SGS S.A. Annual Report 2020

Plain-text annual report

2020 Integrated Annual Report ENABLING A BETTER, SAFER AND MORE INTERCONNECTED WORLD INTRODUCTION 1 In every industry and location our global teams of experts provide specialized solutions to enable a better, safer and more interconnected world making business faster, simpler and more efficient. The services delivered by the Testing, Inspection and Certification (TIC) industry interconnects with and adds value to almost everything that society touches. The breadth and reach of the services provided to industry through its global supply chain is unparalleled in many respects. The furniture that you are sitting on, the clothes that you are wearing and the paper or the phone that you are holding at some stage has been touched by the TIC industry. Our services are diverse, from verifying that the olive oil in your cupboards is unadulterated extra virgin to ensuring that the paint on a toy will not be harmful to your child’s health. The TIC industry is involved in assuring safety, quality and sustainability in a way that impacts us all. It is not just individuals that rely on the TIC industry to provide assurance services. Governments and businesses also need the TIC industry for support and verification of most industrial activities from precision farming to mine decommissioning. The market has three main driving mechanisms. Firstly, a constantly evolving regulatory and legal landscape to which businesses must conform. Secondly, as society increasingly connects digitally, new devices, products and services require increasingly sophisticated testing and security. Finally, the growing requirement to demonstrate to customers and investors that businesses are managing their supply chains ethically and sustainably. MANAGEMENT REPORT INTRODUCTION – Better, safer and more interconnected – Letter to Shareholders – Covid-19 FINANCIAL AND SUSTAINABILITY HIGHLIGHTS – Mission 2020 – Financial results – Sustainability Ambitions 2020 – Group highlights OUR BUSINESS 1 2 4 7 8 9 10 11 12 14 15 – How we do business – Business strategy and governance 16 18 – Megatrends 20 – Our business model – Strategic transformation 22 – Value creation 23 – Better case study 24 26 – Safer case study 28 – More interconnected case study 30 – Risk intelligence – Material topics 32 – UN Sustainable Development Goals 33 OUR VALUE TO SOCIETY 34 36 – Financial capital 38 – Business review – Investor relations 42 – Acquisitions and partnerships 43 – Investing for the future case study 44 46 – Manufactured capital – Increasing testing capacity for vaccine candidates case study – Intellectual capital – Achieving World Class Services status in Shanghai case study – Human capital – Keeping people safe case study – Social and relationship capital – Bringing the SGS family together case study – Natural capital – Helping companies to green their real estate portfolio case study – Measuring our Value to Society CORPORATE GOVERNANCE REMUNERATION REPORT 2020 RESULTS – Shareholder information 48 50 54 56 62 64 68 70 74 76 80 96 124 196 REVENUE CHF 5.6 BN CHF 6 579 MIO 16.1% VALUE TO SOCIETY CALCULATED IN 2020 FOR 2019 ADJUSTED OPERATING INCOME MARGIN* Read our 2020 Corporate Sustainability Report online at: www.sgs.com/en/ annual-report Read our Integrated Report online at www.sgs.com/ en/annual-report Our integrated reporting approach The Integrated Reporting Framework aims to create transparency. For the fourth consecutive year we have integrated our financial, operational and sustainability information in a single report – measuring our financial and non-financial performance across the six capitals. In addition to the information presented in this report, more detailed sustainability information is provided in our 2020 Corporate Sustainability Report www.sgs.com/en/annual-report * Alternative Performance Measures (APM), refer to the ‘2020 Full Year APM document’ SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report SHAREHOLDER INFORMATION FINANCIAL STATEMENTS CORPORATE GOVERNANCE MANAGEMENT REPORT 2 INTRODUCTION INTRODUCTION 3 Better, because society demands ever higher standards for products and services delivered by businesses. AGRICULTURE AND FOOD By supporting our customers’ food product research and development, we help deliver better products to consumers which use fewer additives and higher quality ingredients. Read more on pages 24 and 25 35% expected increase in food production by 2030 The global food system will need to meet an expected 35% rise in demand by 2030. Source: FAO – Food and Agricultural Organization $124 BN global spending on smart city initiatives will total nearly $124 billion this year, an increase of 18.9% over 2019 spending. Source: International Data Corporation Safer, because business is pushing the boundaries of science and technology, from autonomous driving to the race for new vaccines. Safety is the number one priority. LIFE SCIENCES Our analytical, bioanalytical and clinical trial testing, along with process management capabilities, provide a wide range of essential services. Read more on pages 26 and 27 An interconnected world, because the future of business will require managing all aspects of an interconnected society, including consumers, communications, transactions, supply chains and mobility. CONSTRUCTION When a project is conceived, we can help make the plans a reality by ensuring processes run efficiently, construction sites are safe and reliable materials are used throughout the supply chain. Read more on pages 28 and 29 50 MIO life-years have been saved through medical innovation in the United States alone since 1990. Dramatically reducing the burden to healthcare systems and helping expand economies. Source: Forbes Magazine BETTERSAFERSGS | 2020 Integrated Annual ReportSGS | 2020 Integrated Annual Report SHAREHOLDER INFORMATION FINANCIAL STATEMENTS CORPORATE GOVERNANCE MANAGEMENT REPORT MANAGEMENT REPORT 4 INTRODUCTION Letter to Shareholders Value creation is at the heart of our Company Dear Shareholders, This year has marked the completion of significant strategic milestones for SGS. We completed our ‘Mission 2020’ strategy and our Sustainability Ambitions, launched the next stage of our strategic evolution and announced the acquisition of SYNLAB Analytics & Services (A&S). However, the outstanding feature of the year has been the dynamism and responsiveness demonstrated by our employees in challenging circumstances. Through their hard work, commitment and entrepreneurism in supporting our customers, SGS has delivered a strong operational performance, reinforcing our leadership position in the TIC industry. The resilience of our business model was reflected in a robust revenue performance, which, supported by the achievement of over CHF 90 million of structural cost savings, coupled with strong cost management and EVA-driven performance management, has resulted in a 20 basis points increase in the adjusted operating income margin* at constant currency*, despite the revenue decline in 2020. Our FY 2020 free cash flow performance was similarly strong, increasing by 12.6% to CHF 758 million. This was supported by a significant focus on working capital management, with operating net working capital* as a percentage of revenue improving by 280 basis points over prior year. This will improve our market approach, increase cooperation and agility in our global network and will be supported by our focused capital allocation strategy and EVA-driven performance management. We also completed the acquisition of SYNLAB Analytics & Services (A&S), a leading European provider for environment, food, hygiene, pharma and products analysis and testing. This is the largest acquisition in SGS’ history, enhancing our market position in Europe and accelerating the adoption of our hub and spoke model, offering greater scope for automation and digitalization. It also confirms the next stage of our strategic evolution which further aligns SGS with the key TIC megatrends of Health, Nutrition and Environment. We are committed to improving the delivery engine for our services. For example, as part of our global World Class Services (WCS) program, laboratories in Shanghai, Taunusstein and Bangkok all achieved their first external audits and other sites are getting closer to this milestone. In addition, Digital and Innovation’s new leadership has laid out its approach to creating value through three pillars of digital innovation: – The automation of repetitive tasks and work processes, enabling decision-making to become more digital – Making our products and services digital – Creating new products, services and business models STRATEGIC EVOLUTION SERVICE INNOVATION In H2, we started to implement the next phase of our strategic evolution with the purpose of enabling a better, safer and more interconnected world for employees, customers, shareholders and for society. This will align our global network more closely to the key TIC megatrends and customer demand. We have simplified our operational structure into six new areas of focus compared to eight previously. We now have four divisions: Connectivity & Products, Health & Nutrition, Industries & Environment, Natural Resources and two Cross-Divisional Strategic Units: Knowledge and Digital & Innovation, with Knowledge retaining its P&L responsibility. Throughout 2020 we have leveraged our technical capabilities across our global testing and inspection network to develop our ‘Next Normal’ solutions. These support our customers’ and society’s return to normality as far as possible. Services range from enabling people to see their friends and family by testing face masks to carrying out remote inspections and deploying digital solutions to ensure safety standards. For example, our center of excellence for biosafety testing in Glasgow and the wider SGS Life Sciences network is delivering quality control and analytical testing for Covid-19 vaccine development and new innovative therapeutics for several global customers. * Alternative Performance Measures (APM), refer to the ‘2020 Full Year APM’ document Calvin Grieder Chairman of the Board Frankie Ng Chief Executive Officer INTRODUCTION 5 “ In a challenging year, I am proud that we started to implement the next phase of our strategic evolution with the purpose of enabling a better, safer and more interconnected world for employees, customers, shareholders and for society.” Calvin Grieder Chairman of the Board We were proud to be chosen by AstraZeneca and the University of Oxford to test the ingredients of their vaccine candidate. We have also led the TIC market for Personal Protective Equipment (PPE) testing and inspection volumes and continue to make progress on new contract signings across our testing, monitoring, auditing, training and certification services. SUSTAINABILITY LEADERSHIP Sustainability is fundamental to both our operations and our strategic direction. Covid-19 shifted our focus for sustainability to people, to support the huge increase in the number of people working remotely. We provided laptops and ergonomic guidance to keep our colleagues healthy and ran initiatives to support their emotional well-being. We also implemented additional security measures and training to ensure our data and information remain secure. A critical part of the value we add to society is helping our customers become more sustainable. Through our services, we help ensure that their operations, partners and supply chains comply with regulations and standards. As global supply chains were tested in 2020 and customer sites became harder to access, we were able to leverage our digital solutions across our global network to deliver remote inspection, audit and consulting. Technical service solutions delivered through our digital tools and sensor- based technology also gained customer traction and acceptance. ENABLING A BETTER, SAFER AND MORE INTERCONNECTED WORLD Our company purpose is integral to our business strategy, and in 2021 we will be launching our holistic and global 2030 Sustainability Ambitions. These will enable us to continue to raise the sustainability bar for the TIC industry and add value for society enabling a better, safer and more interconnected world. This could not be achieved without the hard work of our employees and I thank them for their dedication, which will continue to reinforce our leadership position in the TIC industry. Calvin Grieder Chairman of the Board Frankie Ng Chief Executive Officer SGS | 2020 Integrated Annual ReportSGS | 2020 Integrated Annual Report SHAREHOLDER INFORMATION FINANCIAL STATEMENTS CORPORATE GOVERNANCE MANAGEMENT REPORT MANAGEMENT REPORT 6 MANAGEMENT REPORT INTRODUCTION Letter to Shareholders continued CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 7 MANAGEMENT REPORT INTRODUCTION Covid-19 SUBSEQUENT EVENTS MANAGEMENT CHANGES BOARD CHANGES On 24 March 2020, Calvin Grieder was elected as Chairman of the Board of Directors. Sami Atiya and Tobias Hartmann were elected as members of the Board of Directors. Peter Kalantzis, former Chairman of the Board, did not stand for re-election. Peter stepped in as Chairman of the Board at a critical time for SGS and ensured a smooth transition. His vast experience and dedication contributed immensely to the success of SGS over the past decade. Luitpold von Finck also did not stand for re-election. SGS would like to thank them both for their support and direction. DISTRIBUTION TO SHAREHOLDERS The SGS Board of Directors will recommend to the Annual General Meeting (to be held on 23 March 2021) the approval of a dividend of CHF 80 per share. SIGNIFICANT SHAREHOLDERS On 4 February 2020, the von Finck family placed a large portion of their holding with institutional investors, and subsequently placed the balance of their holding on 3 August 2020. As at 31 December 2020, Groupe Bruxelles Lambert (acting through Serena SARL and URDAC) held 18.91% (December 2019: 16.73%) of the share capital and voting rights of the company. At the same date, the Group held 1.28% of the share capital of the company (December 2019: 0.18%). The following acquisition was completed after 31 December 2020: On 7 January 2021, the Group announced the acquisition of Analytical & Development Services (ADS) in the UK, a fully accredited food testing laboratory offering pesticides, nutrition, microbiology, food molecular biology and allergen testing services. Following the acquisition of Synlab Analytics & Services (A&S) on 31 December 2020, the Group completed the acquisition on 29 January 2021 of a 55.92% majority stake into BZH GmbH Deutsches Beratungszentrum für Hygiene, a German based subsidiary of SYNLAB Analytics & Services (A&S). On 2 February 2021, the Group announced the acquisition of Autoscope/ CTOK, operating three vehicle inspection services centers in France. We expect to complete the acquisition of the lab facilities of International Service Laboratory (ISL) from Novartis Ireland Limited in Ireland, providing regulated analytical laboratory and stability testing services for a broad variety of pharmaceutical products by the end of Q1 2021. 2021 OUTLOOK – Solid organic growth normalizing for the impact of Covid-19 Siddi Wouters joined the SGS Group as Senior Vice President of Digital & Innovation and has been appointed to the Operations Council. Stephen Nolan (formerly Managing Director of North America) has been appointed Chief Operating Ofﬁcer of North America and to the Operations Council. Wim Van Loon (formerly Executive Vice President of Industrial) has been appointed Chief Operating Ofﬁcer of North and Central Europe. Dominik de Daniel, Chief Financial Ofﬁcer, has taken additional responsibility for Information Technology and Mergers and Acquisitions. Toby Reeks, Senior Vice President of Investor Relations, has also taken on the extended roles of Corporate Communications and Sustainability. The new divisions will be led by: – Alim Saidov, Executive Vice President of Industries & Environment – Charles Ly Wa Hoi, Executive Vice President of Connectivity & Products – Derick Govender, Executive Vice President of Natural Resources – Olivier Coppey, Executive Vice President of Health & Nutrition The new cross-divisional units will be led by: – Jeffrey McDonald, Executive Vice President of Knowledge – Siddi Wouters, Senior Vice President – Improving adjusted operating income of Digital & Innovation – Strong cash conversion – Maintaining best-in-class organic return on invested capital – Accelerate investment into our strategic focus areas with M&A as a key enabler – At least maintaining or growing the dividend The formal communication of the next stage of our strategic evolution will be made to the ﬁnancial markets at our Investor Days in May 2021 and we will launch our 2030 sustainability ambitions in Q2 2021. Fred Herren, Senior Vice President of Digital & Innovation and Dirk Hellemans, Chief Operating Ofﬁcer of North and Central Europe have left the Group to take their well-deserved retirements. Peter Possemiers (formerly Executive Vice President of Environment, Health and Safety) stepped down from the Operations Council to lead the integration of SYNLAB A&S. Christoph Heidler and Roger Kamgaing have also stepped down from the Operations Council. The Management team would like to thank them all for their dedication and service. Our response to the global pandemic Our top priorities were to support our employees and maintain operational resilience for our customers. To meet these aims, we ensured ﬁnancial liquidity and accelerated innovation. 55 000 employees Our business continuity plan and an enhanced IT structure quickly transitioned 55 000 employees to Microsoft Teams enabling our employees to continue to safely support our customers. 77 000 employees impacted by engagement initiatives To support employee well-being we provided stress management and ergonomics information along with competitions to boost employee moral. LAB EXPANSIONS We signiﬁcantly increased the capacity of our Biosafety Centre of Excellence in Glasgow to support the effort of ﬁnding vaccines including Covid-19. CHF 758 MIO Free cash ﬂow* Our ﬁnancial discipline is reﬂected by the issue of two CHF bonds for a total of CHF 500 MIO in April, the strong focus on working capital management through the year and the increase in our free cash ﬂow to CHF 758 MIO. 2.7 MIO medical masks We tested, inspected and distributed over 2.7 MIO medical masks to ensure the safety of our employees and to continue supporting our customers. We launched our innovative ‘Next Normal’ solutions to help enable our customers to continue working. SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report * Alternative Performance Measures (APM), refer to the ‘2020 Full Year APM’ document For more information visit: www.sgs.com 8 MANAGEMENT REPORT MANAGEMENT REPORT HIGHLIGHTS CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 9 FINANCIAL AND SUSTAINABILITY HIGHLIGHTS In challenging circumstances, the agility of our network and resilience of our employees drove a strong ﬁnancial performance, while we remained focused on our strategic aims of investing in long term growth potential markets and raising the bar in sustainability. MISSION 2020 FINANCIAL RESULTS SUSTAINABILITY AMBITIONS 2020 BUSINESS OVERVIEW 9 10 11 12 Investment continued into our strategic priority areas including wireless, 5G, semiconductors, food testing and investment into IT systems to increase productivity. Our sustainability performance received continued and new recognition from a number of bodies. This included being industry leader in the Dow Jones Sustainability Indices (DJSI) World and Europe for the seventh year in a row, being rated A- by the CDP and we were upgraded to AAA in the MSCI ESG rating. 1 SGS | 2020 Integrated Annual Report Mission 2020 Selected achievements of Mission 2020 Since 2016 our focus has been on improving in six key areas: Brand, Growth, Innovation, Expertise, Investment and Operational Excellence. 1. BRAND 2. GROWTH 3. INNOVATION LEADERSHIP position achieved in top Sustainability ratings Our adjusted operating income margin* increased to 16.1% LAUNCH of remote inspections and audits which gained signiﬁcant traction in 2020 See our Sustainability Ambitions 2020 on page 11 Read our ﬁnancial results on page 10 Read more about remote inspections on pages 28 to 29 4. EXPERTISE 5. INVESTMENT 6. OPERATIONAL EXCELLENCE 18.6 MIO hours of training completed CHF 1.4 BN in capital expenditure 20 of our larger sites have adopted the World Class Services methodology Read more about training in the Intellectual Capital on pages 50 to 55 Read our ﬁnancial performance on pages 36 to 45 Read more in our case study on pages 54 to 55 * Alternative Performance Measures (APM), refer to the ‘2020 Full Year APM document’ SGS | 2020 Integrated Annual Report 10 MANAGEMENT REPORT HIGHLIGHTS Financial results Increased adjusted operating income margin and strong free cash ﬂow More than the planned CHF 90 million structural cost savings were achieved, which, supported by strong cost management and EVA-driven performance management, drove a resilient adjusted operating income performance. This was combined with a signiﬁcant focus on working capital management to deliver our strong ROIC. MANAGEMENT REPORT HIGHLIGHTS CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 11 Sustainability Ambitions 2020 Meeting our commitments to environment and society Our Sustainability Ambitions 2030, which we will launch in 2021, will once again raise the industry sustainability bar. ACHIEVEMENTS SGS ranks ﬁrst in the Professional Services Industry and retains its leadership position for the seventh consecutive year 2021 Upgraded to AAA in the MSCI ESG rating Rated Low Risk by Sustainalytics Ecovadis Platinum REVENUE ADJUSTED OPERATING INCOME* ADJUSTED OPERATING INCOME MARGIN* OUR PERFORMANCE CHF 5.6 BN (8.8%)1 (6.5%) organic* 2020 | 5.6 2019¹ | 6.1 CHF 900 MIO (8.0%)1 2020 | 900 2019¹ | 978 16.1% +0.2pp1,3 2020 | 16.1 2019 | 16.1 PROFIT FOR THE PERIOD BASIC EARNINGS PER SHARE PROPOSED DIVIDEND CHF 505 MIO CHF 64.05 CHF 80 (28.1%) 2020 | 505 2019 | 702 (26.7%) 2020 | 64.05 2019 | 87.45 2020 | 80 2019 | 80 FREE CASH FLOW* RETURN ON INVESTED CAPITAL 2,* ACQUISITIONS COMPLETED IN 2020 CHF 758 MIO +12.6% 2020 | 758 2019 | 673 16.5% (8.7pp)3 2020 | 16.5 2019 | 25.2 6 20.9 2020 | 6 2019 | 11 1. Constant currency (CCY)* 2. 2020 ROIC at 20.9% when adjusted from SYNLAB Analytics & Services (A&S) acquisition completed on 31 December 2020 3. Percentage points * Alternative Performance Measures (APM), refer to the ‘2020 Full Year APM document’ SGS | 2020 Integrated Annual Report PROFESSIONAL EXCELLENCE Deliver measurable sustainable value to society (CHF MIO) 2014* 2018 2019 2020 2020 TARGET 4 026 6 176 6 650 6 579 N/A Link management incentive plan to sustainability Achieved N/A OUR PEOPLE Maintain a natural turnover rate of no more than 15% 30% of leadership positions will be held by women Reduce our Lost Time Incident Rate (LTIR) by 50%1 Reduce our Total Recordable Incident Rate (TRIR) by 50%1 12.8 – 0.6 1.11 14.6 26.4 0.25 0.41 ENVIRONMENT Reduce our annual CO2 emissions (per FTE) by 20%1 (CO2 tons/FTE) 2.6 1.7 Reduce our annual CO2 emissions (by revenue) by 20%1 (CO2 tons/M CHF) 42.5 27.6 13.6 26.7 0.26 0.44 1.7 26 10.1 28.7 0.23 0.36 <15.0 >30.0 <0.30 <0.55 1.4 <2.1 21.9 34 COMMUNITY Increase our investment in communities around the world by 30%1, with a focus on volunteering (thousands CHF) 738 1 384 1 331 1 243 959 1. Against 2014 baseline * 2014 baseline year of our ambition SGS | 2020 Integrated Annual Report For more information visit: www.sgs.com 12 MANAGEMENT REPORT HIGHLIGHTS Group highlights A solid foundation for the future MANAGEMENT REPORT HIGHLIGHTS CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 13 The agility and responsiveness of the network ensured that we had a strong operational performance in 2020. Consumer and Retail and Agricultural, Food and Life were stand-out performers. From a geographic perspective, North East Asia and Eastern Europe and Middle East grew organically with China delivering good growth. REVENUE BY REGION GROUP ACHIEVEMENTS OUR BUSINESSES REVENUE BY BUSINESS (CHF million) 2020 20192 Change in % 2019 CCY1 Change in CCY %1 Next stage of our strategic evolution During 2020, we ﬁnalized and implemented our new strategy to align our global portfolio more closely with the TIC megatrends and customer demand. We have also grouped delivery models to improve operational efﬁciency. We expect this to enhance our network agility, time to market and adoption of innovation. Structural optimization plan Over CHF 90 million of structural cost savings were achieved. Economic Value Added performance management Applied to internal performance management and active portfolio management, which combined with continued investment in our World Class Services initiative, automation and digitalization, is enabling SGS to deploy capital for growth at attractive long term returns. Read more on page 37 Enhancing our market position in Europe The acquisition of SYNLAB Analytics & Services (A&S) further aligns SGS with the Health, Nutrition and Environment TIC megatrends and enhances our market position in Europe. It also adds a range of complex services and accelerates the adoption of our hub and spoke model, offering greater scope for automation and digitalization and generating strong operating synergies. EUROPE, AFRICA, MIDDLE EAST 44.8% ASIA PACIFIC 35.5% Africa & Western Europe North East Asia North & Central Europe South East Asia & Paciﬁc Read more on page 44 Eastern Europe & Middle East AMERICAS 19.7% North America Latin America 1 | AGRICULTURE, FOOD AND LIFE (AFL) Revenue Adjusted operating income* Margin %* 2 | MINERALS (MIN) Revenue Adjusted operating income* Margin %* 996 175 17.6 639 111 17.4 3 | OIL, GAS AND CHEMICALS (OGC) Revenue Adjusted operating income* Margin %* 776 76 9.8 1 074 172 16.0 753 128 17.0 1 075 120 11.2 4 | CONSUMER AND RETAIL (CRS) Revenue Adjusted operating income* Margin %* 1 054 1 091 264 25.0 270 24.7 5 | CERTIFICATION AND BUSINESS ENHANCEMENT (CBE) Revenue Adjusted operating income* Margin %* 6 | INDUSTRIAL (IND) Revenue Adjusted operating income* Margin %* 429 82 19.1 847 72 8.5 497 99 19.9 1 091 116 10.6 7 | ENVIRONMENT, HEALTH AND SAFETY (EHS) Revenue Adjusted operating income* Margin %* 471 42 8.9 8 | GOVERNMENTS AND INSTITUTIONS (GIS) Revenue Adjusted operating income* Margin %* 392 78 19.9 540 67 12.4 479 91 19.0 (7.3) 1.7 (15.1) (13.3) (27.8) (36.7) (3.4) (2.2) (13.7) (17.2) (22.4) (37.9) (12.8) (37.3) (18.2) (14.3) 1 007 61 16.0 686 114 16.6 1 006 109 10.8 1 030 253 24.6 467 92 19.7 999 105 10.5 510 63 12.4 443 81 18.3 CRS 1 054 AFL 996 IND 847 EHS 471 CBE 429 GIS 392 MIN 639 OGC 776 ADJUSTED OPERATING INCOME BY BUSINESS (1.1) 8.7 (6.9) (2.6) (22.9) (30.3) IND 72 OGC 76 GIS 78 CRS 264 2.3 4.3 (8.1) (10.9) AFL 175 MIN 111 EHS 42 CBE 82 (15.2) (31.4) (7.6) (33.3) (11.5) (3.7) 1. Constant currency (CCY)* 2. See Note 4 on segment information restatement in the ﬁnancial statements part for CRS, CBE, IND and GIS businesses * Alternative Performance Measures (APM), refer to the ‘2020 Full Year APM’ document SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 14 MANAGEMENT REPORT MANAGEMENT REPORT OUR BUSINESS CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 15 OUR BUSINESS Our industry plays a crucial role in bringing value to society. As TIC industry leaders, SGS’ contribution is central to this. With our 142 years of history, experience and insights, our business model, sound governance and ambitious goals continue to guide our business. Everything we do is underpinned by our ethics and Business Principles, ensuring we uphold the highest standards of conduct and offer unparalleled support to our customers. SGS | 2020 Integrated Annual Report 16 18 20 22 23 24 26 28 30 32 33 BUSINESS STRATEGY AND GOVERNANCE MEGATRENDS OUR BUSINESS MODEL STRATEGIC TRANSFORMATION VALUE CREATION BETTER CASE STUDY SAFER CASE STUDY MORE INTERCONNECTED CASE STUDY RISK INTELLIGENCE MATERIAL TOPICS UN SUSTAINABLE DEVELOPMENT GOALS 2 How we do business BUSINESS STRATEGY AND GOVERNANCE Operating across business lines and geographic regions MEGATRENDS OUR BUSINESS MODEL Identifying megatrends that will have the biggest impact on how we live and do business Creating a business structure that delivers value to society Read more on page 16 Read more on page 18 Read more on page 20 STRATEGIC TRANSFORMATION AND VALUE CREATION Transforming our business and a purpose that informs everything we do RISK INTELLIGENCE Addressing Covid-19 and a changing regulatory landscape MATERIAL TOPICS AND UN SUSTAINABLE DEVELOPMENT GOALS The issues that matter and our sustainability ambitions Read more on pages 22 and 23 Read more on pages 30 and 31 Read more on pages 32 and 33 BETTER SAFER MORE INTERCONNECTED The way we run our business, as well as the services we provide, ensure greater efﬁciency and effectiveness Our testing, inspection and certiﬁcation services make products safer Across the world, we are bringing people together, including through greater digitalization Read more on pages 24 and 25 Read more on pages 26 and 27 Read more on pages 28 and 29 SGS | 2020 Integrated Annual Report 16 OUR BUSINESS Business strategy and governance How we structure our business The organizational chart below reflects our new Operations Council, which will govern SGS’ future. It comprises 18 members, six focus areas, seven regions, four functions and our CEO. Frankie Ng CEO OUR BUSINESS Our Operations Council Our Operations Council is made up of our Executive Vice Presidents, Chief Operating Officers and functional Senior Vice Presidents, as well as our Chief Executive Officer, Chief Financial Officer and General Counsel. The Council meets regularly to decide on strategies and priorities, and to review our Group’s performance. Regions Functions Cross-divisional strategic units Divisions Fabrice Egloff Africa & Western Europe Wim Van Loon North & Central Europe Dominik de Daniel Finance, M&A, IT & Procurement Siddi Wouters Digital & Innovation Charles Ly Wa Hoi Connectivity & Products Teymur Abasov Eastern Europe & Middle East Helmut Chik North East Asia José María Hernández-Sampelayo Human Resources Jeffrey McDonald Knowledge Olivier Coppey Health & Nutrition Luis Felipe Elias Latin America Malcolm Reid South East Asia Pacific Toby Reeks Investor Relations, Corporate Communications and Sustainability Alim Saidov Industries & Environment Stephen Nolan North America Olivier Merkt Legal, Risk & Compliance Derick Govender Natural Resources 17 BUSINESS PRINCIPLES We follow six key principles. Integrity Making sure we build trust. Our integrity code obliges us to behave with integrity and responsibly, to abide by the rules, laws and regulations of the countries we are operating in. It also encourages us to speak up and be confident enough to raise concerns and consider any that are brought to us. Leadership Making sure we work together and think ahead. We are passionate entrepreneurial people with a relentless desire to learn and innovate. We work in an open culture where smart work is recognized and rewarded. We foster teamwork and commitment. Health and safety Making sure we establish safe and healthy workplaces. We have policies and dedicated standard operating procedures that aim at protecting SGS employees, contractors, visitors, stakeholders, physical assets and the environment from any work-related incident, exposure and any kind of damage. Respect Making sure we treat all people fairly. We have policies and procedures in place that aim at promoting respect for human rights and creating a working environment that is grounded in dignity, equal opportunities and mutual respect. We promote diversity in our workforce and do not tolerate discrimination of any kind. Sustainability Making sure we add long-term value to society. We use our scale and expertize to enable a more sustainable future. Our policies, programs and initiatives across the network aim at minimizing the impact on the environment throughout the value chain. Quality and professionalism Making sure we act and communicate responsibly. We are committed to place our customers at the heart of everything we do and continuously challenge ourselves to improve our quality management system by setting and reviewing our objectives, risks, KPIs, results and customer satisfaction levels. We strive to continually improve quality and promote transparency. We respect customer confidentiality and individual privacy. SGS Business Principles are the cornerstone on which all of our activity rests. They are held to be fundamental, overarching beliefs and behaviors that guide our decisions and allow us to embody the SGS brand in everything we do. www.sgs.com/principles SGS | 2020 Integrated Annual ReportSGS | 2020 Integrated Annual Report SHAREHOLDER INFORMATION FINANCIAL STATEMENTS CORPORATE GOVERNANCE MANAGEMENT REPORT MANAGEMENT REPORT 18 MANAGEMENT REPORT OUR BUSINESS OUR BUSINESS Megatrends The key trends impacting society and business across the world We have identiﬁed 12 interconnected megatrends that are having the biggest impact on the way we live and do business. We integrate these factors into our long-term strategic thinking and development of our business and services. 1. CONNECTIVITY 2. MOBILITY 3. CYBERSECURITY According to the World Economic Forum, access to the internet has doubled since 2010. While not everyone has access – even in some of the world’s biggest economies such as India and China – and there is still a signiﬁcant gap between access for populations in cities and rural areas, the gap is closing. Previously untapped markets, such as in Central Africa, are seeing signiﬁcant growth in access. Machines are also increasingly interconnected, as the Internet of Things continues its rapid growth and smartphones get smarter. In 2020, the restrictions of Covid-19 made connectivity all the more critical. 100% increase in access to the internet since 20101 Mobility is an area that is set to change rapidly in the coming years, with accelerated investment in technological innovations that continue to disrupt the automotive industry. These include autonomous driving, electric vehicles, ridesharing services, and the prospect of hydrogen-powered vehicles. $800 BN is the yearly beneﬁt to the public if the USA alone fully adopted autonomous vehicles in 20302 By 20213, cybercrime will cost the world $6 trillion, as a business falls victim to ransomware every 11 seconds. In the face of growing threats, data protection and information security are a top priority for businesses around the world. $6 TN is the world cost of Cybercrime by 20213 4. SUSTAINABILITY & CLIMATE 5. NATURAL RESOURCES 6. NUTRITION We are facing a climate emergency. 11% of the world’s population2 is currently vulnerable to climate change impacts such as droughts, ﬂoods, heat waves, extreme weather events and a rise in sea-levels. Businesses and communities are being tasked by governments to develop actionable strategies that reduce their impact on climate change, while supporting new demographic structures and securing the supply of resources. The earth’s ﬁnite natural resources are being used up at an alarming rate. For the ﬁrst time ever, in 2020 global use of natural resources reached 100 billion tons per year.5 Of all the minerals, fossil fuels, metals and biomass used each year, just 8.6% are cycled back into the circular economy. The philosophy of ‘reduce, reuse, recycle’ has never been more critical, and a global move to a circular economy is increasingly seen as an imperative. According to the World Health Organization 1.9 billion adults are overweight or obese6, while 462 million are underweight. Nutrition is critical to health and development; people with adequate nutrition are more productive, which enhances their chances of gradually breaking out of poverty. The public is increasingly demanding from businesses information on the nutritional value of the foods they eat. 11% of the world’s population currently vulnerable to climate change4 100 BN tons of global natural resources used per year5 1.9 BN adults are currently overweight or obese globally6 CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 19 MANAGEMENT REPORT OUR BUSINESS OUR INDUSTRIES SGS is active in virtually all sectors of the economy, providing a wide range of inspection, veriﬁcation, testing and certiﬁcation services at all stages of the value chain. OIL AND GAS Innovative, sustainable solutions that add up along the value chain. AGRICULTURE AND FOOD Developing innovative safety, quality and sustainability solutions for supply chains. MINING Delivering expert services to improve speed to market, manage risks and maximize returns. INDUSTRIAL MANUFACTURING Making manufacturing more productive and proﬁtable. ENERGY Powering processes in renewables and conventional energy. CONSTRUCTION Ensuring safety and performance when constructing buildings or infrastructure. CHEMICAL Driving innovation, optimization, efﬁciency and safety across the board, from feedstocks to ﬁnished products. CONSUMER GOODS AND RETAIL Enabling manufacturers, exporters, importers and retailers to generate trust throughout the supply chain. TRANSPORTATION Driving a safer, cleaner and more efﬁcient industry. LIFE SCIENCES Safeguarding the quality and efﬁcacy of medicines. PUBLIC SECTOR Facilitating trade and sustainable development. Protecting society against fraud and economic crime. 7. HEALTH & WELLNESS 8. INDUSTRY 4.0 9. URBANIZATION Around the world, health and well-being have become central life goals for people across generations and consumer demographics. In 2020, Covid-19 prompted a global push to protect citizens from the dangers of the pandemic and overall awareness of health and wellness issues increased. 80% of survey respondents said they will be more mindful about practicing regular self-care once the pandemic is over7 The world is undergoing a transformation in the way products are produced, due to the digitalization of manufacturing. Known as Industry 4.0, this new era is made possible by networks of machines that are digitally connected through cyberphysical systems, the Internet of Things, and the Internet of Systems, creating and sharing information often without human involvement. 40% of survey respondents reported they believed machines would take over from people in the manufacturing industry within their lifetime8 More than half of the world’s population lives in metropolitan areas. While this urbanization enables increased productivity, the need for resources and space impacts the economy, environment and quality of life. Innovation in areas such as smart cities and smart mobility are helping to advance economic growth and improve infrastructure and community services. While the Covid-19 lockdowns saw an impact on urban centers, overall the urbanization trend is likely to continue. 68% of the world’s population is projected to live in urban areas by 20509 10. RESPONSIBLE CONSUMPTION 11. GOVERNMENT 12. CITIZENS 62% of consumers want companies to take a stand on issues like sustainability, transparency and fair employment practices.10 This has led to increased market demand for traceability and transparency across the supply chain. 62% of customers want companies to take a stand on issues like sustainability transparency and fair employment10 Regulations set by governments across the world reﬂect policy priorities around issues such as climate change, town planning, chemical safety and nutrition labeling. The amount of regulation has increased with the Covid-19 pandemic, with businesses being required to comply with new requirements ranging from minimum standards for Protective Personal Equipment like masks to cleaning protocols for public spaces. 70 pieces of secondary legislation, emergency primary legislation, and a series of non- legislative changes have been implemented in the UK in response to Covid-1911 Covid-19 has enhanced people’s trust in institutions – businesses, organizations, and governments12 – as the public looks to them for protection. 75% of the public says they accept government lockdowns to beat the pandemic.13 75% of the public say they accept government lockdowns to beat the pandemic13 1. Source: https://www.statista.com/topics/1145/internet-usage-worldwide/ – 2. Source: mckinsey.com – 3. Source: www.lexology.com 4. Source: www.conservation.org – 5. Source: www.circle-economy.com – 6. Source: who.int 7. Source.pharmacytimes.com – 8. Source: statista.com – 9. Source: www.un.org – 10. Source: www.accenture.com 11. Source: www.oecd.org – 12. Source: www.accenture.com – 13. Source: www.edelman.com SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 20 MANAGEMENT REPORT OUR BUSINESS Our business model Creating Value to Society We create value to society OUR INPUTS CHF 702 MIO CHF 1 134 MIO proﬁt (prior year) total equity FINANCIAL The funds available to us (see page 36) CHF 6 908 MIO Total assets +2 600 CHF 259 MIO ofﬁces and laboratories capital expenditure MANUFACTURED Infrastructure, equipment and tools (see page 46) INTELLECTUAL Organizational, knowledge-based intangibles (see page 50) HUMAN The skills and know-how of our employees (see page 56) SOCIAL AND RELATIONSHIP Our relationships with our stakeholders (see page 64) +CHF 50 MIO R&D expenditure CHF 1 984 MIO goodwill and other intangible assets One SGS Recruiter Academy +89 000 employees 15 SGS Rules for Life 65 000 suppliers +800 000 customers SGS Community Program 441 GWh 1.7 MIO m3 electricity consumed water consumed NATURAL The natural resources we need to operate (see page 70) 422 GWh fuel consumed OUR BUSINESS MODEL OUR PURPOSE Enabling a better, safer and more interconnected world WHAT WE DO Testing, inspection, certiﬁcation and knowledge services allow businesses around the world to make informed decisions. TESTING CERTIFICATION Our experts enable businesses to make positive impacts on society. HOW WE DO IT 8 INSPECTION KNOWLEDGE 11 BUSINESSES INDUSTRIES 6 BUSINESS PRINCIPLES 140+ COUNTRIES MANAGEMENT REPORT OUR BUSINESS CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 21 OUR OUTPUTS OUR VALUE CHF 5.6 BN revenue CHF 758 MIO free cash ﬂow* FINANCIAL Long-term shareholder value creation 16.1% adjusted operating income margin* LAB EXPANSION increased capacity of our Biosafety Centre of Excellence in Glasgow CHF 2 797 MIO paid in wages to our employees CHF 253 MIO taxes paid to governments CHF 598 MIO in dividends proposed to our shareholders Ensuring food, medicine and product safety Increasing our capability and capacity for testing cell banks for vaccines, gene and cell therapies, including a Covid-19 vaccine Improvement of infrastructures through our green building services MANUFACTURED Efﬁcient and sustainable services INTELLECTUAL Expertize and innovative solutions HUMAN Diverse leaders in a safe working environment SOCIAL AND RELATIONSHIP Meaningful stakeholder engagement and strong brand and reputation NATURAL Carbon neutrality, limited waste and wastewater 2.51% training ratio1 20 number of laboratories using World Class Services (WCS) Enhancing career opportunities through training Improving knowledge through innovation Empowering customers through training and education 28.7% women in leadership positions 0.36 total Recordable Incident Rate (occurences per 200,000) CHF 1 243K community investment 83% satisfaction score in our Voice of the Customer surveys Protecting the health of employees through Operational Integrity excellence and well-being programs Reducing social risks by reinforcing human rights compliance Ensuring safety of customers through our vehicle testing services Supporting communities during Covid-19 122 952 metric tons of CO2e 678 EEB program: number of buildings under the program Carbon neutral since 2014 Helping mitigate climate change by reducing air pollution Minimizing resource depletion and protecting the environment SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report OUR GLOBAL DRIVERS OUR VALUE TO SOCIETY 1. % of total employment cost spent on training * Alternative Performance Measures (APM), refer to the ‘2020 Full Year APM’ document 22 MANAGEMENT REPORT OUR BUSINESS Strategic transformation Transforming our business Our World Class Services and Global Business Services are helping to deliver strategic transformation for our business and for our customers, bringing improvements to our sites, greater efﬁciency to our processes, and ultimately adding more value to society. WORLD CLASS SERVICES We continue to implement and reﬁne our World Class Services (WCS) methodology to improve productivity, reduce organizational waste and enhance working conditions in our laboratories and operations across the globe. 20 of our larger sites have adopted the WCS methodology and are pursuing our ‘zero optimum’ concept – this means striving for zero accidents, zero waste, zero defects and zero breakdowns. In so doing, we not only beneﬁt our operators, but we provide better value to our customers, because we are working faster and more safely, and using our equipment more effectively. In 2020, for example, in one of our food laboratories we introduced maintenance training for our staff operators to help avoid breakdowns. This has reduced time lost in waiting for technicians to carry out repairs. Going forward, we plan to implement this training across more laboratories. Another example of how we have improved working conditions and throughput is in the sample preparation area in one of our minerals laboratories, where workbenches have been optimized. By analyzing and reducing ergonomic issues and irregular activities we established regular work standards resulting in a reliable process, where quality variation is reduced to a minimum, and testing is properly managed and executed by appropriately skilled personnel. Covid-19 lockdowns slowed down our activity in the ﬁrst half of 2020. However, this only temporarily impacted our strategic transformation, as we started to provide remote training and conducted our ﬁrst remote audits to support laboratories in their roadmaps to achieve world class standards and run more efﬁciently. In China, we introduced robot technology to help move samples around the laboratory, which also helped to maintain social distancing during the pandemic. WORLD CLASS SERVICES SAFETY WORKPLACE ORGANIZATION Safety culture everywhere ZERO ACCIDENTS Total industrial engineering ZERO WASTE QUALITY METHOD AND TOOLS Total quality control ZERO DEFECTS MAINTENANCE LOGISTICS Total productive maintenance ZERO BREAKDOWNS Just in time ZERO INVENTORY As we transform SGS into a more digital business, in 2021 we plan to continue to exploit technology by running training and virtual `shop-ﬂoor’ activities at our laboratories. We will continue our journey to further develop and embed WCS deeper into our initial set of 20 laboratories, engaging our people and strengthening our ‘zero optimum’ culture and have them audited to set an initial benchmark and further expand WCS implementation at other SGS sites. GLOBAL BUSINESS SERVICES Our Global Business Services model involves standardizing and harmonizing back-ofﬁce activities and support functions. At present, we have four shared service centers and regional hubs that support our global network and increase productivity. As a result of the pandemic, in 2020 we had to rethink our operational delivery model as lockdowns meant that many people across the world had to work from home. While presenting a challenge – such as having to purchase thousands of laptops in a short period of time – this also provided us with the opportunity to apply our business continuity plans, and to start rethinking how our service delivery model could be adapted for the future. Despite Covid-19, overall our Global Business Services succeeded in increasing productivity levels. For example, we scaled activities in two traditionally separated processes in our Environmental Health and Safety laboratory operations. This further reduced turnaround time and increased lab throughput and asset utilization, while achieving reduction in cost per sample. Our Global Business Services have further increased capabilities to achieve greater efﬁciency by harmonizing centralized back-ofﬁce activities. For example, we optimized our ﬁnancial processes so that we have two or three standard payment cycles rather than 10 different cycles, and our Certiﬁcation and Business Enhancement (CBE) business line reviewed and standardized our technical standards. Consolidation of transactional and standardized activities in the Shared Service Centers has further progressed with the centralization of additional Order-to-Cash and Record-to-Report processes for six countries in Europe and Asia. We also started to provide offshore data management services to some North American laboratories in our Minerals business. This improved turnaround time and personnel costs savings, making the process more efﬁcient and faster for our customers. In 2021, we will continue the standardization for shared service center activities, particularly for ﬁnance, and will in some cases go beyond traditional back-ofﬁce activities towards offering services such as technical reviews. We will continue to upskill our people, to reﬂect on our evolving business services and remain competitive. We will also review the use of physical ofﬁce space, and how we can continue improving work-life balance through work at home initiatives. MANAGEMENT REPORT OUR BUSINESS CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 23 Value creation How we are creating societal value Through purpose driven leadership, our leading testing, inspection and certiﬁcation services add value to society by enabling a better, safer and more interconnected world. They reduce risk, improve efﬁciency, safety, quality, productivity and sustainability, advance speed to market and create trust. Business principles Integrity Leadership Health & Safety Respect Sustainability Quality and professionalism E n a b l i n g a b e tter, safer and m o r e o r c e i n t d rl o n n ected w Process improvement SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 24 MANAGEMENT REPORT OUR BUSINESS Better Labelwise enhances regulatory compliance and trust MANAGEMENT REPORT OUR BUSINESS CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 25 BETTER “ SGS Digicomply Labelwise is a simple solution for customers looking to ensure compliance with regulations and consumer trust.” Nicola Colombo Global Head of SGS Digicomply Transparency and accuracy in product labelling information is paramount in a heavily regulated industry. Compliance requirements change between geographies and over time. BETTER | SAFER | MORE INTERCONNECTED BETTER | SAFER | MORE INTERCONNECTED BETTER | SAFER | MORE INTERCONNECTED SGS Digicomply Labelwise supports customers’ decision making and speeds up time to market. Label and website accuracy help to ensure the safety of consumers with allergies. Artiﬁcial Intelligence helps in performing tasks that are typically prone to human error and time consuming. THE CHALLENGE When buying any food products, whether online or in stores, people need to be conﬁdent in what they are purchasing. Product information plays a crucial role in providing this trust to consumers. However, creating accurate and compliant labels is complex and prone to error. Regulations vary from country to country, and labels must take into consideration speciﬁc information like allergen and nutrition labelling. According to FDA data, in 2017 12.8% of recalls are due to mislabeling and 30.8% were due to missing allergens. So how does it work? SGS Digicomply Labelwise screens information on product labels and websites to ensure compliance with relevant regulations and business requirements. This helps our customers to simplify the cost of compliance, prevent reputational damage and increase consumer trust. Better product information also helps our customers to sell more, particularly online. Customers tell us that the platform enables them to ensure consumer trust, support internal decision making and reduce time to market. OUR SOLUTION NEXT STEPS SGS Digicomply is a powerful AI- driven content management platform that combines advanced technology with the expertise of our food compliance teams to support our customers’ regulatory compliance regime. Sorting and classifying huge volumes of global compliance data, this single resource delivers coherent, reliable insights that support our customers’ decision-making process and impact assessments. Originally, we developed Labelwise for a well-known online retailer, and in 2020 we extended this service to food manufacturers. Going forward, we see a signiﬁcant opportunity to leverage this service to help customers better sell their products online, making use of accurate and consumer-driven product information. Our next steps will be to extend the system’s AI knowledge to cover more categories of products in more countries. SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report For more information visit: www.sgs.com 26 MANAGEMENT REPORT OUR BUSINESS Safer Ensuring medical PPE meets safety standards Demand for medical personal protective equipment (PPE) has never been higher. Our Testing services protected people during the pandemic by ensuring face masks met stringent safety standards across the world. 30+ Years of state-of-the-art testing for veriﬁcation of ﬁltration performance by SGS IBR Laboratories THE CHALLENGE In 2020, protecting people from Covid-19 was the number one priority for individuals, businesses, organizations and governments. Wearing face masks was compulsory in many settings worldwide. From public transport to intensive care units, medical personal protective equipment (PPE) has never been more important. But how can people ensure that their face masks meet safety standards? OUR SOLUTION SGS testing and certiﬁcation services verify product effectiveness and compliance with relevant regulations. Our prescient acquisition of SGS IBR Laboratories acquired in 2018 in the USA meant we could quickly replicate our ﬁlter test competence where it was needed to test PPE. SGS IBR Laboratories has been a world leader providing state-of-the-art testing for veriﬁcation of ﬁltration performance for more than 30 years. We offer comprehensive testing services across the entire spectrum of ﬁltration applications, testing against industry standards (ASTM, ASHRAE, SAE, IEST, IEC, ISO, NSF, etc) as well as customized testing. Since its inception, SGS IBR has also been an active participant in the Standards Organization, playing a signiﬁcant role in the development of many of the protocols commonly used by industry today. Our experience in the USA enabled us to replicate our expertize across the world. SGS afﬁliates, such as Shanghai and Hong Kong, quickly introduced this testing capability, obtaining the necessary equipment, following our Standard Operating Procedure (SOP), and working closely with the accreditation body so that we could meet the huge demand for these services. MANAGEMENT REPORT OUR BUSINESS CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 27 SAFER BETTER | SAFER | MORE INTERCONNECTED NEXT STEPS We will extend our testing services to different regions, such as Europe and India, to provide local solutions. We will also offer an independent check mark for masks and face coverings to safeguard quality. We will train manufacturers on production excellence, and increase their understanding of how to export the product while complying with international standards. We will extend our testing capability increasingly to medical PPE to help protect against Covid-19. In addition, we will develop more functional tests (such as viral penetration testing) to cope with market need. “ Raising awareness will be key. We will participate in webinars and events to share best practice with industry for medical PPE testing and the IC Mark for reusable fabric masks. Through this work, we’re really adding value to society, and helping˜to˜save lives.” Ivan Chan Vice President, Innovation and Research and Development, NEA region Our mask testing services is improving the quality and safety of face masks and coverings. BETTER | SAFER | MORE INTERCONNECTED Our independent check mark certiﬁes that minimum safety standards have been met. BETTER | SAFER | MORE INTERCONNECTED By ensuring quality of masks and face coverings, we’re helping people get back to the ‘new normal’. SEE OUR FILM ON PPE TESTING For more information visit: www.sgs.com SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report MANAGEMENT REPORT OUR BUSINESS CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 29 MORE INTERCONNECTED “ We recognize that in these uncertain times, prompted by Covid-19, on-site audits may present real risks and challenges to organizations around the world. If on-site audits and inspections are not possible, our advice is˜to go remote.” Jeffrey McDonald Executive Vice President, Certiﬁcation and Business Enhancement 28 MANAGEMENT REPORT OUR BUSINESS More interconnected How remote inspections kept us connected during lockdown SGS is reassuring businesses and industry leaders around the world that, despite the challenge of social distancing and lockdowns prompted by the Covid-19 pandemic, regulatory and compliance audits can continue due to our Remote Auditing Solutions. To position for the long-term, GIS has deployed QiiQ across its network, prioritizing some key locations to achieve economies of scale. With the reduced need for travel, inspectors can also schedule several inspections in a day, at very short notice, maximizing efﬁciency for SGS and our customers. NEXT STEPS QiiQ has been very well received by our customers. It has made the scheduling and execution of inspections quicker and more ﬂexible. If an inspection has to be postponed and rescheduled, there is no additional cost for the customer. Going forward, we aim to expand the deployment of QIIQ to governmental agencies across Africa. We will also expand this technology to any of the services within our portfolio that require a physical inspection. THE CHALLENGE Historically, our local inspectors had to physically go to inspection sites. As a consequence, Product Conformity Assessment (PCA) operations were sometimes wrongly perceived as interfering with and slowing down the requirements for increasingly fast-paced exports. OUR SOLUTION Our Government and Institutions (GIS) business line reviewed our PCA business process model to ﬁnd ways to speed up operations, without sacriﬁcing customer service quality levels. Our solution was to design the SGS QiiQ digital solution – a remote auditing app that enables Quality Assurance (QA) and Quality Control (QC) audits and inspections to take place anywhere in the world. It meant that we were perfectly positioned to conduct remote audit and inspection when faced with the challenge of social distancing and lockdowns during the global Covid-19 pandemic. BETTER | SAFER | MORE INTERCONNECTED BETTER | SAFER | MORE INTERCONNECTED BETTER | SAFER | MORE INTERCONNECTED SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report The inspection exercise has been reduced from three working days’ notice (as per World Trade Organization Guidelines) to less than two hours. In light of the Covid-19 pandemic, the QiiQ digital solution allowed SGS to continue performing inspections and serving our customers, despite bans on travel and face-to-face meetings. The ‘centralized’ remote inspection ofﬁce comprises several ‘remote inspectors’ who are available ‘on call’ from the prioritized areas. SEE OUR FILM ON REMOTE TESTING For more information visit: www.sgs.com 30 MANAGEMENT REPORT OUR BUSINESS Risk intelligence Covid-19 brings safety risks and a changing regulatory landscape MANAGEMENT REPORT OUR BUSINESS CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 31 Our risk management processes are helping to protect against these risks, enabling us to make the world better, safer and more interconnected. RISK GOVERNANCE Our SGS Board of Directors reviews risks to ensure that the Company has a solid strategic approach to mitigating them (see page 90). However, the ultimate responsibility for identifying risks and integrating their management into key business planning processes sits with our Operations Council. The Risk Committee oversees our Risk Management Framework, chaired by the CEO. The committee comprises executive members, including the CFO, CCO and CIO, together with representatives from departments including Human Resources, Operational Integrity and Sustainability. As well as biannual meetings, the Committee meets as necessary, and reports directly to the Board. Accountability for managing risk rests with our ‘Risk Champions’ who are charged with assessing risk in the jurisdictions for which they have responsibility. In addition, SGS integrates a broad array of risk categories (see the charts on the right) directly into the management process, resulting in a robust and comprehensive approach. RISK OVERSIGHT To support our Risk Management Framework, the Group has a customized Governance Risk and Compliance platform named ANTARES. This tool enables afﬁliates, local businesses and operations to assess, taking a bottom-up approach, potential risks and have mitigation in place should those risks materialize at a local level. Additionally, at Group level, we take a top-down approach to identify and assess future global risks to the Company that could potentially be overlooked in the bottom-up evaluation. We recognize the need to identify changing risk, including those from Covid-19. We plan to have measures in place to deal with all new emerging eventualities, ranging from climate change and consequential extreme weather, natural disasters and cyber-attacks. RISK MANAGEMENT PROCESS BOARD OF DIRECTORS AND CEO Reviews risks and ensures that the Company has a solid strategic approach to mitigating them OPERATIONS COUNCIL Ultimately responsible for identifying Company risks and integrating the management of these risks into key business planning processes RISK MANAGEMENT OVERSIGHT COMMITTEE Chaired by the CEO, the Committee gathers executive members, including the CFO, CCO and CIO, together with operational function representatives TASK FORCE ON CLIMATE-RELATED FINANCIAL DISCLOSURES One of the biggest non-ﬁnancial risks is climate change. In 2020, we continued to adopt the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) as part of our corporate reporting on climate change. This is based on the four pillar framework of Governance, Strategy, Risk and Opportunity Management, and Metrics and Targets, to help manage risks around climate change. We plan to launch a detailed study by 2021 to assess the consequences of climate change on our business. For example, in Cape Town we have agricultural laboratories which could be impacted by the increasing number of droughts affecting the city. We have plans in place to mitigate against disruption to services. In the future, internal auditors will be involved in the process to ensure that mitigations have actually happened. 