness. FDI infl ows, a long-term driver

of convergence, should rebound with the cyclical global

rebound.

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

EU transfers to new members as %GDP

Source: European Commission

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The single most important feature that makes

Limestone stand out from the crowd is the structure

of the research process. Right from the beginning

of our activities in the field of socially responsible

investments, it became obvious that the rating-

based portfolio management model does not work in

emerging markets framework. Also in the developed

world, the best-of-class investment products had

started to backfire and investment community was

growing uneasy with poor performance of SRI funds

as compared to more conventional equity products.

Sadly, it was almost a paradigm that money invested

responsibly always had inferior performance. The main

problem was detachment of fundamental analysis

and active portfolio management from the investment

process and replacing it with backward looking ratings.

From this point we understood that while the company

ratings and risk classifications are important in

implementation of CSR factors to portfolio formation,

they cannot be the basis for investment decision, instead

they should serve as a complementary compliance

tool to fundamental valuation. The more we learned

about ESG principles the more certain we became that

integration of „soft“ factors with financial fundamentals

should be the key issue and distinctive feature in our

research framework.

Integration of ESG factors to fundamentals has had

various approaches over the years. There are numerous

studies carried out on how the corporate responsibility

affects market value, what are the key performance

characteristics, and who can benefit most from it,

yet quantitative application has so far been rare. Still,

several studies have indicated that SRI rating has effect

on company’s beta and thereby it’s cost of capital.

Therefore, adjustment of cost of capital is the practice

that we wanted to follow in our integration of CSR to

valuation models.

Based on our knowledge of industry practices, and

after acknowledging that there is very little public

The main problem of many SRI funds is detachment of fundamental analysis from the investment process by replacing it with outsourced ratings.

Integration of Quantitative ESG Factors Into Valuation Models

14

informati on available on companies in our investment

universe, it was clear that a new approach to address

the issue was needed. As our fundamental valuati on

models uti lise cost of equity based on country specifi c

risk free rates with unifi ed risk premium and industry-

specifi c beta factors, adjusted by liquidity and leverage

premiums, we took cost of equity as the main factor to

be adjusted by ESG factors. As beta factor describes

sector risk and it has several adjustment layers already

att ached to it in our model, as per dedicated analyst’s

assessment, we did not regard it necessary to add an

additi onal adjustment level. Accordingly, cost of equity

is calculated by the following formula:

Re = Rf + βxRp +∑ESG

Where Re is cost equity, Rf risk free rate and Rp universal

equity market risk premium. ∑ESG is the sum of basis

points derived from the grades given in the ESG matrix.

To include the assessment of the ESG factors to the

above cost of equity calculati on, we introduced an

ESG matrix, where the analyst can rate each company

by these three factors that together create an overall

ESG score of the company. To make the building blocks

simple, we introduced a rati ng score from 1-5, where

the score of 3 will not ignite any changes to the cost

of equity and each notch below or above adds or

subtracts, respecti vely, basis points from cost of equity.

Rati ng matrix is provided below:

Clearly, the scale of justi fi ed adjustment to cost

of equity is debatable. From our calculati ons we

regard the selected 20 bps per grade to be just about

suffi cient. As was pointed out in the beginning of the

arti cle, we want the integrati on tool to bring relevance

to valuati on process, and avoid the situati on where

ESG factors dominate over fundamental valuati on.

Therefore the adjustment cannot be overly large and

prevail over other fundamentals. On the other hand, in

order to make a diff erence, the change in ESG factors

cannot be too small. According to the selected scale

of adjustment, the cost of equity can vary by 240 bps

on scores from one to fi ve. Given that the average

cost of equity is 12%, the gap between best and worst

ranking companies will be 9.6-14.4%, or about a third,

which is obviously quite signifi cant range that will have

strong impact on esti mated company value. The impact

will be smaller for companies with high cost of equity,

whether due to high risk free rate or beta, and higher

for companies with lower cost of equity. In practi ce,

this is the situati on that we want to achieve, as in order

to express higher upside, companies with higher risk

profi le need to show far bett er fi nancial performance.

On the top side of the companies, it is not so likely

that companies operati ng on stable markets with low

industry risk will have excepti onally poor ESG rati ng,

although there are excepti ons to this rule. Theoreti cally,

the extra harsh outliers from industry practi ce should

then be punished more strongly, which is quite fair that

way.

In practi ce, there are very few extreme cases with

rati ngs with full set of max or min grades in each

category. Companies that are regarded of high risk

from fundamental perspecti ves, tend to have lower

grades also on ESG level. It is unlikely that an analyst

would assign a rati ng of 1 for environment and social

issues and 3 for governance; company that neglects

environmental or social issues cannot be regarded

well governed. Therefore, the rati ngs have a tendency

towards being uniform, without extreme ranges on

the company level. From practi cal point of view, the

impact of ESG assessment to valuati on is in the range

of 10-20% that will make signifi cant diff erence in target

prices, but will not infl uence the valuati on level beyond

reasonable limits.

When assessing the ESG factors, we noti ced that the

rati ng levels of companies vary widely by diff erent

factors, with sector risk being the most informati ve.

Lack of public informati on is and remains to be the

main reason behind low rati ngs compared to similar

companies on more developed markets. This makes the

direct comparison of a parti cular company with Western

European standards not very informati ve exercise.

