2022: a year of active stewardship illustrated

In line with our engagement policy² , we noted the Company’s involvement in important controversies on the topic of cybersecurity. We were also interested in the Company’s approach to data accuracy as this constitutes a material risk for the Company given its activity as a credit bureau.

In November 2022, we held a videocall with the Company’s investor relations representatives.

We engaged on the following topics:

• Cybersecurity: we asked questions around the Company’s learnings from the cyber breaches it has experienced, the governance structure around cybersecurity as well as the processes in place such as third-party assurance. The Company considers cybersecurity is an issue for the entire Company, not just for a few. Initiatives have been undertaken to ensure there is a sufficient level of awareness and responsibility among their workforce through training and initiatives to integrate cybersecurity awareness in the Company’s culture. The Company has dedicated cybersecurity teams on both a global and regional level, but cybersecurity is also ultimately a responsibility of the audit committee. Regarding the board’s skillet on the topic, the nomination committee actively seeks to appoint board members with experience on the topic and current board members also undertake regular training. Lastly, the Company hires external firms on an annual basis to test the robustness of their systems, this includes the ad-hoc hiring of hackers for testing purposes.

• Data accuracy of credit ratings: the Company’s view is that, beyond compliance with regulation, it is in its commercial interest to ensure the accuracy of the data it holds. We discussed the due diligence the Company undertakes when it onboards a new data provider including testing and monitoring. We also discussed its approach to empowering consumers, for example through the introduction of innovative functionalities to allow consumers to review their score and flag any inaccuracy more easily.

Cyber security as well as data accuracy are material risks for the Company. This engagement call gave us an insight into the Company’s practices as well as a better understanding of the policies and processes it has put in place to manage and mitigate those material risks. We will keep monitoring the Company’s actions on these two topics. We decided not to change the Company’s rating under our proprietary ESG assessment system START as we deemed the overall rating of B remains appropriate.

We have been engaging regularly with the Company since 2020, especially given their involvement in industry-wide controversies. The objective of this engagement was to assess the Company’s progress on the resolution of the controversies and provide our feedback.

In October 2022, we held a videocall with the Company’s investor relations representatives.

We discussed the Company’s recent settlement in relation to the industry-wide opioid issue for an amount of over USD 4 billion to be paid over a 13-year period. The settlement also involves the provision of pharmaceuticals to help treat the people affected by the opioid crisis.

We also discussed its approach to resolving the industry-wide price fixing issues. The Company has identified the source of the issue, chosen to settle a number of cases in US States and has strengthened the training provided to employees in sales-related roles as well as managers on the topic.

Regarding its involvement in controversies, we discussed the material impact these issues have on the Company’s reputation and financials as well as our expectations around the management of controversies. We also encouraged the Company to engage with third party ESG rating agencies to ensure the agencies’ assessment and analysis correctly reflects the nature of the controversies and the Company’s actions to resolve them.

The Company is a generics business that produces a significant number of low-price products. It therefore has little control over the labelling. In addition, it has historically had a high level of Merger & Acquisition (M&A) activity, which has brought around issues retrospectively.

In terms of its approach to handling controversies and the reputation implications these issues have, due being more indebted than a number of peers, the Company has less ability to settle claims upfront and therefore the controversies tend to go on for longer.

Regarding the actions taken by the Company, since their restructure in 2017, there has been no further significant M&A activity. It has also streamlined its business, reinforced its compliance policies and processes, and created a number of synergies across its business which makes it easier to manage the Company and therefore potentially reduce risk.

The opioid case settlement has now been agreed but other litigation cases continue. Therefore, we expect the Company will remain involved with controversies going forward. We also note that their low-cost drugs bring about social benefits through enabling access to medicines.

Following the call, the ESG Analyst assessed the Company’s START ESG⁵ rating of B and considered it remains appropriate at this time, therefore no changes were made. We will continue to monitor the Company’s responses to the ongoing controversy issues as well as our engagement with them as a fixed income investor.