2020 RISK ASSESSMENT RESULTS In 2020, we carried out risk assessments in our 16 Tier 1 countries and 24 Tier 2 countries. These have conﬁrmed a number of emerging risks, including in the areas of cyber and data security, the changing regulatory landscape due to Covid-19 and the need for compliance, as well as increasing dependence on technology, including outsourced IT services and disruptive technology. As part of our assessment process, we also identify emerging risks that are likely to impact our business in over the next 3-5 years. An example of these risks is the increase of extreme weather events which already occur due to climate change and are expected to continue increasing in frequency and severity over the coming years. The main impact of extreme weather on SGS is closure of laboratories and ofﬁces and interference with logistics of our services, which may reduce our revenues. To mitigate this impact on SGS, we have business continuity plans to ensure that we are fully prepared for any extreme weather eventuality and we are also conducting a climate scenario analysis to help us with future planning. Another emerging risk is pandemics, which have two variants when looking at the long term: not being able to revert to prepandemic levels, and the appearance of a new pandemic resulting from a different pathogen. The impact of this risk is known to most organizations and passes through general disruption in the way the business operates, which may limit the generation of revenue from speciﬁc services, as well as an increase in certain operational costs. To mitigate this risk, we have learned from Covid-19 what measures are most effective to ﬁght a pandemic crisis, and have integrated various possible scenarios in our long-term future planning. ENTERPRISE RISK MANAGEMENT FRAMEWORK EXTERNAL RISKS Places responsibility and accountability for managing risk close to our operations GROUP LEVEL Top-down approach with the objective of identifying and assessing future global risks MACRO RISK ASSESSMENT ANTARES GLOBAL RISK & COMPLIANCE (GRC) PLATFORM RISK CHAMPIONS Afﬁliates – Local Business Lines – Operations Own risk in their jurisdictions and take a bottom-up approach These include economic, market, geopolitical, climate change, legal and regulatory, natural disaster and public relations risks. External risks are mitigated in various ways including but not limited to: – Insurance policies – Business Continuity planning – Sustainability Strategy – Legal & Compliance team – Economic and geopolitical risk analysis INTERNAL RISKS STRATEGIC RISKS PROCESS RISKS FINANCIAL RISKS These risks include counterparty, credit, equity, foreign exchange, interest rate, liquidity, commodities and opportunity cost among others. The speciﬁc process for ﬁnancial risk management is described in detail in the 2020 Results section. (See pages 153-158) These include business model, intellectual property, advertising, structural, product life cycle, resource allocations and social responsibility risks. Strategic risks are mitigated in various ways including but not limited to: – Strategic planning – Mergers and Acquisitions Policy – Legal & Compliance – Access to capital – Communications – Sustainability These risks include business interruption, environmental, compliance, health and safety, knowledge loss, contractual, taxation, talent acquisition and retention, employee and third-party fraud, and data integrity among others. Process risks are mitigated in various ways including but not limited to: – Business Continuity planning – Operational Integrity, policies and training – Sustainability, internal communications and architecture – Employee branding, global Human Resources (HR) strategy community investment – Legal & Compliance policies – IT Committee, policies, training and architecture SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 32 MANAGEMENT REPORT OUR BUSINESS Material topics What matters most to our business and our stakeholders MANAGEMENT REPORT OUR BUSINESS CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 33 UN Sustainable Development Goals Our contribution to the SDGs Carrying out an extensive analysis of various inputs – including megatrends (see page 18), the United Nations’ Sustainable Development Goals (see page 33), our stakeholders’ interests and concerns, and risks and opportunities – enables us to determine which are material to our business and our stakeholders, and their relative level of importance. We then use this deep understanding to shape our strategy, our Ambitions and our Key Performance Indicators (KPIs) under each pillar of our sustainability strategy – Professional Excellence, People, Environment, and Community. The United Nations Sustainable Development Goals (SDGs) are a comprehensive, universally-recognized framework of global priorities and aspirations to be achieved by 2030. Each goal has speciﬁc targets, and together they aim to eliminate poverty, protect the planet and ensure prosperity for all. Mapping our contribution enables us to create aligned strategic plans, allocate resources and develop associated local management and reporting processes. We have identiﬁed in the table seven SDGs where we can have the most impact through our services and business operations. Our Sustainability Ambitions 2020 are closely linked to the United Nations Sustainable Development Goals (SDGs), ensuring that we directly support them through our services, operations and supply chain. Read our 2020 Corporate Sustainability Report online at: www.sgs.com/en/sustainability-report for more information We carry out an extensive analysis of all these inputs to determine which are material for SGS and our stakeholders, and their relative level of importance. We then use this deep understanding to shape our strategy, our Ambitions and our Key Performance Indicators (KPIs) under each pillar of our sustainability strategy – Professional Excellence, People, Environment, and Community. MATERIALITY ASSESSMENT Although we do not ordinarily conduct a material assessment on an annual basis, in 2020 we decided to update our analysis to evaluate the impact of Covid-19 on our stakeholders’ expectations. Based on 2019 results, we carried out an in-depth stakeholder engagement exercise, consulting with over 4 000 stakeholders in 112 countries (including customers, employees, suppliers, investors, non-government organizations and sustainability professionals) to evaluate the importance of each topic. At the same time, our Operations Council evaluated the potential impact these topics could have on SGS. The whole process has given us a deep understanding of the most material topics for the Group. BUSINESS MATERIALITY MATRIX Having conducted this consultation exercise, we then mapped the topics onto a matrix, showing their position relative to each other, and how critical each one is to our business. The visual representation of the importance of topics to stakeholders in relation to their impact on SGS is a powerful analytical tool. The six topics that are most important to the organization: 1 Cybersecurity 2 Data privacy and protection 3 Ethical behavior 4 Health & Safety 5 Risk Management 6 Talent attraction and retention BUSINESS MATERIALITY MATRIX These are considered key topics, and have helped to shape our sustainability strategy going forward. Although less material, all other topics remain an essential part of our sustainability management systems. We systematically re-evaluate them to determine whether they have become more material to the organization. H G I H S R E D L O H E K A T S O T E C N A T R O P M I W O L 1 4 2 3 6 5 7 20 12 11 21 9 24 13 10 19 25 16 14 17 20 22 15 18 8 LOW IMPACT ON SGS HIGH 1 Cybersecurity 10 Customer relationship management 19 Reducing and managing waste 2 Data privacy and protection 11 Diversity in the executive team 20 Responsible use of materials 3 Ethical behavior 4 Health and safety 5 Risk management 6 Talent attraction and retention 12 Diversity and inclusion 21 Sustainable procurement 13 Employee engagement and consultation 14 Executive compensation linked to sustainability 15 Freedom of Association 22 Tax strategy 23 Training and development 24 Water footprint 7 Adaption and mitigation of climate change 16 Innovation in services and operations 25 Well-being and work life balance 8 Biodiversity 9 Corporate Governance 17 Local community 18 Preventing air pollution Most important topics GOOD HEALTH AND WELL-BEING QUALITY EDUCATION We develop and deliver programs that support the good health and well-being of people not only within our business, but also for our customers and communities. This was particularly critical in 2020, in light of the Covid-19 pandemic. Read more on page 17 of our 2020 Corporate Sustainability Report We have created a range of initiatives that provide educational opportunities for our employees, suppliers and people in the communities in which we work. In 2020, we achieved 4.3 million employee training hours. GENDER EQUALITY Our commitment to inclusion and diversity includes working towards gender equality throughout our business. Read more on page 18 of our 2020 Corporate Sustainability Report Read more on page 18 of our 2020 Corporate Sustainability Report DECENT WORK AND ECONOMIC GROWTH Higher levels of productivity and technological innovation are essential to achieving sustained economic growth. We actively work towards providing productive and safe employment of men and women in the communities in which we work. Read more on page 19 of our 2020 Corporate Sustainability Report INDUSTRY INNOVATION AND INFRASTRUCTURE We contribute to building resilient infrastructure, promoting inclusive and sustainable industrialization and fostering innovation through the services we provide. Our services and innovations are helping the world become more interconnected. Read more on page 19 of our 2020 Corporate Sustainability Report RESPONSIBLE CONSUMPTION AND PRODUCTION We actively promote responsible consumption and production, both within our own operations and in our supply chains, as well as through the services we provide, for example helping customers to choose responsibly- made products through our certiﬁcation programs. Read more on page 20 of our 2020 Corporate Sustainability Report CLIMATE ACTION We are committed to a carbon neutral strategy that is helping tackle climate change and facilitating the transition to a low carbon economy, as well as helping our customers to reduce their emissions, for example through assessment and certiﬁcations. Read more on page 20 of our 2020 Corporate Sustainability Report SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 34 MANAGEMENT REPORT MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 35 OUR VALUE TO SOCIETY OUR VALUE TO SOCIETY T A L I P A L C A R N A T U L A PIT A P C I H S N O I T A L E R D N A L A I C O S H U M A N C APITAL Purpose-driven leadership SERVICES BENEFITS INDUSTRIES OUR VALUE TO SOCIETY FINANCIAL C A PIT A L M A N U F A C T U R E D C A P I T A L OUR VALUE TO SOCIETY A PITAL L C A U T C E L L I N T E The International Integrated Reporting Council (IIRC) recommends six ‘capitals’ on which organizations can report – these include Financial, Manufactured, Social and Relationship, Human, Natural and Intellectual capital. This framework reﬂects the growing interest of many companies in delivering more than ﬁnancial value. We contribute to society in each of these capitals, delivering value to our investors, employees, customers, suppliers and communities. SGS | 2020 Integrated Annual Report FINANCIAL CAPITAL Business review – Investor relations – Acquisitions and partnerships – Case study MANUFACTURED CAPITAL – Case study INTELLECTUAL CAPITAL – Case study HUMAN CAPITAL – Case study SOCIAL AND RELATIONSHIP CAPITAL – Case study NATURAL CAPITAL – Case study MEASURING OUR VALUE TO SOCIETY 36 38 42 43 44 46 48 50 54 56 62 64 68 70 74 76 3 FINANCIAL CAPITAL MANUFACTURED CAPITAL INTELLECTUAL CAPITAL Relates to the cash and cash equivalents that can be used in exchange for other resources (e.g. human capital) that enable SGS to successfully compete in the global marketplace. Relates to the inventory of property, plant, equipment and other manufactured goods that enable SGS to successfully compete in the global marketplace. Consists of intangible and knowledge-based assets. Intellectual inputs include the brand, patents and copyrights, and employees’ knowledge of protocols and procedures. Read more about Financial capital page 36 Read more about Manufactured capital page 46 Read more about Intellectual capital page 50 HUMAN CAPITAL SOCIAL AND RELATIONSHIP CAPITAL NATURAL CAPITAL Relates to the physical and psychological capacity of individuals (e.g. motivation, safety or well- being) to undertake market-based employment and to pursue wider aspirations. Covers SGS’ relationships and interactions with communities, stakeholders, organizations and networks. It includes notions like trust, loyalty and other values. Comprises the renewable and non-renewable natural resources and processes SGS needs to operate. Natural inputs include air, water, land and ecosystem health. Read more about Human capital page 56 Read more about Social and relationship capital page 64 Read more about Natural capital page 70 SGS | 2020 Integrated Annual Report 36 MANAGEMENT REPORT OUR VALUE TO SOCIETY Financial capital INPUTS – CHF 702 MIO proﬁt (prior year) – CHF 1 134 MIO total equity – CHF 6 908 MIO total assets OUTPUTS – CHF 5.6 BN revenue – CHF 758 MIO free cash ﬂow* – 16.1% adjusted operating income margin* OUTCOMES – CHF 253 MIO taxes paid to governments – CHF 598 MIO in proposed dividends – CHF 2 797 MIO paid in wages to our employees MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 37 OUR VALUE TO SOCIETY Financial capital includes the value we add to society through paying taxes to governments, dividends to investors and wages to employees. By generating proﬁt, we can reinvest in growth, innovation and improving our services to our customers. INTRODUCTION In the face of a tough market caused by a global pandemic, we have shown strong resilience by adapting our services to customers, and in developing new services. In an uncertain market, we continued to invest in our strategic priority areas and made the biggest acquisition in the history of SGS. Revenue decreased by 8.8% at constant currency* to CHF 5.6 billion, with an organic decline of 6.5%. Operating income decreased from CHF 1 082 mio in prior year to CHF 795 mio in 2020 mainly driven by the exceptional gain of CHF 268 mio on the disposal of the Petroleum Services Corporation (PSC) business in 2019 and the Covid-19 pandemic in 2020. Adjusted operating income* decreased by 8.0% at constant currency to CHF 900 mio and adjusted operating income margin increased by 20 basis points to 16.1% at constant currency*. While some industries, such as Industrial and Oil, Chemical and Gas, were affected by Covid-19 more than others, our actions limited the overall impact on our proﬁtability and enabled us to invest in the future. In our operations, agile management and increased efﬁciency boosted cash ﬂow Our restructuring program in 2019 increased the efﬁciency of our functions and business lines saving over CHF 90 mio. The agility of our management is reﬂected in the strong cost base and cash ﬂow management performance. Free cash ﬂow increased to CHF 758 mio, a 12.6% increase over the prior year. Implementing an Economic Value Added (EVA) mindset and culture enabled us to wind down areas that are destroying value and deploy capital in value creating opportunities. ‘Next Normal’ solutions demonstrated our adaptability ‘Next Normal’ solutions came to the fore. Our digital solutions gained wider acceptance as a result of the restrictions imposed to slow the spread of Covid-19. Remote inspection, audit, consulting, other technical services and sensor-based technology have all gained customer traction and acceptance. For example, over 50% of eligible Government and Institution inspection services were conducted remotely in 2020. OUR KPIs Revenue CHF 5.6 BN 2020 | 5.6 2019 | 6.6 2018 | 6.7 2017 | 6.3 Free cash ﬂow* CHF 758 MIO 2020 | 758 2019 | 673 2018 | 796 2017 | 706 Adjusted operating income margin* 16.1% 2020 | 16.1 2019 | 16.1 2018 | 15.7 2017 | 15.3 The pandemic has also stimulated additional innovation of our service portfolio including our global Life Sciences network delivering Covid-19 vaccine testing and new innovative therapeutics for several global customers. We continue to have the leading TIC market share in PPE testing and inspection. We have seen strong progress on contract signings across our testing, monitoring, auditing, training and certiﬁcation of disinfection and business recovery services. Investing in uncertain times While some non-essential and maintenance capex has inevitably been delayed, we have continued to invest in our strategic priority areas supported by our focused capital allocation strategy. Priority areas include: wireless, 5G, semiconductors, food testing and investment in IT Systems. A signiﬁcant strategic acquisition A highlight of 2020 was the acquisition of Synlab’s Analytics & Services (A&S) division. A&S is a leading European provider of environment, food, hygiene, pharma and products analysis and testing. The acquisition further aligns SGS with the Health, Nutrition and Environment TIC megatrends, signiﬁcantly increased our penetration into the Scandinavian market and enhances our market position in Europe. It adds a range of higher value-added services and accelerates the adoption of our hub and spoke model. It also offers greater scope for automation and digitalization and generates strong operating synergies. (See our case study on page 44) Our plans for 2021 We will continue to manage our cost base and integrate A&S. We will focus on services in nutrition, health, environment and connectivity, all areas in which we have a strong market share, particularly in Asia. We will also continue to look for growth opportunities, both organic and through acquisitions to invest in the future of our Company and add value to society. SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report * Alternative Performance Measures (APM), refer to the ‘2020 Full Year APM document’ * Alternative Performance Measures (APM), refer to the ‘2020 Full Year APM document’ 38 MANAGEMENT REPORT OUR VALUE TO SOCIETY Business review Performance and outlook by industry MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 39 OUR VALUE TO SOCIETY AGRICULTURE, FOOD AND LIFE (AFL) MINERALS (MIN) OIL, GAS AND CHEMICALS (OGC) CONSUMER AND RETAIL (CRS) Revenue (CHF million) 996 Constant currency* growth in 2020 (1.1)% 2020 | 996 2019 | 1 007 Revenue (CHF million) 639 Constant currency* growth in 2020 (6.9)% 2020 | 639 2019 | 686 Revenue (CHF million) 776 Constant currency* growth in 2020 (22.9)% 2020 | 776 2019 | 1 006 Revenue (CHF million) 1 054 Constant currency* growth in 2020 2.3% 2020 | 1 054 2019 | 1 030 OVERVIEW OVERVIEW OVERVIEW OVERVIEW – Organic revenue increased by 0.3% – Food declined as testing and audit volumes were impacted by lockdown measures – Life lab growth was above the divisional growth, despite clinical research and bioanalysis being impacted by the lockdown – Trade delivered good organic growth – Proﬁtability improvement driven by disciplined cost focus and structural cost optimization – Organic revenue declined by 6.9% with a strong improvement across most activities in H2 – Trade Inspection mainly impacted by reduced demand for coal – Outsourced laboratories remained stable – Metallurgy declined more than the divisional level due to project delays and closures – Cost containment and structural cost optimization led to margin improvement, mitigating the impact of the revenue decline – Revenue declined following the disposal of Plant and Terminal Operations (PSC) in June 2019 – Market share gains provided some offset in a difﬁcult market – Trade declined due to reduced end-demand – Lower sample volumes due to weaker economic activity in NIRT and Oil Condition Monitoring (OCM) – Upstream impacted by a low oil price, project deferrals and site access restrictions OUTLOOK OUTLOOK OUTLOOK – Moderate organic growth as all strategic business units recovered strongly in H2 and Softlines beneﬁted from PPE testing and certiﬁcation – Electrical & Electronics was broadly stable. Strong growth in safety testing, wireless and functional safety offset difﬁcult market conditions in Automotive testing – Strong growth in Softlines was driven by PPE testing and certiﬁcation despite difﬁcult underlying trading conditions – Toys and juvenile decreased while hardgoods remained stable – Margin increased driven by strong PPE demand in North East Asia OUTLOOK – Continued recovery of activities expected following – Expected increase in exploration funding will support the second wave of restrictions growth momentum – Enhanced sales focus across the business units – Consumer product demand and infrastructure to drive growth – Life growth supported by vaccine opportunities – An ongoing recovery of audit activities expected in Food – Trade to remain strong – Solid inorganic pipeline expenditure to increase demand for metal commodities leading to investment in mining projects – Growing pipeline of onsite laboratory opportunities aligned to increasing demand for commodities – Growing demand for sustainable sourcing of critical commodities services – The recovery of the Oil & Gas industry to follow a sustained increase in conﬁdence in the underlying market – Accelerated investment in connectivity related markets – Increased market share through new Retail and – Trade and NIRT should recover in line with an improvement eCommerce solutions in economic activity – A recovery in Upstream will lag the normalization of the oil price – Growth expected in OCM from new contract wins – Continued focus on innovation and digitalization to develop new services, drive efﬁciencies and improve performance * Alternative Performance Measures (APM), refer to the ‘2020 Full Year APM’ document * Alternative Performance Measures (APM), refer to the ‘2020 Full Year APM’ document SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 40 MANAGEMENT REPORT OUR VALUE TO SOCIETY Business review continued MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 41 OUR VALUE TO SOCIETY CERTIFICATION AND BUSINESS ENHANCEMENT (CBE) INDUSTRIAL (IND) ENVIRONMENT, HEALTH AND SAFETY (EHS) GOVERNMENTS AND INSTITUTIONS (GIS) Revenue (CHF million) 429 Constant currency* growth in 2020 (8.1)% 2020 | 429 2019 | 467 Revenue (CHF million) 847 Constant currency* growth in 2020 (15.2)% 2020 | 847 2019 | 999 Revenue (CHF million) 471 Constant currency* growth in 2020 (7.6)% 2020 | 471 2019 | 510 Revenue (CHF million) 392 Constant currency* growth in 2020 (11.5)% 2020 | 392 2019 | 443 OVERVIEW OVERVIEW OVERVIEW OVERVIEW – Organic revenue declined by 12.0%, impacted by site access and travel restrictions, especially for training and Technical Consultancy – Management System Certiﬁcation demonstrated strong resilience with high single-digit growth achieved in H2 – Other services have been slower to recover, in particular Classroom Training and Technical Consultancy with several large projects postponed – Organic revenue declined by 13.4%, while the drop through into adjusted operating income was limited, particularly in H2 – Oil & Gas was impacted by decreased capex spend and project delays, while Transportation, particularly Aeronautics, was also challenging – North East Asia was resilient throughout the year with high single-digit growth in H2 – Power & Utilities was broadly stable with signiﬁcant progress in the strategic focus areas of Renewables and Nuclear, and Manufacturing grew strongly in H2 – Proactive cost measures supported by the growth in Asia drove a strong H2 margin performance – Organic decline of 9.0% with signiﬁcant improvement – Revenue declined in all strategic business units except in H2 and positive growth in North East Asia Border solutions – Laboratory was less impacted, showing solid resilience in Asia Paciﬁc and Europe – Health & Safety was below the divisional average due to weakness in hospitality and construction sectors – Slight decline in Field and Monitoring, which was supported by solid growth in Sensor and Marine services – Vehicle inspections impacted by the end of the California contract in November 2019 and lockdown measures – Product Conformity Assessment declined less than the divisional average with a good recovery in China – Single-window contract in Ghana terminated at end of May – Double-digit growth of TransitNet driven by new market penetration OUTLOOK OUTLOOK OUTLOOK OUTLOOK – Positive momentum in Management System Certiﬁcation – Power & Utilities and high-end Manufacturing markets should continue into 2021 will continue to grow – Technical Consultancy to rebound driven by signed contracts – Double-digit growth expected from new initiatives and a healthier backlog including Industrial Safety, Rail, Calibration – Training demand expected to remain subdued while the shift – Partial recovery in Oil & Gas as postponed opex to virtual classrooms continues projects resume – Adoption of remote delivery model to continue to increase – Infrastructure is expected to recover in Latin America, Asia and Africa – Increasing environmental regulations and enforcement will continue to drive the business in the long term – SYNLAB A&S acquisition opens new market sectors and geographies and drives signiﬁcant operational synergies – Laboratory and industrial hygiene volumes to resume in the Americas – Expansion of scope for biological hygiene – Good recovery expected next year for all strategic business units following the end of lockdowns – New Product Conformity Assessment contracts signed with Central African Republic and Egypt – New digital services to be launched in 2021 – Strong growth expected following Brexit (eCustoms) * Alternative Performance Measures (APM), refer to the ‘2020 Full Year APM’ document * Alternative Performance Measures (APM), refer to the ‘2020 Full Year APM’ document SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 43 OUR VALUE TO SOCIETY Acquisitions and partnerships Strategic acquisitions support our growth objectives In addition to growing organically, acquiring companies to grow across geographical areas, to ﬁll service gaps or to expand our skill set and technological capacities has always been a priority. In 2020 we made six acquisitions: For more information visit: www.sgs.com/en/our-company/ about-sgs/acquisitions THOMAS J. STEPHENS & ASSOCIATES, INC. CTA GALLET GROUPE MOREAU Business line: CRS Location: USA Business line: GIS Location: FRANCE Business line: GIS Location: FRANCE Stephens is a nationally recognized clinical research organization serving the cosmetic and personal care industry. It is a leading provider of safety & efﬁcacy testing and contract research services. CTA Gallet operates 17 vehicle inspection services (VIS) centers in France, employing 24 people. Groupe Moreau operates 22 vehicle inspection services (VIS) centers in France, employing 33 people. 42 MANAGEMENT REPORT OUR VALUE TO SOCIETY Investor relations Fostering transparency and trust Our investor relations program ensures that we provide clear, transparent and consistent information to build trust and to support the ﬁnancial community to make informed decisions. INVESTOR RELATIONS IN 2020 Investor contact by region 1 3 2 1. EUROPE 2. AMERICAS 3. REST OF THE WORLD 61.0% 27.0% 12.0% HOW WE ENGAGE WITH SHAREHOLDERS Institutional investors by geography 1 9 10 11 8 7 6 5 4 3 1. UNITED KINGDOM 2. SWITZERLAND 3. UNITED STATES 4. CANADA 5. NORWAY 6. LUXEMBOURG 7. GERMANY 8. THE NETHERLANDS 9. FRANCE 10. JAPAN 11. OTHER 2 28.0% 26.0% 22.0% 3.0% 3.0% 3.0% 3.0% 2.0% 2.0% 2.0% 6.0% The TIC industry is attractive for investors. The technical and complex services which we provide to our customers are largely mandated by regulations conferring a high proportion of predictable and recurring revenue and attractive returns. Our leadership position in the TIC industry is purpose-driven and directed by a highly experienced management team. In addition, the long-term megatrends towards sustainability support our industry growth. Our commitment to enabling a better, safer and more interconnected world for employees, customers, shareholders and for society at large is integral to the next phase of our strategic evolution. Our CEO, supported by our sustainability team, has played a signiﬁcant role in ensuring that sustainability is at the heart of how we behave as a company and the value we provide to our customers through our services. We welcome the increasing focus that investors and regulators have on ensuring that companies behave more responsibly and we are encouraged by the recent increase in investor dialogue on Environmental, Social and Governance (ESG). OUR APPROACH We have an established and ﬂexible investor relations program to foster transparency, trust and accountability. Our team leads the communication with our current and prospective shareholders, bond holders and analysts. We also engage with a broader ecosystem which supports investor decision-making. A major event in our communications calendar is our annual Investor Days meeting for analysts and investors. This gives participants the opportunity to engage with the majority of our Operations Council in an open and transparent way. The 2020 event was postponed due to Covid-19, and our management team looks forward to fully presenting the next stage in our strategic evolution at our Investor Days, scheduled in May 2021. We have traditionally engaged with shareholders and potential investors through face-to-face meetings on our regular roadshow schedule, at a number of investor conferences and through ad-hoc meetings. We also give access to our management team at our annual Investor Days and through site visits. This ensures that our investors are able to physically experience our facilities and spend time with our operational management team to get a deeper understanding of the business. The global pandemic has meant that society has had to adapt to new working conditions. For us, this quickly resulted in all of our direct investor and analyst communication moving to a virtual format. This has improved efﬁciency and, as with the use of remote inspection, audit and consultancy tools by our colleagues in the ﬁeld, we expect to conduct fewer face-to-face meetings than we have done traditionally. In 2020, our Digital & Brand team helped us to overhaul our Investor Relations website. The new format presents information to investors in a more user-friendly and efﬁcient way. We were pleased that, within two weeks of launching, we saw a 50% increase in trafﬁc to our site. We have also increased the use of technology to streamline our investor relations processes and are using algorithms to efﬁciently target potential investors. In 2020, we successfully organized meetings at two of our European roadshow cities independently and we expect this to increase over time. OUR INVESTOR BASE IS EVOLVING The majority of our institutional investors are based in Europe, which accounts for 71% of our shareholder base, while investors in North America and Asia account for 25% and 4%. The successful placement by the von Finck family of their 15.7% stake in SGS in two tranches and GBL increasing its stake to 18.9% from 16.7% has resulted in our free-ﬂoat increasing from 68% of shares in October 2019 to 79% in December 2020. Institutional investors by investment style 1 6 7 5 ENGINEERING CONTROL LIMITED (ECL) SYNLAB ANALYTICS & SERVICES (A&S) RYOBI GEOTECHNIQUE INTERNATIONAL PTE LTD (RGIPL) 4 3 1. GARP 2. INDEX 3. GROWTH 4. YIELD 5. BROKER/DEALER 6. VALUE 7. OTHER 2 Business line: IND Business line: EHS, AFL, OGC Business line: IND 46.3% 17.3% 15.6% 11.0% 2.5% 1.1% 6.3% Location: NEW ZEALAND Location: EUROPE Location: SINGAPORE ECL is a consultancy company focusing on process automation and functional safety of process systems across multiple industries including oil & gas, power, food & beverage and industrial cybersecurity services. SYNLAB Analytics & Services (A&S) is a leading European environmental, food testing and tribology services company. Currently, A&S is a division of SYNLAB, the leading medical diagnostic services provider in Europe. RGIPL is a company specializing in providing geoengineering solutions for activities such as instrumentation and monitoring, soil investigation, and geotechnical engineering for the construction and infrastructure industry. SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 44 OUR VALUE TO SOCIETY Case study Investing for the future OUR VALUE TO SOCIETY We have acquired SYNLAB Analytics & Services (A&S), a leading provider of environmental, food testing and tribology services in Europe. FINANCIAL CAPITAL THE CHALLENGE SGS has a strategic objective to accelerate M&A in attractive, high growth sectors with scope for automation and digitalization. OUR SOLUTION We know that investing in the future is important to retain and enhance our industry leading position, especially during periods of macro-economic uncertainty. Given our strong balance sheet and our undisputed financial management during the Covid-19 crisis, we were in a strong position to make bold strategic moves. One example is the acquisition of SYNLAB Analytics & Services (A&S), a leading European environmental, food testing and tribology services company. This is the largest acquisition in SGS’ history. In 2020, A&S generated revenue of CHF 207 million and operating income of CHF 22 million. The acquisition enhances SGS’s market position in North-Western Europe, by strengthening our presence especially in Germany and Benelux, and enabling us to enter new attractive markets in Scandinavia. The deployment of the successful hub-and-spoke model of A&S will lead to significant synergies. Acquiring A&S is strongly aligned with our strategic objective of accelerating mergers and acquisitions in attractive, high growth sectors with scope for automation and digitalization. NEXT STEPS The transaction was closed on 31 December 2020. Consistent with our stringent Economic Value Added (EVA) criteria for assessing acquisitions, the transaction is expected to be EVA positive in year four of ownership as the result of the full integration of the business and capitalizing on the underlying growth opportunity in this market. “ The acquisition of SYNLAB A&S significantly strengthens our global network and confirms the next stage of our strategic evolution which will further align SGS to hub and spoke services and to the key megatrends. This will be supported by our focused capital allocation strategy and EVA-driven performance management.” Frankie Ng CEO of SGS SGS | 2020 Integrated Annual Report 45 CHF 207 MIO A&S revenue in 2020 CHF 22 MIO A&S operating income in 2020 BETTER | SAFER | MORE INTERCONNECTED The SYNLAB A&S acquisition enhances the SGS market position in North-Western Europe and provides a successful hub-and-spoke model to capitalize on it. BETTER | SAFER | MORE INTERCONNECTED By securing economic growth for the future, we can continue providing services to customers, assuring safety standards across the world. BETTER | SAFER | MORE INTERCONNECTED The acquisition of SYNLAB A&S will mean greater interconnectivity in Germany, Benelux and Scandinavia. SGS | 2020 Integrated Annual Report SHAREHOLDER INFORMATION FINANCIAL STATEMENTS CORPORATE GOVERNANCE MANAGEMENT REPORT MANAGEMENT REPORT 46 MANAGEMENT REPORT OUR VALUE TO SOCIETY Manufactured capital INPUTS – +2 600 ofﬁces and laboratories – CHF 259 MIO capital expenditure – CHF 1 206 MIO Opex OUTPUTS – Number of laboratories using World Class Services (WCS) OUTCOMES – Ensuring food, medicine and product safety – Increasing our capability and capacity for testing cell banks for vaccines, gene and cell therapies, including a Covid-19 vaccine – Improvement of infrastructures with our green building services – Ensuring food, medicine and product safety MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 47 OUR VALUE TO SOCIETY Manufactured capital relates to the inventory of property, plant, equipment and other manufactured goods that enable our business activities and our company to successfully compete in the global marketplace, ultimately adding value to society. In 2020, we also opened a new, state-of-the-art commercial geochemistry laboratory in Tarkwa, Ghana. This new lab is capable of processing up to 60 000 samples per month, and represents a signiﬁcant increase in our sample processing capacity from preparation to ﬁnal analysis. This will enable us to run sample preparation of both grade control and exploration samples, so we can meet the stringent turnaround times required by our customers. In addition, we opened a new geochemical laboratory in Queensland, Australia, which is quality management standard ISO 9001 accredited. The new laboratory offers increased sample processing capacity for sample preparation, ﬁre assay and chemical analysis and ensures faster, more efﬁcient turnaround times. It offers X-ray ﬂuorescence analytical services, as well as Field Analytical Services and Testing (FAST) services. We continue to invest in wireless 5G testing in China, Taiwan and Korea to expand capacity and cater for current and future demands and in semi-conductor testing in major Asian-producing countries. We also expanded our Saskatoon Genomics Laboratory in Canada. This is the ﬁrst laboratory in Canada approved by the worldwide Non-GMO Project, meaning we can certify food and snack products as being GMO-free, using the project’s ofﬁcial butterﬂy logo. LAB OF THE FUTURE PROGRAMME SGS experts, strategic suppliers and our Procurement function devise next- generation technical and digital inspection and laboratory solutions. For example, in 2020 we continued investing in artiﬁcial intelligence (AI) and machine learning solutions in our laboratories to create signiﬁcant efﬁciency improvements and provide best-in-class service to our customers. DEVELOPMENTS DURING THE YEAR In 2020, capital expenditures reduced compared to the previous year. This was in response to the global pandemic, as well as project delays from key customers, although in some regions we are already seeing signs of renewed growth. Operational expenditures also decreased due to our cost savings program, which helped to maintain proﬁtability. Despite this, we continued investing in physical assets, including new laboratories and testing equipment to support long-term proﬁtable growth. INVESTING IN OUR LABORATORIES AND EQUIPMENT SGS purchases tens of thousands of different items on a recurring basis. One of our largest procurement categories is laboratories and equipment, which includes goods and services required to operate laboratory testing as our main business activity. In average over the last ﬁve years close to CHF 145 Mio is spent on Capex equipment, alongside almost CHF 450 Mio for maintenance services and related laboratory consumables. In 2020, for example, Procurement qualiﬁed and purchased 2.7 million medical masks from carefully selected suppliers around the globe and established an own distribution hub in the Netherlands to supply SGS sites worldwide. With these masks we ensured continued testing in our laboratories and protected our inspectors when performing their services at customers’ premises. This represented an investment of over CHF 2.3 million. In addition, our afﬁliates purchased other Protective Personal Equipment (PPE) such as gloves and coveralls. OPENING NEW LABORATORIES The most signiﬁcant development in 2020 has been the completion of the expansion of SGS Biosafety Center of Excellence in Glasgow, started in 2019, to increase its capability and capacity for testing cell banks for vaccines, cell and gene therapies, including Covid-19 vaccines. (See case study on page 48) OUR KPIs Capital expenditure CHF 259 MIO 2020 | 259 2019 | 290 2018 | 304 2017 | 302 “ As the leading mining service provider in Africa, we deliver quality and trusted data. Our new lab in Tarkwa provides us with the continued opportunity to exceed our customers’ expectations of superior service.” Kiki Gyan Managing Director of SGS Ghana SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 48 MANAGEMENT REPORT OUR VALUE TO SOCIETY Case study Increasing testing capacity for vaccine candidates MANUFACTURED CAPITAL The expansion of our laboratory at the SGS Center of Excellence for Biosafety in Glasgow increased capability and doubled the capacity for testing cell banks for vaccines, cell and gene therapies, monoclonal antibodies and other recombinant protein based biological medicines, including a vaccine testing solution for Covid-19. THE CHALLENGE In light of the devastating effects of the global pandemic, the biopharmaceutical industry has been working intensively to develop and manufacture vaccines for Covid-19. With 30 years of experience supporting vaccine development and manufacturing, our team at SGS Glasgow is proud to have been involved with a number of Covid-19 vaccine candidates, including the Oxford University/AstraZeneca (AZD1222) vaccine candidate. OUR SOLUTION SGS already had an established relationship with Oxford University and had worked on different vaccine development projects. Therefore, they were conﬁdent that, together, we could form a collaboration to fast track the development of a vaccine candidate, providing biosafety and quality control testing. In 2020 we further invested in expansion of our SGS Biosafety Center of Excellence in Glasgow to support the development and supply of vaccines. This initiative will help to safely unlock the world from the pandemic as well as satisfy the growing need of scientists and manufacturers to develop and deliver effective vaccines, cell and gene therapies and other biological medicines. We ﬁnalized the construction of two more laboratories and adapted the existing building space to create two separate GMP and BSL-2 laboratories. Newly installed state-of-the-art equipment includes specialized cell culture equipment for virus detection, enzyme- linked immunosorbent assay (ELISA) technology, and real-time polymerase chain reaction (PCR) to ensure the safety of viral vaccines and other biological medicines. This new expansion project delivers increased capacity for batch testing, which is a legal requirement before vaccines can be safely made available to the public. The ﬁrst batches of AstraZeneca’s Covid-19 vaccine candidate were produced at record speed, allowing the ﬁrst UK clinical trial to start in late April 2020. In November, AstraZeneca and Oxford announced that the vaccine candidate was highly effective in preventing people from developing Covid-19 symptoms. In late December, the vaccine received emergency use authorization from MHRA. NEXT STEPS We successfully contributed to Covid-19 vaccines development while continuing to maintain our existing biosafety and quality control testing activities. Going forward, we will continue to test batches for AstraZeneca global manufacturers of Covid-19 vaccines. Other locations within the SGS network have also been involved in other Covid-19 vaccines and therapies. MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 49 OUR VALUE TO SOCIETY “ With a total of 56 biosafety level 2 laboratories at SGS Glasgow, our PCR services have been greatly enhanced. We˜now have over 300 fully validated assays˜in progress to detect impurities and˜agents of˜concern for human in the bio-manufacturing processes.” Dr Archie Lovatt Scientiﬁc Operations Director (Biosafety) at SGS 1BN doses Manufacturing capacity secured by AstraZeneca SEE OUR FILM ON BIOSAFETY SERVICES BETTER | SAFER | MORE INTERCONNECTED Our collaboration with Oxford University enabled us to fast track the development of AstraZeneca’s Covid-19 vaccine. BETTER | SAFER | MORE INTERCONNECTED Improve patients’ health by safeguarding the quality and efﬁcacy of medicines by delivering world-class analytical testing solutions to the biopharmaceutical industry. BETTER | SAFER | MORE INTERCONNECTED Played an integral part in the development of Covid-19 vaccines and therapies to ﬁght the pandemic and ultimately allow people to resume their regular work and social activities, safe in the knowledge that they are protected. SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 50 MANAGEMENT REPORT OUR VALUE TO SOCIETY Intellectual capital INPUTS – +CHF 50 MIO R&D expenditure – CHF 1 984 MIO goodwill and other intangible assets OUTPUTS – 2.51% training ratio – 20 laboratories using World Class Services (WCS) OUTCOMES – Enhancing career opportunities through training – Improving knowledge through innovation – Empowering customers through training and education MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 51 OUR VALUE TO SOCIETY OUR KPIs +CHF 50 MIO R&D expenditure 20 number of laboratories using World Class Services (WCS) Training ratio % of total employment cost spent on training (includes safety training hours) 2.51% 2020 | 2.51 2019 | 3.24 2018 | 3.38 2017 | 2.43 Intellectual capital at SGS consists of intangible and knowledge-based assets, such as our employees’ knowledge of protocols, procedures, our business lines and customers. It also includes a focus on innovation and helps us to improve our processes as well as our services, adding value to society. DEVELOPMENTS DURING THE YEAR To increase Intellectual capital, we provide learning and development opportunities, which helps us deliver for customers and retain talent. In 2020, Covid-19 prompted a swift pivot to online learning. The large number of employees engaging with online training is testament to the success of our online programs. In this way, we continue to give our employees the resources they need to develop and grow. We also continued to focus heavily on Innovation during the year, especially in the areas of cyber security, to help people back to work – and the ‘Next Normal’ – following Covid-19 lockdowns. LEARNING AND DEVELOPMENT By developing our people’s expertise, we maintain high standards while supporting individual and team development. Talent development is part of SGS’s HR strategy and is implemented at all organizational levels. We tailor our Talent Development programs to ﬁt local market conditions, business needs and employee expectations, ensuring that our highly skilled and talented staff are equipped to meet the needs of our customers across the globe. In 2019, we introduced our knowledge management platform, SGS Campus. In 2020, we worked with SGS internal subject matter experts to capture key knowledge and create engaging training material within the SGS Campus. 72 000 of our employees can now access more than 1,300 courses at any time and from anywhere, which will allow us to foster a knowledge-sharing culture. We are placing increased focus on ensuring content is both engaging and interactive, resulting in a higher take up due to a new content authoring tool which was also implemented in 2020. By leveraging a network of knowledge champions throughout SGS, we are progressively transferring ‘ownership’ of SGS campus to our employees to be run by them, for them. At the same time, we are now focusing on the platform’s automation and efﬁciency by relying on strong chatbot technologies and meaningful analytics which will ensure a ﬂawless employee experience. Our onboarding process ‘SHINE’ provides all new employees with an engaging, comprehensive and supportive start to their employment. Through the three- month program, new employees are equipped with the information, resources and connections they need to successfully become an active member of SGS new technologies and SGS Campus. This will allow us to continue to improve our new employee experience in the upcoming months. During the course of 2020, a group of over 60 managers, representing a variety of SGS afﬁliates and business lines, have developed a simple and meaningful framework to ensure that we are systematically assessing management effectiveness. This framework will form the foundation on which we will build our strategy to reinforce SGS’s leadership capabilities in the coming years. Finally, we have focused on ensuring that succession planning practices are applied throughout the organization and introduced a series of webinars aimed at educating or refreshing our businesses as to how to identify, assess and match talent to the value they create. This collaborative approach is helping SGS to build the right workforce for the future. INNOVATION Innovation plays a signiﬁcant role at SGS, both in terms of making our operations more efﬁcient, and in developing new services for our customers. Factors driving our focus on innovation include greater digitalization, cybersecurity, technology such as artiﬁcial intelligence (AI) and the Internet of Things (IoT), Covid-19 and sustainability. Digital services We aim to create a better, safer and more interconnected world for our users. Covid-19 reinforced the idea that people can quickly adapt to new digital solutions, and we are learning from this experience and including this in our new digital strategy. Our SGS Online (see overleaf), self- assessments, remote inspections and smart services are examples of how digitalization has helped improve our operations and that of our customers in 2020. (See our case study on Remote inspections and ‘Sustainable innovation’ overleaf for further information.) SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 52 OUR VALUE TO SOCIETY Intellectual capital continued OUR VALUE TO SOCIETY 53 “ The large number of employees engaging with online training is testament to the success of our online programs.” Daniel Rüfenacht Group VP Corporate Communications Our new strategy will focus on automating existing operations to become even more efficient for both products and services. In addition, we want to improve the customers’ experience and create new services and business models, which we intend to move forward with in 2021. For example, we will work on accessing data and creating data analytic capabilities, which will help us to become even more sustainable, innovative and agile. Cyber security With the new EU Cyber Security Act coming into force in June 2020, companies have realized the importance of cyber security. We are expanding our focus on this beyond Europe, working on hardware, consumer IT and medical solutions. We are launching an exciting venture with our CyberSecurity Campus Graz in Austria SGS. We will focus on high impact cyber security research – making any discoveries freely available to everyone. SGS is also a founding member of Trust Valley – an innovative platform dedicated to digital trust and cybersecurity in the Lake Geneva area, where our head office is based, and we are sharing our knowledge and expertise in this area. In March 2020, internationally recognized BSI (the German Federal Office for Information Security) granted SGS approval for high level IT information security testing, increasing SGS’s global capability in the cybersecurity space. Another initiative is Komgo – a blockchain- based platform – where we support traders by placing all documents in one place, resulting in industry-wide simplification of operations and standardized documentation. We are also using the blockchain system to ensure that no health data from Covid-19 testing, for example, is shared with anyone apart from the data subject. All data is kept on the user’s mobile phone and the test result is confirmed via the blockchain system. Ecommerce and online presence The SGS Online Store enables us to offer a wide range of services online to customers. It has proved very popular during the pandemic when face-to-face meetings have not always been possible due to lockdowns. For example, we have seen an increase in hotels purchasing our Environment, Health and Safety services through the SGS Online Store. Our pilot program started in 2018 and we are now developing a more comprehensive eCommerce strategy as part of our digital innovation strategy. This will involve expanding our marketing to communicate about SGS Online Store to a broader audience. Sustainable innovation Sustainability will be a key factor when we analyze which innovations to prioritize. Each year, we will develop an Innovation Thesis for all our business lines to check if products need innovative sustainable solutions. In 2020, our business lines focused on developing innovations to help people live as normal a life as possible despite Covid-19 lockdowns. These range from solutions to help people return to work, such as PCR and antigen testing for Covid-19 and digital reporting of test results, to monitoring and certifying disinfection of premises. Other projects include MIRAS, where we identify microbes in pipes to prevent corrosion, and smart warehouses which track the level of humidity to avoid grain wastage. i-Check launched in October 2020 helps customers conduct self-assessments and provides them with data so they understand where they need to make improvements. Through our supply chain visibility program, Transparency One, we collect information about compliance with environmental, social and governance issues. This enables us, for example, to make calculations about the carbon footprint of a product. Innovation culture At SGS, we continue to promote a culture that values innovation. We encourage our employees to put forward new ideas through a series of Idea Challenges that are designed to crowdsource ideas from across the SGS Group. We had planned Ideas Challenges region by region for 2020 but these were postponed because of pandemic lockdowns. We are now looking to re-launch the initiative using remote or other methods. When ideas are developed from the Challenges, we support them through our Innovation Ecosystems, where representatives from all parts of the SGS Group come together to contribute to idea development. In 2020, we began a pilot working with an incubator to help develop our innovation ideas, and also introduced greater agility into our way of working to speed up the development process. Going forward, we will create a centralized system for reporting all innovations across SGS. “ At SGS, we promote a culture that values innovation. We encourage our employees and our partners to put forward new ideas that can deliver value to our customers.” Siddi Wouters SVP, Digital & Innovation Our World Class Services (WCS) program is an innovative approach where we’ve taken a concept from manufacturing and applied it to the processes in our laboratories to eliminate all kinds on waste. (See our case study on page 54) INFORMATION SECURITY AND DATA PROTECTION We protect personal data and comply with all appropriate privacy laws. As a company that holds itself to the highest standards of professional behavior, and that operates in a controlled-risk environment, these are essential commitments. We have a framework in place to protect intellectual property, business services, personal information and customer data. Our data protection strategy is focused on prevention, detection, management and response to security risks. We enhance IT systems and put policies and procedures in place to streamline processes. Information security Information security is vital and we want to ensure that everyone understands that they have a responsibility to protect confidential information and share it appropriately. SGS is a huge network of affiliates all over the world, spanning 2 600 offices and laboratories and more than 89 000 employees. We must therefore strike a balance between local autonomy and flexibility to respond to local issues, while maintaining global consistency in our standards. We have been examining ways that our affiliates and businesses use information and are working on an approach to look at data security as a whole, given that verbal and printed information are just as much in need of security as digital data. In 2020, we initiated the Information Governance Framework (IGF) – a new approach to securing information pertaining to SGS and its employees, customers and suppliers. As well as configuring new technical controls in collaboration with Global IT Security, the approach incorporates behavioural guidelines and physical controls for the protection of hard copy and verbally transmitted information. This major initiative requires close consultation with all businesses and functions and will help to align SGS with the principles of ISO27001:Information Security. In adapting to Covid-19, Corporate Security sustained and even enhanced its operational reach by conducting investigations remotely. This involved training carefully selected local employees to conduct interviews and gather information under our supervision. Alongside our due diligence and certification verification services, this shift to predominantly remote operations is transformative. Data protection We aim to be a leader in the field of data protection. We strive to be transparent and open about the data we collect, respecting individual rights and choices, and protecting the data we hold from unauthorized use or disclosure. To manage this, we have our SGS Data Privacy Policy. We are conscious of the high standards of privacy regulation in Europe provided in the General Data Protection Regulation (GDPR) and we continue to roll out and implement our policies worldwide in jurisdictions which may not have such strict standards. Training Every year, we update security training and our communications on information security and data protection, based on real cases that have taken place. In 2020, we worked to address the implications of remote working regarding information security, data protection and cyber security training. We accelerated a strategic initiative so that our people have been upskilled through online training. We provide courses dedicated to the specific needs of SGS businesses, as well as training for Data Privacy Officers and senior managers on security threats. Security training has covered issues like data protection, secure use of emails, the identification of phishing emails and how to detect and react to cyber-attacks. Each Managing Director has responsibility for ensuring our employees complete our information security eLearning module, and we track this on a monthly basis. New employees are required to complete our compulsory annual training as part of our SHINE Onboarding program. 12_Intellectual_capital_p50_55_v59.indd 52-53 12_Intellectual_capital_p50_55_v59.indd 52-53 24/02/2021 20:58 24/02/2021 20:58 SGS | 2020 Integrated Annual ReportSGS | 2020 Integrated Annual Report SHAREHOLDER INFORMATION FINANCIAL STATEMENTS CORPORATE GOVERNANCE MANAGEMENT REPORT MANAGEMENT REPORT 54 MANAGEMENT REPORT OUR VALUE TO SOCIETY Case study Achieving World Class Services status in Shanghai INTELLECTUAL CAPITAL World Class Services is our adaptation of the World Class Manufacturing concept. Its structured approach reduces organizational waste and losses in our laboratories to bring long-term improvements to safety, quality, workplace organization, logistics and maintenance. THE CHALLENGE As 2018 was coming to a close, we wanted to ﬁnd a way to eradicate organizational waste in our hundreds of laboratories across the world. This meant a culture shift, identifying ways to save time as well as physical waste, further increasing the efﬁciency and sustainability of our operations. OUR SOLUTION We chose the ‘World Class Services’ (WCS) model, which originated in the manufacturing sector, as our continuous improvement program. The program is based on a zero-optimum concept, which aims to eliminate all kinds of waste and losses in processes and the way in which services are provided. We achieve this by using speciﬁc methods and tools. WCS cuts across company boundaries and is applied to all departments, embracing numerous topics (known as pillars) including safety in the workplace, the environment and sustainability, quality, logistics and supply-chain, in-house and specialist maintenance, human resources, technical governance and more. The roadmap towards World Class status for each laboratory is challenging. It consists of systematic improvements, eliminating organizational waste and losses with rigor. Each site or laboratory is benchmarked and must demonstrate how it progressively reached ‘world class’ standards by applying the World Class Manufacturing (WCM) methodology. As with any new product, service or method, it must also be evaluated by external parties in order to have a recognized value. Therefore, we use the same audit approach as WCM applies for other industries. Not only do these audits give us the opportunity to review the progress we make, but also to share best practices inside and outside of SGS. The WCS Route Map requires auditing over a period of years, where the application of the methodology is assessed by external WCM auditors. Any companies participating in the WCS program are assessed with WCM evaluation criteria, which are speciﬁc for each of the 10 technical and 10 managerial pillars. Each pillar involves a seven-step approach and auditing process, culminating in a series of awards (bronze, silver, gold, and ultimately, world class). We are delighted that laboratories in Shanghai, Taunusstein and Bangkok had their ﬁrst external audits in 2020. This is an extraordinary result that marks the starting point for their WCS journey. It is testament to the collective effort of everyone involved in the process: from Pillar leaders, team members and employees involved in projects and proposals, to local management and many others. NEXT STEPS Remote audits are already being organized in Bangkok, Thailand and Taunusstein, Germany. The team is prepared for possible challenges, such as technology constraints, but is conﬁdent that with the technology that is already available within SGS, these afﬁliates can participate in initiatives like World Class Services. It also opens up the opportunity for smaller labs, such as those in more remote areas, to get involved too. Our team in Shanghai are very proud of the status they have achieved. The whole process gave them the opportunity to learn, ﬁne-tune and improve at each step of the award level and in every area of the operational and managerial part of the business. Being the ﬁrst to be audited, remotely, broadened their experience and it provides a roadmap for implementing WCS in other areas of SGS. SGS | 2020 Integrated Annual Report MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 55 OUR VALUE TO SOCIETY SEE OUR FILM ON WORLD CLASS SERVICES, SHANGHAI BETTER | SAFER | MORE INTERCONNECTED By reducing loss of resources we work more efﬁciently. BETTER | SAFER | MORE INTERCONNECTED By focusing on internal reduction of loss and waste, we ensure our operations run sustainably. BETTER | SAFER | MORE INTERCONNECTED We reached our target through the teamwork of our people, who integrate WCS into their daily work. “ In our World Class Services program, we are constantly innovating, using the˜expertise of our people to make our business operate in a faster, simpler, more efﬁcient and sustainable way. Our Shanghai CCL lab achieved the coveted ﬁrst audit in World Class Services status thanks to˜our people’s commitment to continual improvement – it’s an incredible example of˜teamwork.