Therefore, our task is to provide the companies with

15

ratings that reflect their position and quality relative to

regional peers.

Over the next few years the convergence of New

Europe to Western Europe is set to continue. We

expect also the level of CSR awareness and relative

grade level of companies in our universe to converge

with that of Western peers. The difference between

the ratings given by our analysts and that of third-

party consultants is expected to decrease. After the

short period of our operations, during which we have

promoted the importance of CSR in New Europe, some

significant improvements have already happened, and

more information on these issues has appeared on

corporate websites in Eastern Europe. Certainly, there

are also other aspects at work when constructing

an SRI portfolio. For example, despite similarly

good governance of a bank and an oil company, it is

reasonable to assume that the oil company will have

lower environmental rating due to significantly higher

sector environmental risk.

Disregard of fundamental valuation and applied ESG

valuation overlay, we are always careful when investing

in companies with extremely low scores in one or more

category. In addition to fundamental framework there

remain other considerations, especially our clients’

preferences. We feel more comfortable with the

portfolio that is not concentrated in high risk sectors,

although from negative screening point of view they are

acceptable. All in all, the integration of ESG framework

to fundamental valuation models through adjustment

of cost of equity provides us with a superior additional

tool to assess the risk level that is translated into actual

numbers. Over time, we expect this to markedly

improve the risk-adjusted return of Limestone New

Europe SRI Fund and differentiate us from the rest.

We expect our research approach to markedly improve the risk adjusted return of Limestone New Europe SRI Fund and differentiate us from the competition.

16

ClientsOur sole purpose of existence is earning investors

excellent investment returns. Alignment of interests

with our clients is the cornerstone of our operational

structure. In investing, we respond to the values and

aspirations of our investors by seeking to engage in

dialogue with companies to both better understand, as

well as help shape them in ways that favour sustainable

and responsible practices. Mostly because we know

that this contributes to better investment returns

for our investors. At the same time it is the response

that we get from the companies that shapes our

understanding and helps us to further develop each and

every investment case.

PhilosophyWe believe that equity markets, with regard to

individual companies and instruments, have a

tendency toward efficiency over longer periods of time.

Especially in emerging markets, lacking or asymmetrical

information along with limited transparency causes

widely fluctuating perceptions in risk and value.

Consequent pricing inefficiencies can be uncovered

and exploited by bottom-up fundamental research

driven active portfolio management. Our fund’s aim is

to deliver excellent returns by investing in companies

doing business in New Europe that have the willingness

and potential to contribute and best adapt to the shift

to a more sustainable society.

ApproachWe invest in financially attractive companies that are

open to proactive approach to social responsibility

issues. We believe that such companies exhibit higher

management quality, better stakeholder relations,

greater resilience to economic shocks and lesser

risk to any loss of market reputation. In turn these

companies attract lower risk premiums relative to peers

and consequently achieve a higher valuation and out-

performance over the long term.

Competitive AdvantageLimestone is combining its fund managers’ excellent

investment track record in Emerging Europe with

innovative research approach integrating ESG factors

into fundamental company valuation. We are the first

investment company in Emerging Europe to focus on

sustainability. Our in-house valuation database contains

comprehensive information about a wide universe of

companies mostly unknown to general investment

public. Our investment performance from the first two

years of operations is firmly on top of the peer group

ranking.

Investing At Limestone

17

Investable universe Financial forecastsExcess return andjustified multiple models

In depth DCF modelsfor out of ordinaryand high convictionopportunities

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

• International and local peer group information• Inter-sector comparison

• Management information• Analyst forecasts• Cost of capital

• Qualitative factors: liquidity, market and sector sentiment, SRI

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

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

Factors

Sources

DCF models

Excess returnand justified

multiple models

Total Universe Quantitative screening:

liquidity, market cap, free float

Investable UniverseSector based classification.

Information gathering by dedicated analysts.Compliance check.

Qualitative screening

1,000+ companies

400 companies

400

Focus list Financial Forecasts Comparative analysis Fundamental analysis

300 Special situations

Target prices300

Targetprice

Investment Process

18

The ten plus two new member states of the European

Union (EU) are as diverse as the 15 “old” member states.

Any analysis of financial sector convergence within the

enlarged EU must begin with certain parameters. What

is exactly meant by convergence? Does convergence

mean a race to the bottom or to the top? Which

aspects of the financial sector are converging? What is

the mean? And how long is too long?

In a number of areas, such as GDP, purchasing power

parity (PPP) and rural/urban income divide, the process

of convergence in almost all of the 12 new member

states will take decades. In other areas however, and in

certain countries, convergence has proceeded rapidly.

Slovenia and Slovakia have adopted the Euro; Estonia

will do on January 2, 2011. In fields such as corporate

governance and pension reform, several of the new

member states were forerunners, implementing

corporate governance codes and establishing private

pension schemes before many old EU member states.

Prior to and even during the current “financial crisis,”

several new member states, notably Poland, continue

to grow, quarter after quarter.

Thus, all in all, the various indicators briefly outlined

here evidence “convergence” similar to processes

experienced in earlier EU expansions. Portugal and

Spain took decades to converge, whereas Austria,

Finland and Sweden integrated more quickly. Thus, for

the sake of argument, let us agree that convergence of

the ten plus two is moving forward, in broad terms in

not dissimilar fashion to the convergence of Portugal

and Spain as well as perhaps Ireland, but not necessarily

Austria, Finland and Sweden.