“ Filippo Rota Vice President, Strategic Transformation SGS | 2020 Integrated Annual Report 56 MANAGEMENT REPORT OUR VALUE TO SOCIETY Human capital INPUTS – +89 000 employees – One SGS Recruiter Academy – 15 SGS Rules for Life OUTPUTS – Aligning the HR structure to better meet global and regional business prerogatives – 28.7% Women in leadership positions – 0.36% Total Recordable Incident Rate OUTCOMES – Protecting the health of employees through Operational Integrity excellence and well- being programs – Reducing social risks by reinforcing human rights compliance – Ensuring safety of customers through our vehicle testing services MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 57 OUR VALUE TO SOCIETY Ensuring our people work with integrity, that we employ people fairly and without discrimination, and protecting the health and safety of our employees are our top priorities. We address potential social risks by reinforcing compliance with international human rights standards. Our services also support people in communities around the world, by ensuring food, medicines and products are safe, adding value to society. DEVELOPMENTS DURING THE YEAR In 2020, our key challenges were to ensure the safety of our people, by taking steps to protect them against the global pandemic and ensure their well-being so that we could continue providing our services for customers. WORKING WITH INTEGRITY The core of SGS is to act as a trusted third party. We can only legitimately make this claim if we act with integrity, which is embedded into our business model. SGS does not engage in any form of bribery or corruption, and we adhere to the legal requirements of every country where we operate. We hold anyone acting on behalf of, or representing SGS to the highest standards of professional integrity, at all times. This is deﬁned by our SGS Code of Integrity, which applies to all employees as well as afﬁliated companies, contractors, subcontractors, joint venture partners and agents. We reinforce our Code of Integrity through annual mandatory integrity training, and all new employees are required to complete integrity training within three months of joining SGS. In 2020, the launch of our new Integrity Helpline was received well, and employees have used this to report any issues of concern, which we are then able to act upon. We expanded our integrity criteria and launched a policy to deal with a range of integrity issues, ranging from minor to major. We also delivered interactive training on how to deﬁne non-serious breaches and how to conduct an investigation for a non-critical violation. These investigations are reported and dealt with in a systematic way. In 2021, we plan to review our procedures to include more internal integrity audits. We will also ensure more than one team to get involved in hiring outsourced services, reducing opportunities for potential corruption. Human rights We have a company-wide Human Rights Policy, which is in line with the International Bill of Human Rights, the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work, the Children’s Rights and Business Principles, the United Nations Women’s Empowerment Principles and the United Nations Global Compact. We respect freedom of association and cooperate with the trade unions and work councils that our employees collectively choose to represent within the appropriate national legal frameworks. In December 2019, we re-launched our annual human rights eLearning module for all employees. We are currently developing a new program, which will include audits to ensure we are complying with human rights and integrating human rights into the risk assessment process. In 2021, we will invest in more customized training on the human rights issues most relevant to SGS, based on the calls we receive on our Integrity Helpline. Additionally, we will compile data received from both the global helpline and local legal compliance teams. This will enable us to assess if we need to put in place more mitigation programs. TALENT MANAGEMENT Throughout 2020, we continued to implement our Human Resources (HR) strategy, which is based on ﬁve pillars. These include aligning the HR structure to better meet global and regional business prerogatives; implementing a competitive and transparent talent acquisition strategy; fostering an integrated talent management mindset – based on consistent succession planning practices; strengthening our leadership and employee capabilities with tools and guidelines (see page 60); and leveraging our footprint to promote career development opportunities across the Group. Our approach to HR is on a regional as well as global level, and we assess progress against our Key Performance Indicators (such as turnover) twice a year instead of once, to make sure we have the right data to make the right decisions and match talent to value. TALENT ACQUISITION Our strategy for talent acquisition is to attract the best and right people to work at SGS, now and in the future. This is managed locally with global support. In 2020, we rolled out our new e-recruitment tool, SmartRecruiters, to 23 countries. This has helped to increase efﬁciency in recruitment, increase focus on data driven decision-making, as well as increase the diversity of our employees. It has also helped to improve communication with managers and enable collaborative hiring. OUR KPIs Code of Integrity reports Code of Integrity reports to helplines: Total number of integrity issues reported through integrity helplines* 208 2020 | 208 2019 | 211 2018 | 237 2017 | 227 Code of integrity non-compliances Total number of breaches of the code of integrity identiﬁed through corporate integrity helplines* 17 2020 | 17 2019 | 36 2018 | 28 2017 | 14 Code of integrity investigations Total number of valid reports investigated1 104 2020 | 104 2019 | 70 2018 | 67 2017 | 48 * 1 ‘Helplines’ means channels used by employees and external parties to report suspected violations of the Code of Integrity. The reports can be submitted online or by phone, email, fax or post We are working on extending the scope of our reporting in order to include breaches occurring locally and pending cases which are still under review at the time of the reporting. We expect to report on these ﬁgures in the coming years. SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 58 MANAGEMENT REPORT OUR VALUE TO SOCIETY Human capital continued In addition, we trained over 110 recruiters on best practice in talent acquisition, and 400 managers on recruitment and diversity with the SGS recruitment academy. In 2021, we will roll out SmartRecruiters to a further 15 countries, covering more than 80% of SGS open positions. We will accelerate recruitment automation, which will increase our hiring velocity and quality of hires. We also want to increase our focus on recruitment transparency, which will allow our employees to raise their hands and express their interest in career opportunities within SGS. In the ﬁrst year of being hired, we ensure that every member of staff goes through our revised ‘Shine’ onboarding program. We have digitized the onboarding process making it more accessible and interactive for all employees, especially during Covid-19 lockdowns. We plan to do this with long- term employees as well as newcomers to keep our employees fully engaged, and expect all these measures to lead to greater employee retention. DIVERSITY AND EQUAL OPPORTUNITIES Our commitment to diversity and equal opportunities is expressed in our SGS Business Principles, Code of Integrity and Human Rights Policy. We do not tolerate any form of discrimination and are proud to be known as a diverse employer. We train managers annually in the principles of non-discrimination. We run a number of regional programs, and many countries have accelerated the move towards embracing diversity and inclusion. Given that ethnic diversity varies from country to country, targets are set and monitored locally. In Australia, for example, we have achieved 50/50 gender diversity and ethnic minorities are well represented. We monitor the gender of our applicants to ensure that the way we attract and acquire talent has a positive impact on diversity and have programs to encourage women in management and leadership roles. We are raising awareness relating to the gender pay gap. We are also introducing equal beneﬁts for men and women taking time off for parental leave. A diversity working group has put together a series of proposals to enable SGS to enhance diversity and inclusion over the next three years, including raising awareness. PERFORMANCE MANAGEMENT, REWARD AND INCENTIVES OUR KPIs Women in leadership positions CEO -3 28.7% 2020 | 28.7 2019 | 26.7 2018 | 26.4 2017 | 26.2 In 2020, to develop our leaders further, we leveraged our partnership with IMD business school in Lausanne, Switzerland and provided ﬁve and eight week leadership development courses for 18 of our leaders. Covid-19 has also accelerated the introduction of a new learning culture, which is more self-directed, on-demand, shorter and continuous. This will continue to be the focus for 2021. Managers are expected to be clear about expectations and evaluate and critically discuss performance, as well as supporting career management and encourage continuous learning. In 2020, we continued our approach to continuous feedback as opposed to annual feedback sessions. Performance is one of the key elements that drive individual compensation decisions at SGS. Our short-term incentive plans reward both the annual ﬁnancial performance of the Group and the individual performance of the eligible employees; long-term incentives are offered to selected employees who demonstrate an exceptional level of performance. The compensation packages offered to our employees are deﬁned to be competitive against the prevalent compensation practices in the different markets where we operate, based on their performance, level of responsibility, skillset and knowledge. Beneﬁts, such as health care plans and occupational pension plans, are offered to our employees according to prevalent local market practices. 2020 marked the end of a four-year strategic period. During this time, we raised awareness and aligned initiatives around this in our HR departments. In light of the effects of Covid-19 we implemented conservative and selective pay increase criteria. We believe that reward and recognition play a key role in attracting, engaging, motivating, and retaining talent at SGS. We also formed a task group responsible for re-imagining the performance management process. Our aim is to make it more employee-centered and build the coaching capabilities of our managers. We want to make the process more continuous and engaging, adapting it to the current context and ensuring a tighter link between manager and employee. MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 59 OUR VALUE TO SOCIETY OUR KPIs Lost time incident rate (LTIR) Ocurrence per 200 000 hours worked 0.23 2020 | 0.23 2019 | 0.26 2018 | 0.25 2017 | 0.23 Total recordable incident rate (TRIR) Occurrence per 200 000 hours worked 0.36 2020 | 0.36 2019 | 0.44 2018 | 0.41 2017 | 0.40 EMPLOYEE ENGAGEMENT AND WELL-BEING With employees under lockdown, engagement and caring for their well-being became increasingly important for SGS in 2020. We divided our employee engagement program into two parts. The ﬁrst was a simpliﬁed annual global engagement survey for employees, called Catalyst. This included a core compulsory module, as well as an optional bespoke one in which countries could customize questions relevant to them. The results of the survey are used to put in place improvement actions. Each SGS afﬁliate is required to to put in place one action plan as a minimum. We follow up after changes have been implemented to check if improvements have been made. We require afﬁliates to communicate best practices globally so that learnings can be shared among the afﬁliates. We also trained our appointed Catalyst Regional and Country Champions and our Human Resources staff to act as facilitators, providing support through the overall surveying process, action planning phase and to follow up on progress. The second part of our program was from the end of April until mid-June, when we rolled out a series of pilot Covid-19 Pulse Surveys to check how our employees were doing during lockdown. We ran these surveys in more than 13 countries and one subregion, covering 7,500 employees. The feedback has been positive on this new approach. These surveys helped us to better understand the critical needs of our employees in times of difﬁculty, the key challenges employees face while working remotely and how we can better support them during these unprecedented times. We also run ad-hoc surveys, including our recent surveys to gauge employee understanding and motivation on the next phase of our strategic evolution, which received very positive feedback. These types of surveys help us to identify areas where employees need more information, which in turn help us to better plan communications and events. We ran a number of well-being initiatives in 2020. For example, to highlight our support for employees working under lockdown and evolving conditions, we ran a photo contest and video series to enable staff to highlight how they are coping. To underline our support for employees working from home with young children, we ran a drawing competition for the children. In December 2020, we also launched the ‘SGS People Challenge’ to thank colleagues for their hard work and nominate an employee of the year. (See case study on page 68) In 2021, this campaign will also involve a further drawing contest for children, as well as a community food bank challenge. ADD VALUE WITH LËSS In 2020, we continued our ‘Add Value with Lëss’, the bear initiative to help our employees achieve a greater work-life balance. As we transition to greater remote working, this is increasingly important. Based on the four ‘paws’ of Process, Environment, People and Quality, we made the program more digital and included new tips relevant to the pandemic. These include efﬁciency when working from home, online meetings and remote working communication. In January 2021, we re-introduced the initiative and aim to reach 100% of employees by 2030. At the same time, we launched a global communications campaign, which is helping to raise awareness of the importance of work- life balance. OPERATIONAL INTEGRITY (SAFETY) Our goal is for zero accidents and for zero harm to come to our people across our operations. To achieve our Operational Integrity (OI) Global Mission, we develop safety initiatives in the seven areas of leadership, communication, training and awareness, resources and skills, Key Performance Indicators (KPIs), audits and compliance, and Health, Safety and Environmental (HSE) risk assessments. We set long-term safety objectives for each area, which are reported on our Crystal reporting system. Our Group-wide OI Management System also supports improvements. This is aligned with internationally recognized standards on health, safety and the environment. SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 60 MANAGEMENT REPORT OUR VALUE TO SOCIETY Human capital continued “ Our leadership team is heavily committed to helping ensure people’s safety across our operations.” Alain Denielle Vice President, Operational Integrity and Business Continuity OPERATIONAL INTEGRITY CULTURAL INDEX Progress against OI objectives is monitored as part of our OI Cultural Index (OICI), which covers 14 elements. Each country reports on these indicators and the Index provides us with an overview, which is reviewed twice a year. This is helping to support decision-making. COMMUNICATION, RESOURCES AND TRAINING We encourage all SGS leaders to carry out a minimum of six leadership visits every year to assess business and site level OI conditions. We also provide all OI employees with a range of online tools to help them stay up to date with our OI requirements, on-site standard operating procedures, Group OI Management Systems and ‘Rules for Life’. We host regular Safe Talks for all employees, as well as an annual Safety Month. In 2020, these were conducted virtually. We encourage positive reinforcement to promote safe behaviors through our peer-to-peer safety observation program. In 2020, we introduced a new eLearning training for all employees to echo our ‘rules for life’ and produced hard- hitting posters to remind people of the consequences of not following OI rules. In 2020, more than 122 sites, covering more than 14 800 employees, achieved or maintained ISO 45001 (OSHAS 18001) and/or ISO 14001 certiﬁcations. We deﬁned site safety criteria and our OI managers identiﬁed ‘critical’ and ‘important’ sites across our operations. At the end of this process, 500 sites globally were identiﬁed as critical or important. We are now working on tackling these critical sites to enhance safety and resilience. This process, for example, highlighted the need to enhance ﬁre safety. We have since hired a new ﬁre prevention ofﬁcer and are working on developing a ﬁre prevention strategy. We’ve seen an overall improvement in safety in 2020 and we are assessing the reasons for this, which could include more people working from home and a greater focus generally on issues of health and well-being because of the pandemic. Going forward, we will introduce an eighth pillar to our Mission, incorporating greater digitalization into our OI processes. LEADERSHIP Our leadership team is heavily committed to helping ensure people’s safety across our operations. Each year, we identify speciﬁc objectives to be achieved. The Group Vice President for Operational Integrity, Business Continuity and Integrity Programs reports directly to our CEO and oversees the implementation of our OI strategy and objectives. Performance is reviewed on a quarterly basis. THE OPERATIONAL INTEGRITY GLOBAL MISSION Protect SGS employees and partners, our physical assets, the environment and the communities in which we work and live Accelerate our cultural change and journey towards HSE excellence Leverage HSE ownership, leadership and stakeholder involvement Support full compliance with legal, regulatory, customer and Group HSE requirements Improve our performance by providing HSE expertise and guidance through the deployment of OI strategies, programs and tools MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 61 OUR VALUE TO SOCIETY SGS RULES FOR LIFE Our 15 ‘Rules for Life’ include life-saving principles that apply to all employees, contractors and other people working on behalf of SGS. We make them available in 20 languages and incorporate them into all of our safety campaigns. Obtain work permits and prevention plans Wear personal ﬂotation device Control at working height Control of conﬁned spaces Wear seatbelts Comply with substance abuse policy Elimination of ignition sources Engine on — cell phone away Get out of the line of ﬁre Control of work around mobile equipment Control of energy Manage fatigue Follow speed limits Dangers of engulfment and suffocation Wear head protection high- visibility clothing “ 2020 has underlined the need for businesses to be resilient and constantly prepared for disruptive events.” Garry Poole Global Business Continuity Manager We are adding tools for hygiene and chemical management, as well as new apps and platforms for data inspection, to our ‘Crystal’ reporting platform. For example, in 2020 we invested in a new platform called ‘health track’ to support companies with hygiene and occupational health programs. BUSINESS CONTINUITY 2020 has underlined the need for businesses to be resilient and constantly prepared for disruptive events. Business Continuity (BC) is taking our risk assessment process one step further. Alongside risk analysis, we conduct business impact analysis to understand critical processes within the organization. With the global pandemic, our new Global BC Strategy and enhanced BC team were really put to the test, and we succeeded in continuing to deliver for our customers. AUDITS, KPIs AND RISK ASSESSMENTS Before starting a job, inspectors and lab technicians must check that everything is in order regarding working conditions, knowledge, skills and equipment. We call this a ‘last minute risk assessment’. We built a dedicated mobile app so staff can quickly report any problems to the supervisor and stop working if it is not safe. In addition to local reports of incidents and hazards, all site managers are also expected to perform risk assessments and to develop associated action plans. Each year, local OI managers audit country laboratories, ofﬁces and facilities. Centrally, we also audit regional and country-level OI performance. We use these audits and local reports to generate performance evaluations and customer- mandated reports. INDUSTRIAL HYGIENE Our risk assessment process covers health, safety and environmental risks, to protect our employees from diseases and fatalities. For example, we use the Chemwatch tool to manage safety data sheets and chemical inventories across 57 languages. SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 62 MANAGEMENT REPORT OUR VALUE TO SOCIETY Case study Keeping people safe We continually strive to keep our people safe. Covid-19 exacerbated this challenge in an unprecedented way. HUMAN CAPITAL We reported weekly on the number of Covid-19 cases and the number of sites closed – whether fully or partially. Crisis management teams also facilitated collaboration. Given the shortage of medical personal protective equipment (medical PPE) at the beginning of the pandemic, we created a central hub for all countries for masks. We prioritized staff with customer contact since they were at higher risk. (See our case study on page 26) We also organized shift work at sites for those who could not work from home and provided laptops for home working. NEXT STEPS Going forward, the safety of our people will continue to be our top priority. We will monitor developments in relation to the pandemic, as well as take steps to protect our employees from accidents, incidents and injuries in our laboratories, ofﬁces and at work-related events. THE CHALLENGE We needed to address the safety of our employees as our top priority, helping to prevent the spread of the pandemic and ensuring we could continue providing services for our customers and adding value to society. OUR SOLUTION In December 2019, the global meeting of our eight regional Business Continuity (BC) managers met. The issue discussed was contingency plans for a potential future outbreak like SARS in 2002. This meant that when Covid-19 broke out, we had already reviewed our BC plans for the region. This helped enable a rapid response, which we were able to roll out to each country as and when necessary. We rapidly built an eLearning module about Covid-19, explaining the virus and the consequential inspections we would have to undertake. This meant that from the beginning of the pandemic, our colleagues understood the severity of the situation and the measures we were putting in place to keep them safe. We prepared statements for our customers which gave them conﬁdence that we had matters under control. As soon as any workplace building was affected with the virus, our BC ofﬁcers worked closely with local IT to ensure that measures were put in place to enable staff to work from home. In some cases, we had to expand some of the networks and obtain additional licences. Within one week, we had the vast majority of our people seamlessly working remotely. SGS | 2020 Integrated Annual Report MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 63 OUR VALUE TO SOCIETY SEE OUR FILM ON KEEPING PEOPLE SAFE AND ENGAGED BETTER | SAFER | MORE INTERCONNECTED Employee safety beneﬁts everyone, personally and professionally. BETTER | SAFER | MORE INTERCONNECTED By putting our people ﬁrst, we are prioritizing their safety. BETTER | SAFER | MORE INTERCONNECTED By making use of technology during the pandemic, we’ve kept our staff connected. “ In addition to focusing on the safety of our people, we shared information with staff about well-being, stress management, ergonomics and even tips for working from home with children in the background. Our motto throughout has been ‘yes we can!’.” Daniel Rüfenacht Group VP Corporate Communications SGS | 2020 Integrated Annual Report 64 MANAGEMENT REPORT OUR VALUE TO SOCIETY Social and relationship capital INPUTS – SGS Community Program – +800 000 customers – 65 000 suppliers OUTPUTS – CHF 1 243 thousand Community investment1 – 83% satisfaction score in our Voice of the Customer surveys OUTCOMES – Supporting communities during Covid-19 MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 65 OUR VALUE TO SOCIETY Social and relationship capital is about how we engage globally with our customers, suppliers, local communities and other stakeholders like governments and NGOs. All are important to our business operations, our reputation and our success, ultimately helping us add value to society. DEVELOPMENTS DURING THE YEAR Despite lockdowns caused by the global pandemic, we maintained our engagement with our suppliers, customers, local communities and other stakeholders during the year. This helped us take on board feedback to improve our processes and strengthen our brand even more. In 2020, we continued to embed sustainability across our organization and services, which further solidiﬁed our reputation as market leaders. SUPPLIERS We have 65 000 suppliers of which 120 are strategic suppliers and most important to our business. Taking a different approach to that used for our local suppliers, we ask strategic suppliers to complete a questionnaire requesting ﬁnancial and procurement information, and more in-depth sustainability information. This gives us an opportunity to establish sustainability as a precondition for our relationship with them. MANAGING PROCUREMENT AND ENGAGING WITH SUPPLIERS 2020 saw the completion of our Procurement and Supply Chain Strategy, in which we continued our work based on our four strategic pillars: cost and cash ﬂow leadership, global sourcing solutions, sustainable procurement and supply chain, and contributing to the Inspection and Laboratory of the Future program. 1. Cost and cash ﬂow leadership Procurement and Supply Chain Management further increased incremental gross savings in 2020 and reached the three year target of the 2020 procurement strategy. By harmonizing payment terms to our standard procurement contributed to SGS leading net working capital. We believe that procurement is an important driver of sustainability. At SGS, we can inﬂuence up to 65 000 suppliers to follow our principles and values. Sustainability is a qualiﬁer in the selection of suppliers. Going forward, we continue to train our suppliers and run speciﬁc initiatives for them to operate in a more sustainable way. Our suppliers are involved to develop opportunities for driving sustainability in SGS as well. Our SGS business experts work together with strategic suppliers and Procurement to devise next-generation technical and digital inspection and laboratory solutions. 2. Global sourcing solutions We take a user-centric approach to deliver the best global, regional and local solutions. We achieve this through global strategies that drive cost reductions, standardization and efﬁciency improvements. We identify ways in which we can beneﬁt from our main global suppliers and build close partnerships with them. This year, procurement has played a critical role in responding to the global pandemic by ensuring security of supply and helping SGS to continue service delivery for our customers, thereby adding value to society. Procurement was central to sourcing medical personal protective equipment (PPE), enabling our inspectors and employees to return to work safely, as well as helping us access Covid-19 testing resources and contribute to limiting the spread of the Covid-19. Across 120 countries, this required huge effort and co-ordination. 3. Sustainable procurement and supply chain During the pandemic, sustainability continues to play an essential part of our procurement strategy. We have achieved a leadership position in the CDP Supplier Engagement Rating, highlighting our commitment to implementing actions to reduce emissions and manage climate risks in our supply chain. 4. Contributing to inspection and laboratory of the future program Our SGS experts work together with strategic suppliers and our procurement function team to devise next-generation technical and digital inspection and laboratory solutions. WORKING WITH OUR SUPPLIERS TO ASSESS RISK Our objective is to work together with suppliers to identify hazards and threats and implement a governance process that ensures risk management, partnership building and collaboration across our supply chain. SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 1. Since 2018, Investment in community includes philanthropic sponsorships, and since 2019 it also includes the value of in-kind donations For more information on our community involvement, see our 2020 Corporate Sustainability Report 66 MANAGEMENT REPORT OUR VALUE TO SOCIETY Social and relationship capital continued MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 67 OUR VALUE TO SOCIETY The SGS Online Store The SGS Online Store is our online store that enables customers to either buy or begin the procurement process for a large range of SGS services. These include Environment, Health and Safety; Agriculture, Food and Life Sciences; Oil, Gas and Chemicals; and Certiﬁcation and Business Enhancement business lines, as well as services from our Cybersecurity Services unit. The SGS Online Store makes it easier for us to engage with customers, reach new customers and makes the sales process more efﬁcient. For customers, it simpliﬁes the process of engaging with SGS, making it easier for them to access our services. (See page 52) Listening to customer feedback It is important for us to understand how our customers feel about their experiences and learn about their speciﬁc interests, suggestions and expectations. We regularly communicate with our customers and analyze customer sentiment through our ‘Voice of the Customer’ surveys. All feedback is reviewed regularly and any follow up issues are dealt with in a harmonized and timely fashion. Our new tool, Eloqua, is helping us to be even more responsive by automatically alerting if a customer has a request or an issue, which will help us to improve the customer experience. This has currently been rolled out to 10 countries and we hope to double this in 2021. Our Laboratory Excellence Program is the largest of our annual Voice of the Customer surveys. Each year, SGS laboratory customers are asked to complete a survey about their experiences and service from our laboratories. The results enable us to continually improve laboratory services. Last year, these surveys showed 91% customer satisfaction. Strategic enablers Supporting our four pillars are four strategic enablers: Target Operating Model (TOM), supplier partnership management, internal business partnering and high- performing procurement teams. Our TOM is looking at automation and efﬁciency solutions for the Procure to Pay (P2P) process and in reporting and control of our procurement. In 2020, 46% of our procurement was sourced online, compared with 44% in the previous year. In 2020, our supplier management focused on launching ‘a call to action’ to target our most critical 100 global suppliers and 600 local suppliers in order to meet three objectives: (1) ensure business continuity plans guaranteed sufﬁcient availability of critical supplies; (2) identify which parts of the supply chain were at risk and which alternative products were available to off-set any risk; and (3) limit increases in cost and improving payment terms where increases were unavoidable. We renewed our procurement policy, and are communicating this to suppliers, alongside providing eLearning about our policy. Collaboration with our suppliers is a big priority, to maximize performance and develop innovative solutions for our business stakeholders. In 2020, we introduced a more structured framework for greater collaboration with 12 of our strategic suppliers and we are planning to extend this going forward. Our ‘one team’ approach is also important. We hold monthly review meetings between our category managers and local and regional procurement organizations. We track Key Performance Indicators (KPIs) and hold quarterly reviews with our regional procurement managers and their teams to help us continually improve. ENGAGING WITH OUR CUSTOMERS Every business line has a customer-care department, connecting customers to relevant parts of SGS. This year face-to- face meetings were limited because of the pandemic. However, we continued to interact with customers through emails, phone calls, feedback questionnaires, social media and website communications and online chat functions. OUR KPIs Voice of the Customer responses analysed in 2020 Number of responses 7 990 2020 | 7 990 2019 | 9 628 2018 | 9 500 2017 | 8 941 Satisfaction score across all Voice of the Customer surveys This is a satisfaction score on a 0–100% scale 83% 2020 | 83 2019 | 91 2018 | 88 2017 | 88 “ I believe it’s essential to partner with companies who value our mission, and SGS has proven to support us year after year. Partnering with a global market leader like SGS has ultimately delivered a proﬁtable competitive advantage in our ﬁeld of transportation and supply chain security.” Thorsten Neumann, CEO, Transported Asset Protection Association (TAPA) OUR KPIs Investment in community1 CHF thousands on constant currency basis CHF 1 243 K 2020 | 1 243 2019 | 1 331 2018 | 1 384 2017 | 738 Target 959 Community projects Nnumber of projects 323 2020 | 323 2019 | 441 2018 | 462 2017 | 305 SUPPORTING LOCAL COMMUNITIES Our commitment to investing in the communities in which we operate has a measurable and lasting positive impact. In 2020, our approach remained the same – we continued to promote volunteering, pro bono work, corporate donations and employee giving under our three pillars of Empowerment, Education and Environmental Sustainability. This helps us to contribute towards our global priorities of poverty, health, education, climate change and environmental degradation. Although Covid-19 lockdowns forced a decrease in our total number of volunteering hours, we saw an increase in ﬁnancial and other donations, such as pro bono services. Webinars, which are usually chargeable, were provided free, and many of our afﬁliates contributed to foodbank collections. Managing our community programs across the world Our community programs are selected and managed at a global as well as local level, in line with our Group Community Policy and Guidelines. The majority of our initiatives are run by afﬁliates, who manage collaborative partnerships with local charities. Despite Covid-19 restraints, in 2020 we maintained our level of investment in communities around the world. We assess the effectiveness of our community programs by conducting an annual community survey, aligned with the London Benchmarking Group criteria. In 2021, we will take forward learnings from our community programs, for example, by ﬁnding and supporting more online community volunteering opportunities. BRAND, REPUTATION AND SUSTAINABILITY Brand, reputation and sustainability are all interlinked and essential for maintaining our position as the Testing, Inspection and Certiﬁcation industry leader. A strong, favorable brand image is important for employee motivation and loyalty, as demonstrated by the long service of many of our senior team. A good reputation is also essential for investor, customer and consumer conﬁdence. In 2020, we continued to build our understanding of our brand awareness using an innovative intelligence platform. This helps us on a daily basis to measure SGS’ brand, our competitors, megatrends, and digital and social media, and provide regular reports on the results to management. We also conducted an audit of all marketing technologies used globally so we can make strategic decisions regarding our use of technology for marketing purposes. Our focus on sustainability not only adds value to society, but also helps to strengthen our brand and reputation. Sustainability is driven by our CEO and embedded across our operations and services, and in our decision-making processes. Sustainability is also enshrined in our Business Principles (see page 17) and is implemented by a board level committee on sustainability. Managed by our central sustainability team, our activities are based on four pillars: People, Professional Excellence, Environment and Community. Our materiality assessment (see page 32) helped us to identify these focus areas as the issues that matter most to our business and stakeholders. These are aligned with the UN Sustainable Development Goals, and we track our progress using Key Performance Indicators, which you can read about throughout this report. To evaluate our impact, in 2017 we became one of the ﬁrst companies globally to quantify and publish our value to society (see page 76). Our sustainability efforts have grown enormously since then, and by the time Covid-19 took hold in 2020, we had already met most of our sustainability targets. Read more information on our community involvement, in our 2020 Corporate Sustainability Report Read more about our impact and value to society, in our 2020 Corporate Sustainability Report 1. Since 2018, Investment in community includes philanthropic sponsorships, and since 2019 it also includes the value of in-kind donations SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 68 MANAGEMENT REPORT OUR VALUE TO SOCIETY Case study Bringing the SGS family together MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 69 OUR VALUE TO SOCIETY “ I have been absolutely astonished by the response to the drawing contest and People Challenge. It has been exceptional and reinforced what we already knew – that SGS is one big family spread across the world, adding incredible value to society.” Paula Ordoñez Crespo Global Head of Corporate Sustainability SOCIAL AND RELATIONSHIP CAPITAL Besides keeping people safe and ensuring business continuity, when the Covid-19 pandemic hit one of our major concerns was to maintain the well-being and engagement of our employees and lift their spirits during such a difﬁcult time, reinforcing our sense of community. Additionally, some afﬁliates organized local initiatives, such as awards for the best employee and best team of the year. All events were very well received, generating positive comments from more than 1 000 people on our corporate social network. We were sent over 1 500 drawings depicting children’s wishes for 2021 and over 2 000 people took part in the quiz. NEXT STEPS In light of the huge success of the People Challenge, we plan to make this an annual event to strengthen our SGS community and bring our employees closer together. THE CHALLENGE We were fully aware that many of our people were balancing working from home with caring for their families and trying to ﬁnd ways to deal with this exceptional situation. We wanted all of our people to feel the support of the SGS family. OUR SOLUTION We organized two different events. The ﬁrst took place during April, when most countries were in lockdown. We arranged a drawing contest over ﬁve weeks to help keep children of SGS employees occupied. Each week had a different theme, which not only encouraged creativity, but meant they were also learning about nature, protecting the environment and different careers. We received over 2,000 entries and distributed prizes all over our network. The second was on a larger scale and took place in December. We called it the ‘SGS People – 15 Day Challenge’. It was hosted by SGS’ mascot Lëss the bear, and offered activities for employees, their families and local communities. These ranged from a recognition challenge (where employees could thank their colleagues), a drawing contest (where our children drew their wishes for 2021), a fun trivia quiz (about some of our global and local leaders) and fundraising (for local food banks and other charities). SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report BETTER | SAFER | MORE INTERCONNECTED We raised more than CHF 80 000, exceeding our fundraising target and ensuring even greater support for our local communities. BETTER | SAFER | MORE INTERCONNECTED We reinforced our sense of community so that no one felt alone during this difﬁcult time, supporting mental health. BETTER | SAFER | MORE INTERCONNECTED Over 60 countries across the SGS network participated simultaneously in one or more of our activities. 70 MANAGEMENT REPORT OUR VALUE TO SOCIETY Natural capital INPUTS – 441 GWh electricity consumed – 1.7 MIO m3 water consumed – 442 GWh fuel consumed OUTPUTS – 123 thousand metric tons of CO2e – 678 EEB program: number of buildings OUTCOMES – Carbon neutral since 2014 – Helping mitigate climate change by reducing air pollution – Minimizing resource depletion and protecting the environment MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 71 OUR VALUE TO SOCIETY By being a carbon neutral business, and carefully managing our use of the earth’s precious ﬁnite resources, our services include helping to ensure secure, sustainable food sourcing, reducing the use of natural resources, preventing land degradation, limiting the impact of extractive activities and many others, all ultimately adding value to society. DEVELOPMENTS DURING THE YEAR In 2020, we achieved most of our sustainability targets, while at the same time tackling the global pandemic. We pivoted our operations and services to providing remote support and reshaped our ﬂagship Energy Efﬁciency In Buildings (EEB) Program. We have been developing plans for our revised sustainable transport strategy, the relaunch of our Add Value with Lëss internal awareness-raising initiative, and our Green IT Policy for 2021. Additionally, we are working on future programs to embed circular economy in our operations, as well as reducing single use plastics (see Waste Management Program below). Climate change The world is facing a climate emergency. Since 2013, SGS has been carbon neutral and we worked hard to set science-based targets, approved by the Science Based Targets Initiative (SBTi), to ensure that we are cutting our emissions in line with limiting warming to below two degrees. Evaluating and managing the risks associated with climate change is a priority for SGS, and to this end we have adopted the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). Despite Covid-19, we have already achieved almost all of our sustainability targets and we will be releasing a new strategy in 2021 with a longer-term view. Reducing energy consumption The energy used in our 2 600 ofﬁces and laboratories worldwide accounts for 62% of our global energy consumption. Reducing energy consumption across our operations is our priority and we began running energy reduction projects over a decade ago. Eight years ago, we started our EEB program, which evaluates and reduces energy consumption. In 2020, we had planned on conducting on-site audits, especially in China and the USA, our two largest countries and commensurately the largest consumers of energy. Although Covid-19 lockdowns prevented us from carrying out this work, we did not let this deter us from taking positive action. We provided remote support and reshaped our EEB program, as well as focused on further strengthening our sustainable transport program, our Add Value with Lëss internal awareness-raising initiative, and our Green IT Policy. OUR KPIs Carbon intensity by employee Metric tons CO2e/FTE* 1.4 CO2e/FTE 2020 | 1.4 2019 | 1.7 2018 | 1.7 2017 | 1.9 Carbon intensity by revenue1 Metric tons CO2e/CHF MIO* 21.9 CO2e/CHF MIO 2020 | 21.9 2019 | 26 2018 | 27.6 2017 | 30.6 SGS EMPLOYS A 3-PRONGED APPROACH TO DEVELOP ITS CARBON NEUTRALITY STRATEGY 1 REDUCING ENERGY CONSUMPTION We reduce energy consumption at source through processes such as Energy Efﬁciency in Buildings and sustainable transport 2 USING RENEWABLE ENERGY We generate renewable energy on site or purchase renewable energy whenever possible 3 OFF-SETTING RESIDUAL EMISSIONS* Finally, any energy that we still consume after these reductions is mitigated through our off-setting strategy Total GHG emissions Thousand metric tons CO2e* 123.0 CO2e 2020 | 123.0 2019 | 159.8 2018 | 168.0 2017 | 175.9 1. On a constant currency basis * Market-based ﬁgures. Excludes district heating due to unavailability of metered data and refrigerant gases emissions due to unavailability of data. Scope 3 emissions only include Category 3: business travel. Please refer to our Basis of Reporting SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 72 MANAGEMENT REPORT OUR VALUE TO SOCIETY Natural capital continued OUR KPIs Electricity and non-transport fuels GWh 574 GWh 2020 | 574 2019 | 583 2018 | 577 2017 | 544 Renewable energy Vehicle fuels GWh 289 GWh 2020 | 289 2019 | 351 2018 | 368 2017 | 357 Energy conservation measures identiﬁed under the EEB Program since 2017 Number +471 2020 | 471 2019 | 446 2018 | 295 2017 | 155 MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 73 OUR VALUE TO SOCIETY ENERGY EFFICIENCY IN BUILDINGS (EEB) PROGRAM By focusing energy reduction efforts on our highest consumption buildings, we can have a signiﬁcant impact on energy levels. More than 670 buildings are currently under the EEB program. In 2020, we exceeded our target of covering 80% of our energy consumption – the program currently accounts for 85% of electricity and 77% of non-transport fuels consumption. SUSTAINABLE TRANSPORT In order to minimize CO2 emissions, our Vehicle Emissions Policy promotes the use of low-emission ﬂeet cars. The policy committed us to reducing our vehicle ﬂeet CO2 emissions every year from 2016 until 2020. However, the car market and its regulations are changing signiﬁcantly. We have therefore extended our policy to 2021, so that we can work on a new policy that will cover our operations from 2020 onwards. As part of our commitment set in our Vehicles Policy, we seek to implement procurement processes to ﬁnd more environmentally friendly cars to curb CO2 emissions and make our ﬂeet more sustainable, particularly in those countries where we have the largest ﬂeets. We have already integrated fully electric vehicles into our ﬂeet and are running pilot projects to increase their number. We will analyze the data from devices placed in cars in Spain to better understand the most efﬁcient type of vehicle based on its use. Furthermore, prior to the pandemic we had already committed to a Green Travel Policy and a positive outcome of Covid-19 is the realization of how well SGS can operate remotely. We recognize that travel, especially road and air travel, has a direct impact on the environment, and had already made great efforts to reduce CO2 emissions. Going forward, we hope to have as many remote meetings as possible, which will continue to minimize energy consumption from long- distance travel. ADD VALUE WITH LËSS ‘Add Value with Lëss’ was launched in 2015 and revamped in 2019 as a sustainability awareness raising initiative to increase efﬁciency and reduce time, energy and operational waste. Using SGS engaging bear, named Lëss, it is based on four ‘paws’ (or pillars) of Process, Environment, People and Quality. With the onset of Covid-19, we quickly pivoted this program towards greater digitalization and engagement, and are including new tips that are relevant to the pandemic. These include helping our people to achieve a better work-life balance, and reduce their environmental impact when working from home. We plan to expand the initiative in the ﬁrst quarter of 2021, alongside a global communications campaign, and aim to cover 95% of employees in 2030. SUSTAINABLE IT SGS has a well-established sustainable IT program, covering areas like sustainable data centers and migrating servers to the Cloud. Rationalizing our data centers has had a signiﬁcant impact on our energy consumption. We achieved our commitment that by 2020 we would have migrated 80% of the servers we had in 2018. We are now working on a new sustainable IT strategy, which is even more advanced and holistic. We want to reduce CO2 emissions further, embedding circular economy principles into our IT processes, cutting waste generated from old laptops and phones and reducing printing and paper consumption. Additionally, as well as looking at the environment and cyber- security, IT can support environmental, social and government aims. USING RENEWABLE ENERGY Wherever possible, we introduce renewable energy to our operations. However, due to our numerous sites around the world and unavailability of renewables in certain geographies, using 100% renewable energy at SGS is a complex challenge. Having reached 95% energy from renewable sources, we have now extended our RE100 commitment to use 100% energy from renewable sources to 2025 in order to work towards closing the gap. We use on-site energy generation and purchase electricity from renewable sources. While there are times when we still need to rely on diesel fuel, we will be investing more in renewable energy. Going forward, we are working on a new strategy planned to last until 2030. We monitor and seek to minimize the amount of water we consume across all our operations. Our Energy Efﬁciency in Buildings Program, for example, assesses water consumption and installations and recommends site-speciﬁc water efﬁciency improvements. EXTERNAL PARTNERSHIPS AND INITIATIVES To help us strengthen our sustainability performance, we establish external partnerships and take part in initiatives, including: – RE100 – Climate Neutral Now – Science Based Targets initiatives We achieved A- in CDP’s prestigious list for best practice initiatives against climate change. The annual ranking recognizes SGS’ tangible actions to manage climate risks across our operations. For more information on SGS external partnerships and initiatives, please refer to the SGS Sustainability Report. OFF-SETTING RESIDUAL EMISSIONS Our priority is to reduce CO2 emissions from our operations. However, where this isn’t possible, any residual emissions are compensated through our carbon off-setting strategy. This enables us to attribute a speciﬁc cost to the carbon that we generate. Each SGS afﬁliate takes responsibility for their emissions and the cost of off-setting them. WATER AND WASTE MANAGEMENT We know that the earth’s resources are limited, and we are committed to managing our resources effectively to both save water and minimize waste. WATER MANAGEMENT PROGRAMS Compared with other industries, our global water consumption is relatively low. Our main use of water is in our laboratories, and we also need water for drinking, sanitation and food preparation. In 2021, we will continue to focus on water efﬁciency. WASTE MANAGEMENT PROGRAMS Through our services, we handle quantities of hazardous and non-hazardous waste, which we need to dispose responsibly, without risk to our people, the environment or local communities. We produce relatively small amounts of waste compared with other industries. This includes chemicals, test samples, paper, plastic and organic waste from our ofﬁces and laboratories. The waste is produced in varying proportions, determined by the industry or industries served by each site. Our mineral and construction businesses, for example, produce a relatively high volume of waste compared to other business lines, and so focuses heavily on this issue. We monitor our waste across all our operations and develop action plans to minimize waste as much as possible. In 2020, we focused on improving reporting mechanisms, and our Add Value with Lëss initiative encouraged people to minimize their waste. We also drew on external resources to help us reuse and recycle materials in our facilities. In 2021, we will continue our waste reduction programs, with an increased focus on plastics. We are also working on future waste management programs to embed the circular economy into our operations. This means keeping resources in use for as long as possible, extracting the maximum value from them while in use, then recovering and regenerating products and materials at the end of each service life. OUR KPIs Total energy GWh 863 GWh 2020 | 863 2019 | 934 2018 | 944 2017 | 902 Total water purchased Million m2 1.71 m3 2020 | 1.71 2019 | 1.90 2018 | 1.97 2017 | 1.89 Total waste generated Metric tons 49 570 MT 2020 | 49 570 2019 | 54 032 2018 | 48 536 2017 | 45 698 SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 74 MANAGEMENT REPORT OUR VALUE TO SOCIETY Case study Helping companies to green their real estate portfolio NATURAL CAPITAL September 2020 saw governments, investors and corporates make multiple announcements during Climate Week and World Green Building Week committing to a net zero emissions society. These commitments align well with the EU Green Deal and will make Europe the world’s ﬁrst climate-neutral continent. THE CHALLENGE Globally, buildings contribute to almost 20% of greenhouse gas emissions and consume 40% of the global electricity supply. The Paris Agreement sets out a global framework to avoid dangerous climate change by limiting global warming to well below 2°C and to pursue efforts to limit it to 1.5°C. In order to meet this agreement, we need to decrease the impact of our existing buildings and ensure that new buildings are constructed as carbon zero. Whereas previously, companies would focus exclusively on a ‘ﬂagship’ green building, the market is now shifting to encompass all assets under management. Companies are setting ambitious carbon emission reduction targets but are not equipped with the necessary tools or support needed to achieve this transition. OUR SOLUTION Since 2015, we have been a global certiﬁcation provider for the International Finance Corporation’s (‘IFC’) green building standard: Excellence in Design for Greater Efﬁciencies (‘EDGE’). In September 2020, we announced a collaboration with Sintali to expand our services and scale. Operating as a one-stop shop for EDGE certiﬁcation and auditing, we work with Sintali to deliver the highest quality of service to customers. Customers receive a single contract for both the EDGE audit and EDGE certiﬁcation, with an all-inclusive price and expert advice at no additional cost. Sintali-SGS also launched zero carbon services to support customers in the transition to becoming net zero. This service applies to portfolios of buildings across multiple sectors and countries, as well as to individual buildings. NEXT STEPS Together with Sintali, we certiﬁed over 5 million m² worth of project ﬂoor area in 2020, leading to a CO2 saving of 40 500 tons per year. Going forward, we will focus on providing a pathway towards zero carbon. We expect to be certifying over 1 500 buildings next year, helping our customers to save over 100 000 tons of CO2 emissions. Read more about EDGE at www.sgs.com MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 75 OUR VALUE TO SOCIETY “ We are constantly seeking opportunities that will add value for our customers and innovate to provide an efﬁcient service for EDGE audit and certiﬁcation. Working with Sintali means we have the best team of professionals available to deliver certiﬁcation for our customers and facilitate the transition to a sustainable future.” Harry Fernau Global Product Manager of Energy & Green Building at SGS 45 500 Tons of CO2 saved per year after certifying over 5 million m2 of project ﬂoor area 341 503 MWh of energy savings since 2017 of EDGE certiﬁed projects BETTER | SAFER | MORE INTERCONNECTED IMAGE TO COME IMAGE TO COME Operating as a one-stop shop for EDGE certiﬁcation and audit services, Sintali and SGS offer customers a simple and transparent path to EDGE certiﬁcation. BETTER | SAFER | MORE INTERCONNECTED IMAGE TO COME IMAGE TO COME SGS and Sintali act as a global certiﬁcation services provider for EDGE, making buildings more efﬁcient while maintaining safety. BETTER | SAFER | MORE INTERCONNECTED IMAGE TO COME IMAGE TO COME We provide EDGE certiﬁcation in all countries around the world, striving to save our planet for future generations. SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 76 MANAGEMENT REPORT OUR VALUE TO SOCIETY MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 77 OUR VALUE TO SOCIETY Measuring our value to society Adding value for customers, business and society QUANTIFYING OUR VALUE TO SOCIETY With the aim of continuously delivering sustainable value to all our stakeholders across the whole value chain, we have developed a methodology, our SGS Impact Valuation Framework, that provides a more holistic view of the value we create. This pioneering methodology moves beyond ﬁnancial outcomes and monetizes the non-ﬁnancial positive and negative impacts our activities have on the environment and society as a whole. Our methodology is based on the Integrated Reporting Framework developed by the International Integrated Reporting Council (IIRC) which recognizes six forms of capital on which a business’ success depends: ﬁnancial, manufactured, intellectual, human, social and relationship, and natural. For each one of them, we have deﬁned indicators that will help us to understand the impacts in each capital. Examples of these impacts are the effect on human health of work-related incidents or well-being initiatives, knowledge development induced by training programs or climate change-related impacts due to our energy consumption. In the future, the results of our assessment will guide us in maximizing our positive impacts and minimizing our negative impacts and give us the potential to enable better strategic decision-making. RESULTS Using our SGS Impact Valuation Framework for our direct operations and supply chain, we have calculated that the value we create due to positive impacts to society is 7 380 million CHF, primarily driven by proﬁt generation, the paying of taxes and wages, investment in training programs and data security. We also destroyed 801 million CHF of negative societal impacts, primarily driven by the environmental footprint of our supply chain. This amounts to a net value to society of 6 579 million CHF. While we do aim to provide a comprehensive analysis of our value chain, our diverse service portfolio and geographic spread make it extremely complex to evaluate the impact of all our services. We are currently developing a methodology for carrying out this analysis and, once it has been ﬁnalized and implemented, we expect to see a signiﬁcant increase in our Value to Society. Read pages 23 to 26 of our 2020 Corporate Sustainability Report online at: www.sgs.com/en/sustainability-report 2019 SGS VALUE TO SOCIETY (MILLION CHF)1 FINANCIAL CAPITAL MANUFACTURED CAPITAL INTELLECTUAL CAPITAL 210 Our intellectual capital value is mostly driven by our training and development programs 536 Our manufactured capital value measures the improvement of capital assets (directly controlled and those of our supply chain) 6 286 Our ﬁnancial capital results are impacted by proﬁt, revenue, employment costs and taxes paid to governments HUMAN CAPITAL (181) SOCIAL AND RELATIONSHIP CAPITAL 49 NATURAL CAPITAL (321) Our human capital value is directly inﬂuenced, among others, by our risk of having human rights non-compliances in our value chain and by our suboptimal data on gender equality This capital is positively impacted by the way we improve our relationships with local communities, creating trust to customers and also negatively impacted due to the risk of suppliers’ ﬁnancial stress The most negative impact in this capital is related to the footprint in the value chain, specially in our supply chain VALUE TO SOCIETY 6 579 The total value to society of SGS direct operations and supply chain activities Direct operations 4 374 Direct operations 93 Direct operations 210 Direct operations (83) Direct operations 49 Direct operations (6) Supply chain 1 912 Supply chain 443 Supply chain (98) Supply chain (315) 1. Value to society is calculated using 2019 ﬁgures. Within each capital we have identiﬁed positive and negative impacts. The values presented in each capital are the result of adding the positive impacts and subtracting the negative impacts. SGS | 2020 Integrated Annual Report Our approach to sustainability reporting SGS is committed to providing stakeholders with accurate and timely updates on our sustainability activities and our performance, and we strive to produce a report that is fair, transparent and balanced, and meets the needs of our stakeholders. SCOPE AND BOUNDARIES The scope of the Sustainability Information contained in this Integrated Annual Report1 covers all regions and business lines of the SGS Group for the 2020 calendar year. A full list of SGS afﬁliates can be found on pages 193 to 195 of this report. Unless stated otherwise, our reported data scope covers the Group business and targets for the period 1 January to 31 December 2020. We have identiﬁed and prioritized our most material impacts on the business and on stakeholders across our value chain, and this Integrated Annual Report includes performance data for our direct operations and information on how we are managing the most material issues. For more information on how we deﬁne our material issues, please see page 32 of this Report. Our past and present performance is disclosed in this report over a ﬁve-year period. Sometimes historical data may differ from previous reports due to the availability of more accurate data or improved data gathering and/or reporting. In such cases, variations in data of less than 5% are generally considered immaterial: signiﬁcant changes to prior year data are disclosed where they ﬁrst appear in the report. EXTERNAL STANDARDS For the past ten years, SGS has published a Sustainability Report, and since 2015, we have integrated sustainability content into our Integrated Annual Report as we move towards a fully integrated reporting structure in line with the Integrated Reporting Framework. The sustainability content can be found on pages 11, 20-21, 30-31, 32-33, 50-53, 56-61, 64-69, 70-73, 76-77 of this Report. SGS | 2020 Integrated Annual Report SGS supports the principle of integrated reporting. In 2019, we moved forward again with our alignment to the integrated reporting framework by using the six Capitals it deﬁnes as the structure of our Integrated Annual Report. The sustainability content in this Integrated Annual Report is drawn from our Corporate Sustainability Report. Since 2013, our Sustainability Report has been developed using the guidelines for the AA1000 Accountability Principles Standard and the Global Reporting Initiative’s Standards. In 2020 we have also aligned our reporting with the Sustainability Accounting Standard (‘Standard’) for the Professional & Commercial Services Industry (SASB) Our Sustainability Basis of Reporting explains further our reporting approach. ASSURANCE AND BASIS OF PREPARATION External assurance of sustainability performance indicators is an important part of our approach, and our sustainability reporting has been independently assured since 2011. In 2020, we appointed Deloitte LLP to provide independent assurance of our sustainability performance. Deloitte’s Assurance Report describes the work undertaken and their conclusion for the reporting period to 31 December 2020. Documents relating to independent external assurance in the years prior to 2020 are available in our Reports, Policies and Multimedia section on our website: www.sgs.com/en/our-company/corporate- sustainability/sustainability-at-sgs/reports- policies-and-multimedia. Please see independent assurance for further information about our assurance process on pages 78 and 79 of this Integrated Annual Report. 78 MANAGEMENT REPORT OUR VALUE TO SOCIETY Measuring our value to society continued MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 79 OUR VALUE TO SOCIETY Deloitte SA Rue du Pré-de-la-Bichette 1 1202 Geneva Switzerland Phone: +41 (0)58 279 8000 Fax: +41 (0)58 279 8800 www.deloitte.ch Independent limited assurance statement by Deloitte SA to SGS SA in accordance with ISAE 3000 (Revised) over the selected sustainability information presented in the 2020 SGS Annual Report What we looked at: Scope of our work SGS SA (“SGS”) has engaged us to perform limited assurance in respect of the SGS Sustainability Report for the year ended 31 December 2020. Our separate opinion will be published in that document. Selected sustainability information from the Sustainability Report also appears in the SGS Annual Report for the year ended 31 December 2020 (“the Report”). The selected sustainability information which comprises the Subject Matter relevant to this assurance statement appears on pages 5, 8, 11, 18-21, 30-33, 42, 50-53, 56-61, 64, 66-73, 76-77 of the Report. The Subject Matter is to be prepared in accordance with the SGS Basis of Reporting document (Version 1) dated 16 February 2021, which is based on the principles of the Global Reporting Initiative (GRI) Standards and is available to users on request. What standards we used: basis of our work and level of assurance Our limited assurance engagement on the Subject Matter was conducted by a multi-disciplinary team of sustainability and assurance specialists in accordance with the International Standard for Assurance Engagement (ISAE) 3000 (Revised), issued by the International Auditing and Assurance Standards Board. To achieve limited assurance, ISAE 3000 requires that we review the processes and systems used to compile the areas on which we provide limited assurance. This standard requires that we comply with the independence and ethical requirements and to plan and perform our assurance engagement to obtain sufficient appropriate evidence on which to base our limited assurance conclusion. It does not include detailed testing of source data or the operating effectiveness of processes and internal controls. This is designed to give a similar level of assurance to that obtained in the review of interim financial information. This provides less assurance and is substantially less in scope than a reasonable assurance engagement. Inherent limitations The process an organisation adopts to define, gather and report data on its non-financial performance is not subject to the formal processes adopted for financial reporting. Therefore, data of this nature can be subject to variations in definitions, collection and reporting methodology with no consistent, accepted standard. This may result in non-comparable information between organisations and from year to year within an organisation as methodologies develop. What we did: key assurance procedures To form our conclusions, we undertook the following procedures: • • • • • Interviewed selected management based at SGS and those with operational responsibility for sustainability performance to critically evaluate the reporting process, criteria and key controls; Interviewed management at SGS to understand the design of controls and functionality of the group sustainability information management and reporting databases used to manage sustainability data at a corporate level (‘Solaris’ and ‘Crystal’), and performed selected systems integrity tests to assess the accuracy of information generated by the systems; Identified potential material quantitative and qualitative sustainability key performance indicators and disclosures from the 2019 SGS Sustainability Report, by considering criteria such as the outputs of the company’s materiality process; peer reporting; susceptibility of misstatement due to error or fraud; whether a misstatement or control deficiency was noted in the prior-year; indicators or disclosures related to estimates and estimation methods; changes in calculation methods from prior- year; For the determined sustainability key performance indicators (selected as per the methodology noted above and presented in Table 1 below) and a sample of related disclosures we undertook the following procedures: o management interviews and documentation checks to understand and test the reporting boundary and group consolidation and validation checks for complete, accurate and appropriate presentation of the information; o o o o tested the operating effectiveness of key data validation review and sign-off controls; conducted trend analyses on full year data to identify and query anomalies in reported data; conducted sample-based substantive testing of Operational Integrity, to assess the accuracy of data classification, in line with the group Reporting Criteria; and completed a check of the quantitative and qualitative disclosures in the Report related to the selected sustainability key performance indicators against our understanding of the sustainability governance and management structures and performance over the year. Selected a sample of qualitative disclosures significant to the subject matter throughout the Report, and tested SGS’ assertions against underlying evidence. As noted above, this also includes testing material qualitative disclosures which relate to the performance of the selected sustainability key performance indicators denoted in Table 1; and SGS SA 2020 Annual Report Assurance Statement • Where necessary, we made recommendations to SGS management based on findings identified during the assurance that required improvement. Table 1: Selected sustainability key performance indicators • • • • • • • • Total number of integrity issues reported through corporate helplines (absolute number) Natural turnover (%) Women in leadership positions (CEO-3) (%) Total recordable incident rate (%) Lost time incident frequency rate (%) Total number of fatalities (absolute number) Total greenhouse gas emissions (Scope 1, 2, and 3) (thousand tonnes CO2e) Total energy consumption by source (gWh) What we found: our assurance conclusion Based on our procedures described in this report, nothing has come to our attention that causes us to believe that the Subject Matter in the SGS Annual Report for the year ended 31 December 2020 has not been prepared, in all material respects, in accordance with the Reporting Criteria. Emphasis of matter We draw attention to page 77 of the Report that explains that the Subject Matter has been prepared in accordance with the SGS Basis of Reporting, which is based on the Global Reporting Initiative (GRI) Standards. The Basis of Reporting sets out the methodology of bespoke indicators not prepared in accordance with the GRI Standards. One bespoke indicator is the Scope 1 GHG inventory which excludes direct emissions from refrigerants consumption. As disclosed in the SGS Basis of Reporting, management note that sufficient data is not practicably available to make a reasonable estimation for the refrigerants emissions given the high annual variability of refrigerant consumption. A disclosure has therefore been provided on page 71 of the SGS 2020 Annual Report as a caveat to the Scope 1 inventory exclusion. This emphasis of matter did not modify our assurance opinion, as stated above. Our independence and competence in providing assurance to SGS We complied with Deloitte’s independence policies, which address and, in certain cases, exceed the requirements of the Code of Ethics for Professional Accountants issued by the International Ethics Standards Board for Accountants, and in particular preclude us from taking financial, commercial, governance and ownership positions which might affect, or be perceived to affect, our independence and impartiality, and from any involvement in the preparation of the report. We have confirmed to SGS that we have maintained our independence and objectivity throughout the year and in particular that there were no events or prohibited services provided which could impair our independence and objectivity. We have applied the International Standard on Quality Control 1 and accordingly maintain a comprehensive system of quality control including documented policies and procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulatory requirements. Our team consisted of a combination of Auditors with professional assurance qualifications and professionals with a combination of sustainability reporting and subject matter experts including many years’ experience in providing sustainability report assurance. Roles and responsibilities The Directors are responsible for the preparation of the information and statements contained within the Report. They are responsible for determining the goals and establishing and maintaining appropriate performance management and internal control systems from which the reported information is derived. Our responsibility is to independently express conclusions on the subject matters as defined within the scope of work above to SGS in accordance with our letter of engagement. Our work has been undertaken so that we might state to SGS those matters we are required to state to them in this statement and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than SGS for our work, for this report, or for the conclusions we have formed. Deloitte SA Matthew Sheerin Partner Aurélie Darrigade Director 23 February 2021 SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 80 CORPORATE GOVERNANCE MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 81 CORPORATE GOVERNANCE This Corporate Governance Report informs shareholders, prospective investors and society on SGS’ policies in matters of corporate governance, such as: the structure of the Group, shareholders’ rights, the composition, roles and duties of the Board of Directors and its Committees and Management, and internal controls and audits. This report has been prepared in compliance with the Swiss Exchange (SIX) Directive on Information Relating to Corporate Governance of 20 June 2019 and with the Swiss Code of Best Practice for Corporate Governance. The SGS Corporate Governance framework aims to achieve an efﬁcient allocation of resources and clear mechanisms for setting strategies and targets, in order to maximize and protect shareholder value. SGS strives to attain this goal by deﬁning clear and efﬁcient decision making processes, fostering a climate of performance and accountability among managers and employees alike and aligning employees’ remuneration with the long-term interests of shareholders. SGS | 2020 Integrated Annual Report 1. Group Structure & Shareholders 1.1. Group structure 1.2. Signiﬁcant shareholders 1.3. Cross-shareholdings 2. Capital Structure 2.1. Issued share capital 2.2. Authorized and conditional share capital 2.3. Changes in capital 2.4. Shares and participation certiﬁcates 2.5. Dividend-right certiﬁcates 2.6. Limitations on transferability and admissibility of nominee registrations 2.7. Convertible bonds and warrants/options 82 83 83 83 83 83 84 84 84 84 4 3. Board of Directors 3.1. Members of the Board of Directors 3.2. Other activities and vested interests 3.3. Limits and rules on external mandates 3.4. Elections and terms of ofﬁce 3.5. Internal organizational structure 84 87 87 87 87 3.5.1. Allocation of tasks within 87 the Board of Directors 3.5.2. Members list, tasks and area of responsibility for each Committee of the Board of Directors 3.5.3. Working methods of the Board and its Committees 3.6. Deﬁnition of areas of responsibility 3.7. Information and control instruments vis-à-vis the executive committee 4. Operations Council (executive committee) 4.1. Members of the Operations Council 4.2. Other activities and vested interests 4.3. Changes in the Operations Council 4.4. Limits on external mandates 4.5. Management contracts 88 89 89 90 91 92 92 92 92 SGS | 2020 Integrated Annual Report 94 94 94 94 94 94 95 5. Compensation, Shareholdings & Loans 7. Change of Control and Defense Measures 5.1. Content and method of 93 7.1. Duty to make an offer 7.2. Clauses on change of control 93 8. Auditors 8.1. Duration of the mandate and term of ofﬁce of the lead auditor 8.2. Audit fees 8.3. Additional fees 8.4. Information instruments pertaining to the external audit 9. Information Policy determining the compensation and the shareholding programs 5.2. Rules on approbation by the Annual Shareholders Meeting of executive pay 5.2.1. Rules on performance- 93 related pay and allocation of equity-linked instruments, as well as additional amount for payments to members of the executive board appointed after the vote on pay at the AGM 5.2.2. Rules on loans, 93 credit facilities and post-employment beneﬁts 5.2.3. Rules on vote on pay 93 6. Shareholders’ Participation Rights 6.1. Voting rights and representation restrictions 6.1.2. Rules on instructions to the independent proxy and electronic participation in the annual shareholders meeting 6.2. Statutory quorums 6.3. Convocation of General Meetings of Shareholders 6.4. Inclusion of items on the Agenda 6.5. Registration in the share register 93 93 93 93 93 93 At 31 December 2020, geographic operations were organized as follows: • Consumer and Retail • Certiﬁcation and Business Enhancement • North America • Latin America • Africa & Western Europe • North & Central Europe • Eastern Europe & Middle East • North East Asia • South East Asia & Paciﬁc The Group was structured into eight business lines with each business line responsible for the global development of Group activities within its own sphere of specialization and the execution of strategies with the support of the Chief Operating Ofﬁcers. At 31 December 2020, the business lines were organized as follows: • Agriculture, Food and Life • Minerals • Oil, Gas and Chemicals • Industrial • Environmental, Health and Safety • Governments and Institutions Each line of business was led by an Executive Vice President. Chief Operating Ofﬁcers and Executive Vice Presidents are members of the Operations Council, the Group’s most senior management body. With effect as of January 2021, the Group has implemented a reorganization of its activities in order to respond to strategic directions decided by the Group and to achieve operational efﬁciencies. A simpliﬁed business structure has been introduced consisting of six focus areas composed of four divisions: Connectivity & Products, Health & Nutrition, Industries & Environment and Natural Resources and two cross-divisional strategic units: Knowledge and Digital & Innovation. 82 CORPORATE GOVERNANCE 1. Group Structure and Shareholders 1.1. GROUP STRUCTURE 1.1.1. OPERATIONAL GROUP STRUCTURE SGS SA, registered in Geneva (CH), also referred to as the ‘Company’, controls directly or indirectly all entities worldwide belonging to the SGS Group, which provides independent inspection, veriﬁcation, testing, certiﬁcation and quality assurance services. The shares of SGS SA are listed on the SIX Swiss Exchange and are traded on SIX Europe (Swiss Security Number: 249745; ISIN: CH0002497458). On 31 December 2020, market capitalization was approximately CHF 20 201 million (2019: CHF 20 057 million). The operations of the Group are divided into seven regions, each led by a Chief Operating Ofﬁcer responsible for the SGS businesses in that region and for the local implementation of Group policies and strategies. GEOGRAPHIC LOCATIONS At 31 December 2020, geographic operations are organized as follows: AMERICAS North America Latin America EUROPE, AFRICA, MIDDLE EAST Africa & Western Europe North & Central Europe Eastern Europe & Middle East ASIA PACIFIC North East Asia South East Asia & Paciﬁc MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 83 1.1.2. LISTED COMPANIES IN THE GROUP None of the companies under the direct or indirect control of SGS SA have listed shares or other securities on any stock exchange. 1.1.3. NON-LISTED COMPANIES IN THE GROUP The material legal entities consolidated within the Group are listed on pages 193 to 195 of the Annual Report, with details of the share capital, the percentage of shares controlled directly or indirectly by SGS SA and the registered ofﬁce or principal place of business. The list of legal entities is limited to entities whose contribution to the Group revenues in 2020 represent at least 1% of the consolidated revenues. This deﬁnition of materiality excludes dormant companies, pure sub-holding companies or entities used solely for the detention of assets. Details of acquisitions and disposals made by the SGS Group during 2020 are provided in note 3 of the consolidated ﬁnancial statements included in the section 2020 Results on pages 137 and 138 of this Annual Report. 1.2. SIGNIFICANT SHAREHOLDERS To the knowledge of the Company the shareholders owning more than 3% of its share capital as at 31 December 2020, or as the date of their last notiﬁcation as per Article 20 of the Swiss Stock Exchange Act (SESTA) were Groupe Bruxelles Lambert (acting through Serena SARL and URDAC) with 18.91% (December 2019: 16.73%) of the share capital and voting rights of the Company. As at 31 December 2020, the SGS Group held 1.28% of the share capital of the Company (2019: 0.18%). During 2020, the Company has published regularly on the electronic platform of the Disclosure Ofﬁce of the SIX Swiss Exchange Ltd. all disclosure notiﬁcations received from shareholders of transactions subject to the disclosure obligations of Article 20 SESTA. 1.3. CROSS-SHAREHOLDINGS Neither SGS SA nor its direct and indirect subsidiaries have any cross-shareholding in any other entity, whether publicly traded or privately held. 2. Capital Structure 2.1. ISSUED SHARE CAPITAL The share capital of SGS SA is 7 565 732 as of 31 December 2020 and comprises 7 565 732 fully, paid-in, registered shares of a par value of CHF 1. On 31 December 2020, SGS SA held 96 494 treasury shares (2019: 13 342). Shares repurchased for cancellation purpose are directly held by SGS SA, 3 382 shares repurchased to cover equity compensation plans are held by a subsidiary company. In 2020, 3 382 treasury shares were sold and 15 834 shares were purchased to cover the equity compensation plans. On 13 February 2020, the Group announced a share buyback program for the purposes of capital reduction which ended on December 17, 2020. Under this program, SGS SA repurchased 70 700 shares on a second trading line on SIX Swiss Exchange for a total amount of CHF 169.3 million at an average purchase price of CHF 2 394.62 per share. SGS SA intends to request shareholders to approve the cancellation of the 70 700 shares at its 2021 Annual General Meeting. 2.2. AUTHORIZED AND CONDITIONAL SHARE CAPITAL The Board of Directors has the authority to increase the share capital of the Company by a maximum of 500 000 registered shares with a par value of CHF 1 each, corresponding to a maximum increase of CHF 500 000 in share capital. If increased by the maximum amount of the authorized share capital, the existing share capital of 7 565 732 shares would grow by approximately 6.6% to 8 065 732 shares. The Board is authorized to issue the new shares at the market conditions prevailing at the time of issue. In the event that the new shares are issued for the purpose of an acquisition, the Board is authorized to waive the shareholders’ preferential right of subscription or to allocate such subscription rights to third parties. The authority delegated by the shareholders to the Board of Directors to increase the share capital is valid until 23 March 2021. The Board of Directors will propose to the next Annual General Meeting of Shareholders an extension for two more years, until 23 March 2023. The shareholders have conditionally approved an increase of share capital by an amount of CHF 1 100 000 divided into 1 100 000 registered shares with a par value of CHF 1 each. This conditional share capital increase is intended to obtain the shares necessary to meet the Company’s obligations with respect to employee equity-based remuneration plans and option or conversion rights of convertible bonds or similar equity- linked instruments that the Board is authorized to issue. If increased by the maximum amount of the conditional share capital, the existing share capital of 7 565 732 shares would increase by approximately 14.5% to 8 665 732 shares. The conditional capital is not limited in time. The right to subscribe to such conditional capital is reserved to beneﬁciaries of employee share option plans and holders of convertible bonds or similar debt instruments and therefore excludes shareholders’ preferential rights of subscription. The Board is authorized to determine the timing and conditions of such issues, provided that they reﬂect prevailing market conditions. The term of exercise of the options or conversion rights may not exceed ten years from the date of issuance of the equity-linked instruments. 2.3. CHANGES IN CAPITAL The share capital of the Company was reduced twice in the last years, once in 2017 and once in 2019 to cancel shares purchased by application of share buyback programs initiated by the Company. In 2019, the shareholders approved a reduction of the share capital, by cancellation of 68 000 shares. Consequently, the share capital of the Company was reduced from CHF 7 633 732 to 7 565 732 in 2019. Previously, in 2017, the share capital was reduced from CHF 7 822 436 to CHF 7 633 732 by cancellation of 188 704 shares purchased by the Company. No other changes in the share capital of the Company were made in the course of the last three years. SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report The members of the Board of Directors at 31 December 2020 were as follows: CALVIN GRIEDER (1955) SWISS Function in SGS Member: • Chairman, Board of Directors • Chairman, Corporate Governance & Sustainability Committee Initial appointment to the Board March 2019 Professional Background He holds an Engineering Master of Science from the ETH Zurich and has completed an Advanced Management Program (AMP) at Harvard University. Calvin Grieder has held various executive positions at Swiss and German companies (Georg Fischer, Bürkert, Mikron, SIG and Swisscom), all active in the areas of control technology, automation, and system engineering. In these roles, he was primarily responsible for successfully establishing and expanding international businesses. In 2001, Calvin Grieder moved from Swisscom (Head of Mobile & Internet Business) to the Bühler Group, where he acted as CEO for 15 years. Other activities and functions Givaudan SA, Vernier (CH), Chairman of the Board* Bühler Group AG, Uzwil (CH), Chairman of the Board AWK Group AG, Zurich (CH), Chairman of the Board Avenir Suisse, Zurich-Oerlikon (CH), Member of the Board of Trustees * Listed company 84 2.4. SHARES AND PARTICIPATION CERTIFICATES All shares, other than treasury shares held by SGS SA, have equal rights to the dividends declared by the Company and have equal voting rights. The Company has not issued any participation certificates (bons de participation/ Partizipationsscheine). 2.5. DIVIDEND-RIGHT CERTIFICATES The Company has not issued any dividend-right certificates. 2.6. LIMITATIONS ON TRANSFERABILITY AND ADMISSIBILITY OF NOMINEE REGISTRATIONS SGS SA does not limit the transferability of its shares. The registration of shares held by nominees is not permitted by the Company’s Articles of Association, except by special resolution of the Board of Directors. By decision of the Board, the Company’s shares can be registered in the name of a nominee acting in a fiduciary capacity for an undisclosed principal, provided however that shares registered in the names of nominees or fiduciaries may not exercise voting rights above a limit of 5% of the aggregate share capital of the Company. This rule was made public on 23 March 2005. The Company has a single class of shares and no preferential rights, statutory or otherwise, have been granted to any shareholder. 2.7. CONVERTIBLE BONDS AND WARRANTS/OPTIONS No convertible bonds have been issued by the Company or by any entity under its direct or indirect control. In 2020, no options or similar instruments have been issued by the Company or by any of the Group’s subsidiaries. Options plans previously granted to members of the Operations Council, to senior managers and selected key employees have been discontinued by the Company in 2015 and the last outstanding options under this legacy stock option plan have expired or were exercised, in 2020. 3. Board of Directors The Board of Directors is the highest governing body within the Group. It is the ultimate decision-making authority except for those decisions reserved by law to the General Meeting of Shareholders. 3.1. MEMBERS OF THE BOARD OF DIRECTORS This section presents the Members of the Board of Directors of the Company with their functions in the Group, their professional backgrounds and all their material positions held outside the Group in governing and supervisory boards, management positions and consultancy functions, official tenures and political commitments, both in Switzerland and abroad. The Board has set out criteria for the selection of new Directors and has conducted a search which has resulted in changes to the composition of the Board of Directors in 2020. The aim of this exercise is to ensure that the Board is continuously in a position to provide leadership, strategic oversight and guidance and contribute to setting ambitious targets for the Group and meeting long-term value creation objectives. The competencies sought by the Group for its Board of Directors include, experience of senior executive leadership in international businesses, strategic planning, finance, technology and innovation. When selecting candidates to the Board of Directors, the Company has due regards to the experience, professional qualifications, areas of expertise, age, gender and national background as well as leadership style, so that at all time, the Board and its Committees have the required skills. At the Annual Shareholders Meeting of March 2020, two members of the Board of Directors did not stand for re-election, namely Mr. Peter Kalantzis and Mr. Luitpold von Finck. During the same meeting Sami Atiya and Tobias Hartmann were appointed to the Board of Directors. Biographical information on former members of the Board of Directors is available in the Corporate Governance reports of prior years, including pages 93 to 95 of the 2019 Integrated Annual Report. 85 SAMI ATIYA (1964) GERMAN Function in SGS Member: • Board of Directors • Corporate Governance & Sustainability Committee Initial appointment to the Board March 2020 Professional Background ABB Ltd (CH, SE), Member of the Group Executive Committee since 2016 and President of ABB’s Robotics & Discrete Automation business. Dr. Sami Atiya holds a Master of Business Administration (MBA) from the Massachusetts Institute of Technology (MIT), USA, and a master’s degree in Electrical Engineering and Automation from the Karlsruhe Institute for Technology. He also holds a PhD in Electrical Engineering (Robotics, Artificial Intelligence and Sensors) from the University of Wuppertal/Karlsruhe Institute for Technology, Germany. Prior to his current role, he held various senior leadership positions in the Siemens Group, Harald Balzer & Partner, Robert Bosch – Blaupunkt and the Fraunhofer Institute Karlsruhe Institute of Technology. His experience covers a range of industry sectors including medical technology, robotics and automation, software and logistics and transportation. Dr. Atiya has strong intercultural skills with experience in managing teams in international organizations, covering China, the Middle East, India, Japan, the USA and Europe. He has a proven track record in managing international acquisitions and business integration. He will bring to the Board of SGS strong experience of leadership in sectors which will undoubtedly contribute to the future development of SGS. He will be an independent member of the Board of Directors of the Company, with no ties to its management or significant shareholders. PAUL DESMARAIS, JR. (1954) CANADIAN Function in SGS Member: • Board of Directors Initial appointment to the Board July 2013 He joined Power Corporation of Canada in 1981 and assumed the position of Vice President the following year. In 1984, he led the Financial Corporation to consolidate creation of Power’s major financial holdings, as well as Pargesa Holding SA, under a single corporate entity. Mr. Desmarais served as Vice President of Power Financial from 1984 to 1986, as President and Chief Operating Officer from 1986 to 1989, as Executive Vice Chairman from 1989 to 1990, as Executive Chairman from 1990 to 2005, as Chairman of the Executive Committee from 2006 to 2008, as Executive Co-Chairman from 2008 to 2020 and as Chairman from 2020. Mr. Desmarais is Chairman of Power Corporation, a position he has held since 1996. He previously served as Co-Chief Executive Officer of Power Corporation from 1996 until his retirement in February 2020. After Power Financial and the Frère Group of Belgium took control of Pargesa in 1990, Mr. Desmarais moved to Europe from 1990 to 1994, to develop the partnership with the Frère Group and to restructure the Pargesa group. From 1982 to 1990, he was a member of the Management Committee of Pargesa, in 1991, Executive Vice Chairman and then Executive Chairman of the Committee; and from 2003 to 2019, he was Co-Chief Executive Officer. Mr. Desmarais was a director of Pargesa from 1992 until November 2020, when Pargesa’s reorganization was completed. He also served as Chairman of the Board from 2013 to 2020. He is a Director of many Power Group companies in North America. Other Activities and Functions Groupe Bruxelles Lambert, Brussels (BE), Chairman of the Board of Directors* Great-West Lifeco Inc., Winnipeg (CAN), Member of the Board (including those of its major subsidiaries)* IGM Financial Inc., Winnipeg (CAN), Member of the Board (including those of its major subsidiaries)* Member of the Advisory Council the European Institute of Business Administration (INSEAD) Trustee of the Brookings Institution and a Co-Chair of the Brookings International Advisory Council (USA) Past Chairman and a Member of the Business Council of Canada (CAN) Professional Background Chairman, Power Corporation of Canada*. Paul Desmarais, Jr. has a Bachelor of Commerce Degree from McGill University, Montréal and an MBA from the Institut Européen d’Administration des Affaires (INSEAD), France. AUGUST FRANÇOIS VON FINCK (1968) SWISS Function in SGS Member: • Board of Directors He has received honorary doctorates from various Canadian universities. • Corporate Governance & Sustainability Committee Initial appointment to the Board • May 2002 Professional Background August François von Finck holds a Master of Business Administration from Georgetown University, Washington. D.C. Other Activities and Functions Custodia Holding SE, Munich (DE), Member of the Board since 2018* Staatl. Mineralbrunnen AG, Bad Brückenau (DE), Member of the Board since 2001* Bank von Roll, Zürich (CH), Vice President of the Board since 2009 Von Roll Holding AG, Breitenbach (CH), Member of the Board since 2010* IAN GALLIENNE (1971) FRENCH-BELGIAN Function in SGS Member: • Board of Directors • Corporate Governance & Sustainability • Remuneration Committee Initial appointment to the Board July 2013 Professional Background CEO of Groupe Bruxelles Lambert since 2012*. Ian Gallienne has an MBA from INSEAD in Fontainebleau. From 1998 to 2005, he was a Director at the private equity funds Rhône Capital LLC in New York and London. In 2005, he founded the private equity fund Ergon Capital Partners in Brussels and was its Managing Director until 2012. He has been a Board Member of Groupe Bruxelles Lambert since 2009*. Other Activities and Functions adidas (D), Member of the Supervisory Board* Imerys, Paris (F), Member of the Board, Chairman of the Strategic Committee, Member of the Compensation Committee, Member of the Appointments Committee* Pernod Ricard SA, Paris (F), Member of the Board, Member of the Strategic Committee and Member of the Remuneration Committee* Frère-Bourgeois SA (BE), Member of the Board Compagnie Nationale à Portefeuille SA (BE), Member of the Board Société Civile du Château Cheval Blanc (France), Member of the Board Marnix French ParentCo (Webhelp group), Paris (France) * Listed company SHAREHOLDER INFORMATION FINANCIAL STATEMENTS CORPORATE GOVERNANCE CORPORATE GOVERNANCE MANAGEMENT REPORTSGS | 2020 Integrated Annual ReportSGS | 2020 Integrated Annual Report 86 CORNELIUS GRUPP (1947) AUSTRIAN GÉRARD LAMARCHE (1961) BELGIAN Function in SGS Member: • Board of Directors Initial appointment to the Board March 2011 Function in SGS Member: • Board of Directors Chairman: • Audit Committee Other Activities and Functions Swiss National Bank, Member of the Board since 2012* Stonehage Fleming Family & Partners Limited, Member of the Board since 2012 Pictet and Cie Group SCA, Chairman of the Supervisory Board since 2013 Professional Background Dr. Grupp holds a Doctorate in Law and a Master in Business Administration. He is the Owner and General Manager of Tubex Holding GmbH, Stuttgart, Germany, a company active in the packaging industry and of CAG Holding GmbH, Lilienfeld, Austria, which is active in the field of aluminum, glass and biomass. Other Activities and Functions Schoellerbank AG, Vienna (AT), Member of the Board since 1999 Stölzle Oberglas, Koeflach (AT), Member of the Board since 1989 Honorary General Consul of Austria to the Land of Baden-Württemberg TOBIAS HARTMANN (1972) GERMAN Function in SGS Member: • Board of Directors • Audit Committee Initial appointment to the Board March 2020 Professional Background Chief Executive Officer of Scout24, an operator of digital real estate marketplaces based in Munich/Berlin, Germany. Tobias Hartmann has a Master of Business Administration (MBA) and a Bachelor of Arts (BA) degree from Clark University, Worcester, MA, USA. He has extensive experience of senior executive and Board positions in both public and private companies in the USA and Germany. He brings over two decades of senior management experience in several industries, including retail, technology, operations, logistics and eCommerce. He has worked for various digital companies including eBay Inc. Mr. Hartmann has a proven track record of developing, expanding and optimizing existing business models, services and product offerings for both public and private companies with B2B and B2C business models. Other Activities and Functions Zur Rose Group AG (CH), Member of the Board of Directors Initial appointment to the Board July 2013 Professional Background Chairman of Multifin SA (BE), since 2019. Gérard Lamarche is a graduate in Economic Sciences from the University of Louvain-la- Neuve (Belgium) and the INSEAD Business School (Advanced Management Program for Suez Group Executives). He also trained at the Wharton International Forum in 1998-99 (Global Leadership Series). He began his career with Deloitte Haskins and Sells in Belgium in 1983 and was appointed as an M&A consultant in the Netherlands in 1987. In 1988, he joined Société Générale de Belgique as Investment Manager. He was promoted to Controller in 1989 before becoming an Advisor to the Strategy and Planning Department from 1992 to 1995. He joined Compagnie Financière de Suez as Special Advisor to the Chairman and Secretary to the Suez Executive Committee (1995- 1997); he was later appointed Senior Vice President in charge of Planning, Control and Accounting. In 2000, Gérard Lamarche joined NALCO (the US subsidiary of the Suez Group and world leader in industrial water treatment) as General Managing Director. He was appointed CFO of the Suez Group in 2003. He was the Co-CEO of Groupe Bruxelles Lambert from 2012 to 2019. Other Activities and Functions Umicore, Brussels (B), Member of the Board* Groupe Bruxelles Lambert (BE), Member of the Board* SHELBY R. DU PASQUIER (1960) SWISS Function in SGS Member: • Board of Directors Chairman: • Remuneration Committee Initial appointment to the Board March 2006 Professional Background Attorney at Law, Partner, Lenz & Staehelin Law firm, Geneva. Shelby R. du Pasquier holds degrees from Geneva University Business School and School of Law as well as from Columbia University School of Law (LLM). He was admitted to the Geneva Bar in 1984 and to the New York Bar in 1989. He became a Partner of Lenz and Staehelin in 1994. KORY SORENSON (1968) BRITISH Function in SGS Member: • Board of Directors • Audit Committee • Remuneration Committee Initial appointment to the Board March 2019 Professional Background Kory Sorenson has a DESS in Corporate Finance from the Institut d’Etudes Politiques de Paris and a master’s degree in Applied Economics from the Université de Paris – Dauphine. She also holds a bachelor’s degree in Econometrics and Political Science from the American University in Washington, D.C., a certificate in Governance from Harvard Executive Education and a certificate in Leadership and Governance from INSEAD, and a certificate from Stanford GSB, for the 2020 fall session of the Stanford Business Leadership Series. She began her career in finance in 1992 in the Treasury Department of Total in Paris before moving to banking in 1995 and investment banking in 1997. She was Managing Director, Head of Insurance Capital Markets of Barclays Capital, and held senior positions in the capital markets and the financial institutions divisions of Credit Suisse, Lehman Brothers and Morgan Stanley. Other Activities and Functions SCOR SE, Paris (FR), Member of the Board and Chair of the Audit Committee, member of the Risk, Strategic, and Crisis Committees* Phoenix Group Holdings PLC, London (UK), Member of the Board and Chair of the Remuneration Committee, member of the Risk and Sustainability Committees* Pernod Ricard SA, Paris (FR), Member of the Board and Chair of the Remuneration Committee, member of the Audit Committee* Bank Gutmann, Vienna (AU), privately owned, Member of the Supervisory Board * Listed company 87 3.4. ELECTIONS AND TERMS OF OFFICE The Articles of Association of SGS SA provide that each Member of the Board of Directors, and among them the Chairman of the Board of Directors and the Members of the Remuneration Committee, is elected each year by the shareholders for a period ending at the next Annual General Meeting. Each Member of the Board is individually elected. There is no limit to the number of terms a Director may serve. The initial date of appointment of each Board Member is indicated in section 3.1. 3.5. INTERNAL ORGANIZATIONAL STRUCTURE The duties of the Board of Directors and its Committees are defined in the Company’s Articles of Association and in its internal regulations, which are reviewed periodically. They set out all matters for which a decision by the Board of Directors is required. In addition to the decisions required by Swiss company law, the Board of Directors approves the Group’s strategies and key business policies, investments, acquisitions, disposals and commitments in excess of delegated limits. 3.5.1. ALLOCATION OF TASKS WITHIN THE BOARD OF DIRECTORS The Chairman of the Board is elected by the Annual Meeting of Shareholders. He or she plans and chairs the Board meetings, defines the agenda of the meetings and conducts the deliberations of the Board of Directors. All Members of the Board of Directors participate in deliberations of the Board and participate equally in its decisions. Within the limits permitted by law or by the Articles of Association, the Board of Directors can decide to delegate certain of its tasks to standing or ad-hoc committees. With the exception of the members of the Remuneration Committee, who are elected by the shareholders, the members of other Committees are appointed by the Board. The Directors bring a wide range of experience and skills to the Board. They participate fully in decisions on key issues facing the Group. Their combined expertise in the areas of finance, commercial law, digital, innovation, strategy and sustainability, and their respective positions of leadership in various industrial sectors are important contributing factors to the successful governance of an organization of the size of the SGS Group. The Board undertakes a periodic review of the Directors’ interests in which all potential or perceived conflicts of interests and issues relevant to their independence are considered. In line with this review, the Board has set a target stating that at least 60% of its members and members of its committees will be independent and to plan the succession of members accordingly. The Board of Directors considers the following criteria to assess the independence of its members: 1. The Director must not have been employed by the Company in an executive capacity within the last five years; 2. No family member of the Director is employed or was employed during the past three years by the Group in any management capacity; 3. Neither the Director or a family member has received any payments from the Group other than Board remuneration approved by the Annual General Meeting of Shareholders; 4. The Director is not acting (and must not be affiliated with a Company that is acting in material manner) as an adviser or consultant to the Company or a member of the Company’s senior management; 5. The Director must not be affiliated with a significant customer or supplier of the Company; 6. The Director must have no personal services contract(s) with the Company or a member of the Company’s senior management; 7. The Director must not be affiliated with a not-for-profit entity that receives significant contributions from the Company; 8. The Director must not have been a partner or employee of the Company’s external auditor during the past three years; 9. The Director must not have any other conflict of interest that the Board determines to mean they cannot be considered independent; and 10. Any Director who has served for more than 12 consecutive terms is no longer considered as independent. Based on this review, the Board has concluded that a majority of the Directors are independent on the basis of these criteria and all of them are free of any relationship that could materially interfere with the exercise of their independent judgment. The remuneration of the Members of the Board of Directors is detailed in the Remuneration Report. The Chairman of the Board, jointly with members of the Board of Directors, reviews periodically the performance of the Board as a whole, of its Committees and of each of its individual members. On the basis of this periodic assessment, changes to the composition of the Board membership are regularly proposed to the Company’s Annual General Meeting of Shareholders. This periodic performance evaluation is designed to ensure that the Board is always in a position to provide an effective oversight and leadership role to the Group. 3.2. OTHER ACTIVITIES Other activities and vested interests of the members of the Board of Directors are indicated in section 3.1. 3.3. LIMITS ON EXTERNAL MANDATES In compliance with the Ordinance against Excessive Compensation at Listed Joint- Stock Companies (OaEC), the Company’s Articles of Association limit the number of mandates permissible to Board members. These rules limit the number of mandates that Board members can accept to no more than 10 board memberships in entities outside the Group, out of which a maximum of five memberships in boards of companies whose shares are traded on a stock exchange. Mandates assumed at the request of a controlling entity do not count towards the maxima defined in the Articles of Association. In addition, the Articles of Association limit to 10, the permissible participations in boards of associations and other non- profit organizations. All Board members have confirmed that they comply with these rules. SHAREHOLDER INFORMATION FINANCIAL STATEMENTS CORPORATE GOVERNANCE CORPORATE GOVERNANCE MANAGEMENT REPORTSGS | 2020 Integrated Annual ReportSGS | 2020 Integrated Annual Report 88 CORPORATE GOVERNANCE MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 89 3.5.2. MEMBERS LIST, TASKS AND AREA OF RESPONSIBILITY FOR EACH COMMITTEE OF THE BOARD OF DIRECTORS The following chart describes the Committees and their membership as at 31 December 2020: REMUNERATION AUDIT CORPORATE GOVERNANCE & SUSTAINABILITY Sami Atiya August François von Fink Ian Gallienne Calvin Grieder Tobias Hartmann Gérard Lamarche Shelby R. du Pasquier Kory Sorenson C Chair M Member M M M C M C M M C M Calvin Grieder, Chairman of the Board, attends the meetings of the Remuneration and Audit Committees, with a consultative vote. He chairs the Corporate Governance & Sustainability Committee. Each Committee acts within terms of reference established by the Board of Directors and set out in the internal regulations of the Company. The minutes of their meetings are available to all Directors. In 2020, the Board conducted a full revision of the Company’s Internal Regulations and reviewed the allocation of tasks between its Committees. Remuneration Committee Members of the Remuneration Committee are elected individually by the Annual Meeting of Shareholders, with the chairman of the Committee designated among them by the Board of Directors. As part of the revision of the Internal Regulations of the Company, the Remuneration Committee is now focused entirely on matters of executive remuneration. Matters pertaining to appointment and succession planning of the Group ofﬁcers have been delegated to the Corporate Governance & Sustainability Committee. The Remuneration Committee acts in part in an advisory capacity to the Board, and in part as a decision-making body on matters that the Board has delegated to the Committee. The Committee advises the Board of Directors on matters regarding the remuneration of the Members of the Board of Directors and Management, and on general policies relating to remuneration applicable to the Group. The Committee deﬁnes the conditions of share-based remuneration plans or other plans for the allocation of shares, issued from time to time by the Company. The Committee reviews and approves the contractual terms of the employment of the Chief Executive Ofﬁcer and the other members of the Management. The Committee reviews regularly, at least once a year, the compensation of each member of the Operations Council. The Committee drafts the SGS Remuneration Report. Audit Committee The Audit Committee supports the Board of Directors in discharging its duties in relation to ﬁnancial reporting and internal controls. Such duties include consideration of the appropriateness of accounting policies, the adequacy of internal controls, risk management and regulatory compliance. It is also responsible for the supervision of the internal and external auditors of the Group, each of which provides regular reports to the Committee on ﬁndings arising from their work. The Committee reports regularly to the Board of Directors on its ﬁndings. Corporate Governance & Sustainability Committee The Corporate Governance & Sustainability Committee assists the Board in the succession planning, selection and nomination of candidates to positions to the Board of Directors and to the senior management (Operations Council) of the Group. The Committee supports the Board of Directors and Management in establishing policies relating to professional conduct and compliance and oversees their implementation. The Group’s compliance policies are embodied in the Code of Integrity, which sets out the principles governing business conduct, which are applied across the whole SGS Group. The Committee assists the Board in deﬁning the Group policies and strategies relating to sustainability, including matters relevant to the Group reputation and non-ﬁnancial risks. During the course of 2020, the ability of the Board and its Committee to hold physical meeting was curtailed by measures implemented to limit the contagion of Covid-19. In response to this circumstance, the Board and Committee held meetings by telephone and videoconference, the frequency of which was greater than usual, with such meetings being usually shorter than a regular physical meeting. The table below does not make any distinction between physical and remote meetings of the Board and its Committees. MEETINGS HELD IN 2020 FREQUENCY OF MEETINGS AVERAGE DURATION OF MEETINGS Board of Directors Remuneration Committee Audit Committee Corporate Governance & Sustainability Committee 11 times 5 times 7 times 3 times 2.5 hours 1.5 hours 2 hours 1 hour 3.5.3. WORKING METHODS OF THE BOARD AND ITS COMMITTEES The Board of Directors and each Committee convene regularly scheduled meetings with additional meetings held as and when required, in person or by phone conference. The Board and the Committees may pass resolutions by written consent. Each Board Member has the right to request that a meeting be held or that an item for discussion and decision be included in the agenda of a meeting. Board and Committee members receive supporting documentation in advance of the meetings and are entitled to request further information from the Management in order to assist them to prepare for the meetings. The Board and each of the Committees can request the attendance of members of the Management of the Group. The Board and each of the Committees are authorized to hire external professional advisors to assist them in matters within their sphere of responsibility. To be adopted, resolutions need a majority vote of the members of the Board or Committee, with the Chairman having a casting vote. The Board and its Committees convene as often as required. In principle the Board meets at least four times a year, i.e. once every quarter. The Audit Committee meets at least three times a year, i.e. once before the publication of the annual and half-year results, and once outside these periods, to review and approve the scope of internal and external audit. The Corporate Governance and Sustainability Committee and the Remuneration Committee at least once a year. ATTENDANCE TO BOARD AND COMMITTEE MEETINGS The Board of Directors expect its members to attend and participate actively to its meetings and meetings of its Committees and has set a minimum target of attendance at 75% of meetings. The chart below summarizes the attendance by each Board Member in 2020 at the meetings of the Board and the respective standing Committees. MEMBER Peter Kalantzis1 Calvin Grieder Samy Atiya2 Paul Desmarais, Jr. August François von Finck Luitpold von Finck1 Ian Galllienne Tobias Hartmann2 Cornelius Grupp Gérald Lamarche Shelby R. du Pasquier Kory Sorenson1 BOARD MEETINGS NOMINATION & REMUNERATION AUDIT CORPORATE GOVERNANCE & SUSTAINABILITY 3/3 11/11 8/8 10/11 11/11 2/3 11/11 7/8 11/11 11/11 10/11 11/11 3/3 2/23 2/23 2/23 1/1 1/1 1/14 5/5 5/5 4/43 2/24 5/53 7/7 7/7 1. Directors not re-elected in March 2020 – 2. Directors elected for the ﬁrst time in March 2020 – 3. Member of the Committee since March 2020 4. Member of the Committee until March 2020 3.6. DEFINITION OF AREAS OF RESPONSIBILITY The Board of Directors is responsible for the ultimate direction of the Group. The Board discharges all duties and responsibilities that are attributed to it by law. In particular, the Board: • Leads and oversees the conduct, management and supervision of the Group • Determines the organization of the Group • Assesses risks facing the business and reviews risk management and mitigation policies • Appoints and removes the Group’s Chief Executive Ofﬁcer and other members of management • Deﬁnes the Group’s accounting and control principles • Decides on major acquisitions, investments and disposals • Discusses and approves the Group’s strategy, ﬁnancial statements and annual budgets • Prepares the General Meetings of Shareholders and implements shareholders’ resolutions • Notiﬁes the judicial authorities in the event of insolvency of the Company, as required by Swiss law In accordance with the Company’s internal regulations, operational management of the Group, a function which the Board of Directors has delegated, is the responsibility of the Operations Council. The Operations Council has the authority and responsibility to decide on all issues that are not attributed to the Board of Directors. In the event of uncertainty on a particular issue regarding the separation of responsibility between the Board of Directors and the Management, the ﬁnal decision is taken by the Chairman of the Board. The Chairman is regularly informed of the activities of the Operations Council by the Chief Executive Ofﬁcer, the Chief Financial Ofﬁcer and the General Counsel. The Operations Council is chaired by the Chief Executive Ofﬁcer and consists of those individuals entrusted with the operational management of the Group’s activities, as follows: • The Chief Operating Ofﬁcers (COOs) are responsible for operations in the Group’s seven regions (see section 1.1.) • The Executive Vice Presidents (EVPs) are entrusted with the management and development of the Group’s eight business lines (see section 1.1.) • The Senior Vice Presidents (SVPs) represent the principal Group support functions (Finance, Human Resources, Communications and Investor Relations, Digital & Innovation and Legal and Compliance) The composition, role and organization of the Operations Council are detailed in section 4. SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 90 CORPORATE GOVERNANCE 3.7. INFORMATION AND CONTROL INSTRUMENTS VIS-À-VIS THE MANAGEMENT A. RESPONSIBILITY OF THE BOARD The Board of Directors has ultimate responsibility for the system of internal controls established and maintained by the Group and for periodically reviewing its effectiveness. Internal controls are intended to provide reasonable assurance against ﬁnancial misstatement and/or loss, and include the safeguarding of assets, the maintenance of proper accounting records, the reliability of ﬁnancial information and compliance with relevant legislation, regulation and industry practice. B. GOVERNANCE FRAMEWORK The Group has an established governance framework, which is designed to oversee its operations and assist the Company in achieving its objectives. The main principles of this framework include the deﬁnition of the role of the Board and its Committees, an organizational structure with documented delegated authority from the Board to Management, and procedures for the approval of major investments, acquisitions and other capital allocations. The Chief Executive Ofﬁcer and the Chief Financial Ofﬁcer participate in the meetings of the Board of Directors and the Audit Committee. The Group Controller and the Head of the Internal Audit Function participate in the meetings of the Audit Committee. The Head of Human Resources participates in the meetings of the Remuneration Committee, and Corporate Governance & Sustainability Committee, and the General Counsel and Chief Compliance Ofﬁcer attends all meetings of the Board of Directors and its Committees. The other members of the Operations Council and other members of Management only participate in the Board and Committee meetings by invitation. C. INFORMATION TO THE BOARD The Board of Directors is constantly informed about the operational and ﬁnancial results of the Group by way of detailed monthly management reports, which describe the performance of the Group and its divisions. During each Board meeting, the Chief Executive Ofﬁcer and the Chief Financial Ofﬁcer present a report to the Board of Directors on the operations and ﬁnancial results, with an analysis of deviations from prior year and from current ﬁnancial targets. During Board Meetings, the Board is updated on important issues facing the Group. The Chief Executive Ofﬁcer, the Chief Financial Ofﬁcer and the General Counsel and Chief Compliance Ofﬁcer (hereafter ‘Senior Management’) attend all of the Board of Directors meetings, while other Operations Council members attend from time to time to discuss matters under their direct responsibility. The Board of Directors meets regularly with the members of the Operations Council. During Board Meetings or Committee Meetings, Board members can require any information concerning the Group. The Board reviews and monitors regularly and formally previous acquisitions and large investments as well as the implementation of related Group strategies. The Group has a dedicated Internal Audit function, reporting to the Chairman of the Board and the Audit Committee, which assesses the effectiveness and appropriateness of the Group’s risk management, internal controls and governance processes as well as the reliability of internal ﬁnancial and operational information, and ensures that the standards and policies of the Group are respected. Internal Audit reviews and identiﬁes areas of potential risk associated with the key business activities performed by a particular ofﬁce, highlights opportunities for improvement and proposes constructive control solutions to reduce any exposures. All key observations are communicated to the Operations Council and the Chairman of the Board through formal and informal reports. The Audit Committee is regularly informed about audits performed and important ﬁndings, as well as the progress in implementing the agreed actions by Management. D. GENERAL COUNSEL AND CHIEF COMPLIANCE OFFICER Furthermore, the Group has a Compliance Function, headed by the General Counsel and Chief Compliance Ofﬁcer, who is a member of the Corporate Governance & Sustainability Committee and has direct access to the Chairman of the Board. The Compliance Function supports the implementation of a compliance program based on the SGS Code of Integrity, available in 30 languages. The goal of the program is to ensure that the highest standards of integrity are applied to all of the Group’s activities worldwide in accordance with international best practices. The General Counsel and Chief Compliance Ofﬁcer reports violations of compliance rules every semester to the Corporate Governance & Sustainability Committee. The Committee monitors disciplinary actions taken and the implementation of corrective actions. E. OTHER In addition, the main business lines have specialized technical governance units, which ensure compliance with internally set quality standards and industry best practices. Formal procedures are in place for both internal and external auditors to report their ﬁndings and recommendations independently to the Board’s Audit Committee. F. RISK ASSESSMENT The Board conducts on a yearly basis an assessment of the risks facing the Group. This process is conducted with the active participation and input of the Management. Once identiﬁed, risks are assessed according to their likelihood, severity and mitigation. The Board deliberates on the adequacy of measures in place to mitigate and manage risks and assigns responsibility to designated managers for implementation of such measures. As part of this process, the ownership of and accountability for identiﬁed risks are approved by the Board. The implementation of such actions is audited by Internal Audit. These ﬁndings are communicated to the Board of Directors so that progress and identiﬁed risks can be monitored objectively and independently from Management. The risks identiﬁed and monitored by the Board fall broadly into three categories: ﬁrst, environment risk, which includes circumstances outside the Group’s direct sphere of inﬂuence, such as competition and economic or political landscape; second, process risks that include risks linked to the operations of the business, the management of the Group and the integrity of its reputation in the market place; and third, risks associated with information and decision-making. For each of the risk categories and within these categories, for each signiﬁcant risk identiﬁed, the Board deliberates on proposed mitigation, risk avoidance or risk transfer measures and approves action plans designed to control such risks. The Board receives regular updates on the implementation of risks mitigation measures and their effectiveness is tested by Internal Audit which reports to the Board, respectively the Audit Committee. MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 91 4. Operations Council The Operations Council (as deﬁned in section 1.1.) meets on a regular basis, in principle at least ﬁve times a year. Between meetings, it holds regular phone conferences and may make decisions on such calls or by electronic voting. 4.1. MEMBERS OF THE OPERATIONS COUNCIL Members of the Operations Council bring to the Group years of experience and expertise in their respective ﬁelds. They come from a wide range of backgrounds that reﬂects the multiple aspects of the Group. The Group strives to promote talent internally and encourages women to assume senior leadership positions. The members of the Operations Council at 31 December 2020 were as follows: FRANKIE NG (1966) SWISS/CHINESE Chief Executive Ofﬁcer BA in Economics and Electronics Engineering Joined SGS in 1994 Previous responsibilities 2011–2015: EVP, Industrial Services 2005–2011: EVP, Consumer Testing Services 2002–2004: Managing Director, US Testing DOMINIK DE DANIEL (1975) SWISS/GERMAN Chief Finance Ofﬁcer (since February 2019) Degree in Banking, CEFA Investment Analyst Joined SGS in 2019 Previous work experience 2015–2018: CFO and Chief Operating Ofﬁcer, IWG plc. UK, the global leader for ﬂexible workspace 2006–2015: CFO Adecco Group, Switzerland OLIVIER MERKT (1962) SWISS FABRICE EGLOFF (1969) FRENCH Chief Compliance Ofﬁcer COO, Africa & Western Europe Doctorate in Law, admitted to the bar in Switzerland Master of Business Administration in International Business Affairs Joined SGS in 2001 Joined SGS in 1995 Previous responsibilities 2006–2008: VP, Corporate Development Previous responsibilities 2017–2019: COO Africa 2001–2006: Senior Counsel 2009–2017: Managing Director, France TEYMUR ABASOV (1972) AZERBAIJANI COO, Eastern Europe & Middle East Degree in Electrical Engineering Joined SGS in 1994 Previous responsibilities 2006–2007: Managing Director, Kazakhstan and Caspian Sub-Region 2004–2006: Managing Director, Azerbaijan and Georgia 2003–2004: Managing Director, Georgia HELMUT CHIK (1966) CHINESE COO, North East Asia Master of Business Administration Joined SGS in 1991 Previous responsibilities 2004–2017: COO, China and Hong Kong 2004–2008: Managing Director, Hong Kong LUIS FELIPE ELIAS (1959) PERUVIAN COO, Latin America Industrial Engineering Degree and MBA Joined SGS in 2004 Previous responsibilities 2012–2018: Managing Director, Ecuador and Peru 2004–2012: Deputy Managing Director, Peru DERICK GOVENDER (1970) SOUTH AFRICAN EVP, Minerals Diploma in Analytical Chemistry Postgraduate in Business Management Joined SGS in 2002 2003: Managing Director, Hong Kong 2002: Vice President Softline Global, Consumer Testing Services Previous responsibilities 2014–2015: Minerals Manager, Chile 2010–2014: VP Minerals, Africa OLIVIER COPPEY (1972) SWISS EVP, Agriculture, Food and Life MSc Economics Joined SGS in 1994 Previous responsibilities 2009–2013: Vice President Seed and Crop, Agricultural Services 2006–2008: Vice President North America, Agricultural Services, USA 1994–2006: Managerial positions, Agricultural Services, Switzerland/ India/Cameroon 2007–2010: Regional Minerals Manager, SGS Southern Africa JOSÉ MARÍA HERNÁNDEZ-SAMPELAYO (1961) SPANISH SVP, Human Resources Bachelor in Law Master of Business Administration Joined SGS in 1996 Previous responsibilities 2010–2017: Managing Director, Spain 2001–2010: HR Manager, Western Europe 1996–2010: HR Manager, Spain SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 92 CORPORATE GOVERNANCE MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 93 CHARLES LY WA HOI (1966) FRENCH ALIM SAIDOV (1964) AZERBAIJANI/CANADIAN EVP, Consumer and Retail EVP, Oil, Gas and Chemicals PhD in Science Joined SGS in 1993 Previous responsibilities 2007–2013: EVP, Oil, Gas and Chemicals Services and Environmental Services 2005–2007: COO, Eastern Europe and Middle East 2004: COO, North America and Managing Director, Canada WIM VAN LOON (1966) BELGIAN EVP, Industrial Services COO Northern & Central Europe (since October 2020) Engineering degree in Industrial Electro Mechanic and Master’s degree in Business Management Joined SGS in 1989 Previous responsibilities 2015–2018: Managing Director, Benelux 2011–2015: Executive Director, Industrial Services, Benelux 2003–2015: Business Manager for Industrial, Minerals and Consumer Testing Services, Benelux SIDDI WOUTERS (1973) DUTCH SVP, Digital & Innovation (since October 2020) Master’s degree in Applied Physics Joined SGS in 2020 Previous work experience Rabobank (NL) Executive Vice President and Head of Digital Innovation Technip FMC, Digital Ofﬁcer Kongsberg Gruppen, Chief Technology Ofﬁcer Degree in Electronics Engineering from ENSEIRB-MATMECA Initially joined SGS in 1992, rejoined in 2008 Previous responsibilities 2016–2018: Vice President of Retail Solutions and European Business Development, Consumer and Retail 2013–2016: Global Head of Materials and Manufacturing, Industrial Services 2009–2013: Vice President of Strategic Global Accounts, Consumer Testing Services JEFFREY MCDONALD (1964) AUSTRALIAN/AMERICAN EVP, Certiﬁcation and Business Enhancement Postgraduate Diploma in Education Joined SGS in 1995 Previous responsibilities 2007–2015: COO, North America 2004–2007: EVP, Systems and Services Certiﬁcation 2003: Global Project Manager, Systems and Services Certiﬁcation TOBY REEKS (1976) BRITISH SVP, Investor Relations BA in Economics Joined SGS in 2018 Other work experience 2013–2018: Executive Director, Morgan Stanley 2011–2013: Director, Merrill Lynch 2005–2011: Vice President, Merrill Lynch MALCOLM REID (1963) BRITISH COO, South East Asia & Paciﬁc BSc Chemistry Joined SGS in 1987 Previous responsibilities 2012–2015: EVP, Consumer Testing Services 2007–2011: EVP, Systems and Services Certiﬁcation 2005–2007: Managing Director, Australia 4.2. OTHER ACTIVITIES AND VESTED INTERESTS The following list presents all material activities in governing and supervisory boards, management positions and consultancy functions, ofﬁcial tenures and political positions held by each member of the Operations Council outside the Group, both in Switzerland and abroad. DERICK GOVENDER Member of IPMI (International Precious Metal Institute) 4.3. CHANGES IN THE OPERATIONS COUNCIL During 2020, Dirk Hellemans, COO North & Central Europe; Christophe Heidler, Chief Information Ofﬁcer; Frédéric Herren, SVP Digital & Innovation and Roger Kamgaing, EVP, GIS left the Group. Peter Possemiers, EVP EHS has stepped down from the Operations Council as of 31 December 2020 to assume other management responsibilities within the Group. Biographical information on former members of the Operations Council may be found in prior years’ Corporate Governance reports, including pages 99 to 101 of the 2019 Integrated Annual Report. 4.4. LIMITS ON EXTERNAL MANDATES The Articles of Association of the Company, in compliance with the Ordinance against Excessive Compensation at Listed Joint-Stock Companies (OaEC), limit the number of mandates permissible to members of the Operations Council, to no more than four board memberships in entities outside the Group, out of which a maximum of one membership in the board of companies whose shares are traded on a stock exchange. Mandates assumed at the request of a controlling entity do not count towards the maxima deﬁned in the Articles of Association. In addition, the Articles of Association set limits to participations in boards of associations and other not-for-proﬁt organizations to no more than 10 such memberships. 4.5. MANAGEMENT CONTRACTS The Company is not party to any management contract delegating management tasks to companies or individuals outside the Group. 5. Compensation, Shareholdings and Loans 5.1. CONTENT AND METHOD OF DETERMINING THE COMPENSATION AND THE SHAREHOLDING PROGRAMS The Group’s overriding compensation policies are deﬁned by the Board of Directors. The objectives of these policies are twofold: a) to attract and retain the best talent available in the industry and b) to motivate employees and managers to create and protect value for shareholders by generating long-term sustainable ﬁnancial achievements. In line with these principles, Board members are entitled to a ﬁxed fee, which takes into account their level of responsibility. Members of the Operations Council receive a ﬁxed remuneration and are entitled to a performance- related annual bonus and a Long-Term Incentive plan. In compliance with the requirements of the Ordinance against Excessive Compensation at Listed Joint-Stock Companies (OaEC), the Annual General Meeting approves the compensation payable to the Board and the Operations Council. The rules on the vote on pay applicable in the Group are explained below. The ultimate responsibility for deﬁning remuneration policies and deciding on all matters relating to remuneration rests with the Board of Directors, subject to decisions that require binding resolutions of the Annual General Meeting. The Board of Directors is assisted in its work by a Remuneration Committee, which is elected by the Annual General Meeting. 5.2. RULES ON APPROBATION BY THE ANNUAL SHAREHOLDERS MEETING OF EXECUTIVE PAY 5.2.1. RULES ON PERFORMANCE-RELATED PAY AND ALLOCATION OF EQUITY-LINKED INSTRUMENTS The Company’s Articles of Association deﬁne the principles of the variable remuneration and the allocation of shares or equity-linked instruments to the members of the Operations Council. Please refer to the Remuneration Report page 99 to 101 for a description of the Company’s rules in the matter. In the event of changes in composition of the Operations Council occurring after the approval by the Annual General Meeting of the ﬁxed remuneration of the executive team, the Board is authorized to increase up to a maximum of 25% the amount authorized by the shareholders for that purpose. 