In corporate social responsibility (CSR), disclosure of

economic, social and governance (ESG) indicators by

listed companies, and socially responsible investment

Convergence – Some Critical Reflections from Within and WithoutGeoffrey Mazullo

The twelve “new” member states of the European Union are as diverse as the fifteen “old” member states.

19

(SRI) the convergence process among the ten plus two

new member states is also extremely diverse.

In my opinion, corporate governance was the common

denominator and remains a if not the primary driver

behind ESG reporting in the new member states.

Beginning in 2002, corporate governance reforms

were implemented across CEE. By 2009 a corporate

governance code had come into force in each of the ten

CEE countries that became new EU member states in

2004 and 2007. In each of these countries, the local

stock exchange played a major role in drafting and

implementing the corporate governance code. Whereas

reporting on environmental and social indicators

varies widely among CEE blue-chip companies, the

implementation of a corporate governance code in each

country led to incremental and sustainable increases in

reporting on governance indicators over time.

Reporting on social indicators has improved over the

past decade; however, there is no strong driver. The

United Nations Global Compact (UN GC) has played a

positive role in several new member states. However,

only recently has a more rigorous and standardized

approach to “reporting on progress” been visible. EU

directives play a minor role. In this area, convergence

simply might take longer.

Environmental reporting is the weakest of the three

elements; in several new member states there is little

if any meaningful reporting. Apart from relatively

recent EU initiatives, there has been no major driver.

International initiatives such as CERES or the Carbon

Disclosure Project have had little if any impact in the

new member states. It is still relatively rare to find

time-series data on fundamental indicators such as

energy and water use. Nevertheless, the convergence

process has recently gathered steam, demonstrated,

for example, from surveys conducted by the Partners

for Financial Stability (PFS) Program from 2003-2009.

Disclosure (by the ten largest listed companies in the

12 new member states and Croatia) of information

on environmental considerations in supply chain

management increased in the annual report to 24%,

from 19% in April 2009 and on company websites to

39%, from 30% in April 2009. Despite recent progress,

convergence may take the longest here.

CSR is a much broader concept and here I will allow

myself one sweeping generalization. Unfortunately,

to many in the new member states, as in the old

member states and many other jurisdictions, CSR is

simply philanthropy. Management and board members

at many listed companies either misunderstand or

ignore that CSR is actually about internal processes and

how these create internal processes create internal

benefits, which in turn translate into external benefits

for shareholders and stakeholders. This misconception

remains a barrier to a useful discussion about CSR.

Convergence is part of the solution, since over time a

more holistic appreciation of and approach towards CSR

have developed in many Western European countries.

In the field of SRI, convergence has really just begun.

Similar to the challenge with CSR, the major problem

is a misconception about what SRI is. Many reduce

SRI to either negative stock selection (no alcohol,

gambling, nuclear energy or tobacco) or a “do-good and

lose money” paradigm, neither of which are accurate.

Furthermore, the “social” in SRI is problematic for some

constituencies in former Socialist countries. Despite the

many obstacles, some of which are similar to those in

the old member states, there are several recent positive

developments, such as the establishment of SRI funds

and the launch of at least two SRI indices in the region

(the Respect Index in Warsaw and the CE RIU in Vienna).

Moving forward, both internal and external factors will

foster convergence. External or global drivers include:

a growing consciousness of the competitive imperative

of Brazil, Russia, India and China (BRIC) as well as

other emerging markets; the emergence of Extensible

Business Reporting Language (XBRL) as a new reporting

Unfortunately, to many in the new member states, as in the old member states and many other jurisdictions, CSR is simply philanthropy.

20

language; including both financial and extra-financial

data; the launch of Global Reporting Initiative (GRI) as a

standard for extra-financial reporting; increased public

and regulatory scrutiny of the impact of climate change

on corporate performance; increasing consumer

interest in fair trade, organic food and sustainability; the

growth of SRI globally; .the United Nations Principles

for Responsible Investment (UNPRI); and seismic

developments in national legislation on ESG issues,

including mandated gender equality in boards (Norway)

and mandated CSR reporting by listed companies, state-

owned companies and financial institutions (Denmark

as of 2010).

Internal factors include: a growing awareness among

financial elites of the importance of ESG to corporate

profitability and sustainability; the development of a

cadre of talented and internationally-astute investor

relations professionals, ongoing information technology

(IT) advances; and slow but growing pressure from

consumer, investors, the media, the public-at-large and

regulators about ESG issues.

At the outset of the financial crisis, the financial press

offered dire predictions for the new member states,

chastising them en bloc for their poor financial, lending

and monetary policies. This was ironic, given that the

crisis was born not in CEE, but elsewhere, and triggered

by the US sub-prime mortgage debacle and the collapse

of totally unregulated Icelandic banks. The blanket

criticism was also undeserved to a certain extent, since

several countries, notably Poland, had years earlier

instituted restrictions on foreign-currency denominated

mortgage loans. In any case, convergence has continued,

despite the current crisis. Recent developments in

Greece, Ireland and Spain demonstrate that the old

member states remain quite diverse. “Tigers,” whether

Celtic or Iberian, are just as susceptible to crises as

other animals. The ten plus two new member states are

also heterogeneous. Nevertheless, when viewed both

from within and without a broad range of indicators

evidence that convergence within the enlarged EU is

well underway. This bodes well for the development of

a pan-European SRI universe.