5.2.2. RULES ON LOANS, CREDIT FACILITIES AND POST-EMPLOYMENT BENEFITS Loans granted to members of the governing bodies of the Company may not exceed one year of remuneration and must be granted at market conditions. As at 31 December 2020, as at 31 December 2019, no loan or advance is granted by the Group to members of the Operations Council. 5.2.3. RULES ON VOTE ON PAY The Annual General Meeting approves the following matters related to the compensation of the Board and Operations Council: • It approves the ﬁxed fees payable to the Board of Directors until the next Annual General Meeting • It approves in advance a prospective maximum ﬁxed remuneration to the Operations Council during the next ﬁnancial year • It approves the total aggregate amount payable to the Operations Council for the performance-related annual bonus related to the prior year • It approves the maximum amount payable under Long-Term Incentive plans to be introduced by the Company Resolutions of such matters are binding to the Board of Directors. In addition, the Annual General Meeting is invited to cast a non-binding vote on the Remuneration Report that describes the Company’s remunerations policies. This allows shareholders to express a view on the overall policies of the Group in relation to remuneration. 6. Shareholders’ Participation Rights All registered shareholders receive a copy of the half-year and full-year results upon the publication of such results by the Company. They can request a copy of the Company’s Annual Report and are personally invited to attend the Annual General Meeting of Shareholders. 6.1. VOTING RIGHTS AND REPRESENTATION RESTRICTIONS All registered shareholders can attend the General Meetings of Shareholder and exercise their right to vote. A shareholder may also elect to grant power of attorney to an independent proxy appointed by the Company or to any other registered shareholder. There are no voting restrictions, subject to the exclusion of nominee shareholders representing undisclosed principals, as detailed in section 2.6. 6.1.2. RULES ON INSTRUCTIONS TO THE INDEPENDENT PROXY AND ELECTRONIC PARTICIPATION IN THE ANNUAL SHAREHOLDERS MEETING Shareholders have the opportunity to give general or speciﬁc voting instructions to the independent proxy, who is elected by the General Meeting of Shareholders. Shareholders can give speciﬁc or generic voting instructions to the independent proxy on all matters on the agenda of the General Meeting of Shareholders. These instructions can be issued in written form, or by electronic transmission. The voting of resolutions by electronic votes is authorized by the Articles of Association, within the modalities deﬁned by the Board of Directors. 6.2. STATUTORY QUORUMS The General Meeting of Shareholders can validly deliberate regardless of the number of shares represented at the meeting. Resolutions are adopted by the absolute majority of votes cast. If a second ballot is necessary, a relative majority is sufﬁcient, unless Swiss company law mandates a special majority. 6.3. CONVOCATION OF GENERAL MEETINGS OF SHAREHOLDERS The rules regarding the convocation of General Meetings of Shareholders are in accordance with Swiss company law. As authorized by the Covid-19 ordinance of the Swiss Federal Council, shareholders were required to issue voting instructions to the independent representatives as physical attendance of the meeting was not possible to shareholders. 6.4. INCLUSION OF ITEMS ON THE AGENDA The Agenda of the General Meeting of the Shareholders is issued by the Board of Directors. Shareholders representing shares with a minimum par value of CHF 50 000 may request the inclusion of an item on the agenda of the General Meetings, provided that such a request reaches the Company at least 40 days prior to the General Meeting. 6.5. REGISTRATION IN THE SHARE REGISTER The Company does not impose any deadline for registering shares prior to a General Meeting. However, a technical notice of two business days is required to process the registration. SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 94 CORPORATE GOVERNANCE 7. Change of Control and Defense Measures No restriction on changes in control is included in the Company’s Articles of Association. 7.1. DUTY TO MAKE AN OFFER In the absence of any speciﬁc rules in the Company’s Articles of Association, any investor or group of investors acquiring more than 33.3% of the shares and voting rights of the Company has the duty to make a public offer in compliance with the applicable Swiss takeover rules. 7.2. CLAUSES ON CHANGE OF CONTROL There are no general plans or standard agreements offering speciﬁc protection to Board Members, Senior Management or employees of the Group in the event of a change of control, subject to the standard rules regarding termination of employment. 8. Auditors 8.1. DURATION OF THE MANDATE AND TERM OF OFFICE OF THE LEAD AUDITOR Following a competitive process in 2000, Deloitte SA was appointed auditor of the Company and the SGS Group by the Annual General Meeting of Shareholders upon recommendation of the Board of Directors. The auditors of the Company are subject to re-election at the Annual General Meeting every year. The current lead auditor, Matthew Sheerin, was appointed in 2017, after agreement by the Company’s Audit Committee. The Company requires the Lead Auditor to be changed at the latest after completion of ﬁve annual audit cycles, whereas Swiss company law imposes a maximum period of seven years. When designated in 2017 as Lead Auditor, Matt Sheerin replaced James Baird, Lead Auditor for the ﬁnancial years 2012 to 2016 inclusively. The Audit Committee reviews annually the desirability to renew the annual mandate of its external auditors before proposing to the Board and the Annual General Meeting the re-election of the auditors. During the course of 2020, in view of the long tenure of the current auditors, the Company conducted a selection process for the selection of a new audit ﬁrm for the audit of the 2021 ﬁnancial statements, which will be submitted for election to the March 2021 Annual General Meeting of Shareholders. The Audit Committee places a great emphasis on the independence of the external auditors, and on the absence of conﬂict of interests, both at the Group level and at the level of individual subsidiaries. It reviews carefully the type of other services which are provided by the auditors, in addition to the audit, to ensure that such ancillary services could not endanger the independence of the audits. Permitted other services include assistance with tax compliance matters, and limited assistance in due diligence or advisory services for prospective acquisitions. The audit fees are approved on the basis of a negotiated budget agreed with the Group auditors taking into account the complexity of the audit, the structure of the Group and its internal control systems and the responsibility of the auditors. The duties of the Committee include consideration of the audit plan, regular assessment of the performance of the auditor and approval of audit fees on the basis of the amount of work required in order to perform the audit. The Audit Committee reviews with the Group auditors the signiﬁcant ﬁnancial statement risk areas arising from the audit, including the key audit matters referred to in the statutory auditor’s report. The auditor regularly presents its ﬁndings, both during the deliberations of the Audit Committee and in written reports, to the attention of the Board of Directors that summarize key ﬁndings. The Group strives to safeguard and support the independence of the auditor by avoiding conﬂicts of interests. In applying this policy, the attribution of other consultancy assignments is carefully reviewed to ensure that such assignments do not endanger the auditor’s independence. 8.2. AUDIT FEES Total audit fees paid to Deloitte for the audit of the Company and the Group ﬁnancial statements in 2020 amounted to CHF 6.8 million (2019: CHF 7.2 million). 8.3. ADDITIONAL FEES An aggregate amount of CHF 1 million (2019: CHF 1 million) was paid to Deloitte for other professional services, unrelated to the statutory audit activity, mainly composed of tax compliance services, non-statutory and other assurance services. 8.4. INFORMATION INSTRUMENTS PERTAINING TO THE EXTERNAL AUDIT The Audit Committee is responsible for evaluating the external auditor on behalf of the Board of Directors and conducts assessments of the audit services provided to the Group during its regular meetings. It meets with the auditor at least three times per year, including private sessions without the presence of Management. In 2020, the Audit Committee met four times with the external auditors. The Committee considers and approves the proposed audit plan, conducts assessment of the performance of the auditor and approves audit fees on the basis of the amount of work required in order to perform the audit. The Audit Committee reviews with the Group auditors the signiﬁcant ﬁnancial statement risk areas arising from the audit, including the key audit matters referred to in the statutory auditor’s report. When evaluating the performance of the auditors, the Audit Committee assesses the effectiveness of the audit based on Swiss Law, their understanding of the business of the Group and how matters of signiﬁcant importance for the Group internal control and ﬁnancial reporting are identiﬁed, reported and resolved. The Audit Committee reviews also how the Group auditors interact with the component audit ﬁrms in charge of auditing the main subsidiaries of the Group, and the relevance and timeliness of issuance of statutory audits and management letters. MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 95 9. Information Policy The policy of the Group is to provide individual and institutional investors, directly or through ﬁnancial analysts, business journalists, investment consultants (ﬁnancial community) and employees with ﬁnancial and business information in a consistent, broad, timely and transparent manner. The Group website has a section fully dedicated to investor relations, where all ﬁnancial information and presentations are available. This includes an updated version of the Articles of Association, current information on share buyback programs and minutes of shareholders’ meetings. SGS meets regularly with institutional investors, holds results presentations, road shows and presentations at broker-sponsored country or industry conferences, and attends one-on- one meetings. The Group publishes consolidated half- year unaudited and yearly audited results in print and online formats. The Annual Report is published in English and is available upon order from the Group’s website. The current list of publication dates is available on the Group’s website. The Group acknowledges the directives on the independence of ﬁnancial research issued by the Swiss Bankers Association, particularly articles 26 and 29-32. In addition, the Group complies with rules regarding information and reporting of the federal act on stock exchange and securities trading, and the ordinance on stock exchanges and securities trading. The address of SGS main registered ofﬁce and contact details by phone and email can be found on page 108 of the Annual Report. SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 96 CORPORATE GOVERNANCE MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 97 REMUNERATION REPORT The SGS Remuneration Report provides an overview of the SGS remuneration model, its principles and programs and the related governance framework. The report also includes details on the remuneration of the Board of Directors and of the Operations Council related to the 2020 business year. The SGS Remuneration Report has been prepared in compliance with the Ordinance against Excessive Compensation at Listed Joint-Stock Companies (OaEC), in effect as of 1 January 2014, the Swiss Code of Best Practice for Corporate Governance of economiesuisse, approved on 28 August 2014, and the Swiss Exchange (SIX) Directive on Information relating to Corporate Governance, revised on 20 March 2018, and according to the Articles of Association of SGS SA, as approved by the shareholders at the Annual General Meeting in 2015. SGS | 2020 Integrated Annual Report 5 1. 2. Introduction by the Remuneration Committee 98 4. Remuneration Awarded to the Board Of Directors Remuneration Policy and Principles 99 5. Remuneration Awarded to the Operations Council Members 2.1. Remuneration general principles 99 2.2. Remuneration policy for the Executive Management 2.3. Remuneration governance 2.3.1. Remuneration Committee 2.3.2. Shareholders’ engagement 3. Remuneration model 3.1. Structure of remuneration of the Board of Directors 3.2. Structure of remuneration of the Operations Council 100 100 100 101 102 102 103 5.1. Fixed remuneration 5.2. Short-term variable remuneration 5.3. Long-term variable remuneration 5.4. Total remuneration 5.5. Remuneration mix 5.6. Other compensation elements 5.6.1. Severance payments 5.6.2. Other compensation to members or former members of governing bodies 112 115 115 116 117 120 121 121 121 121 3.2.1. Fixed remuneration: 104 5.6.3. Loans to members 121 annual base salary 3.2.2. Fixed remuneration: 104 beneﬁts or former members of governing bodies 3.2.3. Short-term variable remuneration 3.2.4. Long-term variable remuneration 3.2.5. Principles of the long-term incentive for the performance period 2021-2023 3.2.6. Remuneration mix 3.2.7. Shareholding ownership guidelines 3.2.8. Employment contracts 3.2.9. Timeline of remuneration 104 108 110 110 111 111 112 SGS | 2020 Integrated Annual Report 98 CORPORATE GOVERNANCE MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 99 1. Introduction by the Remuneration Committee The Remuneration Committee is pleased to present its 2020 Remuneration Report. 2020 has been a very challenging year; the Covid-19 pandemic impacted our operations and those of our customers and suppliers, and had a signiﬁcant impact on our people, their families and their professional and personal lives. The resilience of our people, their ability to adapt to the changes caused by the pandemic, such as mobility restrictions and the need to work remotely and their exemplary behavior in following the rules of hygiene and safety at work, have allowed the Group to continue to serve its customers and provide services that are often essential to society, beyond their commercial value. The Committee engaged with the Group’s executive management and provided guidelines on how to review and adjust, where needed, the compensation practices, with special focus on the 2020 short-term incentive plan for managers and employees not part of the Operations Council, with the aim to recognize their extraordinary contribution to the Group beyond the 2020 ﬁnancial results. The Committee reviewed also the 2020 short-term incentive for the Operations Council members and decided not to implement any change. The 2018-2020 Long-Term Incentive plan, granted in 2018, vested on 1 February 2021, subject to continuity of employment of the participants and performance conditions. The Committee carefully reviewed the performance conditions and recommended to the Board of Directors their reassessment. Whilst the relative Total Shareholder Return (TSR)1 did not require any speciﬁc consideration, the adjusted operating income margin1 achievement has been reassessed to take into account both the exceptional impact that Covid-19 pandemic had on the 2020 ﬁnancial performance of the Group, and the actual performance of the ﬁrst two years of the plan. Details on the 2018-2020 Long-Term Incentive plan vesting are disclosed in section 5.3. of this Report. During 2020, the Committee attended its statutory duties and worked on two other main topics: the preparation of the 2021–2023 Long-Term Incentive Plan for the Operations Council members and selected senior managers of the Group, and the review of the Short-Term Incentive plan for the Operations Council members for the performance year 2021 onwards. The table below summarizes the main initiatives taken by the Committee during 2020. SUBJECT MATTER DECISION POWER MAIN ACTIVITIES Individual remuneration of the members of the Board of Directors including the Chairman of the Board Establishment of Long-Term Incentive plans Individual remuneration of the CEO Individual remuneration of the Operations Council members Remuneration Report Recommendation to the Board of Directors Review of the fees linked to the chairmanship of the Committees, following the re-deﬁnition of the Board Committees Recommendation to the Board of Directors Recommendation to the Board of Directors Approval (based on the recommendation of the CEO) Recommendation to the Board of Directors Design of a new Long-Term Incentive plan for 2021 and onwards, after the vesting of the 2018-2020 plan Review of the Leadership Multiplier of the 2021 Short-Term Incentive plan, with the inclusion of Environmental, Social and Governance (ESG) metrics Review of the Leadership Multiplier of the 2021 Short-Term Incentive plan, with the inclusion of Environmental, Social and Governance (ESG) metrics Disclosure of the changes introduced in the 2021 Short-Term Incentive plan for Operations Council members and of the main elements of the Long-Term Incentive plan for 2021 onwards The fees linked to the chairmanship of the Audit Committee and of the Remuneration Committee have been increased, to account for the additional time commitment and responsibility of these roles. The new fees are disclosed in section 4 of this Report. A new approach to Long-Term Incentives for the Operations Council members and selected senior managers of the Group has been deﬁned; one change is a shift from one grant every three years to a system with annual grants. A transition plan, to be granted in 2021, has been deﬁned. The new plan further includes changes in the relevant KPIs and in particular, the inclusion of ESG metrics. The main elements of the transition plan and the new annual grants system are disclosed in section 3.2.5. of this Report; the details of the 2021 plan will be disclosed in the 2021 Remuneration Report. The Leadership Multiplier, part of the Short-Term Incentive plan for the OC members including the CEO, has been reviewed, to include in its assessment ESG metrics, in line with the Group’s sustainability ambitions. The new Leadership Multiplier is described in section 3.2.3. of this Report. The Committee reviewed and approved the contractual terms and conditions, including remuneration, of one new member of the Operations Council, appointed during 2020; the changes in the composition of the Operations Council are disclosed in section 4 of the Governance Report. Since 2015, the Board of Directors has implemented the consultative vote on the Remuneration Report and the binding vote on compensation amounts at the Annual General Meeting. The Committee received signiﬁcant support in its activities and direction through positive votes at the Annual General Meeting 2020, and will continue with the same ‘say-on-pay’ vote structure at the forthcoming Annual General Meeting 2021: • Consultative vote on the Remuneration Report • Binding vote on the prospective maximum remuneration amount of the Board of Directors until the next Annual General Meeting • Binding vote on the retrospective short-term variable remuneration amount of the Operations Council members for the business year 2020 • Binding vote on the prospective maximum ﬁxed remuneration amount of the Operations Council members for 2022 • Binding vote on the prospective maximum value of the grants awarded under the Long-Term Incentive plan to the Operations Council members in 2021 The table below summarizes the votes of the Annual General Meeting on the remuneration matters since 2015: (% of votes for) Consultative vote on the Remuneration Report Binding vote on the prospective maximum remuneration amount of the Board of Directors Binding vote on the prospective maximum ﬁxed remuneration amount of the Operations Council members Binding vote on the retrospective short-term variable remuneration amount of the Operations Council members Binding vote on the prospective maximum value of the grants awarded under the Long-Term Incentive plan to the Operations Council members1 2015 93.69 95.41 2016 82.79 97.26 2017 92.44 98.24 2018 89.79 98.72 2019 2020 94.50 98.09 93.05 98.13 95.29 98.27 80.11 75.61 80.28 95.58 94.00 95.94 96.87 95.97 97.17 97.39 90.26 – – 96.63 – – 1. The SGS Long-Term Incentive plan provides a grant every three years; the last grant was done in 2018 On the following pages, you will ﬁnd detailed information about our remuneration model, its principles and programs, and the remuneration awarded to the Board of Directors and the Operations Council related to the business year 2020. We hope that you ﬁnd this report informative. We are conﬁdent that our approach to executive pay is fully aligned with the strategy, wider competitive market benchmarks, the performance of the Company and the interests of our shareholders. Shelby R. du Pasquier Chairman of the Remuneration Committee 2. Remuneration Policy and Principles 2.1. REMUNERATION GENERAL PRINCIPLES The general principles of remuneration of the members of the Board of Directors and the members of the Operations Council are deﬁned in the Articles of Association (Art. 28 and 29). The remuneration of the members of the Board of Directors is deﬁned with two main objectives: (i) to compensate their activities and responsibilities as the highest governing body of the Group and their participation in the Committees established within the Board of Directors, and (ii) to guarantee their independence in exercising their supervisory duties towards the Executive Management. The remuneration of the members of the Operations Council is deﬁned with two main objectives: (i) to attract and retain the best talents available in the industry, and (ii) to motivate them to create and protect long-term sustainable value for our shareholders and the society. The members of the Board of Directors receive a ﬁxed remuneration only. The members of the Operations Council receive a ﬁxed remuneration and a variable remuneration linked to short-term and long-term results. REMUNERATION COMPONENT BOARD OF DIRECTORS (NON-EXECUTIVE) OPERATIONS COUNCIL (EXECUTIVE) Fixed remuneration Short-term variable remuneration Long-term variable remuneration 1. Deﬁnitions of total shareholder return and adjusted operating income margin are provided in section 3.2.4. of this report SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 100 CORPORATE GOVERNANCE MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 101 2.2. REMUNERATION POLICY FOR THE EXECUTIVE MANAGEMENT The Company’s remuneration policy applicable to the executive management (Operations Council members) is deﬁned by the Board of Directors in line with the Company’s value to society ambitions, its business strategy of proﬁtable growth, and with the aim to drive and support the Company’s core values of passion, integrity, entrepreneurialism and innovative spirit. The remuneration system for the Operations Council members operates according to four main principles: • Market competitiveness – Remuneration levels are in line with competitive market practices • Internal equity – Remuneration programs link remuneration to the level of responsibility and the skillset required to perform the role • Pay for performance – A substantial portion of remuneration is directly linked to business and individual performance – Differentiation is based on individual contributions • Long-term value creation and alignment to shareholders’ interests – Part of remuneration is delivered in equity subject to a multi-year vesting period In line with its Anti-Discrimination and Dignity at Work policy, SGS is committed to promoting a workplace that provides equal opportunity for all employees and an environment in which all members of the workplace treat all individuals both in the workplace and in other work-related settings at all time with dignity, consideration and respect. All employment related decisions, including compensation, beneﬁts, promotions, will be solely made on the basis of an individual’s qualiﬁcation, performance and behavior or other legitimate business considerations. SGS does not tolerate any discriminatory practice, in particular based on age, civil partnership, disability, ethnicity, family status, gender, gender identity, ideological views, marital status, nationality, political afﬁliation, pregnancy, religion, sexual orientation, social origin or any other status that is protected as a matter of local law. METHOD OF DETERMINATION OF REMUNERATION LEVELS – BENCHMARKING SGS is a global company, operating in a broad range of sectors; the determination of the remuneration levels of the Operations Council members must consider both global and local practices. We periodically compare our compensation practices with those of other similar global organizations: • Competitors in the Testing, Inspection and Certiﬁcation industry and internationally active companies within and outside Switzerland that operate in the business-to-business services sector: Adecco, ALS, Applus+, Bureau Veritas, Euroﬁns, Intertek, ISS, Mistras, Rentokil, Securitas, Sodexo, Team (the peer group of companies considered for the performance conditions of the Long-Term Incentive plan, see section 3.2.4.) The following chart summarizes the authorization levels for the main decisions relating to the compensation of the Board of Directors and the Operations Council members. When reviewing and deciding on executive remuneration policies, the Committee and the Board of Directors have access to Group Human Resources staff and may use third-party consultants that specialize in compensation matters. In 2020, neither the Committee nor the Board of Directors had recourse to such external advisors. SUBJECT MATTER Aggregate remuneration amount of the Board of Directors Individual remuneration of the members of the Board of Directors including the Chairman of the Board Aggregate ﬁxed remuneration amount of the Operations Council Aggregate short-term variable remuneration amount of the Operations Council Setting of annual ﬁnancial targets for short-term variable remuneration of Operations Council members Establishment of Long-Term Incentive plans Aggregate value of the grants awarded under the Long-Term Incentive plan to Operations Council members Individual remuneration of the CEO Individual remuneration of the Operations Council members Remuneration Report R Recommendation Approval BV Binding Vote CV Consultative Vote CEO REMUNERATION COMMITTEE BOARD OF DIRECTORS R R R R R R R R R R AGM BV BV BV BV CV • All SMI-listed companies The following Directors served on the Committee during their mandate from AGM 2020 to AGM 2021: The elements of executive remuneration benchmarked include annual base salary, other ﬁxed remuneration elements, short-term and long-term incentives, and beneﬁts. To ensure proper benchmarking, we use a proprietary job evaluation methodology. Since half of our Operations Council members are based outside Switzerland, we use information published by reputable data providers, including Mercer and Willis Towers Watson, related to both the Swiss market and the other markets where the Operations Council members are based. As a reference point, SGS targets the median compensation level of the peer group. The most recent executive compensation benchmark supported by a third-party services provider (Mercer) was performed in 2015. No third-party services provider was engaged to perform such benchmark in 2020. 2.3. REMUNERATION GOVERNANCE The Annual General Meeting of Shareholders approves every year the maximum aggregate amount of remuneration of the Board of Directors. Within that limit, the Board of Directors is responsible for determining the remuneration of the Chairman and the Directors of the Board. It also decides on the remuneration and terms of employment of the Chief Executive Ofﬁcer. In addition, the Board of Directors deﬁnes general executive remuneration policies, including the implementation and terms and conditions of Long-Term Incentive plans, as well as the ﬁnancial targets relevant to any incentive plan. 2.3.1. REMUNERATION COMMITTEE The Board of Directors is assisted in its work by a Remuneration Committee (‘the Committee’), which consists of non-executive Directors. The Committee acts in part in an advisory capacity to the Board of Directors, and in part as a decision-making body on matters that the Board of Directors has delegated to the Committee. The Committee reviews regularly, at least once a year, the compensation of each member of the Operations Council (including the Chief Executive Ofﬁcer) and decides on all matters relating to the remuneration of these executives. • Shelby R. du Pasquier (Chairman) • Ian Gallienne • Kory Sorenson In 2020, the Committee met in ﬁve meetings, attended by all members, and handled several matters pertaining to remunerations outside scheduled meetings. The Chairman of the Remuneration Committee reports to the Board of Directors after each meeting on the activities of the Committee. The minutes of the Committee meetings are available to the members of the Board of Directors. Generally, the Chairman of the Board attends the meetings of the Committee, except when matters pertaining to his own compensation are being discussed. Selected members of the Operations Council, the CEO and the Senior VP for HR may be asked to attend the meetings in an advisory capacity. They do not attend the meeting when their own compensation and/or performance are being discussed. 2.3.2. SHAREHOLDERS’ ENGAGEMENT As has been the case since the 2015 Annual General Meeting, we will continue to submit the Remuneration Report to a consultative shareholders’ vote at the Annual General Meeting, so that shareholders have an opportunity to express their opinion about our remuneration model. In addition, as required by the OaEC, the aggregate amounts of remuneration to be paid to members of the Board of Directors and the Operations Council are subject to the approval of the shareholders in form of a binding vote on remuneration. The procedure on the vote is deﬁned in the Articles of Association and foresees separate votes on (i) the maximum remuneration of the Board of Directors for the period until the next Annual General Meeting, (ii) the maximum ﬁxed remuneration of the Operations Council for the next calendar year, (iii) the variable remuneration awarded to the Operations Council in respect to the previous calendar year, and (iv) the maximum amount to be granted to the Operations Council under any Long-Term Incentive plan during the current calendar year. SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 102 CORPORATE GOVERNANCE MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 103 A summary of the shareholders’ votes on remuneration is described in the chart below: The remuneration to the members of the Board of Directors is subject to employer social charges according to Swiss legislation. SHAREHOLDERS’ VOTES ON REMUNERATION SUMMARY SHAREHOLDERS’ VOTE AT THE 2021 AGM 2020 2021 2022 Consultative vote on Remuneration Report REMUNERATION REPORT Binding vote on maximum remuneration of the Board of Directors Binding vote on maximum ﬁxed remuneration of the Operations Council REMUNERATION FIXED REMUNERATION Binding vote on variable remuneration of the Operations Council SHORT-TERM VARIABLE REMUNERATION Binding vote on maximum value of the grants awarded under any Long–Term Incentive plan to the Operations Council LONG-TERM INCENTIVE GRANT Each Board member can choose to receive up to 50% of the remuneration settled in shares that may be restricted. Shares will be awarded after the publication of the Group’s annual results. The number of shares to be allocated is determined by dividing the portion of remuneration settled in shares by the closing share price on the day of the publication of the Group’s annual results; fractions are rounded up to the nearest integer. Shares granted may be restricted at the option of each Board member for a period of three years ending on the third anniversary of their award. If a Board member has elected to receive restricted shares, such restricted shares may not be sold, donated, pledged or otherwise disposed of to third parties during the three years restriction period. In case of change of control or liquidation, or in case a member of the Board ceases to exercise his or her mandate following death or permanent disability, the restriction period of the shares lapses. The shares remain restricted in all other instances. The portion of remuneration settled in cash is paid in two installments, in June and December of the calendar year. Members of the Board of Directors do not hold service contracts and are not entitled to any termination or severance payments. They do not participate in the Company’s beneﬁt schemes and the Company does not make any contributions to any pension scheme on their behalf. 3.2. STRUCTURE OF REMUNERATION OF THE OPERATIONS COUNCIL The members of the Operations Council receive a ﬁxed remuneration and a variable remuneration linked to short-term and long- term results. The ﬁxed remuneration includes an annual base salary and beneﬁts, in the form of employer’s contributions into pension funds, health insurances, life and disability insurances, other contributions and allowances according to local practices in their country of employment, and in the form of beneﬁts in kind. The variable remuneration consists of a short-term incentive, settled 50% in cash and 50% in equity, and a long-term incentive, settled in equity. The table below summarizes the various components of the remuneration of the Operations Council members. REMUNERATION ELEMENT REMUNERATION VEHICLE DRIVERS PERFORMANCE MEASURES PURPOSE PLAN PERIOD The binding votes on the aggregate compensation amounts combined with a consultative vote on the remuneration report reﬂect our true commitment to provide our shareholders with a far-reaching ‘say-on-pay’. Beneﬁts AGM 2021 AGM 2022 FIXED REMUNERATION Annual Base Salary Cash 3. Remuneration Model 3.1. STRUCTURE OF REMUNERATION OF THE BOARD OF DIRECTORS The members of the Board of Directors receive a ﬁxed remuneration only. They are entitled to a ﬁxed annual board membership fee (annual board retainer) and additional annual fees for the participation in board committees (committee fees). The annual board retainer of the Chairman of the Board includes his or her attendance to any committee of the Board, whether as a voting member or as an advisory capacity. By agreement with the relevant tax authorities, part of the remuneration of the Chairman of the Board may be settled as representation fees. Directors do not receive additional compensation for attending meetings and do not receive any variable remuneration. The amounts of the remuneration elements for the Chairman and the other Board members are deﬁned by the Board of Directors every year. The maximum total amount is subject to the binding vote of the Annual General Meeting of Shareholders. In determining the amounts of the compensation elements, the Board of Directors considers the prevailing practices of the Swiss SMI-listed companies. The table below summarizes the remuneration elements of the members of the Board of Directors. ANNUAL BOARD RETAINER COMMITTEE FEES (PER COMMITTEE) REPRESENTATION FEES (SUBJECT TO AGREEMENT WITH RELEVANT TAX AUTHORITIES) CHAIRMAN BOARD MEMBERS Position and experience, market practice (benchmarking) Market practice n/a n/a Attract and retain key executives Continuous Protect executives against risks, attract and retain Continuous Contributions to pension plans and insurances, other contributions, allowances, beneﬁts in kind VARIABLE REMUNERATION Short-Term Incentive 50% cash 50% restricted shares Annual ﬁnancial performance, individual performance against leadership behavioral model Long-Term Incentive Performance Share Units (PSUs) Long-term ﬁnancial performance Group revenue, Group NPAT1, Group ROIC2, Group free cash ﬂow, regional and business line proﬁt, regional NWC3, business operating free cash ﬂow, leadership multiplier Relative TSR4, adjusted operating income margin Pay for performance 1-year performance period (for the portion settled in restricted shares) Reward for long-term performance, align compensation with the interests of the shareholders 3-year performance period 1. NPAT: Net proﬁt after tax 2. ROIC: Return on invested capital 3. NWC: Net working capital 4. TSR: Total shareholder return The remuneration of the members of the Operations Council is subject to employer social charges, according to the legislation in force in their country of employment. SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 104 CORPORATE GOVERNANCE MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 105 3.2.1. FIXED REMUNERATION: ANNUAL BASE SALARY The base salaries of the Chief Executive Ofﬁcer and each Operations Council member are reviewed annually based on market data for similar positions in those companies and geographies against which the Group benchmarks itself. In addition to individual performance and contribution and business performance and results, the deciding body considers the scope and complexity of the areas of responsibility of the position, skillsets, experience required to perform the role, and relevant market practice in the industry. 3.2.2. FIXED REMUNERATION: BENEFITS Beneﬁts include the employer’s contributions to pension plans, the employer’s contributions to insurances for health, life, disability and other risks, other cash contributions and allowances, and beneﬁts in kind. They are awarded in accordance with prevailing practices in the country of employment of the members of the Operations Council. Swiss-based Operations Council members participate, on the same basis as other Swiss employees of the Group, in the Company’s pension scheme. Each participant can choose between three levels of employee contributions (‘Standard’, ‘Plus 2’ and ‘Maxi’), deﬁned based on the participant’s age; the Company contributes an amount equal to one and a half times the participant’s contribution at the ‘Standard’ level. Flexibility is granted to employees who wish to fund a potential retirement before the normal age, and to those who wish to continue working after the age of 65. 3.2.3. SHORT-TERM VARIABLE REMUNERATION The Chief Executive Ofﬁcer and the other members of the Operations Council are eligible to a performance-related annual incentive (the ‘Short-Term Incentive’). The Short-Term Incentive is designed to reward the CEO and the other members of the Operations Council for the annual ﬁnancial performance of the Group and its businesses, and for the demonstration of leadership behaviors in line with the SGS competency model. The table below summarizes the Short-Term Incentive components for the CEO and the other members of the Operations Council. SHORT-TERM INCENTIVE COMPONENT Annual ﬁnancial performance Leadership behaviors CEO OTHER OPERATIONS COUNCIL MEMBERS The target incentive is expressed as a percentage of the annual base salary and varies depending on the role. For the CEO, the target incentive amounts to 100% of annual base salary, while the target incentive for the other members of the Operations Council varies between 65% and 90% of annual base salary. The table below summarizes the key performance indicators applicable to the CEO and the other members of the Operations Council. GROUP RESULTS Proﬁtability (bottom-line) Growth (top-line) Efﬁcient use of capital Cash generation CEO Group NPAT 25% HEADS OF CORPORATE FUNCTIONS (SVPS) HEADS OF BUSINESS LINES (EVPS) HEADS OF REGIONS (COOS) Group NPAT 25% Group NPAT 25% Group NPAT 25% Group Revenue 25% Group Revenue 25% Group Revenue 25% Group Revenue 25% Group ROIC (Organic) 25% Group ROIC (Organic) 25% Group Free Cash Flow (Organic) 25% Group Free Cash Flow (Organic) 25% – – BUSINESS LINES RESULTS Proﬁtability (bottom-line) REGIONS RESULTS Cash generation Proﬁtability (bottom-line) Cash generation – – – – – – – – Business-line Proﬁt 40% Business Operating Free Cash Flow (Organic) 10% – – – – – – Regional Proﬁt 40% Regional NWC 10% For each key performance indicator, a pay-out curve is deﬁned according to the following principles: • A threshold (minimum level of performance to trigger a pay-out, and below which the pay-out is zero), a target (expected level of performance that triggers a pay-out equivalent to the target incentive), and a maximum (level of performance that triggers the highest pay-out, and above which the pay-out is capped) are deﬁned • The lowest pay-out (triggered by the threshold performance) and the highest pay-out (triggered by the maximum performance) The table below summarizes the Annual Incentive opportunity for the CEO and the other members of the Operations Council. are deﬁned Incentive frequency Minimum incentive opportunity as % of base salary as % of target incentive opportunity Target incentive opportunity as % of base salary Maximum incentive opportunity as % of target incentive opportunity as % of base salary CEO Annual 0% 0% 100% 250% 250% OTHER OPERATIONS COUNCIL MEMBERS Annual 0% 0% 65%–90% 250% 162.5%–225% Annual financial performance Each year, an annual business plan is derived from the long-term strategic plan and sets the business objectives to be achieved during the year. The key performance indicators used in the Short-Term Incentive to measure the annual ﬁnancial performance of the Group and its businesses include measurements of growth (top-line contribution), proﬁtability (bottom-line contribution), cash generation and efﬁcient use of capital, and thus reﬂect the ﬁnancial performance of the Company in a balanced manner. Those ﬁnancial metrics are cascaded consistently throughout the organization to ensure collective alignment. The CEO and the heads of corporate functions (SVPs) are measured on the ﬁnancial performance of the Group, while the other members of the Operations Council are measured on the ﬁnancial performance of the Group and on the ﬁnancial performance of their own business line (EVPs) or region (COOs). At the beginning of each year, based on a recommendation by the CEO, the Board of Directors sets the target values of the key performance indicators used in the Short-Term Incentive, in line with the annual business objectives. • The pay-out for performances between threshold and target and between target and maximum are calculated by linear interpolation The chart below shows the pay-out curves for the Group NPAT, Group Revenue, Group ROIC, Group Free Cash Flow, Business-line Proﬁt, Regional Proﬁt and Business Operating Free Cash Flow. BOTTOM-LINE, TOP-LINE, ROIC AND FCF PERFORMANCE (PAY-OUT CURVE) 250% 200% % T U O - Y A P 150% 100% 50% 0% 80% 100% 133.3% 200% PERFORMANCE % The pay-out curve for Regional NWC is deﬁned by the CEO at the beginning of the performance year together with the objectives for each performance metric. At the end of the performance period, the results for each key performance indicator are assessed against the pre-deﬁned target and the pay-out curve to determine a pay-out factor. The weighted average of the pay-out factors of each key performance indicator corresponds to the overall ﬁnancial performance pay-out factor. SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 106 CORPORATE GOVERNANCE MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 107 An example of the calculation of the ﬁnancial performance pay-out factor for an Executive Vice President is described in the chart below. FINANCIAL PERFORMANCE PAY-OUT FACTORS FOR AN EXECUTIVE VICE PRESIDENT GROUP NPAT WEIGHT 25% GROUP REVENUE WEIGHT 25% BUSINESS OPERATING CASH FLOW WEIGHT 10% BUSINESS PROFIT WEIGHT 40% FINANCIAL PERFORMANCE PAYOUT PERFORMANCE 96% PERFORMANCE 120% PERFORMANCE 100% PERFORMANCE 110% PAY-OUT 80% 80% x 0.25 PAY-OUT 160% 160% x 0.25 PAY-OUT 100% 100% x 0.1 PAY-OUT 130% 130% x 0.4 SETTLEMENT OF THE SHORT-TERM INCENTIVE Once the ﬁnal incentive amount is determined, it is settled 50% in cash and 50% in restricted shares, to strengthen the link between the compensation of executives and the interests of the shareholders. The cash component is paid, and the restricted shares are allocated after the shareholders’ approval at the Annual General Meeting of the following year. The number of restricted shares to be allocated is determined by dividing 50% of the ﬁnal incentive amount by the average closing share price during the 20-day period following the payment of the dividends after the Annual General Meeting, and the result is rounded up to the nearest integer. They are restricted for a period of three years during which they may not be sold, transferred or pledged. In case of change of control or liquidation or termination of employment following retirement, death or disability, the restriction period of the shares lapses. The shares remain restricted in all other instances. The Group does not issue new shares to be allocated to employees for equity-based compensation plans, but uses treasury shares instead, acquired through share buyback programs. Detailed information on the overhang and burn rate are disclosed in note 29. TERMINATION OF EMPLOYMENT In case of termination of employment for any reason except for cause, if the last day of employment is on or after 31 December of the respective business year, the executive is eligible to the full annual incentive payment. The annual incentive is paid fully in cash after the approval of the Annual General Meeting of Shareholders. In case of termination for cause before the date of payment, irrespective of whether the last day of employment is before or after 31 December of the respective business year, the executive has no entitlement to receive any annual incentive payment. 122% In case of resignation, and if the last day of employment is before 31 December of the respective business year, the participant has no entitlement to receive any annual incentive payment. LEADERSHIP MULTIPLIER The members of the Operations Council are also rewarded for the demonstration of leadership behaviors in line with the SGS competency model. Their ﬁnal incentive amount is calculated by multiplying the ﬁnancial performance pay-out factor by a leadership multiplier. The leadership multiplier is determined for each executive based on an assessment of their behaviors against the leadership competency model of SGS in the areas of innovation, people management and change management. The assessment of the CEO is conducted at year end by the Board of Directors, while the assessment of the other members of the Operations Council is conducted by the CEO and approved by the Remuneration Committee. The assessment leads to a leadership multiplier that can range between 70% and 125%. CHANGES TO THE LEADERSHIP MULTIPLIER AS OF THE 2021 PERFORMANCE YEAR Sustainability is fundamental to both our operations and our strategic direction. Through our purpose-driven leadership and using our scale and expertise, we are committed to delivering value to society and enabling a more sustainable future. With the objective to strengthen the commitment of the executive management towards the Group’s sustainability strategy, as of the 2021 performance year the CEO and the other members of the Operations Council’s leadership behaviors will be assessed also against Environmental, Social and Governance (ESG) metrics aligned with the Group’s sustainability ambitions. The overall assessment will continue to determine a leadership multiplier between 70% and 125%. An example of the calculation of the ﬁnal incentive amount for an OC member is described in the chart below. FINAL INCENTIVE AMOUNT FOR AN OC MEMBER TARGET INCENTIVE FINANCIAL PERFORMANCE PAY-OUT FACTOR LEADERSHIP MULTIPLIER FINAL INCENTIVE AMOUNT 100.000 122% 125% 152.500 If employment ceases due to death or disability before 31 December of the respective business year, the annual incentive payment is calculated pro-rata (calendar days) based on the Board of Directors’ best estimate of the performance on the last day of employment. The annual incentive is paid fully in cash shortly after the last day of employment, as soon as administratively possible. In case of retirement or termination not for cause before 31 December of the respective business year, the annual incentive payment is calculated pro-rata (calendar days) based on actual performance at the end of the performance year, and it is paid fully in cash after the approval of the Annual General Meeting of Shareholders. The table below summarizes the rules in case of termination of employment. Last day of employment before 31 December Last day of employment between 31 December and AGM Incentive opportunity (target incentive) Incentive pay-out Payment date Payment vehicle Incentive opportunity (target incentive) Termination reason Termination for Cause Resignation Zero Zero Zero Zero – – – – Death or Disability Pro-rated on calendar days Based on estimated performance Retirement, Termination not for Cause Pro-rated on calendar days Based on actual performance 100% cash Shortly after the termination date After the AGM approval 100% cash Zero Full Full Full Incentive pay-out Payment date Payment vehicle Zero – – Based on actual performance Based on actual performance Based on actual performance After the AGM approval 100% cash 100% cash Shortly after the termination date After the AGM approval 100% cash Clawback provisions A clawback policy applies to any variable remuneration awarded to the members of the Operations Council. Under this policy, the Company may reclaim the value of any variable incentives paid, in cash or shares, in the following cases: i) any fraud, negligence or intentional misconduct was a signiﬁcant contributing factor to the Company having to restate all or a portion of its ﬁnancial statements; ii) a serious violation of the SGS internal regulations and/or Code of Integrity; iii) any violation of law within the scope of employment at the Company. SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 108 CORPORATE GOVERNANCE MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 109 3.2.4. LONG-TERM VARIABLE REMUNERATION The Chief Executive Ofﬁcer and the other members of the Operations Council are eligible to a performance-related long-term incentive (the ‘Long-Term Incentive’). The Long-Term Incentive is designed to motivate the leadership team to achieve the long-term objectives of the Group and to align their remuneration with the interests of the shareholders. The Long-Term Incentive consists of a grant of Performance Share Units (PSUs), done once every three years. The last grant under the Long-Term Incentive was done in 2018; the previous one was done in 2015. The value of the grants, deﬁned as the number of PSUs granted multiplied by the average share price of the 20 trading days preceding the grant date, covering a three-year period, is expressed as a percentage of the annual base salary and varies depending on the role. For the CEO, the value of the grant is 500% of the annual base salary; for the other members of the Operations Council it is 300% of the annual base salary. The table below summarizes the value of the incentive opportunity over a three-year period and annualized for the CEO and the other Operations Council members. Incentive frequency CEO OTHER OPERATIONS COUNCIL MEMBERS Once every three years Once every three years Three-year period Annualized Three-year period Annualized Minimum incentive opportunity value as % of base salary as % of target incentive opportunity Target incentive opportunity value as % of base salary Maximum incentive opportunity value as % of target incentive opportunity as % of base salary 0% 0% 500% 150% 750% 0% 0% 167% 150% 250% 0% 0% 300% 150% 450% 0% 0% 100% 150% 150% The PSUs granted under the Long-Term Incentive vest after a performance period of three years (for the grant of 2018, the performance period is 2018-2020), conditionally upon the achievement of pre-deﬁned performance objectives and subject to continuity of employment of the beneﬁciaries during the vesting period. Performance conditions The performance conditions of the Long-Term Incentive consist of two ﬁnancial key performance indicators, equally weighted at 50%: • Total shareholder return (TSR1) (relative SGS performance compared with the peer group) • Adjusted operating income margin (AOIM2) (absolute SGS performance against an internal target) The TSR of the Group will be compared to the TSR of a group of 12 peer companies, selected by the Board of Directors because they have a comparable range of services, technology, customers, suppliers or investors and thus are exposed to similar market cycles. The intention of indexing performance against a peer group of companies is to reward the relative performance of the Company, where market factors that are outside the control of the executives are neutralized. The list of the peer group companies is illustrated in the table below. Adecco ISS ALS Mistras Applus+ Rentokil Bureau Veritas Securitas Euroﬁns Sodexo Intertek Team The vesting levels for the TSR are deﬁned as follows: 150% vesting if SGS is ranked ﬁrst among the 13 companies composing the peer group, 100% vesting if SGS is ranked ﬁfth, and zero vesting if SGS is ranked eight or worse; in between, a linear interpolation applies. The AOIM will be assessed against a pre-deﬁned internal target. The vesting levels for the AOIM are deﬁned as follows: a threshold performance is set at 90% of target, and a maximum performance is set at 110% of target; if the AOIM performance is at or below threshold, the vesting is zero; if the AOIM is at target, the vesting is 110%; if the AOIM is at or above maximum, the vesting is 150%; in between, a linear interpolation applies. The graphics below summarize the key performance indicators of the Long-Term Incentive and their vesting levels. TOTAL SHAREHOLDER RETURN (TSR) SGS ranking versus peer companies WEIGHT 50% % G N I T S E V 200% 150% 100% 50% 0% 13TH 12TH 11TH 10 TH 9 TH 8TH 7TH 6TH 5 TH 4TH 3RD 2ND 1ST PERFORMANCE ADJUSTED OPERATING INCOME MARGIN (AOIM) Relative ranking against internal target WEIGHT 50% % G N I T S E V 200% 150% 100% 50% 0% THRESHOLD TARGET PERFORMANCE MAXIMUM The overall vesting level of the PSUs granted will be calculated as a weighted average of each of the respective vesting levels for TSR (50%) and AOIM (50%), and ranges between 0% and 150%. Settlement of the long-term incentive At the end of the vesting period, the PSUs vest, subject to the performance conditions and the continuity of employment condition, and shares are allocated to the participants based on the overall vesting level. The number of shares to be allocated at vesting is calculated by multiplying the number of PSUs granted by the overall vesting level, the result being rounded up to the nearest integer. NUMBER OF PSUS GRANTED OVERALL VESTING LEVEL (0-150%) NUMBER OF SHARES ALLOCATED AT VESTING 1. Total shareholder return: (Ending stock price – Beginning stock price) + Sum of all dividends received during the measurement period 2. See note 4 to the SGS Group Results (page 138) for details on the calculation of the adjusted operating income SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 110 CORPORATE GOVERNANCE MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 111 The Group does not issue new shares to be allocated to employees for equity-based compensation plans, but uses treasury shares instead, acquired through share buyback programs. Detailed information on the overhang and burn rate are disclosed in note 29. Termination of employment In case of termination of employment, all unvested PSUs are immediately forfeited without value and without any compensation, except in the following cases: • In case of termination of employment as a result of disability or retirement, unvested PSUs vest on a pro-rata basis, based on the number of full months of the vesting period that have expired until the termination date. The shares are allocated after the regular vesting date and the vesting level is determined based on the performance during the entire regular performance period. There is no early allocation of the shares. • Upon termination of employment as a result of death, unvested PSUs will vest immediately on a pro-rata basis, based on the number of full months of the vesting period that have expired until the termination date. The vesting level is based on an estimation of performance by the Board of Directors. • In the event of a corporate transaction or liquidation, unvested PSUs vest immediately. The vesting level is based on an estimation of performance by the Board of Directors. The table below summarizes the vesting rules in case of termination of employment. TERMINATION REASON VESTING RULE VESTING TIME AND SHARES ALLOCATION VESTING LEVEL Retirement or disability Vesting on a pro-rata basis At regular vesting date Based on actual performance Death Vesting on a pro-rata basis Immediate Corporate transaction or liquidation Full vesting Immediate Based on an estimation of performance by the Board of Directors Based on an estimation of performance by the Board of Directors Other reasons Forfeiture – – Malus and clawback provisions A malus and clawback policy applies to any Long-Term Incentive grant awarded to the members of the Operations Council. Under this policy, the Company may forfeit any unvested equity compensation and/or reclaim the value of any vested equity compensation granted under a Long-Term Incentive plan, in the following cases: i) any fraud, negligence or intentional misconduct was a signiﬁcant contributing factor to the Company having to restate all or a portion of its ﬁnancial statements; ii) a serious violation of the SGS internal regulations and/or Code of Integrity; iii) any violation of law within the scope of employment at the Company. 3.2.5. PRINCIPLES OF THE LONG-TERM INCENTIVE FOR THE PERFORMANCE PERIOD 2021-2023 The Committee reviewed the Long-Term Incentive scheme in place for the Operations Council Members and selected senior managers of the Group, and decided to move from the current schedule, with one grant every three years, to a system with one grant every year. The main reason for the change is the alignment with prevalent market practices. The new annual grant scheme will be implemented starting 2021 (as the 2018-2020 Long-Term Incentive plan comes to its end). The 2021 grant, designed as a transition scheme from the past practice to the new annual cycle, will cover the performance period 2021–2023. The vesting and performance period of the 2021 plan onwards will be three years (unchanged from previous plan). The performance conditions will include relative TSR against a more focused list of competitors, part of the Testing, Inspection and Certiﬁcation industry, and Environmental, Social and Governance KPIs. The details of the 2021–2023 Long-Term Incentive plan will be disclosed in the 2021 Remuneration Report. 3.2.6. REMUNERATION MIX The part of remuneration at risk (Short-Term Incentive and Long-Term Incentive) for the CEO represents, at target, 73% of his total remuneration. The part of remuneration settled in equity instruments (Restricted Shares and PSUs) represents, at target, 59% of his total remuneration. For the other members of the Operations Council, the part or remuneration at risk represents, on average, 64% of their total remuneration. The part of remuneration settled in equity instruments represents, on average, 50% of their total remuneration. The Long-Term Incentive is considered at its annualized value. The part of the ﬁxed remuneration linked to beneﬁts is not considered in this analysis. The charts below show the remuneration mix for the CEO and the other members of the Operations Council in three cases: at minimum (both Short-Term and Long-Term Incentives at zero pay-out), at target (both Short-Term and Long-Term Incentives at 100% pay-out) and at maximum (both Short-Term and Long-Term Incentives at maximum pay-out). REMUNERATION MIX FOR THE CEO AND OTHER OPERATIONS COUNCIL MEMBERS IN THREE CASES (%) CEO 100 90 80 70 60 50 40 30 20 10 0 OTHER OPERATIONS COUNCIL MEMBERS (ON AVERAGE) 100 90 80 70 60 50 40 30 20 10 0 Minimum Target Maximum Minimum Target Maximum Base salary (Cash) Short-Term Incentive (Cash) Short-Term Incentive (Restricted Shares) Long-Term Incentive (PSUs) 3.2.7. SHAREHOLDING OWNERSHIP GUIDELINES A shareholding ownership guideline (SOG) is in force since 2015, requiring the members of the Operations Council to own at least a certain multiple of their annual base salary in SGS shares, as follows: • CEO: three times the annual base salary • Other members of the Operations Council: two times the annual base salary In the event of a substantial drop in the share price, the Board of Directors has the discretion to modify the SOG. The determination of equity amounts against the SOG is deﬁned to include vested shares allocated under the Short-Term and Long-Term Incentive plans and other shares that are owned by the Operations Council member directly or indirectly (by ‘closely related persons’). The Remuneration Committee reviews compliance with the SOG on an annual basis. Until the minimum requirement is met, 25% of the shares allocated under the Short-Term Incentive plan and all shares allocated upon vesting of the PSUs under the Long-Term Incentive plan will be blocked. 3.2.8. EMPLOYMENT CONTRACTS Employment contracts of the Operations Council members have no ﬁxed term and can be terminated at any time by either party, provided a notice period of six months is respected. For the Chief Executive Ofﬁcer, the notice period is 12 months. The executive contracts do not provide for any severance payments (beyond the minimum legally required in the country of employment) and are subject to applicable legislation in the country of employment. SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 112 CORPORATE GOVERNANCE MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 113 3.2.9. TIMELINE OF REMUNERATION The following chart outlines the timeline of payment of each remuneration element that was earned in 2020: • The annual base salary is paid during 2020 • The cash portion of the Short-Term Incentive is paid in March 2021, shortly after the Annual General Meeting • The share portion of the Short-Term Incentive is allocated in April 2021 and will be unblocked in April 2024 • The PSUs granted under the Long-Term Incentive in 2018 will be earned over the performance period from 2018 to 2020 and will vest, subject to performance conditions and continuity of employment, in February 2021 TIMELINE OF REMUNERATION TIMELINE (PERFORMANCE PERIOD, TIME OF PAYMENT PERFORMANCE KPIS LONG-TERM INCENTIVE 2018 GRANT VESTING SHARES ALLOCATION 50% IN RESTRICTED SHARES 50% IN CASH SHORT-TERM INCENTIVE ANNUAL BASE SALARY AND BENEFITS Relative TSR (50%) Adjusted operating income margin (50%) UNBLOCKING Group revenue (25%) Group NPAT (25%) Role speciﬁc proﬁt, cash generation, efﬁcient use of capital (50%) Multiplied by leadership multiplier 2018 2019 2020 2021 2022 2023 2024 SHAREHOLDING OWNERSHIP GUIDELINE 4. Remuneration Awarded to the Board of Directors For the mandate from AGM 2020 to AGM 2021, the annual board retainer was CHF 500 000 for the Chairman of the Board (AGM 2019 to AGM 2020: CHF 500 000) and CHF 150 000 for the other Board of Directors members (AGM 2019 to AGM 2020: CHF 150 000). The Chairman of the Audit Committee was entitled to an additional fee of CHF 70 000; Directors serving as Audit Committee members were entitled to an additional fee of CHF 50 000. The Chairman of the Remuneration Committee was entitled to an additional fee of CHF 40 000; Directors serving as Remuneration Committee members were entitled to an additional fee of CHF 30 000. Directors serving on the Governance & Sustainability Committee were entitled to an additional fee of CHF 30 000 (AGM 2019 to AGM 2020: Directors serving on the Audit Committee were entitled to an additional fee of CHF 50 000; Directors serving on the other committees were entitled to an additional fee of CHF 30 000 per committee). (CHF) Chairman Membership Board retainer 500 000 150 000 Audit Committee fee Remuneration Committee fee Governance & Sustainability Committee fee 70 000 50 000 40 000 30 000 – 30 000 The total remuneration of the Board of Directors for the mandate from AGM 2020 to AGM 2021 is equal to CHF 2 210 000, within the amount approved by the AGM 2020 (CHF 2 300 000). Each Board member can choose to receive up to 50% of her/his remuneration settled in shares that may be restricted; the remaining portion is settled in cash. The cash part is paid partly in the current ﬁscal year and partly in the next ﬁscal year, on a pro-rata temporis basis. The shares or restricted shares are granted in the next ﬁscal year, after the publication of the Group’s results. The table below details the remuneration elements and the settlement vehicle of the Directors for the mandate AGM 2020 to AGM 2021. Chairmanship Board membership 500 000 – – – – – – – – – – 150 000 150 000 150 000 150 000 150 000 150 000 150 000 150 000 150 000 Audit Committee membership Remuneration Committee membership Governance & Sustainability Committee membership Total remuneration Proportion to be settled in cash Proportion to be settled in shares1 Proportion to be settled in restricted shares1 – – – – – – 50 000 70 000 – 50 000 – – – – 30 000 – – – 40 000 30 000 – 500 000 30 000 180 000 – 150 000 30 000 30 000 – – – – – 180 000 210 000 150 000 200 000 220 000 190 000 230 000 100% 100% 100% 100% 100% 100% 100% 100% 75% 100% – – – – – – – – – – – – – – – – – – 25% – 500 000 1 350 000 170 000 100 000 90 000 2 210 000 C. Grieder S. Atiya P. Desmarais, Jr. A. F. von Finck I. Gallienne C. Grupp T. Hartmann G. Lamarche S. R. du Pasquier K. Sorenson TOTAL The table below details the remuneration elements and the settlement vehicle of the Directors for the mandate AGM 2019 to AGM 2020. Chairmanship Board membership Audit Committee membership Remuneration Committee membership Professional Conduct Committee membership Total remuneration Proportion to be settled in cash Proportion to be settled in shares1 Proportion to be settled in restricted shares1 P. Kalantzis 500 000 – P. Desmarais, Jr. A. F. von Finck L. von Finck I. Gallienne C. Grieder C. Grupp G. Lamarche S. R. du Pasquier K. Sorenson TOTAL – – – – – – – – – 150 000 150 000 150 000 150 000 150 000 150 000 150 000 150 000 150 000 – – – – 50 000 30 000 – – 50 000 – 50 000 – 30 000 30 000 – – – – – – – 30 000 30 000 500 000 150 000 230 000 150 000 180 000 260 000 180 000 – 200 000 – 30 000 30 000 210 000 50 000 – – 200 000 100% 50% 100% 100% 100% 100% 100% 100% 100% 50% – 50% – – – – – – – – – – – – – – – – – 50% 500 000 1 350 000 200 000 120 000 90 000 2 260 000 1. Shares and restricted shares were granted during ﬁscal year 2020 Fixed remuneration 1. Shares and restricted shares will be granted during ﬁscal year 2021 SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 114 CORPORATE GOVERNANCE MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 115 The remuneration of the Board of Directors is subject to employer social charges according to Swiss legislation. The following table details the remuneration elements granted to each of the Directors for their tenure in ﬁscal year 2020. It includes both pro-rata temporis elements of remuneration for the mandate AGM 2019 to AGM 2020 and pro-rata temporis elements or remuneration for the mandate AGM 2020 to AGM 2021. Board retainer Representation fees Committee fees Total remuneration Shares value Shares NB Restricted shares value Restricted shares NB Employer social charges (CHF thousand) C. Grieder P. Kalantzis1 S. Atiya2 P. Desmarais, Jr. A. F. von Finck L. von Finck1 I. Gallienne C. Grupp T. Hartmann2 G. Lamarche S. R. du Pasquier K. Sorenson TOTAL 1. Until the AGM 2020 2. As of the AGM 2020 418 113 115 190 149 34 149 149 115 149 146 190 1 917 – – – – – – – – – – – – – 25 – 23 – 41 – 53 7 39 65 44 87 443 113 138 190 190 34 202 156 154 214 190 277 Cash 443 113 138 115 190 34 202 156 154 214 190 177 – – – 75 – – – – – – – – – – – 27 – – – – – – – – 384 2 301 2 126 75 27 – – – – – – – – – – – – – – – – – – – – – – 100 100 36 36 – 9 13 14 17 3 18 11 14 19 17 23 158 The following table details the remuneration elements granted to each of the Directors for their tenure in ﬁscal year 2019. It includes both pro-rata temporis elements of remuneration for the mandate AGM 2018 to AGM 2019 and pro-rata temporis elements or remuneration for the mandate AGM 2019 to AGM 2020. Board retainer Representation fees Committee fees Total remuneration Shares Cash value Shares NB Restricted shares value Restricted shares NB Employer social charges (CHF thousand) P. Kalantzis P. Desmarais, Jr. A. von Finck1 A. F. von Finck L. von Finck2 I. Gallienne C. Grieder2 C. Grupp C. Kirk1 G. Lamarche S. R. du Pasquier K. Sorenson2 463 113 37 154 116 154 116 154 37 154 154 75 TOTAL 1 727 1. Until the AGM 2019 2. As of the AGM 2019 – – – – – – – – – – – – – 15 – 8 69 – 31 85 31 – 46 61 25 478 113 45 223 116 185 201 185 37 200 215 100 478 113 45 223 116 185 201 185 37 200 215 100 371 2 098 2 098 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 36 7 3 19 10 16 17 13 3 18 19 9 170 The overall remuneration paid to the Board of Directors in 2020 is higher than the overall remuneration paid in 2019, due to the increase of the committee fee for the Chairmen of the Audit Committee and of the Remuneration Committee, timing impacts of share awards versus cash payments, and the change in the composition of the Board. 5. Remuneration Awarded to the Operations Council members This section sets out the remuneration that was paid to the Operations Council as a whole, to the three Operations Council members who make up Senior Management and to the Chief Executive Ofﬁcer in 2020. All amounts disclosed in this section include the Short-Term Incentive cash amount and restricted shares that will be granted in April 2021 with respect to performance in 2020 (disclosure according to the accrual principle). 5.1. FIXED REMUNERATION The table below summarizes the ﬁxed remuneration paid to the Operations Council, Senior Management and the Chief Executive Ofﬁcer in 2020. (CHF thousand) Base salary OPERATIONS COUNCIL (INCLUDING SENIOR MANAGEMENT) Other cash allowances Contributions to pension plans Other contributions and beneﬁts in kind Total ﬁxed remuneration Cash (including allowances) 7 969 1 024 Contributions and beneﬁts in kind Equity TOTAL – – – – 7 969 1 024 SENIOR MANAGEMENT (INCLUDING CHIEF EXECUTIVE OFFICER) Cash (including allowances) Contributions and beneﬁts in kind Equity TOTAL CHIEF EXECUTIVE OFFICER Cash (including allowances) Contributions and beneﬁts in kind Equity TOTAL 2 078 – – 2 078 1 000 – – 1 000 138 – – 138 64 – – 64 – 1 044 – 1 044 – 257 – 257 – 101 – 101 – 320 – 320 – 21 – 21 – 8 – 8 8 993 1 364 – 10 357 2 216 278 – 2 494 1 064 109 – 1 173 The aggregate total ﬁxed remuneration of the members of the Operations Council did not exceed the maximum amount approved by the Annual General Meeting of Shareholders in 2019 (CHF 14 000 000). For 2021, the 2020 Annual General Meeting of Shareholders already approved a maximum aggregate total ﬁxed remuneration for the members of the Operations Council (CHF 14 000 000). The table below summarizes the ﬁxed remuneration paid to the Operations Council, Senior Management and the Chief Executive Ofﬁcer in 2019. (CHF thousand) Base salary OPERATIONS COUNCIL (INCLUDING SENIOR MANAGEMENT) Other cash allowances Contributions to pension plans Other contributions and beneﬁts in kind Total ﬁxed remuneration Cash (including allowances) 8 748 1 385 Contributions and beneﬁts in kind Equity TOTAL – – – – 8 748 1 385 SENIOR MANAGEMENT (INCLUDING CHIEF EXECUTIVE OFFICER) Cash (including allowances) Contributions and beneﬁts in kind Equity TOTAL CHIEF EXECUTIVE OFFICER Cash (including allowances) Contributions and beneﬁts in kind Equity TOTAL 2 337 – – 2 337 1 000 – – 1 000 187 – – 187 74 – – 74 – 1 121 – 1 121 – 280 – 280 – 101 – 101 – 394 – 394 – 29 – 29 – 9 – 9 10 133 1 515 – 11 648 2 524 309 – 2 833 1 074 110 – 1 184 The decrease in ﬁxed remuneration compared with 2019 reﬂects the change in the composition of the Operations Council. SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 116 CORPORATE GOVERNANCE MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 117 5.2. SHORT-TERM VARIABLE REMUNERATION The short-term variable remuneration of the members of the Operations Council is determined by the achievement of ﬁnancial targets and by their leadership behaviors. In 2020, the achievement of ﬁnancial targets at Group level, in the businesses and in the regions ranges from 47.3% to 108.7% (2019: 61.1% to 114.6%). The chart below summarizes the 2020 performance achievements against targets for the ﬁnancial objectives (revenue, proﬁtability, cash generation and capital efﬁciency) used in the Short-Term Incentive. 2020 PERFORMANCE ACHIEVEMENTS AGAINST TARGETS THRESHOLD TARGET MAXIMUM PERFORMANCE LEVEL GROUP REVENUE GROUP NPAT GROUP ROIC GROUP FREE CASH FLOW REGIONAL AND BUSINESS PROFIT BUSINESS OP. FREE CASH FLOW REGION NWC Achievement Median achievement Performance range The overall Short-Term Incentive pay-out amounts to 60.9% of the target incentive opportunity for the CEO (2019: 108.9%) and ranges from 12.4% to 86.4% of the target incentive opportunity for the other members of the Operations Council (2019: 45.6% to 129.1%). For the purpose of the Short-Term Incentive, targets and performance achievement are measured at constant currency exchange rates. In settlement of the equity portion of the Short-Term Incentive 2020, SGS restricted shares will be allocated to the members of the Operations Council in April 2021, after the approval of the total Short-Term Incentive amount by the Annual General Meeting of Shareholders (in April 2020, 1 514 restricted shares were granted in settlement of the equity portion of the Short-Term Incentive 2019). The number of restricted shares to be allocated is calculated by dividing the equity portion of the Short-Term Incentive by the average closing price of the share during a 20-trading day period following the payment of the dividends after the Annual General Meeting of Shareholders, rounded up to the nearest integer, and are restricted for a period of three years. The total short-term remuneration amount will be submitted for approval to the Annual General Meeting of Shareholders of 2021, and the settlement for both the cash and the equity part will be implemented shortly after. The table below summarizes the short-term variable remuneration awarded to the Operations Council, Senior Management and the Chief Executive Ofﬁcer for the 2019 performance year, and its comparison with the incentive opportunity. (CHF thousand) Minimum Target Maximum Actual short-term variable remuneration OPERATIONS COUNCIL (INCLUDING SENIOR MANAGEMENT) Cash (including allowances) Contributions and beneﬁts in kind Equity TOTAL – – – – SENIOR MANAGEMENT (INCLUDING CHIEF EXECUTIVE OFFICER) Cash (including allowances) Contributions and beneﬁts in kind Equity TOTAL CHIEF EXECUTIVE OFFICER Cash (including allowances) Contributions and beneﬁts in kind Equity TOTAL – – – – – – – – 3 645 – 3 353 6 998 1 139 – 931 2 070 500 – 500 1 000 9 113 – 8 383 17 496 2 848 – 2 328 5 176 1 250 – 1 250 2 500 3 646 – 3 356 7 002 1 273 – 1 047 2 320 545 – 545 1 090 The total 2019 short-term remuneration amount was approved by the Annual General Meeting of Shareholders of 2020, and the settlement for both the cash and the equity part were implemented shortly after. The decrease in short-term variable remuneration compared to 2019 reﬂects the impact of the Covid-19 pandemic on the ﬁnancial performance of the Group, and the change in the composition of the Operations Council. 5.3. LONG-TERM VARIABLE REMUNERATION In 2020, the Group did not implement any Long-Term Incentive for the Operations Council members. In 2019, the Group implemented a cash Long-Term Incentive for the two Operations Council members who were newly appointed. This incentive mirrors the Long-Term Incentive 2018-2020, with exact same vesting and performance conditions, from the date of their respective appointment to 31 December 2020. The table below summarizes the short-term variable remuneration awarded to the Operations Council, Senior Management and the Chief Executive Ofﬁcer for the 2020 performance year, and its comparison with the incentive opportunity. In 2018, under the Long-Term Incentive 2018-2020, a total of 10 784 PSUs were awarded to the members of the Operations Council. This includes 2 905 PSUs awarded to Senior Management, of which 1 881 awarded to the Chief Executive Ofﬁcer. The PSUs awarded under the Long-Term Incentive 2018-2020 vest after the three-year performance period 2018-2020, in early 2021, subject to the performance conditions (relative total shareholder return and adjusted operating income margin, equally weighted at 50%) and to continuity of employment of the beneﬁciaries during the vesting period. (CHF thousand) Minimum Target Maximum Actual short-term variable remuneration OPERATIONS COUNCIL (INCLUDING SENIOR MANAGEMENT) Cash (including allowances) Contributions and beneﬁts in kind Equity TOTAL – – – – SENIOR MANAGEMENT (INCLUDING CHIEF EXECUTIVE OFFICER) Cash (including allowances) Contributions and beneﬁts in kind Equity TOTAL CHIEF EXECUTIVE OFFICER Cash (including allowances) Contributions and beneﬁts in kind Equity TOTAL – – – – – – – – 3 651 – 2 908 6 559 959 – 959 1 918 500 – 500 1 000 9 128 – 7 270 16 398 2 398 – 2 398 4 796 1 250 – 1 250 2 500 1 711 – 1 409 3 120 569 – 569 1 138 304 – 304 608 SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 118 CORPORATE GOVERNANCE MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 119 The table below summarizes the 2020 annualized value of the long-term variable remuneration awarded to the Operations Council, Senior Management and the Chief Executive Ofﬁcer in 2018 and 2019. Number of PSUs granted Total value of the grant (CHF Thousand) Annualized value of the grant (CHF Thousand)1 2019 Annualized value of the grant (CHF Thousand)2 OPERATIONS COUNCIL (INCLUDING SENIOR MANAGEMENT) Cash (including allowances) Contributions and beneﬁts in kind Equity TOTAL – – – – SENIOR MANAGEMENT (INCLUDING CHIEF EXECUTIVE OFFICER) Cash (including allowances) Contributions and beneﬁts in kind Equity TOTAL CHIEF EXECUTIVE OFFICER Cash (including allowances) Contributions and beneﬁts in kind Equity TOTAL – – – – – – – – – – – – – – – – – – – – 1 172 – 7 777 8 949 980 – 1 837 2 817 – – 1 500 1 500 1 042 – 8 469 9 511 898 – 2 317 3 215 – – 1 500 1 500 1. The annualized value of the grant for the year 2020 is: i) for the Equity part, one third of the total value of the 2018 grant at grant date, and ii) for the cash part, a fraction of the total value of the 2019 grant corresponding to the period from 1 January 2020 to 31 December 2020 2. The annualized value of the grant for the year 2019 is: i) for the Equity part, one third of the total value of the 2018 grant at grant date, and ii) for the cash part, a fraction of the total value of the 2019 grant corresponding to the period from the OC appointment to 31 December 2019 The table below summarizes the 2019 annualized value of the long-term variable remuneration awarded to the Operations Council, Senior Management and the Chief Executive Ofﬁcer in 2018 and 2019. Number of PSUs granted Total value of the grant (CHF Thousand)1 Annualized value of the grant (CHF Thousand)2 2018 Annualized value of the grant (CHF Thousand)3 OPERATIONS COUNCIL (INCLUDING SENIOR MANAGEMENT) Cash (including allowances) Contributions and beneﬁts in kind Equity TOTAL – – – – SENIOR MANAGEMENT (INCLUDING CHIEF EXECUTIVE OFFICER) Cash (including allowances) Contributions and beneﬁts in kind Equity TOTAL CHIEF EXECUTIVE OFFICER Cash (including allowances) Contributions and beneﬁts in kind Equity TOTAL – – – – – – – – 2 214 – – 2 214 1 878 – – 1 878 – – – – 1 042 – 8 469 9 511 898 – 2 317 3 215 – – 1 500 1 500 – – 8 469 8 469 – – 2 317 2 317 – – 1 500 1 500 1. Two members of the Operations Council (of whom one member of Senior Management), who have been appointed in 2019, were granted a LTI in cash for the period between their appointment and 31 December 2020 (the end of the performance period of the LTI PSUs 2018-2020). Vesting and performance conditions of the cash LTI are exactly the same as the LTI PSUs 2018-2020 2. The annualized value of the grant for the year 2019 is: i) for the Equity part, one third of the total value of the 2018 grant at grant date, and ii) for the cash part, a fraction of the total value of the grant corresponding to the period from the OC appointment to 31 December 2019 3. The annualized value of the grant for the year 2018 is one third of the total value of the 2018 grant at grant date Vesting of the 2018-2020 PSUs Long-Term Incentive and of the 2019 Cash Long-Term Incentive On 1 February 2021 the 2018-2020 PSUs Long-Term Incentive and the 2019 cash Long-Term Incentive vested, according to the vesting conditions and the performance conditions. The assessment of the performance conditions has been performed by the Board of Directors, based on the recommendation of the Committee. Whilst the relative TSR performance did not require any special consideration, the AOIM performance has been reassessed to take into account both the exceptional impact that Covid-19 pandemic had on the 2020 ﬁnancial performance of the Group, and the actual performance of the ﬁrst two years of the plan. The chart below summarizes the performance achievements against targets for the two metrics. 2020 PERFORMANCE ACHIEVEMENTS AGAINST TARGETS THRESHOLD TARGET MAXIMUM PERFORMANCE LEVEL RELATIVE TSR AOIM Achievement The table below details the vesting of the 2018-2020 PSUs Long-Term Incentive plan and of the 2019 Cash Long-Term Incentive plan. Number of PSUs granted in 2018 Value at grant (CHF Thousand)1 Number of PSUs outstanding at vesting date Number of shares allocated Value at vesting (CHF Thousand)2 OPERATIONS COUNCIL (INCLUDING SENIOR MANAGEMENT) Cash (including allowances) Contributions and beneﬁts in kind Equity3 TOTAL – – 10 784 10 784 SENIOR MANAGEMENT (INCLUDING CHIEF EXECUTIVE OFFICER) Cash (including allowances) Contributions and beneﬁts in kind Equity TOTAL CHIEF EXECUTIVE OFFICER Cash (including allowances) Contributions and beneﬁts in kind Equity TOTAL – – 2 905 2 905 – – 1 881 1 881 2 214 – 25 806 28 020 1 878 – 6 952 8 830 – – 4 501 4 501 – – 9 248 9 248 – – 2 303 2 303 – – 1 881 1 881 – – 7 716 7 716 – – 1 920 1 920 – – 1 568 1 568 1 845 – 20 887 22 732 1 565 – 5 197 6 762 – 4 245 4 245 1. For the equity part: based on the average closing share price of the 20 trading days preceding the grant date 2. For the equity part: based on the closing share price at vesting date 3. The number of PSUs granted in 2018 reported in this table includes PSUs granted to one OC member who was appointed to the OC in 2019, and was not OC member at the time of grant Discontinued share option plans The members of the Operations Council were entitled to a Share Option grant until 2014. As of the 2015 performance year, the Share Option plans have been discontinued and replaced by Restricted Shares for the settlement of the equity part of the Short-Term Incentive and by Performance Share Units for the Long-Term Incentive. No Share Options granted before 2015 are outstanding at the end of 2020. SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 120 CORPORATE GOVERNANCE MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 121 5.4. TOTAL REMUNERATION The tables below present all components of the remuneration earned in 2020 and 2019 by the Operations Council, Senior Management and the Chief Executive Ofﬁcer. The employer social charges are reported separately in the last column of the table. Total and annualized remuneration 2020 (CHF thousand) Total ﬁxed remuneration Total short- term variable remuneration Total 2020 remuneration before LTI Total long- term variable remuneration1 Annualized long-term variable remuneration1 Total 2020 remuneration 2020 Annualized remuneration Employer social charges OPERATIONS COUNCIL (INCLUDING SENIOR MANAGEMENT)2 Cash (including allowances) Contributions and beneﬁts in kind Equity TOTAL 8 993 1 364 – 10 357 1 711 10 704 – 1 409 3 120 1 364 1 409 13 477 SENIOR MANAGEMENT (INCLUDING CHIEF EXECUTIVE OFFICER)3 Cash (including allowances) Contributions and beneﬁts in kind Equity TOTAL CHIEF EXECUTIVE OFFICER Cash (including allowances) Contributions and beneﬁts in kind Equity TOTAL 2 216 278 – 2 494 1 064 109 – 1 173 569 – 569 1 138 304 – 304 608 2 785 278 569 3 632 1 368 109 304 1 781 – – – – – – – – – – – – 1 172 10 704 11 876 – 7 777 8 949 980 – 1 837 2 817 – – 1 500 1 500 – 1 378 – 1 364 1 409 1 364 9 186 13 477 22 426 1 378 2 785 278 569 3 632 1 368 109 304 1 781 3 765 278 2 406 6 449 1 368 109 1 804 3 281 – 359 – 359 – 174 – 174 1. The annualized value of the grant for the year 2020 is: i) for the Equity part, one third of the total value of the 2018 grant at grant date, and ii) for the cash part, a fraction of the total value of the 2019 grant corresponding to the period from 1 January 2020 to 31 December 2020 2. 21 FTE (Full-Time Equivalent) 3. 3 FTE Total and annualized remuneration 2019 (CHF thousand) Total ﬁxed remuneration Total short- term variable remuneration Total 2019 remuneration before LTI Total long- term variable remuneration1 Annualized long-term variable remuneration2 Total 2019 remuneration 2019 Annualized remuneration Employer social charges OPERATIONS COUNCIL (INCLUDING SENIOR MANAGEMENT)3 Cash (including allowances) Contributions and beneﬁts in kind Equity TOTAL 10 133 1 515 – 11 648 3 646 13 779 2 214 1 042 15 993 14 821 – – 3 356 7 002 1 515 3 356 18 650 – – 2 214 – 8 469 9 511 1 515 3 356 20 864 1 515 1 341 11 825 28 161 – 1 341 SENIOR MANAGEMENT (INCLUDING CHIEF EXECUTIVE OFFICER)4 Cash (including allowances) 2 524 1 273 3 797 1 878 898 5 675 4 695 Contributions and beneﬁts in kind Equity TOTAL CHIEF EXECUTIVE OFFICER Cash (including allowances) Contributions and beneﬁts in kind Equity TOTAL 309 – 2 833 1 074 110 – – 1 047 2 320 545 – 545 309 1 047 5 153 1 619 110 545 1 184 1 090 2 274 – – 1 878 – – – – – 2 317 3 215 – – 1 500 1 500 309 1 047 7 031 1 619 110 545 2 274 309 3 364 8 368 1 619 110 2 045 3 774 – 401 – 401 – 201 – 201 1. In 2019, the Group implemented a cash Long-Term Incentive for the Operations Council members who were appointed in 2019 2. The annualized value of the grant for the year 2019 is: i) for the Equity part, one third of the total value of the 2018 grant at grant date, and ii) for the cash part, a fraction of the total value of the grant corresponding to the period from the OC appointment to 31 December 2019 3. 23 FTE (Full-Time Equivalent) 4. 4 FTE 5.5. REMUNERATION MIX In 2020, the part of remuneration at risk (Short-Term Incentive and Long-Term Incentive) for the CEO represents 68% of the total remuneration (2019: 72%); the part of remuneration settled in equity instruments (Restricted Shares and PSUs) represents 58% of the total remuneration (2019: 57%). For the other members of the Operations Council, the part or remuneration at risk represents, on average, 56% of the total remuneration (2019: 62%); the part of remuneration settled in equity instruments represents, on average, 48% of the total remuneration (2019: 47%). The Long-Term Incentive is considered at his annualized value. For both 2020 and 2019, the annualized value at grant of the Long-Term Incentive 2018-2020 has been considered. The part of the ﬁxed remuneration linked to beneﬁts is not considered in this analysis. The charts below show the remuneration mix for the CEO and for the other members of the Operations Council in 2020 and 2019. REMUNERATION MIX FOR THE CEO AND OTHER OPERATIONS COUNCIL MEMBERS (%) CEO 100 90 80 70 60 50 40 30 20 10 0 OTHER OPERATIONS COUNCIL MEMBERS (ON AVERAGE) 100 90 80 70 60 50 40 30 20 10 0 2019 2020 2019 2020 Base salary (Cash) Short-Term Incentive (Cash) Short-Term Incentive (Restricted Shares) Long-Term Incentive (PSUs) 5.6. OTHER COMPENSATION ELEMENTS 5.6.1. SEVERANCE PAYMENTS No severance payments were made in 2020 to members of the Operations Council (unchanged from prior year). 5.6.2. OTHER COMPENSATION TO MEMBERS OR FORMER MEMBERS OF THE GOVERNING BODIES Consideration for non-compete of CHF 240 000 has been paid in 2020 to a former member of the Operations Council (in 2019 no other payment was made to any member or former member of the governing bodies). 5.6.3. LOANS TO MEMBERS OR FORMER MEMBERS OF THE GOVERNING BODIES As at 31 December 2020, no loan, credit or outstanding advance was due to the Group from members or former members of its governing bodies (unchanged from prior year). SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 122 MANAGEMENT REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 123 Deloitte SA Rue du Pré-de-la-Bichette 1 1202 Geneva Switzerland Phone: +41 (0)58 279 8000 Fax: +41 (0)58 279 8800 www.deloitte.ch Report of the statutory auditor To the General Meeting of SGS SA, Geneva Report of the Statutory Auditor in relation to sections 4 and 5 of the remuneration report in accordance with the Ordinance against Excessive compensation in Stock Exchange Listed Companies (Ordinance) We have audited sections 4 and 5 of the Remuneration Report of SGS SA for the year ended 31 December 2020, presented on pages 112 to 121. Responsibility of the Board of Directors The Board of Directors is responsible for the preparation and overall fair presentation of the Remuneration Report in accordance with Swiss law and the Ordinance against Excessive compensation in Stock Exchange Listed Companies (Ordinance). The Board of Directors is also responsible for designing the remuneration system and defining individual remuneration packages. Auditor's Responsibility Our responsibility is to express an opinion on the Remuneration Report. We conducted our audit in accordance with Swiss Auditing Standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether sections 4 and 5 of the Remuneration Report comply with Swiss law and articles 14 – 16 of the Ordinance. An audit involves performing procedures to obtain audit evidence on the disclosures made in the Remuneration Report with regard to compensation, loans and credits in accordance with articles 14 – 16 of the Ordinance. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatements in the Remuneration Report, whether due to fraud or error. This audit also includes evaluating the reasonableness of the methods applied to value components of remuneration, as well as assessing the overall presentation of the Remuneration Report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Opinion In our opinion, sections 4 and 5 of the Remuneration Report of SGS SA for the year ended 31 December 2020 comply with Swiss law and articles 14 – 16 of the Ordinance. Deloitte SA Matthew Sheerin Licensed Audit Expert Auditor in Charge Geneva, 23 February 2021 Aurelie Darrigade Licensed Audit Expert SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual ReportCORPORATE GOVERNANCE CORPORATE GOVERNANCE124 FINANCIAL STATEMENTS MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 125 2020 RESULTS 1. SGS Group 1.1. Consolidated Income Statement 1.2. Consolidated Statement of Comprehensive Income 1.3. Consolidated Statement of Financial Position 1.4. Consolidated Statement of Cash Flows 1.5. Consolidated Statement of Changes in Equity 1.6. Notes to Consolidated Financial Statements 1. Activities of the Group 2. Signiﬁcant accounting policies and exchange rates 3. Business combinations 4. 5. Information by business and geographical segment Revenues from contracts with customers 6. Government grants 7. Other operating expenses 8. 9. Financial income Financial expenses 10. Taxes 11. Earnings per share 12. Property, plant and equipment 13. Right-of-use assets and lease liabilities 126 126 127 128 129 130 130 130 137 138 141 142 142 142 142 143 144 145 146 14. Goodwill 147 2. SGS SA 3. Historical Data 15. Other intangible assets 150 2.1. Income Statement 178 3.1. SGS Group – ﬁve-year 189 16. Other non-current assets 150 2.2. Statement of Financial Position 17. Trade receivables 151 2.3. Notes to Financial Statements 18. Other receivables and prepayments 151 2.3.1. Signiﬁcant account policies 179 180 180 statistical data consolidated income statements 3.2. SGS Group – ﬁve-year statistical data of ﬁnancial position 2.3.2. Subsidiaries 180 3.3. SGS Group – ﬁve-year 190 191 191 192 statistical share data 3.4. SGS Group share information 3.5. Closing prices for SGS and the SMI 2019-2020 4. Material Operating Companies and Ultimate Parent 193 19. Cash and cash equivalents 20. Cash ﬂow statement 21. Acquisitions 22. Financial risk management 151 151 153 153 2.3.3. Corporate bonds 2.3.4. Total equity 2.3.5. Share capital 23. Share capital and treasury shares 24. Loans and other ﬁnancial liabilities 158 2.3.6. Financial income and ﬁnancial expenses 159 2.3.7. Guarantees and comfort letters 25. Deﬁned beneﬁt obligations 159 2.3.8. Remuneration 180 181 181 182 182 182 183 26. Provisions 27. Trade and other payables 28. Contingent liabilities 166 166 166 29. Equity compensation plans 167 30. Related-party transactions 31. Signiﬁcant shareholders 32. Approval of ﬁnancial statements and subsequent events 168 169 169 2.3.9. Shares and options held by members of governing bodies 2.3.10. Signiﬁcant shareholders 184 2.3.11. Approval of ﬁnancial statements and subsequent events 184 SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 126 FINANCIAL STATEMENTS 1. SGS Group 1.1. Consolidated Income Statement FOR THE YEARS ENDED 31 DECEMBER (CHF million) REVENUE Salaries and wages Subcontractors’ expenses Notes 4 Depreciation, amortization and impairment 12 to 15 Gain on business disposals Other operating expenses OPERATING INCOME (EBIT)1 Financial income Financial expenses Share of proﬁt of associates and joint ventures PROFIT BEFORE TAXES Taxes PROFIT FOR THE PERIOD Profit attributable to: Equity holders of SGS SA Non-controlling interests BASIC EARNINGS PER SHARE (IN CHF) DILUTED EARNINGS PER SHARE (IN CHF) 1. Refer to note 4 for analysis of non–recurring items 3 7 4 8 9 10 11 11 1.2. Consolidated Statement of Comprehensive Income Notes 25 10 FOR THE YEARS ENDED 31 DECEMBER (CHF million) Actuarial gains/(losses) on deﬁned beneﬁt plans Income tax on actuarial gains/(losses) ITEMS THAT WILL NOT BE SUBSEQUENTLY RECLASSIFIED TO INCOME STATEMENT Exchange differences and other1 ITEMS THAT MAY BE SUBSEQUENTLY RECLASSIFIED TO INCOME STATEMENT OTHER COMPREHENSIVE LOSS FOR THE PERIOD Proﬁt for the year TOTAL COMPREHENSIVE INCOME FOR THE PERIOD Attributable to: Equity holders of SGS SA Non-controlling interests 2020 5 604 (2 797) (352) (517) 63 (1 206) 795 12 (66) 1 742 (237) 505 480 25 64.05 63.82 2020 14 (4) 10 (182) (182) (172) 505 333 311 22 1. In 2020, exchange differences and other include net exchange loss of CHF 1 million on long-term loans treated as net investment in a foreign entity according to IAS 21 (2019: loss of CHF 6 million) 2019 6 600 (3 357) (386) (548) 268 (1 495) 1 082 18 (79) (4) 1 017 (315) 702 660 42 87.45 87.18 2019 (18) 6 (12) (68) (68) (80) 702 622 584 38 MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 127 1.3. Consolidated Statement of Financial Position AT 31 DECEMBER (CHF million) ASSETS NON-CURRENT ASSETS Property, plant and equipment Right-of-use assets Goodwill Other intangible assets Investments in joint ventures, associates and other companies Deferred tax assets Other non-current assets TOTAL NON-CURRENT ASSETS CURRENT ASSETS Inventories Unbilled revenues and work in progress Trade receivables Other receivables and prepayments Current tax assets Marketable securities Cash and cash equivalents TOTAL CURRENT ASSETS TOTAL ASSETS EQUITY AND LIABILITIES CAPITAL AND RESERVES Share capital Reserves Treasury shares EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF SGS SA Non-controlling interests TOTAL EQUITY NON-CURRENT LIABILITIES Loans and other ﬁnancial liabilities Lease liabilities Deferred tax liabilities Deﬁned beneﬁt obligations Provisions TOTAL NON-CURRENT LIABILITIES CURRENT LIABILITIES Loans and other ﬁnancial liabilities Lease liabilities Trade and other payables Provisions Current tax liabilities Contract liabilities Other creditors and accruals TOTAL CURRENT LIABILITIES TOTAL LIABILITIES TOTAL EQUITY AND LIABILITIES Notes 2020 2019 12 13 14 15 10 16 5 17 18 19 23 24 13 10 25 26 24 13 27 26 5 872 590 1 651 333 34 161 154 3 795 57 160 856 188 77 9 1 766 3 113 6 908 8 1 282 (230) 1 060 74 1 134 2 390 470 53 136 88 3 137 863 151 658 85 140 189 551 2 637 5 774 6 908 926 611 1 281 187 35 174 149 3 363 45 195 953 219 77 9 1 466 2 964 6 327 8 1 536 (30) 1 514 81 1 595 2 199 490 23 151 91 2 954 38 154 638 74 145 155 574 1 778 4 732 6 327 SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 128 FINANCIAL STATEMENTS MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 129 1.4. Consolidated Statement of Cash Flows FOR THE YEARS ENDED 31 DECEMBER (CHF million) Proﬁt for the year Non-cash and non-operating items Decrease/(Increase) in working capital Taxes paid CASH FLOW FROM OPERATING ACTIVITIES Purchase of property, plant and equipment and other intangible assets Disposal of property, plant and equipment and other intangible assets Acquisition of businesses Proceeds from disposal of businesses Increase in other non-current assets Decrease/(Increase) in investments in joint ventures, associates and other companies Interest received CASH FLOW USED BY INVESTING ACTIVITIES Dividends paid to equity holders of SGS SA Dividends paid to non-controlling interests Transaction with non-controlling interests Cash paid on treasury shares Proceeds/(payment) of corporate bonds Interest paid Payment of lease liabilities Proceeds from borrowings Payment of borrowings CASH FLOW USED BY FINANCING ACTIVITIES Currency translation INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR Increase/(decrease) in cash and cash equivalents CASH AND CASH EQUIVALENTS AT END OF YEAR Notes 20.1 20.2 21 20.3 20.3 20.3 20.3 20.3 19 2020 505 748 186 (253) 1 186 (259) 13 (492) 71 (4) 1 15 (655) (598) (37) (1) (208) 499 (63) (161) 542 (154) (181) (50) 300 1 466 300 1 766 2019 702 756 (3) (306) 1 149 (290) 11 (169) 333 (2) (4) 21 (100) (589) (43) (12) (23) (375) (87) (174) – – (1 303) (23) (277) 1 743 (277) 1 466 Attributable to: Non- controlling Interests 74 42 (4) Total Equity 1 675 702 (80) 1.5. Consolidated Statement of Changes in Equity FOR THE YEARS ENDED 31 DECEMBER (CHF million) Share capital Treasury shares Capital reserve Cumulative translation adjustments Cumulative gains/ (losses) on deﬁned beneﬁt plans1 Retained earnings and Group reserves Equity Holders of SGS SA BALANCE AT 1 JANUARY 2019 8 (191) 129 (1 064) (239) 2 958 1 601 Proﬁt for the period Other comprehensive income for the period Total comprehensive income for the period Dividends paid Share-based payments Movement in non-controlling interests Movement on treasury shares BALANCE AT 31 DECEMBER 2019 BALANCE AT 1 JANUARY 2020 Proﬁt for the period Other comprehensive income for the period Total comprehensive income for the period Dividends paid Share-based payments Movement in non-controlling interests Movement on treasury shares – – – – – – – 8 8 – – – – – – – BALANCE AT 31 DECEMBER 2020 8 1. Net of tax – – – – – – 161 (30) – – – – – – (200) (230) – – – – 17 – – – (64) (64) – – – – – 660 660 (12) – (76) (12) 660 584 38 622 – – – – (589) (589) (43) (632) – 17 (102) (102) (158) 3 – 12 – 17 (90) 3 146 (1 128) (251) 2 769 1 514 81 1 595 (30) 146 (1 128) (251) 2 769 1 514 – – – – 17 – (3) – (179) (179) – – – – – 10 10 – – – – 480 480 81 25 1 595 505 – (169) (3) (172) 480 311 22 333 (598) (598) (37) (635) – 20 17 20 (1) (204) – 8 – 17 28 (204) 160 (1 307) (241) 2 670 1 060 74 1 134 SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 130 FINANCIAL STATEMENTS MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 131 1.6. Notes to Consolidated Financial Statements 1. ACTIVITIES OF THE GROUP SGS SA and its subsidiaries (the ‘Group’) operate around the world under the name SGS. The head ofﬁce of the Group is located in Geneva, Switzerland. SGS is the global leader in inspection, veriﬁcation, testing and certiﬁcation services supporting international trade in agriculture, minerals, petroleum and consumer products. It also provides these services to governments, international institutions and customers engaged in the industrial, environmental and life science sectors. 2. SIGNIFICANT ACCOUNTING POLICIES AND EXCHANGE RATES BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS The consolidated ﬁnancial statements of the Group are stated in millions of Swiss Francs (CHF million). They are prepared from the ﬁnancial statements of the individual companies within the Group with all signiﬁcant companies having a year end of 31 December 2020. The consolidated ﬁnancial statements comply with the accounting and reporting requirements of the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and Swiss law. The accounting conventions and accounting policies are the same as those applied in the 2019 consolidated ﬁnancial statements, except for the Group’s adoption of new IFRSs effective 1 January 2020. The ﬁnancial statements are prepared on an accruals basis and under the historical cost convention, modiﬁed as required for the revaluation of certain ﬁnancial instruments. COVID-19 PANDEMIC Covid-19 has been declared a pandemic by the World Health Organization on 11 March 2020. Through this challenging period, SGS has focused on employee safety, customer service continuity and has been managing the business with a strong ﬁnance discipline. The Group has remained agile, adapting its operations to local guidelines and requirements, travel restrictions within and across countries, micro-and macro-economic changes, as well as speciﬁc client needs and requests. These have resulted in local business disruptions, such as temporary site closures, supply chain interruptions, postponement or suspension of consultancy and supervision projects. Consequently, SGS experienced a decline in activities in 2020 across most business lines and also incurred additional costs to respond to the new way of operating during the pandemic while maintaining efﬁcient workforce management. Supported by its diversiﬁed service portfolio, know-how and geographical coverage, SGS has been able to further evolve core products and develop new services to serve newly created customer demands. These 2020 consolidated ﬁnancial statements were prepared considering the impact of the pandemic, as well as the future uncertainties, with particular attention to the below speciﬁc areas: • Impairment of non-current assets: the Group has analyzed whether any triggering event could be identiﬁed that would indicate an impairment of its assets and none were identiﬁed • Goodwill impairment test: in addition to the annual impairment test carried out, the Group considered Covid-19 as a trigering event for impairment test in May 2020. The Group recognized an impairment loss of CHF 37 million • Appropriateness of expected credit loss allowance for trade receivables, unbilled revenue and work in progress: applying the simpliﬁed approach for IFRS 9 expected credit loss model, the Group reviewed its impairment matrix to ensure it continues to reﬂect current and future credit risks and assessed it as adequate • Accounting for government grants: at 31 December 2020, the Group recognized CHF 36 million as deduction of salaries and wage expenses BUSINESS SEGMENT FINANCIAL RESTATEMENT As of 1 January 2020, the Transportation business line (TRP) was integrated into other business segments. Other than creating operational synergies, the Group expects to reinvigorate the growth proﬁles of these services. The previously reported 2019 segment disclosures have been restated to reﬂect this change and are disclosed in note 4. ADOPTION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS Several new amendments and interpretations were adopted effective 1 January 2020 but have no material impact on the Group’s consolidated ﬁnancial statements. There are no IFRS standards or interpretations which are not yet effective and which would be expected to have a material impact on the Group. BASIS OF CONSOLIDATION Subsidiaries The consolidated ﬁnancial statements incorporate the ﬁnancial statements of the Company and the entities controlled by the Group. Control is achieved when the Group: • Has power over the investee • Is exposed, or has the right, to variable return from its involvement with the investee; and • Has the ability to use its power to affect its return The Company reassesses whether or not the Group controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. The principal operating companies of the Group are listed on pages 193 to 195. Non-controlling interests Non-controlling interests in subsidiaries are identiﬁed separately from the Group’s equity therein. Initially they are measured at the non-controlling interests’ proportionate share of the fair value of the acquiree’s identiﬁable net assets. Subsequently to the acquisition, the carrying amount of non-controlling interests is the amount of those interests at initial recognition plus the non- controlling interests’ share of subsequent changes in equity. Associates Associates are entities over which the Group has signiﬁcant inﬂuence but no control or joint control over the ﬁnancial and operating policies. The consolidated ﬁnancial statements include the Group’s share of the earnings of associates on an equity accounting basis from the date that signiﬁcant inﬂuence commences until the date that signiﬁcant inﬂuence ceases. Joint ventures A joint venture is a contractual arrangement over which the Group exercises joint control with partners and where the parties have rights to the net assets of the arrangement. The consolidated ﬁnancial statements include the Group’s share of the earnings and net assets on an equity accounting basis of joint ventures that it does not control, effective from the date that joint control commences until the date that joint control ceases. Joint operations A joint operation is an arrangement whereby the parties that have joint control have separable speciﬁc rights to the assets and the liabilities within the arrangement. When a Group entity undertakes its activities under joint operations, the Group as a joint operator recognizes in relation to its interest in a joint operation: • Its assets, including its share of any assets held jointly • Its liabilities, including its share of any liabilities incurred jointly • Its revenue from the sale of its share of the output arising from the joint operation • Its share of the revenue from the sale of the output by the joint operation; and • Its expenses, including its share of any expenses incurred jointly Investments in companies not accounted for as subsidiaries, associates or jointly controlled entities Investments in companies not accounted for as subsidiaries, associates or jointly controlled entities (normally below 20% shareholding levels) are stated at fair value through proﬁt and loss. Dividends received from these investments are included in ﬁnancial income. Transactions eliminated on consolidation All intra-Group balances and transactions, and any unrealized gains and losses arising from intra-Group transactions, are eliminated in preparing the consolidated ﬁnancial statements. Unrealized gains and losses arising from transactions with associates and jointly controlled entities are eliminated to the extent of the Group’s interest in those entities. Foreign currency transactions Transactions in foreign currencies are recorded at the foreign exchange rate prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the foreign exchange rate prevailing at that date. Exchange differences arising on the settlement of monetary items or on reporting monetary items at rates different from those at which they were initially recorded during the period or in previous ﬁnancial statements, are recognized in the income statement. Consolidation of foreign companies All assets and liabilities of foreign companies that are consolidated are translated using the exchange rates in effect at the balance sheet date. Income and expenses are translated at the average exchange rate for the year. Translation differences resulting from the application of this method are recognized in other comprehensive income and reclassiﬁed to proﬁt or loss on disposal. Average exchange rates are used to translate the cash ﬂows of foreign subsidiaries in preparing the consolidated statement of cash ﬂows. REVENUE RECOGNITION IFRS 15 Revenue from Contracts with Customers establishes a ﬁve-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognized at an amount that reﬂects the consideration to which an entity expects to be entitled in exchange for transferring services to a customer. The standard requires entities to exercise judgment, taking into consideration all of the relevant facts and circumstances when applying each step of the model to contracts with their customers. The Group recognizes revenue based on two main models: services transferred at a point in time and services transferred over time. • The majority of SGS’ revenue is transferred at a point in time and recognized upon completion of performance obligations and measured according to the transaction price agreed in the contract. Once services are rendered, e.g. a report issued, the client is invoiced and payment is due • Services transferred over time mainly concern long-term contracts, where revenue is recognized based on the measure of progress. When the Group has a right to consideration from a customer at the amount corresponding directly to the customer’s value of the performance completed to date, the Group recognizes revenue in the amount to which it has a right to invoice. In all other situations, the measure of progress is either based on observable output methods (usually the number of tests or inspection performed) or based on input methods such as the time incurred to date relative to the total expected hours to the satisfaction of the performance obligation. These contracts invoices are usually issued per contractually agreed installments and prices. Payments are due upon invoicing SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 132 FINANCIAL STATEMENTS MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 133 SEGMENT INFORMATION The Group reports its operations by business segment, according to the nature of the services provided. The Group operates in eight business segments. The Chief Operating Decision Maker evaluates segment performance and allocates resources based on several factors, of which revenue, adjusted operating income and return on capital are the main criteria. For the Group, the Chief Operating Decision Maker is the Senior Management, which is composed of the Chief Executive Ofﬁcer, the Chief Financial Ofﬁcer and the General Counsel. All segment revenues reported are from external customers. Segment revenue and operating income are attributed to countries based on the location in which the services are rendered. Capital additions represent the total cost incurred to acquire land, buildings and equipment as well as other intangible assets. PROPERTY, PLANT AND EQUIPMENT Land is stated at historical cost and is not depreciated. Buildings and equipment are stated at historical cost less accumulated depreciation. Subsequent expenditures are capitalized only if they increase the future economic beneﬁts embodied in the related item of property and equipment. All other expenditures are expensed as incurred. Depreciation is calculated on a straight-line basis over the estimated useful life of the assets as follows: • Buildings 12–40 years • Machinery and equipment 3–10 years • Other tangible assets 3–10 years RIGHT-OF-USE ASSETS The Group recognizes right-of-use assets at the commencement date of the lease. Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses. They are adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognized, initial direct costs incurred and lease payments made at or before the commencement date, less any lease incentives received. Unless the Group is reasonably certain to obtain ownership of the leased asset at the end of the lease term, the recognized right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term. Right-of-use assets are subject to impairment. LEASE LIABILITIES At the commencement date of the lease, the Group recognizes lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include ﬁxed payments less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The Group elected to use the practical expedient to account for each lease component and any non-lease components as a single lease component. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Group and payments of penalties for terminating a lease, if the lease term reﬂects the Group exercising the option to terminate. In the case that the implicit rate cannot be readily determined, the Group uses an incremental borrowing rate considering the country and the lease duration. The rate is estimated by the combination of the reference rate, the ﬁnancing spread and any asset speciﬁc adjustment when required. After the commencement date, the amount of lease liabilities is increased to reﬂect the accretion of interests and reduced for the lease payments made. Subsequently, the carrying amount of lease liabilities is remeasured if there is a modiﬁcation, a change in the lease term, a change in the in-substance ﬁxed lease payments or a change in the assessment to purchase the underlying asset. The Group applies the short-term lease and low-value recognition exemptions. Lease payments on short-term leases and leases of low-value assets are recognized as expenses on a straight-line basis over the lease term. GOODWILL In the case of acquisitions of businesses, the acquired identiﬁable assets, liabilities and contingent liabilities are recorded at fair value. The difference between the purchase price and the fair value is classiﬁed as goodwill and recorded in the statement of ﬁnancial position as an intangible asset. Goodwill arising from business combinations is measured at cost less any accumulated impairment losses. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period, or additional assets or liabilities are recognized, to reﬂect new information obtained about facts and circumstances that existed at the acquisition date that, if known, would have affected amounts recognized at that date. Goodwill arising on the acquisition of a foreign entity is recorded in the relevant foreign currency and is translated using the end of period exchange rate. On disposal of part or all of a business that was previously acquired and which gave rise to the recording of acquisition goodwill, the relevant amount of goodwill is included in the determination of the gain or loss on disposal. Goodwill and other intangible assets with indeﬁnite useful lives acquired as part of business combinations are tested for possible impairment annually and whenever events or changes in circumstances indicate their value may not be fully recoverable. For the purpose of impairment testing, the Group has adopted a uniform method for assessing goodwill and other intangible assets recognized under the acquisition method of accounting. These assets are allocated to a cash generating unit or a group of cash generating units (CGU) which are expected to beneﬁt from the business combination. The recoverable amount of a CGU or the group of CGUs is determined through a value-in-use calculation. If the value-in-use of the CGU or the group of CGUs is less than the carrying amount of its net operating assets, then a fair value less costs to sell valuation is also performed with the recoverable amount of the CGU or the group of CGUs being the higher of its value-in-use and the fair value less costs to sell. The key assumptions for the value-in-use calculations are those regarding the discount rates, growth rates, operating margins and expected changes to selling prices or direct costs during the period. Pre-tax discount rates used are based on the Group’s weighted average cost of capital, adjusted for speciﬁc risks associated with the CGUs or the group of CGUs’ cash ﬂow projections. The growth rates are based on industry growth forecasts. Expected changes in selling prices and direct costs are based on past practices and expectations of future changes in the market. For all CGUs or groups of CGUs, a value-in-use calculation is performed using cash ﬂow projections covering the next ﬁve years. These cash ﬂow projections take into account the most recent ﬁnancial results and outlook approved by Management, while the subsequent ﬁve years are extrapolated based on the estimated long-term growth rate for the relevant activity. If the recoverable amount of the CGU or of the group of CGUs is less than the carrying amount of the unit’s net operating assets, the impairment loss is allocated ﬁrst to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit. An impairment loss recognized for goodwill is not reversed in a subsequent period. Even if the initial accounting for an intangible asset acquired in the reporting period is only provisional, this asset is tested for impairment in the year of acquisition. OTHER INTANGIBLE ASSETS Intangible assets, including software, licences, trademarks and customer relationships are capitalized and amortized on a straight-line basis over their estimated useful lives, normally not exceeding 20 years. Indeﬁnite life intangible assets are not amortized but are subject to an annual impairment test. The following useful lives are used in the calculation of amortization: • Trademarks 5–20 years • Customer relationships 2–20 years • Computer software 1–5 years Other intangible assets acquired as part of an acquisition of a business are capitalized separately from goodwill if their fair value can be measured reliably. Internally generated intangible assets are recognized if the asset created can be identiﬁed, it is probable that future economic beneﬁts will be generated from it, the related development costs can be measured reliably and sufﬁcient ﬁnancial resources are available to complete the development. These assets are amortized on a straight-line basis over their useful lives, which usually do not exceed ﬁve years. All other development costs are expensed as incurred. IMPAIRMENT OF ASSETS EXCLUDING GOODWILL At each balance sheet date, or whenever there is an indication that an asset may be impaired, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether they have suffered an impairment loss. If indications of impairment are present, the assets are tested for impairment. If impaired, the carrying value of the asset is reduced to its recoverable value. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the CGU to which the asset belongs. The recoverable amount of an asset is the greater of the net realizable value and its value-in-use. In assessing its value-in-use, the pre-tax estimated future cash ﬂows are discounted to their present value using a pre-tax discount rate that reﬂects current market assessments of the time-value of money and the risks speciﬁc to the asset. REVERSAL OF IMPAIRMENT LOSSES Where an impairment loss on assets other than goodwill subsequently reverses, the carrying amount of the asset or CGU is increased to the revised estimate of its recoverable amount, but not in excess of the carrying amount that would have been recorded had no impairment loss been recognized. A reversal of an impairment loss is recognized as income immediately. GOVERNMENT GRANTS IAS 20 sets out the principle for the recognition, measurement, presentation and disclosure of government grants. Government grants that are not related to assets are credited to the income statement as a deduction of the related expenses. Government grants are recognized when there is a reasonable assurance that the grant will be received and all attached conditions will be met. TRADE RECEIVABLES Trade receivables are recognized and carried at original invoice amount less an allowance for any non-collectible amounts. An expected credit loss allowance is made in compliance with the simpliﬁed approach using a provision matrix (expected credit loss model). This provision matrix has been developed to reﬂect the country risk, the credit risk proﬁle, as well as available historical data. The Group considers a trade receivable to be credit impaired when one or more detrimental events have occurred such as: • Signiﬁcant ﬁnancial difﬁculty of the customer; or • It is becoming probable that the customer will enter bankruptcy or other ﬁnancial reorganization UNBILLED REVENUES AND WORK IN PROGRESS Unbilled revenues are recognized for services completed but not yet invoiced and are valued at net selling price. Work in progress is recognized for the partially ﬁnished performance obligations under a contract. The measure of progress is either based on observable output methods or based on input methods. A margin is recognized based on actual costs incurred, provided that the project is expected to be proﬁtable once completed. Similarly to receivables, an allowance for unbilled revenues and work in progress is made in compliance with the simpliﬁed approach using a provision matrix (expected credit loss model). SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 134 FINANCIAL STATEMENTS MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 135 MARKETABLE SECURITIES Marketable securities are recorded in the statement of ﬁnancial position at fair value through the statement of comprehensive income and recognized in the income statement at the time of disposal. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash and deposits held with banks with an original maturity of three months or less, and are subject to an insigniﬁcant risk of changes in value. Bank overdrafts are included within current loans. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING The Group uses derivative ﬁnancial instruments to hedge its exposure to foreign exchange and interest rate risks arising from operational, ﬁnancing and investment activities. In accordance with its treasury policy, the Group does not hold or issue derivative ﬁnancial instruments for trading purposes. Derivatives are accounted for on a mark-to-market basis. Derivative ﬁnancial instruments are initially recognized at fair value and subsequently remeasured at fair value at each balance sheet date. The gains and losses resulting from the fair value remeasurement are recognized in the income statement. The fair value of forward exchange contracts is determined with reference to market prices at the balance sheet date. CORPORATE BONDS The corporate bonds issued by the Group are measured at amortized cost using the effective interest method, with interest expense recognized on an effective yield basis. The effective interest method is a method of calculating the amortized cost of a ﬁnancial liability and allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the ﬁnancial liability to the net carrying amount on initial recognition. The Group uses ﬁnancial instruments to economically hedge interest rate risks relating to its corporate bonds. The changes in fair value of ﬁnance instruments are recognized in the income statement. LIABILITIES RELATED TO PUT OPTIONS GRANTED TO HOLDERS OF NON-CONTROLLING INTERESTS Written put options in favor of holders of non-controlling interests give rise to the recognition of a ﬁnancial liability recognized initially at the present value of the expected cash outﬂow. The present value is determined by Management’s best estimate of the cash outﬂow required to settle the obligation on exercise of the option, discounted by the Group’s cost of debt. The ﬁnancial liability is initially recorded with the corresponding entry within equity and in the absence of speciﬁc guidance in IFRS, subsequent changes in the valuation of the liability shall be recognized directly in equity attributable to owners, including the unwinding of the discount. FAIR VALUE MEASUREMENT Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. Equity compensation plans The Group provides additional beneﬁts to certain senior executives and employees through equity compensation plans. An expense is recognized in the income statement for shares and equity-linked instruments granted to senior executives and employees under these plans. TRADE PAYABLES Trade payables are recognized at amortized cost that approximates the fair value. PROVISIONS The Group records provisions when: it has an obligation, legal or constructive, to satisfy a claim; it is probable that an outﬂow of Group resources will be required to satisfy the obligation; and a reliable estimate of the amount can be made. In the case of litigation and claims relating to services rendered, the amount that is ultimately recorded is the result of a complex process of assessment of a number of variables, and relies on Management’s informed judgment about the circumstances surrounding the past provision of services. It also relies on expert legal advice and actuarial assessments. Changes in provisions are reﬂected in the income statement in the period in which the change occurs. CONTRACT LIABILITIES Contract liabilities arise upon advance payments from clients and issuance of upfront invoices. RESTRUCTURING COSTS The Group recognizes costs of restructuring against operating income in the period in which Management has committed to a formal plan, the costs of which can be reliably estimated, and has raised a valid expectation in those affected that the plan will be implemented and the related costs incurred. Where appropriate, restructuring costs include impairment charges arising from the implementation of the formal plan. CAPITAL MANAGEMENT Capital comprises equity attributable to equity holders, loans and other ﬁnancial liabilities, lease liabilities and cash and cash equivalents. The Board of Directors’ policy is to maintain a strong capital base in order to maintain investor, creditor and market conﬁdence, and to sustain the future development of the business. The Board also recommends the level of dividends to be distributed to ordinary shareholders on an annual basis. The Group maintains sufﬁcient liquidity at the Group and subsidiary level to meet its working capital requirements, fund capital purchases and small and medium-sized acquisitions. Treasury shares are intended to be used to cover the Group’s employee equity participation plan, convertible bonds and/or cancellation of shares. Decisions to buy or sell are made on an individual transaction basis by Management. There were no changes in the Group’s approach to capital management during the year. • Level 1 fair value measurements are those derived from the quoted price in active markets The Group is not subject to any externally imposed capital requirements. • Level 2 fair value measurements are those derived from inputs other than quoted prices that are observable for the asset and liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices) • Level 3 fair value measurements are those derived from valuation techniques as it cannot be derived from publicly available information. The assumptions and inputs used in the model take into account externally veriﬁable inputs. However, such information is by nature subject to uncertainty, particularly where comparable market-based transactions often do not exist. External valuers are involved for valuation for signiﬁcant assets and liabilities EMPLOYEE BENEFITS Pension plans The Group maintains several deﬁned beneﬁt and deﬁned contribution pension plans in accordance with local conditions and practices in the countries in which it operates. Deﬁned beneﬁt pension plans are based on an employee’s years of service and remuneration earned during a pre-determined period. Contributions to these plans are normally paid into funds, which are managed independently of the Group, except in rare cases where there is no legal obligation to fund. In such cases, the liability is recorded in the Group’s consolidated statement of ﬁnancial position. The Group’s obligations towards deﬁned beneﬁt pension plans and the annual cost recognized in the income statement are determined by independent actuaries using the projected unit credit method. Remeasurement gains and losses are immediately recognized in the consolidated statement of ﬁnancial position with the corresponding movement being recorded in the consolidated statement of comprehensive income. Past service costs are immediately recognized as an expense. Net interest expense is calculated by applying the discount rate at the beginning of the period to the net deﬁned beneﬁt liability or asset. The retirement beneﬁt obligation recognized in the statement of ﬁnancial position represents the present value of the deﬁned beneﬁt obligation reduced by the fair value of plan assets. Any asset resulting from this calculation is limited to the present value of available refunds and reductions in future contributions to the plan. Payments to deﬁned contribution plans are recognized as an expense in the income statement as incurred. Post-employment plans other than pensions The Group operates some non-pension post-employment deﬁned beneﬁt schemes, mainly healthcare plans. The method of accounting and the frequency of valuations are similar to those used for deﬁned beneﬁt pension plans. TAXES Income taxes include all taxes based upon the taxable proﬁts of the Group, including withholding taxes payable on the transfer of income from Group companies and tax adjustments from prior years. Taxes on income are recognized in the income statement except to the extent that they relate to items directly charged or credited to equity or other comprehensive income, in which case the related income tax effect is recognized in equity or other comprehensive income. Provisions of income and withholding taxes that could arise on the remittance of subsidiary retained earnings are only made where there is a current intention to remit such earnings. Other taxes not based on income, such as property taxes and capital taxes, are included within operating expenses. Deferred taxes are provided using the full liability method. They are calculated on all temporary differences that arise between the tax base of an asset or liability and the carrying values in the consolidated ﬁnancial statements except for non-tax-deductible goodwill and for those differences related to investments in subsidiaries where their reversal will not take place in the foreseeable future. Deferred income tax assets relating to the carry-forward of unused tax losses and tax credits are recognized to the extent that it is probable that future taxable proﬁts will be available against which they can be used. Current income tax assets and liabilities are off-set when the income taxes are levied by the same taxing authority and where there is a legally enforceable right of off-set. Deferred tax assets and liabilities are determined based on enacted or substantively enacted tax rates in the respective jurisdictions in which the Group operates that are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. EARNINGS PER SHARE Basic earnings per share are calculated by dividing the Group’s proﬁt by the weighted average number of shares outstanding during the year, excluding treasury shares. For diluted earnings per share, the weighted average number of shares outstanding is adjusted assuming conversion of all potential dilutive shares. Group proﬁt is also adjusted to reﬂect the after-tax impact of conversion. DIVIDENDS Dividends are reported as a movement in equity in the period in which they are approved by the shareholders. SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 136 FINANCIAL STATEMENTS MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 137 TREASURY SHARES Treasury shares are reported as a deduction to equity. The original cost of treasury shares and the proceeds of any subsequent sale are recorded as movements in equity. SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGMENTS Use of estimates The key assumptions concerning the future, and other key sources of estimation at the balance sheet date that may have a risk of causing a material adjustment to the carrying amount of assets and liabilities within the next ﬁnancial year. Business combinations In a business combination, the determination of the fair value of the identiﬁable assets acquired, particularly intangibles, requires estimations which are based on all available information and in some cases on assumptions with respect to the timing and amount of future revenues and expenses associated with an asset. The purchase price is allocated to the underlying acquired assets and liabilities based on their estimated fair value at the time of acquisition. The excess is reported as goodwill. As a result, the purchase price allocation impacts reported assets and liabilities, future net earnings due to the impact on future depreciation and amortization expense and impairment charges. The purchase price allocation is subject to a maximum period of 12 months adjustment. Valuation of trade receivables, unbilled revenue and work in progress The balances are presented net of expected credit loss allowance. These allowances for potential uncollected amounts are estimated in compliance with the simpliﬁed approach using a provision matrix (expected credit loss model), which has been developed to reﬂect the country risk, the credit risk proﬁle, as well as available historical data. In addition, an allowance is estimated based on individual client analysis when the collection is no longer probable. Impairment of goodwill The Group determines whether goodwill is impaired at a minimum on an annual basis. This requires identiﬁcation of CGUs and an estimation of the value-in-use of the CGUs to which the goodwill is allocated. Estimating the value-in-use requires the Group to make an estimate of the expected future cash ﬂows from the CGU or group of CGUs that holds the goodwill at a determined discount rate in order to calculate the present value of those cash ﬂows. Estimations of employee post-employment benefits obligations The Group maintains several deﬁned beneﬁt pension plans in accordance with local conditions and practices in the countries in which it operates. The related obligations recognized in the statement of ﬁnancial position represent the present value of the deﬁned beneﬁt obligations calculated annually by independent actuaries. These actuarial valuations include assumptions such as discount rates, salary progression rates and mortality rates. These actuarial assumptions vary according to the local prevailing economic and social conditions. Income Taxes The Group is subject to income taxes in numerous jurisdictions. There are many transactions and calculations for which the ultimate tax determination is uncertain. In assessing how an uncertain tax treatment may affect the determination of the taxable proﬁt (tax loss), the Group assumes that a taxation authority will examine amounts and have full knowledge of all related information. If the Group concludes it is not probable that a taxation authority will accept a particular tax treatment, the Group reﬂects the effect of each uncertainty in determining the taxable proﬁt (tax loss) by using one of the following methods: • The single most likely amount • The sum of probability-weighted amount in a range of possible outcomes The Group recognizes liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due, including estimated interest and penalties where appropriate. Where the ﬁnal tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made. Legal and warranty claims on services rendered The Group is subject to litigation and other claims. Management bases its judgment on the circumstances relating to each speciﬁc event, internal and external legal advice, knowledge of the industries and markets, prevailing commercial terms and legal precedent, and evaluation of applicable insurance cover where appropriate. The process of estimation is complex, dealing with uncertainty, requiring the use of informed estimates, actuarial assessment, evaluation of the insurance cover where appropriate and the judgment of Management. The timing of cash outﬂows from pending litigation and claims is uncertain since it depends, in the majority of cases, on the outcome of administrative and legal proceedings. The Group’s legal and warranty claims are reviewed, at a minimum, on a quarterly basis by a cross-functional representation of Management. Any changes in these estimates are reﬂected in the income statement in the period in which the estimates change. Judgments In the process of applying the entity’s accounting policies described above, Management has made the following judgment that has a signiﬁcant effect on the amounts recognized in the ﬁnancial statements. Lease termination of contracts with renewal and exit options The Group determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised. The Group has the option, for some of its leases to lease the assets for additional terms. The Group applies judgment in evaluating whether it is reasonably certain to exercise the option to renew. That is, it considers all relevant factors that create an economic incentive for it to exercise the renewal. After the commencement date, the Group reassesses the lease term if there is a signiﬁcant event or change in circumstances that is within its control and affects its ability to exercise (or not to exercise) the option to renew. EXCHANGE RATES The most signiﬁcant currencies for the Group were translated at the following exchange rates into Swiss Francs: Statement of ﬁnancial position period-end rates Income statement period average rates Australia Brazil Canada Chile China Eurozone AUD BRL CAD CLP CNY EUR United Kingdom GBP Russia Taiwan USA RUB TWD USD 100 100 100 100 100 100 100 100 100 100 2020 67.66 16.98 69.12 0.12 13.54 108.42 119.75 1.19 3.15 88.45 2019 68.02 24.07 74.47 0.13 13.93 109.03 127.49 1.58 3.24 97.35 2020 64.75 18.46 70.05 0.12 13.60 107.04 120.47 1.31 3.19 93.92 2019 69.11 25.24 74.89 0.14 14.40 111.29 126.88 1.54 3.22 99.38 3. BUSINESS COMBINATIONS The following business combinations occurred during 2020 and 2019: BUSINESS COMBINATIONS 2020 In 2020, the Group completed six business combinations for a total purchase price of CHF 536 million (note 21). • 100% of Thomas J. Stephens & Associates, Inc., a company providing clinical research serving the cosmetic and personal care industry in the USA (effective 8 January 2020) • 100% of CTA Gallet, a company operating vehicle inspection services in France and providing road safety inspections (effective 2 June 2020) • 100% of Groupe Moreau, a company providing vehicle inspection services in France (effective 28 August 2020) • 100% of Engineering Control Limited, a consultancy company focusing on process automation and functional safety of process systems in New Zealand (effective 4 November 2020) • 80% of Ryobi Geotechnique International Pte Ltd a company specializing in providing geoengineering solutions in Singapore (effective 31 December 2020) • 100% of SYNLAB Analytics & Services, a leading European environmental, food testing, life activities and tribology services company (effective 31 December 2020) These companies were acquired for an amount of CHF 536 million and the total goodwill generated on these transactions amounted to CHF 481 million. All the above transactions contributed a total of CHF 16 million in revenue and CHF 2 million in operating income in 2020. Had all acquisitions been effective 1 January 2020, the revenue for the period from these acquisitions would have been CHF 254 million and the operating income would have been CHF 30 million. On 31 December 2020 SGS has acquired SYNLAB Analytics & Services. This acquisition will strengthen Group’s presence in North-Western Europe in environmental testing, food testing, life activities and oil condition monitoring as well as allowing SGS to enter new markets in the Nordics. SYNLAB Analytics & Services has not contributed to Group’s revenue and operating income in 2020. Had the company been acquired on 1 January 2020 the revenue for the year would have been CHF 207 million and the operating income CHF 22 million. On 31 December 2020 SGS has acquired Ryobi Geotechnique International Pte Ltd.. This acquisition supports Group’s strategic evolution following TIC megatrends as well as the presence of Industrial business in Singapore. Ryobi Geotechnique International Pte Ltd. has not contributed to Group’s revenue and operating income in 2020. Had the company been acquired on 1 January 2020 the revenue for the year would have been CHF 25 million and the operating income CHF 4 million. None of the goodwill arising on these acquisitions is expected to be tax deductible. DIVESTMENT 2020 The Group has disposed of Pest management and fumigation operations in Belgium and Netherlands for a total purchase price of CHF 68 million, generating a gain on disposal of CHF 63 million. SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 138 FINANCIAL STATEMENTS MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 139 BUSINESS COMBINATIONS 2019 In 2019, the Group completed 11 business combinations for a total purchase price of CHF 185 million (note 21). ANALYSIS OF REVENUE AND OPERATING INCOME December 2020 • 60% of LeanSis Productividad, a company providing operational and manufacturing training as well as capacity building services in Spain (effective 21 January 2019) • 100% of Floriaan B.V., providing ﬁre safety services to industrial and real estate companies in the Netherlands. (effective 5 February 2019) • 100% of Testing, Engineering and Consulting Services, Inc., a leading independent testing, engineering and consulting services laboratory in the USA (effective 4 April 2019) • 97.54% of PT WLN Indonesia, a leading provider of water, soil and air testing services in Indonesia (effective 12 April 2019) • 100% of Chemical Solutions Ltd, a nationally recognized testing laboratory specializing in element and heavy metal testing for food, nutraceuticals, pharma and cosmetic products in the USA (effective 3 May 2019) • 100% of i2i Inﬁnity Ltd, a company providing customs compliance services to exporters and chambers of commerce with the help of innovative proprietary software solutions in the United Kingdom (effective 12 June 2019) • 60% of Maine Pointe LLC, a supply chain and operations consulting ﬁrm delivering business process optimization and improvement in the USA (effective 28 June 2019) • 100% of DMW Environmental Safety LTD, a leading provider of health and safety solutions, including asbestos, building compliance and water hygiene services amongst others, based in the United Kingdom (effective 22 July 2019) • 100% of Forensic Analytical Laboratoris, Inc., one of the leading providers of industrial hygiene, mold, bacteria, metals, particles, contamination control and asbestos testing, based in the USA (effective 16 July 2019) (CHF million) Revenue Adjusted operating income* Amortization of acquisition intangibles Restructuring costs Goodwill impairment Gain on business disposals Transaction and integration costs Operating income by business AFL MIN OGC CRS CBE IND EHS GIS 996 639 776 1 054 429 847 471 392 175 111 76 264 82 72 42 78 TOTAL 5 604 900 (4) (1) – (2) (10) (7) (4) (3) (31) (5) (7) (5) (3) (3) (13) (3) (45) (84) * Alternative Performance Measures (APM), refer to the ‘2020 Full Year APM’ document (16) 63 – – – (8) (10) – (3) (37) – – – – – – – (4) – (2) (1) – (2) (6) (1) 209 103 69 258 61 40 29 26 795 63 (16) SEGMENT INFORMATION RESTATEMENT Following the completion of a strategic review, the Transportation business line (TRP) has been integrated in our other business segments as of 1 January 2020. The previously reported 2019 segment disclosures have been restated to reﬂect this change and are disclosed in the table below. • 70% of ARGUS International a provider of data-driven inspection, audit, safety and compliance solution to the global aviation December 2019 restated market, based in USA (effective 24 September 2019) • 100% of Personal protective equipment testing and certiﬁcation activities of the Finnish Institute of Occupational Health, based in Finland (effective 1 October 2019) In 2019, these companies were acquired for an equivalent of CHF 185 million and the total goodwill generated on these transactions amounted to CHF 142 million (note 21). All the above transactions contributed in total CHF 66 million in revenues and CHF 12 million in operating income. Had all acquisitions been effective 1 January 2019, the revenues for the period would have been CHF 116 million and the Group operating income for the period would have been CHF 20 million. In 2019, Maine Pointe LLC has contributed to the diversiﬁcation of Certiﬁcation and Business Enhancement (CBE) business portfolio and contributed CHF 32 million in revenues and CHF 6 million in operating income. Had Maine Pointe LLC been acquired effective 1 January 2019, the revenue would have been CHF 64 million and the operating income would have been CHF 12 million. None of the goodwill arising on these acquisitions except Maine Pointe LLC is expected to be tax deductible. DIVESTMENT 2019 The Group has disposed of Petroleum Services Corporation (PSC), a provider of downstream Plant and Termination Operations for a total purchase price of CHF 333 million, generating a gain on disposal of CHF 268 million. 4. INFORMATION BY BUSINESS AND GEOGRAPHICAL SEGMENT The information presented is disclosed by business line and focuses on revenue, operating income, capital expenditures and employee numbers because these are the performance measures used by the Chief Operating Decision Maker to assess segment performance. ANALYSIS OF OPERATING INCOME (CHF million) ADJUSTED OPERATING INCOME* Amortization and impairment of acquired intangibles Restructuring costs Goodwill impairment Gain on business disposals Transaction and integration costs Other non-recurring items1 OPERATING INCOME 2020 900 (31) (84) (37) 63 (16) – 795 2019 1 063 (36) (89) (21) 268 (19) (84) 1 082 1. 2019 included mainly tax provisions of CHF 33 million, impairment of ﬁxed and intangible assets of CHF 24 million and the remeasurement of the deﬁned beneﬁt obligation of the Swiss pension fund of CHF 10 million * Alternative Performance Measures (APM), refer to the ‘2020 Full Year APM’ document (CHF million) Revenue Adjusted operating income* Amortization of acquisition intangibles Restructuring costs Goodwill impairment Gain on business disposals Transaction and integration costs Other non-recurring items Operating income by business AFL MIN OGC CRS CBE IND EHS GIS 1 074 753 1 075 1 091 497 1 091 540 479 172 128 120 270 99 116 67 91 TOTAL 6 600 1 063 (3) (1) (4) (3) (6) (13) (4) (2) (36) (13) (14) (15) (8) (5) (20) (5) (9) (89) – – – – – (21) – – – – 268 – – – – – (2) – (10) – (4) (1) (1) (1) (21) 268 (19) (11) (8) (22) (11) (5) (15) (5) (7) (84) 143 105 337 248 79 46 52 72 1 082 * Alternative Performance Measures (APM), refer to the ‘2020 Full Year APM’ document December 2019 published (CHF million) Revenue Adjusted operating income* Amortization of acquisition intangibles Restructuring costs Goodwill impairment Gain on business disposals Transaction and integration costs Other non-recurring items Operating income by business AFL MIN OGC CRS CBE IND EHS TRP GIS 1 074 753 1 075 1 021 447 930 540 500 260 172 128 120 262 91 112 67 66 45 TOTAL 6 600 1 063 (3) (1) (4) (3) (6) (10) (4) (5) – (36) (13) (14) (15) (8) (5) (15) (5) (11) (3) (89) – – – – – (21) – – – – – 268 – – – – – – (2) – (10) – (4) – (1) (2) – (11) (8) (22) (10) (4) (12) (5) (7) (5) 143 105 337 241 72 54 52 41 37 (21) 268 (19) (84) 1 082 * Alternative Performance Measures (APM), refer to the ‘2020 Full Year APM’ document SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 140 FINANCIAL STATEMENTS MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 141 RESTRUCTURING COSTS The Group incurred a pre-tax restructuring charge of CHF 84 million (2019: CHF 89 million), out of which CHF 45 million is recognized for GIS activities, mainly driven by the termination of the single-window contract with the Government of Ghana and the vehicle inspection contract with the Government of Uganda. Total restructuring costs comprised personnel reorganization of CHF 44 million (2019: CHF 67 million) as well as ﬁxed asset impairment of CHF 25 million (2019: CHF 9 million) and other charges of CHF 15 million (2019: CHF 13 million). REVENUE FROM EXTERNAL CUSTOMERS BY GEOGRAPHICAL SEGMENT (CHF million) Europe/Africa/Middle East Americas Asia Paciﬁc TOTAL 2020 2 508 1 102 1 994 5 604 % 44.8 19.7 35.5 100.0 2019 2 894 1 579 2 127 6 600 % 43.9 23.9 32.2 100.0 Revenue in Switzerland from external customers for 2020 amounted to CHF 149 million (2019: CHF 177 million). No country represented more than 20% of revenues from external customers in 2020 nor 2019. MAJOR CUSTOMER INFORMATION In 2020 and 2019, no external customer represented 5% or more of the Group’s total revenue. SPECIFIC NON-CURRENT ASSETS BY GEOGRAPHICAL SEGMENT Speciﬁc non-current assets directly attributable to geographical segment mainly include property, land and equipment, right-of-use assets, goodwill and other intangible assets: (CHF million) Europe/Africa/Middle East Americas Asia Paciﬁc TOTAL SPECIFIC NON-CURRENT ASSETS 2020 2 102 806 628 3 536 % 59.4 22.8 17.8 100.0 2019 1 494 945 656 3 095 Speciﬁc non-current assets in Switzerland for 2020 amounted to CHF 164 million (2019: CHF 131 million). RECONCILIATION WITH TOTAL NON-CURRENT ASSETS (CHF million) Speciﬁc non-current assets as above Deferred tax assets Retirement beneﬁt assets Non-current loans to third parties TOTAL 2020 3 536 161 90 8 3 795 % 48.3 30.5 21.2 100.0 2019 3 095 174 78 16 3 363 CAPITAL ADDITIONS BY BUSINESS SEGMENT December December restated December published (CHF million) AFL MIN OGC CRS CBE IND EHS TRP GIS TOTAL 2020 40 28 41 82 4 30 21 n.a. 13 259 % 15.4 10.9 15.8 31.7 1.5 11.6 8.1 n.a. 5.0 100.0 2019 46 36 48 75 5 38 23 n.a. 19 290 % 15.9 12.4 16.6 25.8 1.7 13.1 7.9 n.a. 6.6 2019 46 36 48 65 5 25 23 31 11 100.0 290 AVERAGE NUMBER OF EMPLOYEES BY GEOGRAPHICAL SEGMENT (Average number of employees) Europe/Africa/Middle East Americas Asia Paciﬁc TOTAL Number of employees at year end 2020 36 350 17 878 34 870 89 098 91 698 % 15.9 12.4 16.6 22.4 1.7 8.6 7.9 10.7 3.8 100.0 2019 37 946 21 863 34 685 94 494 92 661 5. REVENUES FROM CONTRACTS WITH CUSTOMERS TIMING OF REVENUE RECOGNITION (CHF million) Services transferred at a point in time Services transferred over time Services transferred at a point in time Services transferred over time Services transferred at a point in time Services transferred over time 2020 2019 restated 2019 published AFL MIN OGC1 CRS2 CBE2 IND2 EHS TRP2 GIS2 TOTAL 89% 72% 81% 81% 96% 57% 76% n.a. 91% 79% 11% 28% 19% 19% 4% 43% 24% n.a. 9% 21% 85% 69% 68% 83% 98% 59% 77% n.a. 93% 77% 15% 31% 32% 17% 2% 41% 23% n.a. 7% 23% 85% 69% 68% 85% 97% 56% 77% 83% 94% 77% 15% 31% 32% 15% 3% 44% 23% 17% 6% 23% 1. The disposal of the PSC business in the USA has impacted the proportion of revenue recognized at a point in time versus over time in OGC 2. See note 2 on Segment information restatement SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 142 FINANCIAL STATEMENTS MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION ASSETS AND LIABILITIES RELATED TO CONTRACTS WITH CUSTOMERS (CHF million) Unbilled revenues and work in progress Trade receivables Contract liabilities 2020 160 856 189 2019 195 953 155 Revenue evolution, timing and project maturity are the main factors impacting assets and liabilities related to contracts with customers. In 2020, SGS has recognized revenue of CHF 93 million related to contract liabilities at 31 December 2019. In 2019, the revenue recognized from contract liabilities at 31 December 2018 amounted to CHF 81 million. Revenue recognized from performance obligations satisﬁed in previous periods were immaterial in 2020 and 2019. The remaining performance obligations (unsatisﬁed or partially satisﬁed) expected to be recognized for long-term contracts amount to CHF 568 million at 31 December 2020, out of which CHF 300 million are expected to be recognized in revenue within one year. SGS is applying the practical expedient IFRS 15.121 and does not disclose unsatisﬁed or partially unsatisﬁed performance obligations from contracts with an original duration of one year or less or where SGS may recognize revenue from the satisfaction of the performance obligation in accordance with IFRS 15.B16. This paragraph permits as a practical expedient to exclude contracts where SGS has a right to payment for performance completed to date. Assets recognized from costs to fulﬁll a contract in 2020 were not signiﬁcant, while amortization and impairment losses were nil. 6. GOVERNMENT GRANTS Government grants for the period amount to CHF 36 million (2019: CHF 5 million), presented as a deduction of salaries and wages expenses. The Group has applied for subsidies in certain countries for which a scheme has been put in place to cover partial unemployment due to the Covid-19 pandemic. Conditions attached to the grants differ from one country to another and the Group recognizes the grants only when the conditions are met. The outstanding balance recognized in the statement of ﬁnancial position amounted to CHF nil million (2019: CHF nil million). 7. OTHER OPERATING EXPENSES (CHF million) Consumables, repairs and maintenance Travel costs Rental expense, insurance, utilities and sundry supplies External consultancy fees IT expenses Communication costs Allowance for expected credit losses Gain on disposal of property, plant and equipment Miscellaneous operating expenses TOTAL 8. FINANCIAL INCOME (CHF million) Interest income Foreign exchange gains/(losses) Other ﬁnancial income TOTAL 9. FINANCIAL EXPENSES (CHF million) Interest expense1 Loss on derivatives at fair value Other ﬁnancial expenses Net ﬁnancial expenses on deﬁned beneﬁt plans TOTAL 1. 2020 includes CHF 20 million (2019: CHF 25 million) of lease liabilities interest expense (see note 13) 2020 446 246 136 105 91 66 3 (2) 115 1 206 2020 11 1 – 12 2019 490 362 161 104 87 99 32 (2) 162 1 495 2019 17 1 – 18 2020 2019 46 11 9 – 66 49 27 3 – 79 143 2019 299 16 315 2020 251 (14) 237 10. TAXES MAJOR COMPONENTS OF TAX EXPENSE (CHF million) Current taxes Deferred tax (credit)/expense relating to the origination and reversal of temporary differences TOTAL The Group has operations in various countries that have different tax laws and rates. Consequently, the effective tax rate on consolidated income varies from year to year. A reconciliation between the reported income tax expense and the amount that would arise using the weighted average statutory tax rate of the Group is as follows: RECONCILIATION OF TAX EXPENSE (CHF million) Proﬁt before taxes TAX AT STATUTORY RATES APPLICABLE TO THE PROFITS EARNED IN THE COUNTRY CONCERNED Tax effect of non-deductible or non-taxable items Tax effect on losses not currently treated as being recoverable in future years Tax effect on losses previously considered irrecoverable, now expected to be recoverable Non-creditable foreign withholding taxes Minimum taxes Prior period adjustments Rate changes Other TAX CHARGE DEFERRED TAX AFTER NETTING (CHF million) Deferred tax assets Deferred tax liabilities TOTAL 2020 742 139 24 21 (12) 39 6 11 6 3 237 2020 161 (53) 108 2019 1 017 205 21 48 (14) 34 2 5 4 10 315 2019 174 (23) 151 COMPONENTS OF DEFERRED INCOME TAX BALANCES (CHF million) Right-of-use assets Fixed assets Trade receivable, unbilled revenues and work in progress Deﬁned beneﬁt obligation Provisions and other Lease liabilities Intangible assets Tax losses carried forward DEFERRED INCOME TAXES 2020 2019 Assets Liabilities Assets Liabilities – 42 26 15 56 135 2 47 323 128 8 5 9 – – 65 – 215 – 45 29 22 50 137 2 39 324 131 6 7 7 – – 22 – 173 SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 144 FINANCIAL STATEMENTS NET CHANGE IN DEFERRED TAX ASSETS/(LIABILITIES) (CHF million) NET DEFERRED INCOME TAX ASSET AT 1 JANUARY 2019 IFRS 16 adjustment Acquisition of subsidiaries (Charged) to the income statement Credited to other comprehensive income Exchange differences and other NET DEFERRED INCOME TAX ASSET AT 31 DECEMBER 2019 Acquisition of subsidiaries Credited to the income statement (Charged) to other comprehensive income Exchange differences and other NET DEFERRED INCOME TAX ASSET AT 31 DECEMBER 2020 The Group has unrecognized tax losses carried forward amounting to CHF 152 million (2019: CHF 139 million). UNRECOGNIZED TAX LOSSES CARRYFORWARDS AT 31 DECEMBER 2020 (CHF million) Expiring in the next 3 years Expiring in 4–10 years Available without limitation TOTAL UNRECOGNIZED TAX LOSSES Total 173 9 (2) (16) 6 (19) 151 (42) 14 (4) (11) 108 27 34 91 152 At 31 December 2020, the unrecognized deferred tax assets amount to CHF 47 million (2019: CHF 60 million). At 31 December 2020, the retained earnings of subsidiaries and foreign incorporated joint ventures consolidated by the Group include approximately CHF 2 621 million (2019: CHF 2 929 million) of undistributed earnings that may be subject to tax if remitted to the parent company. As set out in note 22, the nature of the Group’s business requires keeping a signiﬁcant part of the cash reserves in the operating units. As a Group policy, no deferred tax is recognized in respect of undistributed earnings until the point at which the distributable earnings are determined and foreign statutory requirements allowing the distribution are fulﬁlled. Until then, the Group takes the view that it is probable that they will not be reversed in the foreseeable future. 11. EARNINGS PER SHARE Basic earnings per share are calculated as follows: Proﬁt attributable to equity holders of SGS SA (CHF million) Weighted average number of shares (‘000) BASIC EARNINGS PER SHARE (CHF) 2020 480 7 489 64.05 2019 660 7 552 87.45 Diluted earnings per share are calculated as basic earnings per share except that the weighted average number of shares includes the dilutive effect of the Group’s equity compensation plans (see note 29): Proﬁt attributable to equity holders of SGS SA (CHF million) Diluted weighted average number of shares (‘000) DILUTED EARNINGS PER SHARE (CHF) 2020 480 7 516 63.82 2019 660 7 575 87.18 MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 145 12. PROPERTY, PLANT AND EQUIPMENT (CHF million) 2020 COST At 1 January Additions Acquisition of subsidiaries Disposals Exchange differences and other At 31 December ACCUMULATED DEPRECIATION AND IMPAIRMENT At 1 January Depreciation Impairment Acquisition of subsidiaries Disposals Exchange differences and other At 31 December NET BOOK VALUE AT 31 DECEMBER 2020 (CHF million) 2019 COST At 1 January Additions Acquisition of subsidiaries Disposals Exchange differences and other At 31 December ACCUMULATED DEPRECIATION AND IMPAIRMENT At 1 January Depreciation Impairment Acquisition of subsidiaries Disposals Exchange differences and other At 31 December NET BOOK VALUE AT 31 DECEMBER 2019 Land & buildings Machinery & equipment Other tangible assets Total 478 6 5 (11) (14) 464 256 15 15 1 (10) (6) 271 193 2 154 135 45 (93) (99) 2 142 1 677 164 7 24 (86) (94) 1 692 450 743 90 14 (59) (73) 715 516 53 3 4 (57) (33) 486 229 Land & buildings Machinery & equipment Other tangible assets 482 7 – (6) (5) 478 246 17 2 – (3) (6) 256 222 2 116 146 3 (97) (14) 2 154 1 613 174 15 1 (91) (35) 1 677 477 739 103 4 (48) (55) 743 509 61 3 2 (45) (14) 516 227 3 375 231 64 (163) (186) 3 321 2 449 232 25 29 (153) (133) 2 449 872 Total 3 337 256 7 (151) (74) 3 375 2 368 252 20 3 (139) (55) 2 449 926 Included in the other tangible assets are leasehold improvements, ofﬁce furniture and IT hardware as well as construction-in-progress assets amounting to CHF 37 million (2019: CHF 27 million). At 31 December 2020, the Group had commitments of CHF 7 million (2019: CHF 5 million) for the acquisition of land, buildings and equipment. SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 146 FINANCIAL STATEMENTS MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 13. RIGHT-OF-USE ASSETS AND LEASE LIABILITIES The following table summarizes the main foreign currencies of the lease liabilities. (CHF million) Euro (EUR) US Dollar (USD) Renminbi Yuan (CNY) Taiwan Dollar (TWD) Australian Dollar (AUD) Canadian Dollar (CAD) Indian Rupee (INR) Morocco Dirham (MAD) New Zealand dollar (NZD) Russian Ruble (RUB) Hong Kong Dollar (HKD) British Pound Sterling (GBP) Brazilian Real (BRL) Korean Won (KRW) Other TOTAL (CHF million) AT 1 JANUARY Additions Acquisition Depreciation expense Interest expense Payment of lease liabilities and interests Exchange difference and other AT 31 DECEMBER 2020 Analyzed as: Current liabilities Non-current liabilities TOTAL (CHF million) AT 1 JANUARY Additions Acquisition Disposal Depreciation expense Interest expense Payment of lease liabilities and interests Exchange difference and other AT 31 DECEMBER 2019 Analyzed as: Current liabilities Non-current liabilities TOTAL Right-of-use assets Total Lease liabilities Land & buildings Machinery & equipment Other tangible assets 539 92 37 (125) – – (27) 516 – – 6 – – – – 6 72 37 2 (40) – – (3) 68 611 129 45 (165) – – (30) 590 644 123 46 – 20 (181) (31) 621 2020 151 470 621 Right-of-use assets Total Lease liabilities Land & buildings Machinery & equipment Other tangible assets 585 98 3 (2) (133) – – (12) 539 9 – – (7) – – – (2) – 91 32 – (3) (45) – – (3) 72 685 130 3 (12) (178) – – (17) 611 713 127 – (12) – 25 (195) (14) 644 2019 154 490 644 Included in other tangible assets are mainly vehicles for CHF 62 million (2019: CHF 66 million). 147 2019 208 120 102 35 20 14 12 10 9 9 7 7 6 6 79 644 2020 229 94 93 29 21 15 12 6 8 7 5 7 3 7 85 621 The Group leases mainly ofﬁces, laboratory spaces and vehicles. During the year ended 31 December 2020, an additional CHF 4 million (2019: CHF 8 million) was recognized as an expense in the income statement. (CHF million) IFRS 16 OTHER QUANTITATIVE INFORMATION Expense relating to short-term leases Expense relating to leases of low-value assets Expense relating to variable lease payments TOTAL EXPENSE RECOGNIZED IN INCOME STATEMENT 14. GOODWILL (CHF million) COST AT 1 JANUARY Additions Consideration/fair value adjustments on prior years’ acquisitions Disposal Impairment Exchange differences AT 31 DECEMBER 2020 2019 2 2 – 4 5 2 1 8 2020 2019 1 281 481 (5) (6) (37) (63) 1 224 142 (5) (32) (21) (27) 1 651 1 281 Goodwill recognized by the Group is allocated to Cash Generating Units (CGUs) or groups of CGUs for impairment testing purposes and is annually tested. • For the following four business lines, CGUs cover the entire worldwide operations since customer activities are executed by the local entities, the clients and customers that they serve and the drivers of cash inﬂows are largely interdependent on worldwide basis across each business line: – Consumer and Retail (CRS) – Oil, Gas and Chemicals (OGC) – Environment, Health and Safety (EHS) – Minerals (MIN) • The Agriculture, Food and Life (AFL) business is split into three worldwide CGUs to reﬂect the global nature of customer activities and drivers of cash inﬂows in each of Agriculture and Food, Clinical Research and Life Science Laboratories SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 148 FINANCIAL STATEMENTS MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 149 Following the organizational structure changes stated in note 2, the goodwill of the Transportation business line (previously two CGUs), has been mainly reallocated to Governments and Institutions (GIS) and Industrial (IND). • The Governments and Institutions (GIS) business line now includes two main CGUs in Spain and France regrouping mobility (regulated services) activities since customers in this sector are country speciﬁc, they are assessed as two distinct CGUs • The Industrial (IND) business line now includes an additional CGU related to the transportation testing and engineering activities in the USA where the cash inﬂows are concentrated. It also includes an additional CGU following the acquisition of Ryobi Ltd., thus bringing the number of CGUs in this business line to eight. The other CGUs continue to be driven primarily by regional and local customer activities and therefore have cash inﬂows, which are largely independent from each other. Consequently, a CGU organization by region or by country has been maintained As required by IAS 36 and considering speciﬁc impairment indicators, the technical consultancy activity in the USA was assessed as a separate CGU within the Certiﬁcation and Business and Enhancement (CBE) business line. The acquisition of SYNLAB Analytics & Services, completed on 31 December 2020, has generated additional goodwill of CHF 439 million. Considering completion date as well as announced changes in the management reporting of business lines, this goodwill remains unallocated at 31 December 2020. ALLOCATION OF GOODWILL TO CGUS OR GROUP OF CGUS Goodwill allocated to the main CGUs or groups of CGUs, as of 31 December, is broken down as follows: (CHF million) AFL IND EHS MIN CBE OGC CRS GIS Unallocated TOTAL 2020 211 257 153 106 98 103 113 171 439 2019 251 257 167 113 112 105 107 169 – 1 651 1 281 PRE-TAX DISCOUNT RATE USED IN 2020 FOR THE MAIN CGUS OR GROUP OF CGUS IMPAIRMENT TESTING AFL IND EHS MIN CBE OGC CRS GIS 2020 9.4% 6.4%–12.2% 7.8% 10.7% 6.2%–12.1% 9.4% 9.3% 6.9%–7.3% The cash ﬂow projections for the ﬁrst ﬁve years were based upon ﬁnancial plans, approved by the Group, for each CGU or group of CGUs. The overall assumptions used in the cash ﬂow projections are consistent with the expected average growth rates of the segments served by the Group. For the subsequent years, the Group assumes a long-term growth rate in the range of 0%–2% and stable operating margins depending on each CGU or group of CGUs. SENSITIVITY TO CHANGES IN ASSUMPTION After considering the Goodwill impairment loss of CHF 37 million, sensitivity analyses were conducted using the following key assumptions • Reducing the expected annual revenue growth rates for the ﬁrst ﬁve years by 2 pp1 • Reducing the operating margin by 0.25 pp1 • Increasing the discount rate assumption by 1 pp1 For all impairment tests, changing the key assumptions retained in the scenario using the sensitivity analyses described above would not result in any additional impairment. SPECIFIC IMPAIRMENT TEST PERFORMED FOR CBE TECHNICAL CONSULTANCY USA Due to a decline in sales, primarily driven by the suspension of several large technical consultancy projects and a reduction in projects associated with business transactions due to lower deal activity in the USA as a result of the Covid-19 pandemic, an impairment test has been conducted for this CGU using the following key assumptions: • Pre-tax discount rate of 12.1% assuming a risk size premium of 5.2% reﬂecting uncertain future revenue development for Goodwill impairment reviews have been conducted for all goodwill balances allocated to the CGUs as described above. consultancy businesses The recoverable amount of each of the CGUs, determined based upon a value-in-use calculation, is higher than its carrying amount. Cash ﬂow projections were used in this calculation, discounted at a pre-tax rate depending on the business activities and geographic proﬁle of each of the respective CGUs. However, following the closure of certain activities within the business lines and restructuring as a result of the global downturn and ongoing economic uncertainty, the Group recognized an impairment loss of CHF 37 million mainly allocated to the following CGUs or groups of CGUs: • An impairment of CHF 10 million has been recognized in our IND CGUs mainly in North America in the transportation testing and engineering activities as the recoverable amount of the CGU was lower than its carrying amount due to the worldwide downturn of the automotive industry • An impairment of CHF 16 million has been recognized in our AFL Life clinical CGU due to a decline in expected synergies for our clinical research activities as a result of the closure of the business in France • An impairment of CHF 11 million has been recognized following the reorganization of the Group’s Transportation business mainly impacting the aviation, audit and advisory services in Australia (CBE), which have been heavily impacted by the Covid-19 pandemic In 2019, the Group restructured parts of the Industrial USA business. Consequently, the CGU was reduced to its recoverable amount, resulting in an impairment charge of CHF 21 million. • Strong recovery in 2021, supported by recommencement of suspended projects and increasing transactional activity, with a 2021 revenue growth rate of approximately 200% to reach pre-Covid-19 pandemic level and an average growth rate of 12% from 2022 to 2025 • Average EBITDA margin back to its historical trend prior Covid-19 pandemic in the mid 20s from 2021 to 2025 • Long-term growth rate of 2% after 2025 Based on the above assumptions, the recoverable amount exceeds the carrying amount for this CGU for which the Group’s share of goodwill is CHF 78 million. The Group has assessed the sensitivity of the value-in-use to the changes in the assumptions as follows: • Missing the 2021 revenue target by 20% and decreasing the 2022 to 2025 average revenue growth by 4 pp¹ would reduce the value-in-use by CHF 85 million • Decreasing the average EBITDA margin by 4 pp¹ would reduce the value-in-use by CHF 45 million • Decreasing the long-term growth rate by 1 pp¹ would reduce the value-in-use by CHF 20 million Based on the above sensitivity analyses, the recoverable amount exceeds the carrying value of the CGU and therefore would not result in an impairment. Missing the 2021 revenue target by 35% and decreasing both the 2022 to 2025 average revenue growth and average EBITDA margin by 4 pp¹ respectively, whilst leaving other assumptions unchanged (including the risk size premium of 5.2% in the pre-tax discount rate), would bring the value in use of the CGU to its carrying amount. SGS | 2020 Integrated Annual Report 1. Percentage points SGS | 2020 Integrated Annual Report 150 FINANCIAL STATEMENTS 15. OTHER INTANGIBLE ASSETS (CHF million) 2020 COST At 1 January Additions Trademarks and other Customer relationships Internally generated Purchased Total Computer software and other assets Acquisition of subsidiaries Disposals Exchange differences and other At 31 December ACCUMULATED AMORTIZATION AND IMPAIRMENT At 1 January Amortization Impairment Acquisition of subsidiaries Disposals Exchange differences and other At 31 December NET BOOK VALUE AT 31 DECEMBER 2020 93 – 10 (9) (3) 91 68 6 – 2 (9) (2) 65 26 238 1 165 (9) (7) 388 137 23 3 (1) (10) (8) 144 244 158 14 1 (3) 12 182 137 12 – – (3) 1 147 35 302 13 – (37) (16) 262 262 11 3 – (36) (6) 234 28 791 28 176 (58) (14) 923 604 52 6 1 (58) (15) 590 333 Trademarks and other Customer relationships Internally generated Purchased Total Computer software and other assets (CHF million) 2019 COST At 1 January Additions Acquisition of subsidiaries Disposals Exchange differences and other At 31 December ACCUMULATED AMORTIZATION AND IMPAIRMENT At 1 January Amortization Impairment Disposals Exchange differences and other At 31 December NET BOOK VALUE AT 31 DECEMBER 2019 16. OTHER NON-CURRENT ASSETS (CHF million) Non-current loans or amounts receivable from third parties Retirement beneﬁt asset Other non-current assets TOTAL 77 – 22 (2) (4) 93 65 5 3 (2) (3) 68 25 251 – 17 (25) (5) 238 136 24 4 (25) (2) 137 101 137 17 1 – 3 158 109 11 6 – 11 137 21 313 16 – (19) (8) 302 266 17 7 (12) (16) 262 40 2020 8 90 56 154 778 33 40 (46) (14) 791 576 57 20 (39) (10) 604 187 2019 16 78 55 149 Other non-current assets are measured at fair value through proﬁt and loss except non-current loans or amounts receivable from third parties that are measured at amortized cost. Depending on the nature of the balances, currency and date of maturity, interest rates on long-term balances or loans to third parties range between 0.0% and 12.97%. In 2020, other non-current assets included deposits for guarantees and restricted cash of CHF 36 million (2019: CHF 35 million). SGS | 2020 Integrated Annual Report MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 151 Typical examples of restricted cash are cash deposits for performance bonds, rentals and other operating obligations. At 31 December 2020 and 2019, the fair value of the Group’s other non-current assets approximates their carrying value. 17. TRADE RECEIVABLES (CHF million) Trade receivables Allowance for expected credit losses TOTAL The movement of allowance for expected credit losses is analyzed as follows: (CHF million) At 1 January Acquisition of subsidiaries Increase in allowance recognized in the income statement Utilizations Exchange differences TOTAL AT 31 DECEMBER 18. OTHER RECEIVABLES AND PREPAYMENTS (CHF million) Prepayments Derivative assets Other receivables TOTAL 2020 1 032 (176) 856 2020 (209) (1) (3) 19 18 (176) 2020 69 8 111 188 The Group has no signiﬁcant concentration of credit risk, with exposure spread over a large number of counterparties. Other receivables consist mainly of sales taxes and other taxes recoverable as well as advances to suppliers. 2019 1 162 (209) 953 2019 (196) (1) (36) 18 6 (209) 2019 66 15 138 219 2019 1 425 40 1 19. CASH AND CASH EQUIVALENTS (CHF million) Cash and short-term deposits Deposits on demand Short-term loans TOTAL 20. CASH FLOW STATEMENT 20.1. NON-CASH AND NON-OPERATING ITEMS (CHF million) Depreciation of property, plant and equipment Impairment of property, plant and equipment and other intangible assets Depreciation/impairment of right-of-use asset Amortization of intangible assets Impairment of goodwill ECL1 on trade receivables, unbilled revenues and work in progress Net ﬁnancial expenses (Decrease)/increase in provisions and employee beneﬁts Share-based payment expenses Gain on disposals Share of results from associates and other entities Taxes NON-CASH AND NON-OPERATING ITEMS 1. Expected Credit Losses SGS | 2020 Integrated Annual Report 2020 1 766 – – 1 766 1 466 2020 232 31 165 52 37 3 54 (14) 17 (65) (1) 237 748 2019 252 40 178 57 21 31 61 48 17 (268) 4 315 756 Notes 12 12 and 15 13 15 14 8 and 9 10 152 FINANCIAL STATEMENTS 20.2. DECREASE/(INCREASE) IN WORKING CAPITAL (CHF million) Decrease in unbilled revenues and inventories Decrease/(increase) in trade receivables Decrease/(increase) in other receivables and prepayments Decrease/(increase) in trade and other payables Increase in other creditors and accruals Increase in other provisions DECREASE/(INCREASE) IN WORKING CAPITAL 2020 17 71 25 23 37 13 186 2019 29 (66) (17) (5) 31 25 (3) 20.3. CHANGES IN LIABILITIES ARISING FROM FINANCING ACTIVITIES (CHF million) 1 January Financing cash ﬂows Equity movement Acquisition and disposals New Leases Other movements1 31 December Cash impact Non cash impact 2020 Corporate bonds Bank loans Put option on acquisition Lease liabilities Other ﬁnancial liabilities TOTAL 2 105 8 89 644 25 2 871 499 388 – (161) (1) 725 – – (23) – 1 (22) – 162 – 46 – 208 – – – 123 – 123 (4) (2) (4) (31) (2) (43) 2 600 556 62 621 23 3 862 1. Other movements include interest accruals and payments, amortization under effective interest rate method, currency effects and other contingent consideration movements (CHF million) 1 January Financing cash ﬂows Equity movement Acquisition and disposals New Leases Other movements¹ 31 December Cash impact Non cash impact 2019 Corporate bonds Bank loans Put option on acquisition Lease liabilities Other ﬁnancial liabilities TOTAL 2 484 (375) 4 – 713 24 3 225 – – (174) (12) (561) – – 89 – 12 101 – 4 – (12) 2 (6) – – – 127 – 127 (4) – – (10) (1) (15) 2 105 8 89 644 25 2 871 1. Other movements include interest accruals and payments, amortization under effective interest rate method, currency effects and other contingent consideration movements MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 153 21. ACQUISITIONS ASSETS AND LIABILITIES ARISING FROM ACQUISITIONS (CHF million) Property, plant and equipment Right-of-use assets Intangible assets Other non-current assets Trade receivable Other current assets Cash and cash equivalents Current liabilities Non-current liabilities Non-controlling interests NET ASSETS ACQUIRED Goodwill TOTAL PURCHASE PRICE Acquired cash and cash equivalents Consideration payable Payment on prior year acquisitions Prepayment on acquisitions NET CASH OUTFLOW ON ACQUISITIONS Fair Value on SYNLAB Analytics & Services Fair value on Ryobi Geotechnique International Pte Ltd Fair value on other acquisitions 2020 Total fair value on acquisition 2020 Total fair value on acquisition 2019 27 32 156 1 30 24 32 (62) (216) – 24 433 457 (32) – – 1 426 7 3 9 – 1 6 7 (5) (6) (4) 18 26 44 (7) – – – 37 1 10 10 – 3 1 5 (5) (12) – 13 22 35 (5) (3) 2 – 29 35 45 175 1 34 31 44 (72) (234) (4) 55 481 536 (44) (3) 2 1 492 4 1 40 1 11 7 24 (19) (5) (21) 43 142 185 (24) (1) 9 – 169 In compliance with IFRS 3, fair value on acquisition remains provisional for a twelve-month period following the date of acquisition, during which the Group can ﬁnalise the purchase price allocation. The goodwill arising on these acquisitions relates mainly to the value of expected synergies and the value of the qualiﬁed workforce that do not meet the criteria for recognition as separable intangible assets. Consideration payable relates mainly to environmental and commercial warranty clauses and the fair value of contingent future earn-out payments. The Group incurred transaction-related costs of CHF 14 million (2019: CHF 13 million) related to external legal fees, due diligence expenses and the costs of maintaining an internal acquisition department. These expenses are reported within Other Operating Expenses in the consolidated income statement. 22. FINANCIAL RISK MANAGEMENT RISK MANAGEMENT POLICIES AND OBJECTIVES The Group’s activities expose it primarily to market, credit and liquidity risk. Market risk includes foreign exchange, interest rate and equity price risks. The risk management policies and objectives are governed by the Group’s policies approved by the Board of Directors. The Group’s risk management policies are designed to identify and analyze these risks, to set appropriate risk limits and controls and to monitor the risk and limits continually by means of reliable and up-to-date administrative and information systems. The Audit Committee oversees how Management monitors compliance with the Group’s risk management policies. The Audit Committee is assisted in its oversight role by Internal Audit. SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 154 FINANCIAL STATEMENTS RISK MANAGEMENT ACTIVITIES The Group uses foreign exchange contracts to manage the Group’s exposure to ﬂuctuations in foreign currency exchange rates. These activities are carried out in accordance with the Group’s risk management policies and objectives in areas such as counterparty exposure and economic hedging practices. Counterparties to these agreements are major international ﬁnancial institutions with high credit ratings and positions are monitored using market value and sensitivity analyses. The associated credit risk is therefore limited. These agreements generally include the exchange of one currency for a second currency at a future date. The following table summarizes foreign exchange contracts outstanding at year end. The notional amount of derivatives summarized below represents the gross amount of the contracts and includes transactions, which have not yet matured. Therefore the ﬁgures do not reﬂect the Group’s net exposure at year end. The market value approximates the costs to settle the outstanding contracts. These market values should not be viewed in isolation but in relation to the market values of the underlying hedged transactions and the overall reduction in the Group’s exposure to adverse ﬂuctuations in foreign exchange rates. Currently, the Group has certain exposure to interest and credit risks and no exposure to equity price risk. Notional amount Market value (CHF million) 2020 2019 2020 2019 FOREIGN EXCHANGE FORWARD CONTRACTS Currency: Australian Dollar (AUD) Brazilian Real (BRL) Canadian Dollar (CAD) Chilean Peso (CLP) Chinese Renminbi (CNY) Colombian Peso (COP) Euro (EUR) British Pound Sterling (GBP) Hong Kong Dollar (HKD) Indian Rupee (INR) Japanese Yen (JPY) Kenyan Shilling (KES) Korean Won (KRW) New Zealand Dollar (NZD) Philippines Peso (PHP) Polish Zloty (PLN) Russian Ruble (RUB) Turkish New Lira (TRY) US Dollar (USD) South African Rand (ZAR) Other TOTAL CREDIT RISK MANAGEMENT (9) (31) 11 (24) 17 (3) (59) (36) 12 2 (1) (3) 2 (7) (14) (3) (4) 2 (106) (19) (19) (292) (12) (42) 21 (36) 8 (5) (187) 48 23 2 (2) (4) 4 (3) (8) (5) 4 1 (501) (21) (11) (726) – (2) – (2) – – (2) – – – – – – – – – – – 2 (1) – (5) – (1) – – – – 1 – – – – – – – – – – – 7 (1) – 6 Credit risk arises from the possibility that customers may not be able to settle their obligations as agreed. It arises principally from the Group’s commercial activities. Trade receivable, unbilled revenues and work in progress are subject to a policy of active risk management which focuses on the assessment of country risk, credit limits and approval procedures. Due to its large geographic base and number of customers, the Group is not exposed to material concentrations of credit risk on its trade receivable, unbilled revenue and work in progress. As at 31 December 2020, the Group has unbilled revenue and work in progress of CHF 160 million (2019: CHF 195 million) which is net of an allowance for expected credit losses of CHF 15 million (2019: CHF 19 million). Receivables are recognized and carried at original invoice amount less an allowance for any non-collectible amounts. A credit loss allowance is made in compliance with the simpliﬁed approach using a provision matrix (expected credit loss model). This provision matrix has been developed to reﬂect the country risk, the credit risk proﬁle and available historical data. Similarly to receivables an allowance for unbilled revenues and work in progress is made using a provision matrix. MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 155 Set out below is the information about the credit risk exposure on the Group’s trade receivables using a provision matrix based on aging of trade receivables as of invoice date at 31 December 2020: (CHF million) 0 – 60 days 61 – 90 days 91 – 120 days 121 – 180 days 181 – 240 days 241 – 300 days 301 – 360 days > 360 days TOTAL Expected credit loss range Gross carrying amount Expected credit loss 0% 0.5%-5% 10%-25% 20%-50% 35%-75% 50%-75% 75%-100% 100% 701 80 40 36 21 14 10 130 1 032 – 3 6 11 9 9 8 130 176 Set out below is the information about the credit risk exposure on the Group’s trade receivables using a provision matrix based on ageing of trade receivables as of invoice date at 31 December 2019: (CHF million) 0 – 60 days 61 – 90 days 91 – 120 days 121 – 180 days 181 – 240 days 241 – 300 days 301 – 360 days > 360 days TOTAL Expected credit loss range Gross carrying amount Expected credit loss 0% 0.5%-5% 10%-25% 20%-50% 35%-75% 50%-75% 75%-100% 100% 762 105 45 57 30 14 17 132 1 162 – 4 9 20 19 10 15 132 209 As part of ﬁnancial management activities, the Group enters into various types of transactions with international banks, usually with a credit rating of at least A. Exposure to these risks is closely monitored and kept within predetermined parameters. The Group does not expect any non-performance by these counterparties. The maximum credit risk to which the Group is theoretically exposed at 31 December 2020 is the carrying amount of ﬁnancial assets including derivatives. In addition, the Group has issued CHF 193 million (2019: CHF 212 million) ﬁnancial guarantees to certain ﬁnancial institutions that have provided credit facilities and foreign exchange lines to its subsidiaries. Management believes the likelihood that a material payment will be required under these guarantees is remote. Analysis of ﬁnancial assets by class and category at 31 December 2020: Amortized cost At fair value through OCI At fair value through P&L Total Fair value (CHF million) Carrying amount Fair value Carrying amount Fair value Carrying amount Fair value Carrying amount Fair value Cash and cash-equivalents 1 766 1 766 Trade receivables Other receivables¹ Unbilled revenues and work in progress Non-current loans or amounts receivable from third parties Marketable securities Derivative assets 856 114 160 8 – – 856 114 160 8 – – TOTAL FINANCIAL ASSETS 2 904 2 904 1. Excluding VAT and other tax related items – – – – – 9 – 9 – – – – – 9 – 9 – – – – – – 8 8 – – – – – – 8 8 1 766 1 766 856 114 160 8 9 8 856 114 160 8 9 8 2 921 2 921 SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 156 FINANCIAL STATEMENTS MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Analysis of ﬁnancial assets by class and category at 31 December 2019: Analysis of ﬁnancial liabilities by class and category at 31 December 2019: Amortized cost At fair value through OCI At fair value through P&L Total Amortized cost At fair value through Equity At fair value through P&L Total Fair value Fair value 157 Fair value 336 133 (CHF million) Trade payables Other payables¹ Carrying amount 336 133 Fair value 336 133 Loans and other ﬁnancial liabilities 2 132 2 236 Lease liabilities TOTAL FINANCIAL LIABILITIES 644 644 3 245 3 349 1. Excluding VAT and other tax related items Carrying amount Fair value Carrying amount Fair value Carrying amount – – 89 – 89 – – 89 – 89 – – 16 – 16 – – 16 – 16 336 133 2 237 2 341 644 644 3 350 3 454 Undiscounted contractual maturities of ﬁnancial liabilities including interest payments at 31 December 2020: (CHF million) Trade payables Other payables¹ Gross settled derivative ﬁnancial instruments outﬂows Gross settled derivative ﬁnancial instruments inﬂows On demand or within one year 322 160 1 259 (1 263) Within the second year Within the third year Within the fourth year Within the ﬁfth year After ﬁve years 1. Excluding VAT and other tax related items – – – – – – – – – – – – – – – – – – – – Loans and other ﬁnancial liabilities Lease liabilities 863 285 546 269 254 167 125 98 70 53 Total 1 508 410 644 339 307 1 122 175 1 297 Undiscounted contractual maturities of ﬁnancial liabilities including interest payments at 31 December 2019: (CHF million) Trade payables Other payables¹ Gross settled derivative ﬁnancial instruments outﬂows Gross settled derivative ﬁnancial instruments inﬂows On demand or within one year 336 133 1 380 (1 376) Within the second year Within the third year Within the fourth year Within the ﬁfth year After ﬁve years 1. Excluding VAT and other tax related items – – – – – – – – – – – – – – – – – – – – Loans and other ﬁnancial liabilities 38 317 351 338 262 Lease liabilities Total 172 130 95 74 56 683 447 446 412 318 1 027 191 1 218 The Group economically hedges its foreign exchange exposure on a net basis. The net position of the gross settled derivative ﬁnancial instruments of CHF (4) million (2019: CHF 4 million) represents the net nominal value expressed in CHF of the Group’s foreign currency contracts outstanding at 31 December 2020. (CHF million) Carrying amount Fair value Carrying amount Fair value Carrying amount Fair value Carrying amount Fair value Cash and cash-equivalents 1 466 1 466 Trade receivables Other receivables¹ Unbilled revenues and work in progress Non-current loans to third parties Marketable securities Derivative assets 953 142 195 16 – – 953 142 195 16 – – TOTAL FINANCIAL ASSETS 2 772 2 772 1. Excluding VAT and other tax related items – – – – – 9 – 9 – – – – – 9 – 9 – – – – – – – – – – – – 15 15 15 15 1 466 1 466 953 142 195 16 9 15 953 142 195 16 9 15 2 796 2 796 In the fair value hierarchy, Level 1 measurements are those derived from the quoted price in active markets. Level 2 fair value measurements are those derived from inputs other than quoted prices that are observable for the asset and liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Marketable securities, CHF 9 million (2019: CHF 9 million) qualify as Level 1, fair value measurement category. Derivative assets (2020: CHF 8 million; 2019: CHF 15 million) qualify as Level 2 fair value measurement category in accordance with the fair value hierarchy. Derivative assets consist of foreign currency forward contracts that are measured using quoted forward exchange rates and yield curves derived from quoted interest rates matching maturities of the contract. LIQUIDITY RISK MANAGEMENT The objective of the Group’s liquidity and funding management is to ensure that all its foreseeable ﬁnancial commitments can be met when due. Liquidity and funding are primarily managed by Group Treasury in accordance with practices and limits set in the risk management policies and objectives approved by the Board of Directors. The nature of the Group’s business requires keeping a signiﬁcant part of the cash reserves in the operating units. Due to the signiﬁcant cash position, liquidity risk is limited. The Group has various committed and uncommitted bilateral credit facilities with its banks. Analysis of ﬁnancial liabilities by class and category at 31 December 2020: Fair value Amortized cost At fair value through Equity At fair value through P&L Total Carrying amount Fair value Carrying amount Fair value Carrying amount Fair value Carrying amount (CHF million) Trade payables Other payables¹ Loans and other ﬁnancial liabilities 3 174 3 292 Lease liabilities TOTAL FINANCIAL LIABILITIES 621 621 4 277 4 395 1. Excluding VAT and other tax related items 322 160 322 160 – – 62 – 62 – – 62 – 62 – – 17 – 17 – – 17 – 17 Fair value 322 160 322 160 3 253 3 371 621 621 4 356 4 474 The corporate bonds qualify as fair value Level 1 which amounts to CHF 2 718 million (2019: CHF 2 209 million). Other ﬁnancial liabilities include CHF 62 million qualifying as fair value Level 3 (2019: CHF 89 million), which represents the estimated present value of the redemption amount to acquire the remaining non-controlling interests of acquisitions if the put/call option is exercised. This includes the fair value of the redemption amount to acquire the remaining 40% of Maine Pointe LLC. The put/ call option was initially set to be exercisable in June 2022, but has been extended to June 2023 following the unfavorable market environment due to Covid-19 pandemic. The fair value has been estimated at CHF 30 million by applying a discounted valuation method based on weighted average revenue growth scenarios and a discount rate of 1%. The put option is sensitive to changes in revenue and reaching an EBITDA target up to a maximum pay-out of CHF 83 million. Subsequent changes in the valuation of the redemption amount to acquire the remaining non-controlling interests of acquisitions if the put/call option is exercised shall be recognized directly in equity attributable to owners, including the unwinding of the discount. The remaining ﬁnancial liabilities qualify as Level 2 determined in accordance with generally accepted pricing models. SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 158 FINANCIAL STATEMENTS SENSITIVITY ANALYSES The estimated changes in the value of net foreign currency positions are based on an instantaneous 5% weakening of the Swiss Franc against all other currencies from the level applicable at 31 December 2020 and 2019 with all other variables remaining constant. Sensitivity analysis based on net hedged positions at 31 December 2020 and 2019: 2020 2019 Income statement impact income/ (expense) Equity impact increase/(decrease) Income statement impact income/ (expense) Equity impact increase/(decrease) 1 (3) 3 – – (2) – – 1 2 – (3) 3 – – (3) – – 1 3 (CHF million) US Dollar (USD) Euro (EUR) CFA Franc BEAC (CFA) Taiwanese Dollar (TWD) Canadian Dollar (CAD) INTEREST RATE RISK MANAGEMENT The Group is exposed to fair value interest rate risk because the Group borrows funds at ﬁxed interest rates. Where appropriate, the risk is managed by the Group using Interest Rate Swap contracts. Hedging activities are evaluated regularly to align with interest rate views and deﬁned risk appetite, ensuring the most cost-effective hedging strategies are applied. If interest rates were 50 basis points higher/lower, the proﬁt for the year ended 31 December 2020 would increase/decrease by CHF nil (2019: CHF nil). 23. SHARE CAPITAL AND TREASURY SHARES BALANCE AT 1 JANUARY 2019 Treasury shares released into circulation Treasury shares cancelled BALANCE AT 31 DECEMBER 2019 Treasury shares released into circulation Treasury shares purchased for equity compensation plans Treasury shares purchased for cancellation BALANCE AT 31 DECEMBER 2020 ISSUED SHARE CAPITAL Shares in circulation 7 550 707 1 683 – 7 552 390 3 382 (15 834) (70 700) 7 469 238 Treasury shares 83 025 (1 683) (68 000) 13 342 (3 382) 15 834 70 700 96 494 Total shares issued 7 633 732 – (68 000) 7 565 732 – – – 7 565 732 Total share capital (CHF million) 8 – – 8 – – – 8 SGS SA has a share capital of CHF 7 565 732 (2019: CHF 7 565 732) fully paid in and divided into 7 565 732 (2019: 7 565 732) registered shares of a par value of CHF 1. All shares, other than own shares, participate equally in the dividends declared by the Company and have equal voting rights. TREASURY SHARES On 31 December 2020, SGS SA held 96 494 treasury shares (2019: 13 342 shares). The shares purchased for cancellation are directly held by SGS SA, while the shares to cover the equity compensation plans are held by a subsidiary company. In 2020, 3 382 treasury shares were sold or given in relation with the equity compensation plans and 15 834 were purchased. On 17 February 2020, SGS SA announced a CHF 200 million share buyback program for the purpose of capital reduction. The program ended on 17 December 2020 and 70 700 shares were repurchased for a total amount of CHF 169 million at an average price of CHF 2 394. AUTHORIZED AND CONDITIONAL ISSUE OF SHARE CAPITAL The Board has the authority to increase the share capital of SGS SA by a maximum of 500 000 registered shares of a par value of CHF 1 each, corresponding to a maximum increase of CHF 500 000 in share capital. The Board is mandated to issue the new shares at the market conditions at the time of issue. In the event that the new shares are issued for an acquisition, the Board is authorized to waive the shareholders’ preferential right of subscription or to allocate such subscription right to third parties. The authority delegated by the shareholders to the Board of Directors to increase the share capital is valid until 22 March 2021. The Board of Directors will propose to the next Annual General Meeting of Shareholders an extension for two more years, until 23 March 2023. The shareholders have conditionally approved an increase of share capital in the amount of CHF 1 100 000, divided into 1 100 000 registered shares of a par value of CHF 1 each. This conditional share capital increase is intended to procure the necessary shares to satisfy employee equity participation plans and option or conversion rights to be incorporated in convertible bonds or similar equity-linked instruments that the Board is authorized to issue. The right to subscribe to such conditional capital is reserved for beneﬁciaries of employee equity participation plans and holders of convertible bonds or similar debt instruments and therefore excludes shareholders’ preferential rights of subscription. The Board is authorized to determine the timing and conditions of such issues, provided that they reﬂect prevailing MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 159 market conditions. The term of exercise of the options or conversion rights may not exceed ten years from the date of issuance of the equity-linked instruments. 