Geoffrey Mazullo is

Principal of Emerging

Markets ESG (www.

emergingmarketsesg.

net) and Adjunct

Professor of the School

of American Law (SAL) in

Gdansk and in Wroclaw,

Poland. He is Chair of the

Baltic Market Awards

Committee, an initiative of the Riga, Tallinn and Vilnius

NASDAQ OMX Stock Exchanges to promote excellence

in investor relations. From 2001-2009 he directed the

PFS Program (www.pfsprogram.org), a regional financial

sector development project co-financed by USAID and

East-West Management Institute. Previously he worked

as a corporate governance analyst with IRRC and ISS.

Since the mid-1990s he has been directly involved in a

number of corporate governance initiatives across CEE.

Since 2001 he has increasingly focused on ESG reporting

by listed companies in emerging markets, postulating

that rigorous analysis and detailed reporting on ESG

indicators bring internal benefits to the company and

external benefits to its shareholders and stakeholders.

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

21

Bulgaria

22

Republic of Bulgaria is a country in the Balkans in south-

eastern Europe, bordering Romania to the north along

the River Danube, Serbia and the Republic of Macedonia

to the west, and Greece and Turkey to the south. The

Black Sea defi nes the extent of the country to the east.

With a territory of 110,994 square kilometres, Bulgaria

ranks as the 16th-largest country in Europe. Several

mountainous areas defi ne the landscape, including the

highest peak in the Balkan region, Musala. In contrast,

the Danubian plain in the north and the Upper Thracian

Plain in the south are low and agriculturally very ferti le

regions. Bulgaria’s capital city and largest sett lement

is Sofi a, with a permanent populati on slightly short of

1.5m people, out of almost 8m total for the country.

The emergence of a unifi ed Bulgarian nati onal identi ty

and state dates back to the 7th century AD. The First

Bulgarian Empire (681 – 1018) at ti mes covered most of

the Balkans and eventually became a cultural hub for the

Slavs in the Middle Ages. In the 15th century Bulgarian

territories came under Ott oman rule for nearly fi ve

centuries. Bulgaria regained its full sovereignty in 1908.

Aft er World War II it became a communist state and

was a part of the Eastern Bloc unti l the fall of the Berlin

Wall lead to a transiti on to parliamentary democracy

and free-market capitalism. A member of the European

Union, NATO, and the World Trade Organizati on,

Bulgaria has a high Human Development Index of 0.84,

ranking 61st in the world in 2009.

Country Focus: Bulgaria

23

Classifi ed by the World Bank as an „upper-middle-

income economy“, Bulgaria ranks as the lowest-income

member state of the European Union. The fi nancial

crisis hit the economy hard and neighbouring Greece’s

fi scal problems are having impact to Bulgaria’s recovery.

Politi cal stability, relati vely good fi scal positi on, and

low unemployment give hope to rebound in 2011 and

income level resumes sustainable convergence to core

EU standards.

Bulgaria Stock Exchange was set up in 1997 to

„strengthen the public acknowledgment of the capital

market as a source of funding for the local business

and an essenti al tool in the Bulgarian economy“. One of

the main prioriti es of BSE, as listed on Exchange’s web

site, is Corporate Governance. Bulgaria is one of few

countries in emerging markets that have introduced

requirement for listed companies that have a dedicated

Investor Relati ons Director. Corporate governance code

was introduced and enforced in 2006.

Limestone met in Sofi a with Ivan Takev, the Executi ve

Director of BSE to enquire about the offi cial view as well

as personal opinion about ESG issues in Bulgaria and

prospects for sustainable investi ng. According to Mr

Takev, the introducti on of IR Directors and the Code has

made a visible diff erence in quality of communicati on

with the top ti er companies but more wide-spread

acknowledgement of the benefi ts of enhanced

transparency has been delayed by the economic crisis.

Associati ons of IR Directors promote quality of investor

communicati on through training and various events,

but the importance of IR as a corporate functi on varies

greatly. Investor acti vism is sti ll very limited. Market’s

small scale and illiquidity is a major issue delaying

Financial Markets and Corporate Governance

Bulgaria is today the lowest income EU member state, by definition having the most to gain from future convergence

Source: ING

24

Bulgaria has the highest energy consumption per unit

of GDP in Europe. Limestone team met with Evgeny

Angelov, Deputy Minister of Economy, Energy and

Tourism over dinner to discuss energy efficiency

and other development issues that the Government

must tackle at these economically distressed times.

According to Mr Angelov, the country is planning

several initiatives to promote energy efficiency. For

example, the Government has launched a program in

the amount of EUR 200 million to support projects that

will yield smaller consumption of energy. Currently the

issue is debated with the EU, as the planned support

measures of half the cost of

the project are considered

too high and could be seen as

state subsidies. Also, support

for and promotion of green

energy projects is scheduled,

but efficiency improvement

remains a key topic, as more

active introduction of green

energy projects does not

mitigate the high level of

consumption.

As a verification of what

Mr Angelov had told us, in

late June 2010 US based Clean Energy and Power,

Inc. announced exclusive negotiations to acquire

a controlling stake in a 3 megawatt solar project in

Bulgaria. The recent announcement by Bulgaria and

European Energy Commission to approve the details of

a solar program which will last for the next several years

included a 25-year guaranteed off-take price (purchase

price by the utility). According to CEP CEO, the boom in

European solar development is continuing and the next

country to lead these efforts is Bulgaria with some of

the highest sun-hours per year in Europe.

Development and Prospects in Sustainable Development

any development, especially now that international

investors have become extremely risk averse. Stock

Exchange has historically been more active in promoting

Bulgaria as investment target, but with rather modest

success.

In June 2010 the National Corporate Governance

Committee together with BSE decided to launch a

project for calculating an index of the companies with

good corporate governance. The detailed methodology

will be developed by the Exchange. The date of launching

the index is expected to commence at the end of the

third quarter of 2010. The index basis is expected to be

formed by companies that have pledged to follow the

principles of Corporate Governance Code. Thus far the

only equity benchmark in New Europe to consider ESG

factors is Warsaw Stock Exchange launched RESPECT.

25

Industrial Holding Bulgaria IHBL is a former privatization fund transferred into a

holding of a group of maritime and machine building

businesses. Main business lines are lathes, shipbuilding,

port operation, and river cruises. The holding takes an

active role in its subsidiaries, providing managerial

expertise, financial optimization, and control. Limestone

took interest in the company when our research base

indicated severely distressed valuation levels. The

reasons for market pessimism were also clear, as IHBL is

a deeply cyclical company that typically struggles during

economic downturns.

The principal products and services IHBL is deriving its

business from are shipbuilding and maritime services.

The range of 10k-56k DWT vessels are constructed

partly as eco-ships in JV with Finnish global industry

leader Wärtsila and partly under licence from highly

efficient Mitsubishi ship design. IHBL also operates two

Black Sea seaports. Promising business development

is expansions of own fleet of vessels from current

two to five by 2013. With in-house chartering service

under development, a well integrated business model

should ensure rich margins and rapidly growing volume

when business cycle turns. The machine building arm

of the company is the biggest producer and exporter

of universal lathes in the country. A connection to

renewable energy comes from the production of hydro

plant turbines.

IHBL can be described as one of the corporate social

responsibility pioneers in Bulgaria. It was the first

public company to start CSR reporting in 2006 and its

corporate web-site has devoted an unusually high share

to Social Responsibility and Corporate Governance. CEO

Georgi Momtchilov told us during our latest meeting

that he is personally a great fan of Socially Responsible

Investing and has been systematically enforcing

corporate social responsibility in IHBL. Company has

developed outstanding reporting practices concerning

almost all the aspects of company and its stakeholders,

including labour policies and unions, safety and quality,

environment and sustainability, etc. IHBL has been

constantly shortlisted among the best employers in the

country and has a strive to be a “good citizen of the

country and community”, according to Mr Momtchilov.

Companies in Focus

26

Sopharma

Sopharma is the largest pharmaceuticals producer in

Bulgaria with an aspiration to become a strong regional

player. Company was privatized in 2000, after which

there has been constant investment in modernization

and growth. For most of its products Sopharma has

a closed production cycle, as it produces both the

pharmaceutical substances and ready to use products.

Today more than half of the production is exported,

mainly to Russia, Poland and Ukraine. 25% of product

volume is original drugs and 75% generics. Supporting

company’s success has been its proactive approach to

distribution consolidation. Sopharma Trading is the

largest drugs distribution company in Bulgaria, with hi-

tech equipped distribution centres.

Today’s Sopharma is a modern state of the art equipped

drugs producer and distributor with considerable local

market power. The investment case for Limestone

has evolved over the years since we first met with

the charismatic CEO and largest shareholder of the

company Mr Donev back in 2005. It was always a

case of considerable potential but too highly priced

– until now. The market slump has taken its toll from

everywhere and Sopharma valuation has become

attractive for us. Sopharma has been growing sales

and profitability throughout the financial crisis, despite

even the ambitious investment program. Sector risk is

low and exports to East, if supported by the amount

of expertise and brand awareness that Sopharma has

developed over the decades, have massive potential.

There are several noteworthy things about Sopharma

with regard to ESG issues. It is perceived in Bulgaria

as one of the most transparent public companies.

Company’s facilities apply to highest environmental

and energy efficiency standards and considerable effort

has been put on workers’ safety issues. Sopharma

is currently supporting five larger social initiatives,

including continuous campaigns to promote health

education and support of no-smoking movement (with

one of the latest successful product launches being a

quit smoking drug). One traditional social initiative

is the construction or renovation of one large public

playground for children every year. Sopharma is active

in communities where it is an influential employer;

good example is the development of local social

infrastructure in Triar village, including postal facilities

and medical service point. Subsidiary Sopharma

Property is developing the first “green” residential

buildings in the country. We were truly impressed

with Sopharma’s awareness of CSR issues and clear

commitment to constant improvement of reporting.

Bulgarian Real Estate Fund REITBulgarian Real Estate Fund (BREF) is close-ended real

estate investment trust. Incorporated in October

2004, it is among the first REITs to take advantage of

one of the most advanced and accommodative REITs’

legislation in Europe. Today, BREF is among the largest

27

REITs in Bulgaria with a solid track record of creating

value for its investors. BREF specializes in commercial

development, strategic property acquisitions and

investments in strategic asset plays, like farmland. In

2008, BREF completed one full cycle of business activity:

from acquisition of investment plots, through planning

and development, to exiting projects – just in time to

escape the crisis.

Limestone interest with BREF goes back to the launch

of the REIT six years ago, when the team was among

the few international investors in Bulgaria at that time.

Over the years the connection to BREF management

has stayed good and trust in their abilities has grown

constantly, especially during the last two years when

BREF has managed the extremely difficult markets

exceptionally well. Limestone research indicates BREF

to be one of the most attractive asset plays in the

region. The legal requirement for REITs to pay out 90%

of realized gains as yearly dividends assures that for

shareholders value is unlocked continuously, especially

now that investment cycle is ending.

When Limestone considered BREF as an investment

for SRI Fund back in 2009, the team engaged with

the company with a primary goal to encourage the

management to be more transparent in ESG reporting

and CSR issues. The response was positive, and the

team was provided a detailed account of social and

environmental activities that BREF had initiated over

the years. In 2010 the company is due to launch a

new website with extended focus on ESG reporting.

Kambanite Business Centre, an office building completed

in 2009 that represents the main asset of the REIT, was

in 2009 selected as a regional case study for the holistic

design strategy and installed technologies that opt at

the energy efficiency. The study, called The Potential

for Green Building in Southeast Europe was conducted

by Colliers International. During this study, 64 buildings

in six different countries were audited in search of

examples of existing good practices for sustainable

design, technologies, and practices.

28

The studyGES Investment Services has performed a ESG

comparison on blue chip indices in all major European

countries including New Europe. A total of 746

companies have been assessed according to GES Risk

Rating criteria. Altogether a total of twenty-nine indices

were analysed each of them comprising approximately

six-forty1 of the largest companies by market

capitalization on each market. 2

What is ges risk rating?The GES Risk Rating is an analysis of risks in the

companies’ methods of dealing with the environment,

human rights and corporate governance. The analysis

is based on international norms on Environmental,

Social and Governance (ESG) issues in accordance with

the UN Principles for Responsible Investments (PRI).

It evaluates both the companies’ present status and

readiness for the future.

The analysis processThe environmental analysis is based on international

standards for environmental management and industry-

specific key indicators for environmental performance.

The human rights analysis is based on UN Universal

Declaration of Human Rights, UN Convention on the

Rights of the Child and ILO Core Labour Conventions.

The corporate governance analysis is based on the

OECD Guidelines for Good Corporate Governance.

The analysis of each specific company is based on

official company documents, dialogue with companies,

information from non-governmental organizations, the

media and GES partners.

RatingIn this assessment, the companies obtain a rating (from

0-3) for each of the areas environment, human rights

and corporate governance. A low score indicates no

information or total failure and a high score indicates

ESG Reporting In CEE Has Catch-Up RoomMartin Pitura, GES Investment Services

1 With the exception of the FTSE 100 index where the 100 largest companies are taken into account.

2 In addition to the blue chip indices we have also included the RESPECT Index (a Polish CSR Index) and

mWIG40 index from Poland (Index of forty midsized polish companies).

29

that the company has management systems and

routi nes in place in order to secure that a parti cular

program is carried out, performance data is published

and preferably also verifi ed by a third party. Altogether

the rati ng shows the company’s ability to deal with the

general risks that concern the type of acti vity and to

comply with internati onal norms and procedures.

The result show the average performance of a company

on each of the indices in this assessment.

We will present the result for the three E, S and G pillars

separately and jointly, where we use equal weight for

each of the tree pillars in the analysis. We start with

New Europe and aft er that we will incorporate rest of

Europe to fi nd out how New Europe performs compared

to major indices in Europe. Finally we will investi gate

the diff erences of ESG performance between industries,

as classifi ed by Global Industry Classifi cati on Standard

(GICS)

A total of twelve indices were analysed in New Europe,

covering markets in the Balti c countries, Poland, Czech

Republic, Russia, Hungary, Slovenia, Croati a, Bulgaria,

Romania and Republic of Serbia.

With regard to ESG reporti ng in New Europe the analysis

shows that the best performing pillar is the Corporate

Governance pillar, followed by the Environmental and

Social pillars, with a quite large gap between Corporate

Governance pillar and the other two pillars.

Best performers on Corporate Governance are

companies present on the WIG 20 in Poland, the PX

index in Czech Republic and the mWIG 40 Index in

New Europe And Russia

30

A total of seventeen indices were analysed in rest of

Europe, covering markets in Sweden, Norway, Finland,

Denmark, Germany, The Netherlands, Belgium,

Germany, France, Great Britain, Ireland, Portugal, Spain,

Italy, Greece, Turkey3 , Switzerland and Austria.

When adding rest of Europe to the analysis, and looking

at the three ESG pillars independently the fi ndings from

New Europe in one sense repeats itself. As before, the

best performing pillar is the Corporate Governance

pillar, followed by the Environmental and Social pillars,

however now company preparedness and performance

generally being on a much higher level for all three

pillars.

Best performers on Corporate Governance are

companies present on the FTSE 100 index in Great

Britain, the SLI 30 index in Switzerland and the AEX

Rest of Europe

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

Poland. If we would only concentrate on blue chip

indices and exclude the mWIG40 index, then the BUX

index from Hungary would make third place. If we

include the RESPECT index then it would be the number

one performing index with regards to Corporate

Governance in New Europe. Noteworthy is that all

except for one company from the menti oned indices

above publish informati on on Corporate Governance.

Laggards in New Europe are the CROBEX 25, BET-XT

25 and BELEX 15 from Croati a, Romania and Serbia

respecti vely.

The OMX Russia 15 index is also the top performer on

the Social pillar in New Europe, followed by the PX 14

and WIG 20 indices, with laggards being indices from

Romania, Bulgaria (SOFIX 20) and Serbia, not taking

mWIG 40 into account. Noteworthy is that a total of

9 companies (18%) among the three top performing

indices in the Social pillar did not report anything on

social issues.

If we consider the three pillars jointly then this

comparison shows that the best ESG performer in New

Europe is the PX index, followed by the OMX Russia

15 and WIG 20 indices. If we were to take the Polish

RESPECT index into considerati on then that index

would be the number one performing ESG index in New

Europe, with indices from Bulgaria, Romania and Serbia

being the laggards.

31

25 index in the Netherlands. Noteworthy is that all

companies from the menti oned indices above publish

informati on on Corporate Governance. Laggards are

indices from Italy (FTSE MIB Index 40), Greece (ATHEX

20) and Turkey (ISE 30).

The OMX Stockholm 30 index is the top performer on

the Environmental pillar, followed by the CAC 40 and

the DAX 30 index in Germany. Noteworthy is that all

companies from the menti oned indices above publish

informati on on Environmental issues.

The OMX Stockholm 30 index is also the top performer

on the Social pillar in the examined group of companies,

followed by the CAC 40 index in France and the IBEX 35

Index in Spain. Noteworthy is that one company (1%)

among the three top performing indices in the Social

pillar did not report anything on social issues.

The top Corporate Governance, Social and

Environmental performers in New Europe fall behind the

more developed countries in Europe when extending

the universe. Being the leader in New Europe, WIG 20

ranks fourteenth place among Corporate Governance

performers in Europe. If we would take the RESPECT

index into account then it would make eleventh place

in Europe, just slightly bett er than the DAX Index from

Germany and the PSI Index from Portugal. The OMX

Russia 15, being the leader on Social and Environmental

pillars in New Europe, ranks fi ft eenth on Social and

fourteenth on Environmental in when incorporati ng

rest of Europe into the analysis.

If we sum up all the E, S and G pillars and create a

separate ESG pillar where all the parts have equal

weights we come up with the fi ndings below. We have

identi fi ed fi ve clusters of ESG performance in Europe.

There is a group of markets in Europe which clearly are

the ESG leaders in Europe, with Swedish OMX 30 as

the top performer, followed by CAC 40, AEX 25, FTSE

100 and DAX 30. These indexes are all part of the fi rst

cluster.

The second cluster comprises companies that sti ll have

ESG performance on a relati vely high level, including for

example OMX Oslo 20, OMX Copenhagen 20, however

not reaching the top ESG performers in Europe.

32

The third cluster comprises indices with a litt le less than

average ESG performance in Europe, including the ATX

20, ISEQ 20, ATHEX 20 from Old Europe and RESPECT, PX

14, OMX Russia 15 and WIG 20 from New Europe.

The fourth cluster comprise below average ESG

performers in Europe, including BUX 13 in Hungary,

SBITOP 6 from Slovenia, mWIG 40, OMX Balti c 10,

comprising companies from Latvia, Estonia and Litvia

and fi nally the ISE 30 in Turkey. The gap between the

third and fourth cluster is however quite small especially

for the indices from Hungary and Slovenia.

The fi ft h cluster comprises are the clear laggards

in Europe with regards to ESG preparedness and

performance comprising of the blue chip indices from

Croati a, Bulgaria, Romania and Republic Serbia.

33

When we assess the outcome of the sector analysis

in New Europe we can see that Telecommunicati on

Services are best performers on Corporate Governance,

followed by Uti liti es and Consumer Discreti onary, with

Industrials, Health Care and Informati on Technology

being the laggards.

Energy, Uti liti es and Telecommunicati on Services are

best performers with regards to the Environmental

pillar, with Industrials, Consumer Discreti onary and

Financials as laggards. Noteworthy is that the laggards

present very litt le informati on on its Environmental

preparedness and performance.

Sector Analysis

34

Telecommunicati on Services, Energy and Uti liti es

are best performers with regard to the Social Pillar,

with Consumer Discreti onary, Industrials and Health

Care being the laggards. Again the laggard presents

very litt le informati on on its Social preparedness and

performance.

If we create only one ESG pillar for New Europe, then

the outcome shows that the leading ESG industry is

Telecommunicati on Services, followed by Energy and

Uti liti es. Laggards in New Europe are Health Care,

Industrials and Informati on Technology.

When we incorporate rest of Europe in our analysis

we can see that Telecommunicati on Services are best

performers on Corporate Governance, followed by

Uti liti es and Consumer Discreti onary, however one

can conclude that there is not a huge diff erence in

performance between industries.

Uti liti es, Telecommunicati on Services and Materials

are best performers with regards to the Environmental

pillar, with Industrials, Consumer Discreti onary and

Financials as laggards.

Uti liti es, Informati on Technology and Telecommunicati on

35

Services are best performers with regard to the Social

Pillar, with Health Care, Materials and Financials as the

laggards.

If we create only one ESG pillar for whole Europe, then

the outcome shows that the leading ESG industries are

Uti liti es, Telecommunicati on Services, and Informati on

Technology. Laggards are Europe are Health Care,

Industrials and Financials. Noteworthy is that when we

look at the analysis for the whole Europe the diff erence

between ESG performance between the industries is

not that big as compared with New Europe.

When looking at the analysis above one can draw

the conclusion that the Corporate Governance pillar

in some indexes in New Europe is quite competi ti ve.

The diff erence between the best performing index in

Europe, the FTSE 100 and the best performing indexes

in New Europe, the WIG 20 and RESPECT indexes is not

that large. The diff erence between Environmental and

Social performance between New Europe and rest of

Europe is however quite large. This is something that

New Europe is working on and the improvement during

the last ten years has been quite good. Our opinion is

that the current leaders in New Europe were on the

same level ten years ago as the current laggards in

Europe are today.

We would suggest that New Europe is moving forward

with regards to ESG reporti ng. More and more

companies in New Europe are realising the value of

ESG reporti ng to potenti al investors. Although being

laggards, and distanced by the top performing indexes

in Europe, one can see that indices from New Europe

are close to catching up on ESG reporti ng with indices

coming from Portugal, Austria, Ireland. The Polish

RESPECT index even slightly exceeds the Greek Athex

20 index. We expect to see for the coming years that

companies from New Europe conti nue to improve their

ESG reporti ng, which will make them more att racti ve

for investors.

Conclusion

36

The European SRI Transparency logo signifies that Limestone commits to provide accurate, adequate and

timely information to enable stakeholders, in particular consumers, to understand the Sustainable Respon-

sible Investment (SRI) policies and practices relating to the fund. Detailed information about the European

SRI Transparency Code can be found on www.eurosif.org, and information of the SRI policies and practices

of the The European SRI Transparency Logo reflects the fund manager’s commitment as detailed above and

should not be taken as an endorsement of any particular company, organisation or individual.

European SRI Transparency Code

Section 1. Basic Details

Company & fund Limestone Investment Management Limestone New Europe SRI Fund www.limestonefunds.eu

LU0373664472 Equity Structured products Bonds Money market Mixed …..

Focus Ca

pitail

isatin

Large cap Mid cap Small cap Blend Private equity …..

Geog

raph

ic

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

Them

atic Environment

Social Governance Particular Sector: ….. SRI

Section 2. ESG Investment Criteria

Best-in-Class Screening Thematic Screening Engagement Norms-based Screening Ethical Screening ESG Integration

Section 3. Research process

Research Team Internal External Both

Advisory Committee Yes No

Audit Process Internal audit External audit

Stakeholder consultation Yes No

Update The assessment of issuers is updated every 3 months

Research Disclosure Do you disclose the analysis results of individual issuers? Never Sometimes Always

Section 4. Evaluation and implementation

Selection Process Internal External Both

Selection Implementation How are the research results integrated in the investment process? Restricted investment universe

Over/underweight

recommendations Other

Active Fundamental Value Based Selection

Portfolio Disclosure Do you disclose the portfolio holdings? No Partly Completely

Divestment Notice

Are investors informed about divestments on ESG grounds? No Regularly Always Are companies informed about divestments on ESG grounds? No Regularly Always Regularly Always

Section 5. Engagement Approach

Do you have such a policy? Yes No If yes, who undertakes engagement? Internal team External team Both If yes, which engagement methods do you use? Co-filling shareholders

resolution Proxy voting

Direct engagement

conducted publicly Filling shareholders

resolutions Collaborative engagement Direct engagement

conducted privately If yes, do you disclosure the results? No Regularly Always

Section 6. Voting Policy

Do you have such a policy? Yes No If yes, do you disclose your voting practices/decisions?

No Regularly Always If yes, do you fill resolutions? No Regularly Often

37

Name:

Fund Domicile:

Base Currency:

Fund Launch Date:

Investment Manager:

Fund Manager:

Benchmark:

Quotation:

Liquidity:

Management Fee:

Administrator:

Custodian:

Auditor:

Legal:

ISIN:

Bloomberg:

Lipper ID:

Contacts:

Fund - New Europe Socially Responsible Fund

Luxembourg, SICAV, UCITS

EUR

31.07.2008

Limestone Investment Management

Alvar Roosimaa

Stoxx EU Enlarged TMI

Daily

Daily

1.25% institutional

2.50% retail

Krediettrust Luxembourg S.A.

Kredietbank Luxembourg S.A.

Deloitte S.A.

Arendt & Medernach

LU0373664472

LIMNESR LX

68021312

Paavo Põld

paavo.pold@limestonefunds

Telephone +372 712 0851,

Fax: +372 628 2370,

Skype: paavopold

Contacts and Fund TermsLimestone Fund - New Europe Socially Responsible

38

For notes

39

40