24. LOANS AND OTHER FINANCIAL LIABILITIES (CHF million) Bank loans Corporate bonds Put option on acquisition Other ﬁnancial liabilities Derivatives TOTAL Current Non-current 2020 556 2 600 62 23 12 3 253 863 2 390 2019 8 2 105 89 25 10 2 237 38 2 199 Depending on the nature of the loan, currency and date of maturity, interest rates on long-term loans from third parties range between 0.25% and 2% and on short-term loans from third parties range between 0% and 13%. The loans from third parties exposed to fair value interest rate risk amounted to CHF 3 156 million (2019: CHF 2 105 million) and the loans from third parties exposed to cash ﬂow interest rate risk amounted to CHF less than 0.5 million (2019: CHF 8 million). SGS SA issued the following corporate bonds listed on the SIX Swiss Exchange: Date of issue 27.05.2011 27.02.2014 27.02.2014 25.04.2014 08.05.2015 08.05.2015 03.03.2017 29.10.2018 29.10.2018 06.05.2020 06.05.2020 Face value in CHF Million Coupon in % Year of Maturity Issue price in % Redemption price in % 275 138 250 112 325 225 375 225 175 175 325 3.000 1.375 1.750 1.375 0.250 0.875 0.550 0.750 1.250 0.450 0.950 2021 2022 2024 2022 2023 2030 2026 2025 2028 2023 2026 100.480 100.517 101.019 101.533 100.079 100.245 100.153 100.068 101.157 100.117 100.182 100.000 100.000 100.000 100.000 100.000 100.000 100.000 100.000 100.000 100.000 100.000 The currency composition of bank loans, corporate bonds and other ﬁnancial liabilities is as follows: Bank loans and corporate bonds Put option and Other ﬁnancial liabilities (CHF million) Swiss Franc (CHF) Euro (EUR) Brazilian Real (BRL) US Dollar (USD) British Pound Sterling (GBP) New Zealand Dollar (NZD) Other TOTAL 25. DEFINED BENEFIT OBLIGATIONS 2020 2 601 548 4 – – – 3 2019 2 105 1 7 – – – – 3 156 2 113 2020 30 18 – 31 1 3 2 85 2019 17 20 2 71 2 – 2 114 The Group mainly operates deﬁned beneﬁt pension plans in Switzerland, the USA, the UK, the Netherlands, Germany, Italy, France, South Korea and Taiwan. Contributions to most plans are paid to pension funds that are legally separate entities. The Group also operates post-employment beneﬁt plans, principally healthcare plans, in the USA and Switzerland. They represent a deﬁned beneﬁt obligation at 31 December 2020 of CHF 12 million (2019: CHF 14 million). The method of accounting and the frequency of valuation are similar to those used for deﬁned beneﬁt pension plans. Healthcare cost trend assumptions do not have a signiﬁcant effect on the amounts recognized in the income statement. There is a risk to the Group that adverse experience could lead to a requirement for the Group to make additional contributions to recover any deﬁcit that arises. The Group’s material deﬁned beneﬁt plans are in Switzerland, the USA and the UK. SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 160 FINANCIAL STATEMENTS SWITZERLAND The Group jointly operates with the employees a retirement foundation in Switzerland. The assets and liabilities of the retirement foundation are held separately from the Group. The foundation board is equally composed of representatives of the employees and representatives of the employer. This foundation covers all the employees in Switzerland and provides beneﬁts on a deﬁned contribution basis. Each employee has a retirement account to which the employee and the Group contribute at a rate set out in the foundation rules based on a percentage of salary. Every year, the foundation decides the level of interest, if any, to apply to retirement accounts based on the agreed policy. At retirement, employees can elect either to withdraw all or part of the balance of their retirement account or to convert it into annuities at pre-deﬁned conversion rates. As the foundation board is expected to eventually pay out all of the foundation’s assets as beneﬁts to employees and former employees, no surplus is deemed to be recoverable by the Group. Similarly, unless the assets are insufﬁcient to cover minimum beneﬁts, the Group does not expect to make any deﬁcit contribution to the foundation. According to IFRS, the foundation has to be classiﬁed as a deﬁned beneﬁt plan due to underlying beneﬁt guarantees and has to be accounted for on this basis. The weighted average duration of the expected beneﬁt payment is approximately 14 years. The Group expects to contribute CHF 5 million to this plan in 2021. The Group also operates an employer fund. The assets are held separately from the Group. This foundation has unilateral power to provide beneﬁts and consequently has no obligations. Therefore, this foundation has no pension liabilities. UNITED STATES OF AMERICA The Group operates a non-contributory deﬁned beneﬁt plan, which is subject to the provisions of the Employee Retirement Income Security Act (ERISA). The assets of the plan are held separately from the Group by the trustee-custodian and the plan’s third-party pension administrator who disburses payments directly to retirees or beneﬁciaries under the plan. Both the trustee-custodian and the administrator ensure adherence to ERISA rules. Funding valuations are calculated on an actuarial basis and contributions are made as necessary. The funding target is to provide the plan with sufﬁcient assets to meet future plan obligations. Effective 16 March 2004, non-exempt participants ceased accruing any additional beneﬁts; only exempt employees of certain SGS business units in the USA are eligible for annual beneﬁt accrual. In addition, the pension beneﬁt was changed and is deﬁned as a percentage of the current year’s pensionable compensation; the cost of additional beneﬁt accrual is evaluated annually. The Group reserves the right to make future changes to the beneﬁt accrual structure of the plan. Eligible employees become participants in the plan after the completion of one year of service and after reaching the age of 21. Participants become fully vested in the plan after ﬁve years of service. The weighted average of duration of the expected beneﬁt payment is approximately 15 years. The Group expects to contribute CHF 7 million to this plan in 2021. UNITED KINGDOM The Group operates a deﬁned beneﬁt plan through a trust, with the assets of the plans held separately from the Group and trustees who ensure the plan’s rules are strictly adhered to. This plan has been closed to new entrants since 2002, and effective 31 October 2020, all remaining participants ceased accruing any additional beneﬁts in the deﬁned beneﬁt plan. Employees are now offered membership in deﬁned contribution plans operated by the Group. Funding valuations of the deﬁned beneﬁt plans are carried out and agreed between the Group and the plan trustees at least once every three years. The funding target is for the plans to hold assets equal in value to the accrued beneﬁts based on projected salaries. As part of the valuation process, if there is a shortfall against this target, then the Group and trustees will agree on deﬁcit contributions to meet this deﬁcit over a speciﬁed period. The weighted average of duration of the expected beneﬁt payments from the combined plans is approximately 19 years. The Group expects to contribute CHF 0.3 million to this plan in 2021. MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 161 OTHER COUNTRIES The Group sponsors deﬁned retirement beneﬁts plans in other countries where the Group operates. No individual countries other than those described above are considered material and need to be separately disclosed. The Group expects to contribute CHF 8 million to those plans in 2021. The assets and liabilities recognized in the statement of ﬁnancial position at 31 December for deﬁned beneﬁt obligations and for post-employment beneﬁt plans are as follows: (CHF million) 2020 Fair value of plan assets Present value of funded deﬁned beneﬁt obligation FUNDED/(UNFUNDED) STATUS Present value of unfunded deﬁned beneﬁt obligation NET ASSET/(LIABILITY) AT 31 DECEMBER (CHF million) 2019 Fair value of plan assets Present value of funded deﬁned beneﬁt obligation FUNDED/(UNFUNDED) STATUS Present value of unfunded deﬁned beneﬁt obligation NET ASSET/(LIABILITY) AT 31 DECEMBER CH UK USA Other Total 454 (446) 8 (11) (3) 253 (203) 50 – 50 196 (201) (5) (4) (9) 48 (70) (22) (62) (84) 951 (920) 31 (77) (46) CH UK USA Other Total 444 (433) 11 (10) 1 245 (207) 38 – 38 194 (218) (24) (6) (30) 45 (67) (22) (60) (82) 928 (925) 3 (76) (73) The net liability of CHF 46 million (2019: CHF 73 million) includes CHF 90 million (2019: CHF 78 million) of pension fund assets recognized in the item Other Non-Current Assets in note 16 and CHF 136 million (2019: CHF 151 million) of pension fund liability recognized in the item Deﬁned Beneﬁt Obligation in statement of ﬁnancial position. Amounts recognized in the income statement: (CHF million) 2020 Service cost expense Administrative expenses TOTAL EXPENSE DUE TO DEFINED BENEFIT OBLIGATION AT 31 DECEMBER Expense charged in: Salaries and wages TOTAL EXPENSE DUE TO DEFINED BENEFIT OBLIGATION AT 31 DECEMBER (CHF million) 2019 Service cost expense Net interest expense on deﬁned beneﬁt plan Administrative expenses TOTAL EXPENSE DUE TO DEFINED BENEFIT OBLIGATION AT 31 DECEMBER Expense charged in: Salaries and wages Financial expenses TOTAL EXPENSE DUE TO DEFINED BENEFIT OBLIGATION AT 31 DECEMBER CH UK USA Other Total 9 – 9 9 9 (5) – (5) (5) (5) (1) 1 – – – 9 – 9 9 9 12 1 13 13 13 CH UK USA Other Total 18 – – 18 18 – 18 1 (1) – – 1 (1) – 2 1 1 4 3 1 4 9 – – 9 9 – 9 30 – 1 31 31 – 31 SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 162 FINANCIAL STATEMENTS MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 163 Amounts recognized in the statement of other comprehensive income: Change in the deﬁned beneﬁt obligation is as follows: (CHF million) 2020 CH UK USA Other Total (CHF million) 2020 CH UK USA Other Total Remeasurement on net deﬁned beneﬁt liability Change in demographic assumptions Change in financial assumptions Experience adjustments on benefit obligations Actual return on plan assets excluding net interest expense TOTAL RECOGNIZED IN THE STATEMENT OF OTHER COMPREHENSIVE INCOME AT 31 DECEMBER (CHF million) 2019 Remeasurement on net deﬁned beneﬁt liability Change in demographic assumptions Change in financial assumptions Experience adjustments on benefit obligations Actual return on plan assets excluding net interest expense TOTAL RECOGNIZED IN THE STATEMENT OF OTHER COMPREHENSIVE INCOME AT 31 DECEMBER Movements in the net asset/(liability) during the period: (CHF million) 2020 NET ASSET/(LIABILITY) AT 1 JANUARY Expense recognized in the income statement Remeasurements recognized in other comprehensive income Contributions paid by the Group Employer beneﬁt payments Exchange differences NET ASSET/(LIABILITY) AT 31 DECEMBER (CHF million) 2019 NET ASSET/(LIABILITY) AT 1 JANUARY Expense recognized in the income statement Remeasurements recognized in other comprehensive income Effect of acquisitions/disposals Contributions paid by the Group Employer beneﬁt payments Exchange differences NET ASSET/(LIABILITY) AT 31 DECEMBER – 6 14 (19) 1 (1) 21 1 (29) (8) (2) 14 (3) (19) (10) 1 (1) 3 – 3 (2) 40 15 (67) (14) CH UK USA Other Total (7) 44 8 (32) 13 (3) 23 – (35) (15) 5 30 1 (23) 13 – 7 1 (1) 7 (5) 104 10 (91) 18 CH UK USA Other Total 1 (9) (1) 6 – – (3) 38 5 8 1 – (2) 50 (30) – 10 8 – 3 (9) (82) (9) (3) 8 2 – (73) (13) 14 23 2 1 (84) (46) CH UK USA Other Total 25 (18) (13) – 7 – – 1 20 – 15 – 2 – 1 (21) (4) (13) – 9 – (1) 38 (30) (81) (9) (7) 1 12 2 – (82) (57) (31) (18) 1 30 2 – (73) Opening present value of the deﬁned beneﬁt obligation 443 207 224 127 1 001 Current service cost Interest cost Plan participants’ contributions Past service cost Actual net beneﬁt payments (Gains)/losses due to changes in demographic assumptions (Gains)/losses due to changes in ﬁnancial assumptions Experience differences Exchange rate (gains)/losses 9 1 5 – (21) – 6 14 – 1 4 – (6) (11) (1) 21 1 (13) 1 6 1 (2) (13) (2) 14 (3) (21) 9 1 – – (7) 1 (1) 3 (1) DEFINED BENEFIT OBLIGATION AT 31 DECEMBER 457 203 205 132 20 12 6 (8) (52) (2) 40 15 (35) 997 (CHF million) 2019 CH UK USA Other Total Opening present value of the deﬁned beneﬁt obligation 389 186 193 122 890 Current service cost Interest cost Plan participants’ contributions Past service cost Net increase/(decrease) in DBO from acquisitions/disposals Actual net beneﬁt payments (Gains)/losses due to changes in demographic assumptions (Gains)/losses due to changes in ﬁnancial assumptions Experience differences Exchange rate (gains)/losses 8 3 5 10 – (17) (7) 44 8 – 1 5 – – – (9) (3) 23 – 4 2 8 1 – – (13) 5 30 1 (3) 9 1 – – (1) (11) – 7 1 (1) 20 17 6 10 (1) (50) (5) 104 10 – DEFINED BENEFIT OBLIGATION AT 31 DECEMBER 443 207 224 127 1 001 Change in fair value of plan assets is as follows: (CHF million) 2020 Opening fair value of plan assets Interest income on plan assets Return on plan assets excluding amounts included in net interest expense Actual employer contributions Actual plan participants’ contributions Actual net beneﬁt payments Actual admin expenses paid Exchange differences CH UK USA Other Total 444 1 19 6 5 (21) – – 245 4 29 1 – (11) – (15) 194 6 19 8 1 (13) (1) (18) 45 1 – 10 – (7) – (1) 928 12 67 25 6 (52) (1) (34) 951 FAIR VALUE OF PLAN ASSETS AT 31 DECEMBER 454 253 196 48 SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report CH UK USA Other Total In 2020 and 2019, the Group did not occupy any property that was included in the plan assets. MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 165 164 FINANCIAL STATEMENTS (CHF million) 2019 Opening fair value of plan assets Interest income on plan assets Return on plan assets excluding amounts included in net interest expense Actual employer contributions Actual plan participants’ contributions Actual net beneﬁt payments Actual admin expenses paid Exchange differences 414 3 32 7 5 (17) – – 206 6 35 2 – (9) – 5 172 7 23 9 1 (13) (1) (4) 41 1 1 14 – (11) – (1) 45 833 17 91 32 6 (50) (1) – 928 FAIR VALUE OF PLAN ASSETS AT 31 DECEMBER 444 245 194 There are no reimbursement rights included in plan assets. The actual return on plan assets was a gain of CHF 79 million (2019: gain of CHF 108 million). The major categories of plan assets at the balance sheet date are as follows: (CHF million) 2020 Cash and cash equivalents Equity securities Debt securities Assets held by insurance company Properties Investment funds Other TOTAL PLAN ASSETS AT 31 DECEMBER (CHF million) 2019 Cash and cash equivalents Equity securities Debt securities Assets held by insurance company Properties Investment funds Other TOTAL PLAN ASSETS AT 31 DECEMBER CH UK USA OTHER TOTAL 33 153 55 – 174 37 2 454 3 60 170 – – 20 – 253 – 25 171 – – – – 16 – 1 31 – – – 196 48 52 238 397 31 174 57 2 951 CH UK USA OTHER TOTAL 38 144 58 – 162 41 1 444 7 69 148 – – 22 (1) 245 1 25 168 – – – – 194 15 – 1 28 – – 1 45 61 238 375 28 162 63 1 928 Properties are rented at fair market rental rates. There are no SGS SA shares or any other ﬁnancial securities used by the Group included in plan assets. The plan assets are primarily held within instruments with quoted market prices in an active market, with the exception of the property and insurance policy holdings. The investment strategy in Switzerland is to invest, within the statutory and legal requirements, in a diversiﬁed portfolio with the aim of generating long-term returns, which will enable the Board of the foundation to grow the accounts of the members of the pension fund, whilst taking on the lowest possible risk in order to do so. In the USA, the Pension Plan Target Policy is determined by both quantitatively and qualitatively assessing the risk tolerance level and return requirements of the Plan as determined by the Investment Committee. The investment portfolio asset allocation and structure are developed based on the results of this process. In the UK, the Trustees review the investment strategy of the Scheme and the Plan on a regular basis in order to ensure that they remain appropriate. The last review for both the Scheme and Plan was recently undertaken and is in the process of being implemented. Actuarial assumptions vary according to local prevailing economic and social conditions. The principal weighted average actuarial assumptions used in determining the cost of beneﬁts for both 2020 and 2019 are as follows: (Weighted average %) 2020 Discount rate Mortality assumption CH 0.1 UK 1.4 LPP 2015 CMI 2016 1.25% SPA03M104%/ SPAF94% CMI 2019 1.25% Salary progression rate Future increase for pension in payments Healthcare cost trend assumed for the next year Ultimate trend rate Year that the rate reaches the ultimate trend rate (Weighted average %) 2019 Discount rate Mortality assumption 1.5 – 3.0 3.0 CH 0.2 LPP 2015 CMI 2016 USA Other 2.6 PRI 2012 MP 2019 3.3 – 7.5 4.5 2030 1.0 – 2.4 0.3 – – 2.1 2.7 – – UK USA Other 2.0 3.1 SNA02F/M CMI 2018 1.25% PRI 2012 MP 2019 1.2 – 2.6 0.3 – – Salary progression rate Future increase for pension in payments Healthcare cost trend assumed for the next year Ultimate trend rate Year that the rate reaches the ultimate trend rate 1.5 – 3.0 3.0 3.3 2.3 – – 3.3 – 7.0 4.5 2025 The weighted average rate for each assumption used to measure the beneﬁts obligation is also shown. The assumptions used to determine end-of-year beneﬁts obligation are also used to calculate the following year’s cost. In Switzerland, a decrease in the discount rate of 0.5% per annum would, all other things being equal, increase the obligation by CHF 34 million; a 0.5% increase in assumed salary would increase the obligation by CHF 2 million; and a one-year increase in members’ life expectancy would increase the obligation by approximately CHF 14 million. In the USA, a decrease in the discount rate of 0.5% per annum would, all other things being equal, increase the obligation by CHF 14 million; a 0.5% increase in assumed salary would not impact the obligation; and a one-year increase in members’ life expectancy would increase the obligation by approximately CHF 8 million. In the UK, a decrease in the discount rate of 0.5% per annum would, all other things being equal, increase the obligation by CHF 20 million; a 0.5% increase in assumed salary would not impact the obligation; and a one-year increase in members’ life expectancy would increase the obligation by approximately CHF 11 million. These sensitivities have been calculated to show the movement in the deﬁned beneﬁt obligation in isolation and assume no other changes in market conditions at the accounting date. This is unlikely in practice; for example, a change in discount rate is unlikely to occur without any movement in the value of the assets held by the plans. The amount recognized as an expense in respect of deﬁned contribution plans during 2020 was CHF 61 million (2019: CHF 70 million). SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 166 FINANCIAL STATEMENTS 26. PROVISIONS (CHF million) AT 1 JANUARY 2020 Charge to income statement Release to income statement Payments Exchange differences AT 31 DECEMBER 2020 Analyzed as: Current liabilities Non-current liabilities TOTAL Legal and warranty claims on services rendered Demobilization and reorganization Other provisions 36 17 (3) (10) (2) 38 71 67 (9) (45) (4) 80 58 9 (3) (7) (2) 55 2020 85 88 173 Total 165 93 (15) (62) (8) 173 2019 74 91 165 A number of Group companies are subject to litigation and other claims arising out of the normal conduct of their business that can be best viewed as claims on services rendered. The claim provision represents the sum of estimates of amounts payable on identiﬁed claims and of losses incurred but not yet reported. They therefore reﬂect estimates of the future payments required to settle both reported and unreported claims. In the opinion of Management, based on all currently available information, the provisions adequately reﬂect the Group’s exposure to legal and warranty claims on services rendered. The ultimate outcome of these matters is not expected to materially affect the Group’s ﬁnancial position, results of operations or cash ﬂows. Demobilization and reorganization provisions relate to present legal or constructive obligations of the Group toward third parties, such as termination payments to employees upon leaving the Group, which in some jurisdictions are a legal obligation. For speciﬁc long-term contracts, typically with two to ﬁve years’ duration, the Group is required to dismantle infrastructure and terminate the services of personnel upon completion of the contract. These demobilization costs are provided for during the life of the contract. Experience has shown that these contracts may be either extended or terminated earlier than expected. Other provisions include present legal or constructive obligations towards tax authorities for indirect tax exposure as well as other provisions towards third parties. 27. TRADE AND OTHER PAYABLES (CHF million) Trade payables Other payables TOTAL 2020 322 336 658 2019 336 302 638 Trade accounts and other payables principally comprise amounts outstanding for trade purchases and ongoing operating costs. At 31 December 2020 and 2019, the fair value of the Group’s trade accounts and other payables approximates the carrying value. 28. CONTINGENT LIABILITIES In the normal course of business, the Group and its subsidiaries are parties to various lawsuits and claims. Management does not expect that the outcome of any of these legal proceedings will have a material adverse effect on the Group’s ﬁnancial position, results of operations or cash ﬂows. GUARANTEES AND PERFORMANCE BONDS (CHF million) Guarantees Performance bonds TOTAL 2020 829 230 1 059 2019 556 163 719 The Group has issued unconditional guarantees of CHF 829 million (2019: CHF 556 million), as well as performance bonds and bid bonds of CHF 230 million (2019: CHF 163 million) to commercial customers on behalf of its subsidiaries. Management believes the likelihood that a material payment will be required under these guarantees is remote. MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 167 29. EQUITY COMPENSATION PLANS Selected employees of the SGS Group are eligible to participate in equity compensation plans. I) GRANTS TO MEMBERS OF THE OPERATIONS COUNCIL In 2020, a total of 1 514 Restricted Shares were granted to members of the Operations Council, in settlement of 50% of the annual incentive related to the 2019 performance. The Restricted Shares fully vest at grant date and are blocked for a period of three years from the grant date, until April 2023. The value at grant date of the Restricted Shares granted, being deﬁned as the average closing price of the share during a 20-day period following the payment of the dividends after the 2020 Annual General Meeting, was CHF 3 379 248. 50% of the Annual Incentive related to the 2020 performance will be settled in Restricted Shares. The grant of the Restricted Shares will be done after the 2021 Annual General Meeting; the total number of Restricted Shares to be granted will be calculated dividing 50% of the annual Incentive amount by the average closing price of the share during a 20-day period following the payment of the dividends after the 2021 Annual General Meeting, rounded up to the nearest integer. The Restricted Shares will fully vest at grant date and will be blocked for a period of three years from the grant date, until April 2024. The Shareholding Ownership Guideline apply to the Restricted Share Plans. More information on the Short-Term Incentive for the members of the Operations Council is disclosed in the SGS Remuneration Report. II) GRANTS TO OTHER EMPLOYEES In 2020, a total of 2 338 Restricted Share Units (RSUs) were granted to selected key employees under the Restricted Share Units Plan 2020. The RSUs vest three years after the grant date. The value at grant date of the RSUs granted, being deﬁned as the average closing price of the share during a 20-day period preceding the grant date, was CHF 5 206 609. III) DISCONTINUED SHARE OPTION PLANS Share options were granted to the members of the Operations Council, selected senior managers and key employees of the Group until 2015 and have been discontinued since. Option plan Description SGSBB-2015 TOTAL Description SGS-RSU-17 SGS-PSU-18 SGS-RSU-18 SGS-RSU-19 SGS-RSU-20 TOTAL Exercise period from Jan.18 Options Outstanding at 31 December 2019 Strike Price 1 to Jan.20 1 798.00 40 208 40 208 40 208 Canceled – – Exercised or adjusted (40 208) (40 208) Of which exercisable at 31 December 1. The strike price of the options has been adjusted in accordance with market practice for capital reductions and special dividends PERFORMANCE SHARE UNIT (PSU) AND RESTRICTED SHARE UNIT (RSU) PLANS Exercise period from Units Outstanding at 31 December 2019 Granted Canceled Apr.20 Feb.21 Apr.21 Apr.22 Apr.23 1 857 25 936 1 991 1 929 – 31 713 – – – – 2 338 2 338 Vested or adjusted (1 796) – (12) – – (61) (1 483) (172) (107) (47) (1 870) (1 808) Options Outstanding at 31 December 2020 – – – Units Outstanding at 31 December 2020 – 24 453 1 807 1 822 2 291 30 373 The Group does not issue new shares to grant employees in relation to the equity-based compensation plans but uses treasury shares, acquired through share buyback programs. In total, as of 31 December 2020, the equity overhang, deﬁned as the total number of share units, restricted shares and shares underlying options outstanding (30 373 units) divided by the total number of outstanding shares (7 565 732 shares) amounted to 0.40%. The Company’s burn rate, deﬁned as the number of equities (restricted shares and share units) granted in 2020 (3 852 units) divided by the total number of outstanding shares, was 0.05%. The Group recognized during the year a total expense of CHF 17 million (2019: CHF 17 million) in relation to equity compensation plans. SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 169 LOANS TO MEMBERS OF GOVERNING BODIES As at 31 December 2020, no loan, credit or outstanding advance was due to the Group from members or former members of its governing bodies (unchanged from previous year). TRANSACTIONS WITH OTHER RELATED PARTIES In 2020 and in 2019, the Group did not perform any activity generating revenue for the other related parties. During 2020 and 2019, neither related trade receivable balances unpaid nor expense in respect of any bad or doubtful debts due from these related parties were recognized. 31. SIGNIFICANT SHAREHOLDERS On 4 February 2020, the von Finck family has disposed a large portion of their holding, resulting in their participation falling below the threshold of 3% of the share capital and voting rights. As at 31 December 2020, Groupe Bruxelles Lambert (acting through Serena SARL and URDAC) held 18.91% (December 2019: 16.73%) of the share capital and voting rights of the Company. At the same date, the Group held 1.28% of the share capital of the Company (December 2019: 0.18%). 32. APPROVAL OF FINANCIAL STATEMENTS AND SUBSEQUENT EVENTS The Board of Directors is responsible for the preparation and presentation of the ﬁnancial statements. These ﬁnancial statements were authorized for issue by the Board of Directors on 23 February 2021, and will be submitted for approval on 23 March 2021 during the Annual General Meeting of Shareholders. On 7 January 2021 the Group announced the acquisition of Analytical & Development Services in the UK, providing ISO/IEC 17025 accredited food testing activities. On 29 January 2021, the Group completed the acquisition of a 55.92% majority stake into BZH GmbH Deutsches Beratungszentrum für Hygiene, a German based subsidiary of SYNLAB Analytics & Services (A&S). On 2 February 2021, the Group announced the acquisition of Autoscope/CTOK, operating three vehicle inspection services centers in France. 168 FINANCIAL STATEMENTS Shares available for future plans: AT 1 JANUARY 2019 Repurchased shares Granted SGS-RSU-19 plan Shares for PSU cancelled and adjusted Shares for RSU cancelled and adjusted Shares used for Restricted Shares plan as settlement of Short-Term Incentive AT 31 DECEMBER 2019 Repurchased shares Granted SGS-RSU-20 plan Shares for PSU cancelled and adjusted Shares for RSU cancelled and adjusted Shares used for Restricted Shares plan as settlement of Short-Term Incentive AT 31 DECEMBER 2020 At 31 December, the Group had the following shares available to satisfy various programs: Number of shares held Shares allocated for 2017 RSU plans Shares allocated for 2018 PSU plans Shares allocated for 2018 RSU plan Shares allocated for 2019 RSU plan Shares allocated for 2020 RSU plan SHARES REQUIRED FOR FUTURE EQUITY COMPENSATION PLANS AT 31 DECEMBER Total (18 322) – (2 011) 2 382 600 (1 020) (18 371) 15 834 (2 338) 1 483 390 (1 577) (4 579) 2020 Total 2019 Total 25 794 – (24 453) (1 807) (1 822) (2 291) (4 579) 13 342 (1 857) (25 936) (1 991) (1 929) – (18 371) 30. RELATED-PARTY TRANSACTIONS Transactions between the Company and its subsidiaries, which are related parties of the Group, have been eliminated on consolidation and are not disclosed. COMPENSATION TO DIRECTORS AND MEMBERS OF THE OPERATIONS COUNCIL The remuneration of Directors and members of the Operations Council during the year was as follows: (CHF million) Short-term benefits Post-employment benefits Share-based payments TOTAL 2020 2019 14 1 2 17 20 1 3 24 The remuneration of Directors and members of the Operations Council is determined by the Nomination and Remuneration Committee. Additional information is disclosed in the SGS Remuneration Report. During 2020 and 2019, no member of the Board of Directors or of the Operations Council had a personal interest in any business transactions of the Group. The Operations Council (including Senior Management) participates in the equity compensation plans as disclosed in note 29. The total compensation, including social charges, received by the Board of Directors amounted to CHF 2 459 000 (2019: CHF 2 268 000). The total compensation (cash and shares/options), including social charges, received by the Operations Council (including Senior Management) amounted to CHF 14 855 000 (2019: CHF 22 205 000). SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 170 FINANCIAL STATEMENTS MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 171 Deloitte SA Rue du Pré-de-la-Bichette 1 1202 Geneva Switzerland Phone: +41 (0)58 279 8000 Fax: +41 (0)58 279 8800 www.deloitte.ch SGS SA Statutory Auditor’s Report for the year ended 31 December 2020 Statutory Auditor’s Report To the General Meeting of SGS SA, Geneva Report on the Audit of the Consolidated Financial Statements (cid:10)pinion We have audited the consolidated financial statements of SGS SA and its subsidiaries (cid:61)the Group(cid:62), which comprise the consolidated statement of financial position as at 31 December 2020, and the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of cash flows, consolidated statement of changes in equity for the year then ended and notes to the consolidated financial statements, including a summary of significant accounting policies. In our opinion the consolidated financial statements (cid:61)presented on pages 12(cid:72) to 1(cid:72)9(cid:62) give a true and fair view of the consolidated financial position of the Group as at 31 December 2020, its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (cid:61)IFRS(cid:62) and comply with Swiss law. (cid:3)asis for (cid:10)pinion We conducted our audit in accordance with Swiss law, International Standards on Auditing (cid:61)ISAs(cid:62) and Swiss Auditing Standards. Our responsibilities under those provisions and standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the provisions of Swiss law and the requirements of the Swiss audit profession, as well as the International Code of Ethics for Professional Accountants (cid:61)including International Independence Standards(cid:62) of the International Ethics Standards Board for Accountants (cid:61)IESBA Code(cid:62) and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our Audit Approach Summary (cid:11)ey audit matters Materiality Scoping Based on our audit scoping, we identified the following key audit matters: (cid:60) (cid:60) Revenue recognition in respect of unbilled revenue and work- in-progress Goodwill and associated impairment testing Based on our professional judgment we determined materiality for the Group as a whole to be C(cid:9)F (cid:70)3 million, (cid:72)(cid:78) of Profit before tax (cid:61)adjusted for non-recurring items, goodwill and intangible impairment and restructuring costs(cid:62). Based on our understanding of SGS’s operations, we scoped our audit of component operations based on the significance of account balances and significant risks. We gained sufficient and appropriate coverage across the Group. Coverage details are provided on page 17(cid:71). (cid:8)e(cid:32) Audit (cid:9)atters (cid:11)ey audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 172 FINANCIAL STATEMENTS MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 173 Revenue recognition: Work-in-progress and unbilled revenues SGS SA Statutory Auditor’s Report for the year ended 31 December 2020 Page 3 (cid:11)ey audit matter The Group’s balance sheet includes C(cid:9)F 1(cid:72)0 million of unbilled revenue and work-in-progress (cid:61)3(cid:78) of total Group revenues(cid:62). The Group recognises revenue on fees for services rendered to third parties when the services have been completed. (cid:9)owever, under certain circumstances, including where services are not billed at the end of each financial period, revenue is recognised in proportion to the stage of completion, normally by reference to costs incurred to the balance sheet date in comparison with the total estimated costs of the contracted services to completion. A margin is recognised based on cost incurred, providing it is expected that the project will be profitable once completed. Where services are completed, but unbilled, revenue is recorded at net selling price. Where services have been rendered but the project is still incomplete, revenue is recorded including a margin based on cost incurred and expected margin at the completion of the project. For certain contracts, significant judgement is required by management at the operational level to estimate the value of unbilled revenue and work-in-progress and the level of profit to be recognised by year-end as it is highly dependent on the nature and complexity of the services being provided and the contractual terms with customers. The assessment of the degree of completion of the project and the estimated profitability requires judgement. The revenue and profit recognised by year-end is also included in the determination of management incentives, increasing the risk of inappropriate estimation. Accordingly, we have assessed the estimation of work-in-progress and unbilled revenues as a key audit matter. We also note it is considered to be a significant accounting judgement and estimate (cid:61)note 2(cid:62). Refer to the accounting policy in note 2 and the revenues from contracts with customers in note (cid:71). (cid:9)ow the scope of our audit responded to the key audit matter Our audit work included the following procedures on work- in-progress and unbilled revenues: • We reviewed SGS’s revenue recognition policies and obtained an understanding of the process for work-in- progress and unbilled revenues recognition(cid:52) • We assessed the design and implementation of key internal controls regarding revenue recognition and the approval of unbilled revenue and work-in-progress balances(cid:52) • We selected samples of unbilled revenue and work-in- progress balances recorded at the prior year-end to review and compare to subsequent invoices and cash received from clients in order to evaluate the reliability of management’s estimation process and to test for appropriateness of past revenue recognition(cid:52) • We selected samples of credit notes and reversals of unbilled revenue and work-in-progress throughout the year to ensure that these adjustments were appropriate and not related to deliberate overstatement of revenue(cid:52) • We used analytical procedures to identify businesses and geographies across the Group which had recorded significant work-in-progress and unbilled balances at the year-end, and challenged local management by tracing to contract and status reports to verify significant variances for a sample of contracts(cid:52) • We selected samples of work-in-progress and unbilled balances to the related customer contracts and appropriate operational evidence to confirm that the services had been completed prior to the year-end(cid:52) • On a sample basis, we tested new contracts by reviewing revenue recorded with reference to the customer contract terms and conditions and assessed whether the revenue recognition is in line with group policy and IFRS 1(cid:71)(cid:52) • Where work had not yet been subsequently invoiced and cash had not yet been received, we requested third party confirmation of the work being performed on a sample basis. We obtained alternate audit evidence where direct confirmations were not received(cid:52) • We tested manual journal entries booked in revenue(cid:52) and • We also assessed the adequacy of the disclosures in the consolidated financial statements. Based on the procedures performed, we consider management’s estimates and disclosures regarding work-in- progress and unbilled revenue balances to be appropriate. SGS SA Statutory Auditor’s Report for the year ended 31 December 2020 Page (cid:33) Goodwill and associated impairment testing (cid:11)ey audit matter The Group’s balance sheet includes C(cid:9)F1’(cid:72)(cid:71)1 million of goodwill (cid:61)23.9(cid:78) of total Group assets(cid:62). In accordance with IFRS, these balances are allocated to Cash Generating (cid:21)nits (cid:61)CG(cid:21)s(cid:62) which are tested at least annually for impairment using discounted cash-flow models of each CG(cid:21)’s or group of CG(cid:21)’s recoverable value compared to the carrying value of the assets. A deficit between the recoverable value and the CG(cid:21)’s net assets would result in impairment. The inputs to the impairment testing model which have the most significant impact on CG(cid:21) recoverable value include: • • • Projected revenue growth, operating margins and operating cash-flows in the years 1-(cid:71)(cid:52) Stable long-term growth rates in years (cid:72)-10 and in perpetuity(cid:52) and Country and business specific discount rates (cid:61)pre-tax(cid:62). The impairment test models include sensitivity testing of key assumptions, including revenue growth, operating margin and discount rate. As a result of the impact on many of SGS’s businesses in the first half of 2020 from CO(cid:22)ID-19 imposed lock-downs and restrictions, management conducted full impairment tests taking into account reductions in sales and results as at 31 May 2020 and recorded impairments totaling C(cid:9)F 37 million in the (cid:9)alf-year results. In the second half of the year, management conducted analysis to determine if there were any new indicators of impairment. We consider the annual impairment testing of goodwill to be a key audit matter because the assumptions on which the tests are based are highly judgmental and are affected by estimates of future market and economic conditions which are inherently uncertain, and because of the materiality of the balance to the financial statements as a whole. We also note it is considered to be a significant accounting judgement and estimate (cid:61)note 2(cid:62). Also SGS acquired S(cid:25)(cid:14)LAB Analytics (cid:63) Services as at 31 December 2020 and performed provisional purchase price accounting resulting in a material increase in goodwill (cid:61)C(cid:9)F (cid:70)39 million(cid:62). The provisional goodwill amount is subject to judgement and estimation in relation to the fair value of the assets and liabilities purchased including the value ascribed to other intangible assets such as customer relationships, and despite being acquired during the year is still required to be subject to impairment consideration. Refer to the accounting policy in note 2 and the goodwill balances and impairment testing inputs in note 1(cid:70) (cid:9)ow the scope of our audit responded to the key audit matter We assessed the appropriateness of SGS’s impairment testing methodology applied with reference to IAS3(cid:72) (cid:56)Impairment of Assets(cid:57) including consideration of the judgements in determining the CG(cid:21)’s to which goodwill is allocated. We evaluated the appropriateness of the definition of CG(cid:21)s through discussions with senior operational management, confirmation of the reporting levels at which Group management monitors independent cash inflows and trading performance and our knowledge of the Group’s operations. We tested the design and implementation of key internal controls implemented by management related to testing for impairment. We specifically reviewed the impairments identified and recorded by management totaling C(cid:9)F 37 million. We then assessed each remaining CG(cid:21) for risk of impairment with reference to actual financial performance in 2020 and analysis of headroom levels from management’s tests. In conducting this analysis we also performed a review of any unexpected changes in key assumptions from the prior year including discount rates and growth rates. Following our risk assessment, we identified the goodwill (cid:61)C(cid:9)F 78 million(cid:62) associated with CBE Technical Consultancy (cid:21)SA CG(cid:21) as significant risk because the results of that operation declined significantly from 2019 to 2020. SGS concluded that no impairment was required due to an anticipated rebound in sales growth in 2021 and beyond. For CG(cid:21)’s where we assessed the risk of impairment as remote, no further audit work was performed. For CG(cid:21)s assessed with increased but not significant level of risk, we assessed the impairment testing models and calculations by: • Checking the mathematical accuracy of the impairment model and the extraction of inputs from source documents(cid:52) • • • • • • Challenging the discount rates applied in the impairment reviews incorporating the use of Deloitte experts in valuation as part of the team(cid:52) Comparing forecasted long-term growth rates to economic data(cid:52) Evaluating the sensitivity in the valuation resulting from changes to the key assumptions applied, including but not limited to discount rates, margin rates and revenue growth rates(cid:52) Performing retrospective review to compare prior period forecasts with actual results(cid:52) (cid:22)erifying that forecasted cash-flows were consistent with Board approved forecasts, and, Reviewing the sensitivity disclosures in the annual report, refer to note 1(cid:70). SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 174 FINANCIAL STATEMENTS MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 175 SGS SA Statutory Auditor’s Report for the year ended 31 December 2020 Page (cid:34) For the CG(cid:21) assessed as having a significant level of risk, we performed the below additional audit procedures: • Compared the (cid:17)1 pipeline weighted for probability of success and then annualised, to management’s 2021 forecast revenue and performed additional sensitivity analysis on management’s impairment model taking lower than forecast revenue into account(cid:52) • • • Assessed the appropriateness of cash-flow assumptions by analysing and performing substantive detail testing on a sample of the 2021 opportunity pipeline.(cid:52) Obtained CRM documentation from the CG(cid:21)’s systems, supporting the samples selected above to substantiate the existence and amount of the opportunity. We also held meetings with the operational opportunity leaders to corroborate progress, opportunity value of and likelihood of success recorded in the opportunity pipeline(cid:52) and (cid:9)eld discussions with senior Group management including the CEO, CFO and those charged with governance in relation to their expectations of the business. For the provisionally calculated goodwill related to the S(cid:25)(cid:14)LAB Analytics (cid:63) Services acquisition, we utilised our own experts to review and challenge the provisional purchase price allocation. We assessed the identification of assets including other intangibles and the valuation methodologies used to calculate the fair value with specific focus on the valuation of customer relationships and the resulting goodwill balance. To assess management’s conclusion that there is no impairment of the goodwill, we considered the timing of the acquisition (cid:61)31 December 2020(cid:62), the business valuation supporting the transaction, the competitive nature of the acquisition and subsequent events. Based on the audit procedures performed, we consider the judgements applied in the determination of CG(cid:21)s, the assumptions included in the impairment testing models and management’s conclusions on impairment, together with the disclosures set out in the consolidated financial statements, to be appropriate. SGS SA Statutory Auditor’s Report for the year ended 31 December 2020 Page (cid:35) (cid:10)ur application of materialit(cid:32) We define materiality as the magnitude of misstatement in the consolidated financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work. Based on our professional judgment we determined materiality for the Group as a whole to be C(cid:9)F (cid:70)3 million, based on a calculation of (cid:72)(cid:78) of profit before tax adjusted for non-recurring items, goodwill and intangible impairment and restructuring costs. We selected profit before tax as the basis of materiality because, in our view, it is the measure against which the performance of the Group is most commonly assessed. The materiality applied by the component auditors ranged from C(cid:9)F8.(cid:72) million to C(cid:9)F2(cid:71).8 million depending on the scale of the component’s operations, the component’s contribution to Group profit before tax and our assessment of risks specific to each location. We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of C(cid:9)F 2.1 million as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also reported to the Audit Committee on significant disclosure matters that we identified when assessing the overall presentation of the financial statements. An o(cid:30)er(cid:30)ie(cid:31) of the scope of our audit We designed our audit by obtaining an understanding of the Group and its environment, including Group- wide controls, determining materiality and assessing the risks of material misstatement in the consolidated financial statements. Based on our scope assessment, we performed full scope component audits at 17 key locations in 2020. In addition, we requested 11 components to perform specified audit procedures on account balances (cid:61)principally Revenue, Accounts Receivable, Work-In-Progress and (cid:21)nbilled Revenues(cid:62). We obtained assurance over these countries through a combination of audit procedures performed locally, within the SGS shared service centres and centrally at the (cid:9)ead office. In aggregate, these components represented the scope coverage below: Revenue (cid:14)et income for the year Total assets SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 176 FINANCIAL STATEMENTS MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 177 SGS SA Statutory Auditor’s Report for the year ended 31 December 2020 Page (cid:36) Remaining wholly owned and joint venture businesses were subject to analytical review procedures for the purpose of the Group audit performed by the group audit team. Annual statutory audits are conducted by affiliates of Deloitte SA at the majority of the Group’s subsidiaries, although these are predominantly completed subsequent to our audit report on the consolidated financial statements and do not form part of the Group Audit process. At the parent entity level we tested the consolidation process and carried out analytical procedures to confirm our conclusion that there were no significant risks of material misstatement of the aggregated financial information of the remaining components not subject to a full scope audit. The group audit team continued to follow a program of planned meetings with management and audit teams that has been designed so that the Senior Statutory Auditor visits most of the in scope locations on a rotational basis. The program for the visits is established based on the significance of the components and the results of our risk assessment. This year, the meetings and selected working paper reviews by the group team were performed virtually given travel restrictions imposed as a result of CO(cid:22)ID19. For all components in scope for group reporting, we have included the component audit partner in our team briefing, discussed their risk assessment, risk of fraud discussions and reviewed documentation of the findings from their work. (cid:10)ther (cid:7)nformation in the Annual Report The Board of Directors is responsible for the other information in the annual report. The other information comprises all information included in the annual report, but does not include the consolidated financial statements, the stand-alone financial statements of the Company upon which we issue a separate Statutory Auditor’s report, sections (cid:70) and (cid:71) of the Remuneration Report and our auditor’s reports thereon. SGS SA Statutory Auditor’s Report for the year ended 31 December 2020 Page 8 and using the going concern basis of accounting unless the Board of Directors either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Swiss law, ISAs and Swiss Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. A further description of our responsibilities for the audit of the consolidated financial statements is located at the website of EXPERTsuisse: http://expertsuisse.ch/en/audit-report-for-public-companies. This description forms part of our auditor’s report. Report on Other Legal and Regulatory Requirements In accordance with article 728a paragraph 1 item 3 CO and the Swiss Auditing Standard 890, we confirm that an internal control system exists, which has been designed for the preparation of consolidated financial statements according to the instructions of the Board of Directors. We recommend that the consolidated financial statements submitted to you be approved. Our opinion on the consolidated financial statements does not cover the other information in the annual report and we do not express any form of assurance conclusion thereon. Deloitte SA In connection with our audit of the consolidated financial statements, our responsibility is to read the other information in the annual report and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilit(cid:32) of the (cid:3)oard of (cid:5)irectors for the Consolidated Financial Statements The Board of Directors is responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with IFRS and the provisions of Swiss law, and for such internal control as the Board of Directors determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, the Board of Directors is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern Matthew Sheerin Licensed Audit Expert Auditor in Charge Aurelie Darrigade Licensed Audit Expert Geneva, 23 February 2021 SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 178 FINANCIAL STATEMENTS 2. SGS SA 2.1. Income Statement FOR THE YEARS ENDED 31 DECEMBER (CHF million) OPERATING INCOME Dividends from subsidiaries TOTAL OPERATING INCOME OPERATING EXPENSES Other operating and administrative expenses Other operating expenses TOTAL OPERATING EXPENSES OPERATING RESULT FINANCIAL INCOME Financial income Exchange gain, net TOTAL FINANCIAL INCOME FINANCIAL EXPENSES Financial expenses Liquidation of subsidiaries, net TOTAL FINANCIAL EXPENSES FINANCIAL RESULT PROFIT BEFORE TAXES Taxes Withholding taxes PROFIT FOR THE YEAR Notes 6 6 2020 592 592 (5) – (5) 587 39 – 39 (48) (1) (49) (10) 577 – (10) 567 2019 782 782 (6) (36) (42) 740 67 1 68 (55) (7) (62) 6 746 (1) (10) 735 MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 179 2.2. Statement of Financial Position at 31 December (BEFORE APPROPRIATION OF AVAILABLE RETAINED EARNINGS) (CHF million) ASSETS CURRENT ASSETS Cash and cash equivalents Other ﬁnancial assets Amounts due from subsidiaries Accrued income and prepaid expenses TOTAL CURRENT ASSETS NON-CURRENT ASSETS Investments in subsidiaries Loans to subsidiaries Long-term assets TOTAL NON-CURRENT ASSETS TOTAL ASSETS SHAREHOLDERS’ EQUITY AND LIABILITIES SHORT-TERM LIABILITIES Bank overdraft Amounts due to subsidiaries Bank short-term loans Corporate bonds (less than one year) Deferred income and accrued expenses Provisions TOTAL SHORT-TERM LIABILITIES LONG-TERM LIABILITIES/NON-CURRENT LIABILITIES Long-term liabilities – Third party Long-term liabilities – subsidiaries Corporate bonds TOTAL LONG TERM LIABILITIES/NON-CURRENT LIABILITIES SHAREHOLDERS’ EQUITY Share capital Statutory capital reserve Statutory retained earnings Own shares for share buyback Reserve for own shares held by a subsidiary TOTAL SHAREHOLDERS’ EQUITY TOTAL SHAREHOLDERS’ EQUITY AND LIABILITIES Notes 2020 2019 540 7 534 2 1 083 1 980 1 475 2 3 457 4 540 9 232 542 275 52 1 1 111 1 290 2 325 2 616 8 34 878 (169) 62 813 4 540 550 52 497 – 1 099 1 745 887 – 2 632 3 731 10 210 – – 42 33 295 – 323 2 100 2 423 8 34 940 – 31 1 013 3 731 2 3 3 4 to 5 4 to 5 4 to 5 4 to 5 4 to 5 SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 180 FINANCIAL STATEMENTS MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 181 2.3. Notes SGS SA (‘the Company’) is the ultimate parent company of the SGS Group which owns and ﬁnances, either directly or indirectly, its subsidiaries and joint ventures throughout the world. The head ofﬁce is located in Geneva, Switzerland. The average number of employees is less than 10 people for this company (2019: less than 10). 1. SIGNIFICANT ACCOUNTING POLICIES The ﬁnancial statements are prepared in accordance with the accounting principles required by Swiss law. In certain instances, the 2019 comparative ﬁgures were reclassiﬁed with no impact on previous year net income and retained earnings to match the current year presentation. INVESTMENTS IN SUBSIDIARIES Investments in subsidiaries are valued individually at acquisition cost less an adjustment for impairment where appropriate. FOREIGN CURRENCIES Balance sheet items denominated in foreign currencies are converted at year-end exchange rates with the exception of investments in subsidiaries which are valued at the historical exchange rate. Unrealized gains and losses arising on foreign exchange transactions are included in the determination of the net proﬁt, except long-term unrealized gains on long-term loans and related instruments, which are deferred. DIVIDENDS FROM SUBSIDIARIES Dividends are treated as an appropriation of proﬁt in the year in which they are ratiﬁed at the Annual General Meeting and subsequently paid, rather than as an appropriation of proﬁt in the year to which they relate or for which they are proposed by the Board of Directors. As a result, dividends are recognized in income in the year in which they are received, on a cash basis. BONDS Bonds are recorded at nominal value. 2. SUBSIDIARIES The list of principal Group subsidiaries appears in the Annual Report on pages 193 to 195. In 2020, SGS SA acquired 80% of the capital of Ryobi Geotechnique Pte Ltd in Singapore. The share purchase agreement includes an option to acquire the remaining 20% of Ryobi Geotechnique Pte Ltd in 2025. The option may be exercised if certain conditions are met. 3. CORPORATE BONDS SGS SA made the following bond issuances: Date of issue 27.05.2011* 27.02.2014 27.02.2014 25.04.2014 08.05.2015 08.05.2015 03.03.2017 29.10.2018 29.10.2018 06.05.2020 06.05.2020 * Recorded as short term bond Face value in CHF Million Coupon in % Year of Maturity Issue price in % Redemption price in % 275 138 250 112 325 225 375 225 175 175 325 3.000 1.375 1.750 1.375 0.250 0.875 0.550 0.750 1.250 0.450 0.950 2021 2022 2024 2022 2023 2030 2026 2025 2028 2023 2026 100.480 100.517 101.019 101.533 100.079 100.245 100.153 100.068 101.157 100.117 100.182 100.000 100.000 100.000 100.000 100.000 100.000 100.000 100.000 100.000 100.000 100.000 On 6 May 2020, SGS SA issued two bonds, one CHF 175 million with a 0.450% coupon and one CHF 325 million with a 0.950% coupon (2019: nil). As at 31 December 2020, one bond in the above table is classiﬁed as short-term liabilities. The Group has listed all bonds on the SIX Swiss Exchange. 4. TOTAL EQUITY (CHF million) BALANCE AT 1 JANUARY 2019 Dividends paid Decrease in the reserve for own shares Cancellation of treasury shares Proﬁt for the year BALANCE AT 31 DECEMBER 2019 Dividends paid Transfer to the reserve for own shares Share buyback program Proﬁt for the year BALANCE AT 31 DECEMBER 2020 5. SHARE CAPITAL BALANCE AT 1 JANUARY 2019 Own shares released into circulation Capital reduction by cancellation of own shares BALANCE AT 31 DECEMBER 2019 Own shares released into circulation Own shares purchased for future equity compensation plans Treasury shares purchased for cancellation BALANCE AT 31 DECEMBER 2020 Share capital 8 – – – – 8 – – – – 8 Statutory capital reserve 34 – – – – 34 – – – – 34 Shares in circulation 7 550 707 1 683 – 7 552 390 3 382 (15 834) (70 700) 7 469 238 Reserve for own shares held by a subsidiary Own shares for share buyback Statutory Retained earnings 35 – (4) – – 31 – 31 – – 62 Own shares 83 025 (1 683) (68 000) 13 342 (3 382) 15 834 70 700 96 494 (158) – – 158 – – – – (169) – (169) 948 (589) 4 (158) 735 940 (598) (31) (0) 567 878 Total 867 (589) – – 735 1 013 (598) – (169) 567 813 Total shares issued Total share capital CHF (million) 7 633 732 – (68 000) 7 565 732 – – – 7 565 732 8 – – 8 – – – 8 ISSUED SHARE CAPITAL SGS SA has a share capital of CHF 7 565 732 (2019: CHF 7 565 732) fully paid-in and divided into 7 565 732 (2019: 7 565 732) registered shares of a par value of CHF 1. In 2019, SGS SA proceeded to a capital reduction of 68 000 shares. All shares, other than own shares, participate equally in the dividends declared by the Company and have equal voting rights. OWN SHARES On 31 December 2020, SGS SA held 96 494 of its own shares, thereof 70 700 directly and 25 794 through an afﬁliate company. On 17 February 2020, SGS SA announced a CHF 200 million share buyback program for the purpose of capital reduction. The program ended on 17 December 2020 and 70 700 shares were repurchased for a total amount of CHF 169.3 million at an average purchase price of CHF 2 394.62 per share. Further, in 2020 15 834 shares have been repurchased through an afﬁliate company for covering future equity compensation plans, whilst 3 382 shares were released into circulation. SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 182 FINANCIAL STATEMENTS MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 183 6. FINANCIAL INCOME AND FINANCIAL EXPENSES 9. SHARES AND OPTIONS HELD BY MEMBERS OF GOVERNING BODIES 2020 2019 9.1. SHARES AND OPTIONS HELD BY MEMBERS OF THE BOARD OF DIRECTORS The following table shows the shares held by Members of the Board of Directors as at 31 December 2020: (CHF million) FINANCIAL INCOME: Interest income 3rd party Interest income Group FINANCIAL INCOME FINANCIAL EXPENSES Interest expenses 3rd party Interest expenses Group Other ﬁnancial expenses FINANCIAL EXPENSES – 39 39 (28) (6) (14) (48) 4 63 67 (27) (7) (21) (55) 7. GUARANTEES AND COMFORT LETTERS (CHF million) Guarantees Performance bonds TOTAL 2020 issued 2020 utilised 2019 issued 2019 utilised 2 055 53 2 108 341 35 376 709 55 764 488 55 543 The Company has unconditionally guaranteed or provided comfort to ﬁnancial institutions providing credit facilities (loans and guarantee bonds) to its subsidiaries. In addition, it has issued performance bonds to commercial customers on behalf of its subsidiaries. The Company is part of a VAT Group comprising itself and other Group companies in Switzerland. 8. REMUNERATION 8.1. REMUNERATION POLICY AND PRINCIPLES This section appears in the SGS Remuneration Report paragraph 2 in the Annual Report on pages 99 to 102. 8.2. REMUNERATION MODEL This section appears in the SGS Remuneration Report paragraph 3 in the Annual Report on pages 102 to 112. 8.3. REMUNERATION AWARDED TO THE BOARD OF DIRECTORS This section appears in the SGS Remuneration Report paragraph 4 in the Annual Report on pages 112 to 114. 8.4. REMUNERATION AWARDED TO THE OPERATIONS COUNCIL MEMBERS This section appears in the SGS Remuneration Report paragraph 5 in the Annual Report on pages 115 to 120. Name C. Grieder A. F. von Finck C. Grupp S. R. du Pasquier P. Desmarais, Jr. K. Sorenson I. Gallienne G. Lamarche S. Atiya T. Hartmann The following table shows the shares held by Members of the Board of Directors as at 31 December 2019: Name L. von Finck A. F. von Finck C. Grupp P. Kalantzis S. R. du Pasquier P. Desmarais, Jr. K. Sorenson I. Gallienne G. Lamarche C. Grieder 9.2. SHARES AND OPTIONS HELD BY SENIOR MANAGEMENT The following table shows the shares and restricted shares held by Senior Management as at 31 December 2020: Shares 90 1 000 1 10 37 36 1 25 92 – Shares 53 786 255 – 150 10 10 – 1 25 5 Name F. Ng D. de Daniel O. Merkt Corporate Responsibility Chief Executive Ofﬁcer Chief Financial Ofﬁcer General Counsel and Chief Compliance Ofﬁcer Restricted shares Shares 599 163 136 2 125 1 165 200 Shares 1 980 855 223 The following table shows the shares and restricted shares held by Senior Management as at 31 December 2019: Name F. Ng D. de Daniel O. Merkt Corporate Responsibility Chief Executive Ofﬁcer Chief Financial Ofﬁcer General Counsel and Chief Compliance Ofﬁcer Restricted shares 500 – 98 Details of the various plans are explained in the SGS Remuneration Report. SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 184 10. SIGNIFICANT SHAREHOLDERS To the knowledge of the Company the shareholders owning more than 3% of its share capital as at 31 December 2020, or as the date of their last notification as per Article 20 of the Swiss Stock Exchange Act were Groupe Bruxelles Lambert (acting through Serena SARL and URDAC) with 18.91% (December 2019: 16.73%) of the share capital and voting rights of the company. At the same date, SGS Group held 1.28% of the share capital of the Company (2019: 0.18%). PROPOSAL OF THE BOARD OF DIRECTORS FOR THE APPROPRIATION OF AVAILABLE RETAINED EARNINGS (CHF) Profit for the year Balance brought forward from previous year Dividend not paid on own shares bought in 2020 prior the Annual General Meeting in March 2020 Dividend paid on own shares released into circulation in 2019 prior the Annual General Meeting on 22 March 2019 Capital reduction by cancellation of shares Share buyback program (Transfer to)/Reversal from the reserve for own shares TOTAL RETAINED EARNINGS AVAILABLE FOR APPROPRIATION Proposal of the Board of Directors: Dividends¹ BALANCE CARRIED FORWARD Ordinary gross dividend per registered share 1. No dividend is paid on own shares held directly or indirectly by SGS SA 2020 2019 566 859 163 735 232 728 335 400 834 200 446 558 6 202 320 – – – (169 299 740) (85 410) 68 000 – (30 626 419) 3 930 158 708 536 159 939 592 034 (597 539 040) (604 191 200) 110 997 119 335 400 834 80.00 80.00 11. APPROVAL OF FINANCIAL STATEMENTS AND SUBSEQUENT EVENTS The Board of Directors is responsible for the preparation and presentation of the financial statements. These financial statements were authorized for issue by the Board of Directors on 23 February 2021, and will be submitted for approval by the Annual General Meeting of Shareholders to be held on 23 March 2021. 185 Deloitte SA Rue du Pré-de-la-Bichette 1 1202 Geneva Switzerland Phone: +41 (0)58 279 8000 Fax: +41 (0)58 279 8800 www.deloitte.ch Statutory Auditor’s Report To the General Meeting of SGS SA, Geneva Report on the Audit of the Financial Statements Opinion We have audited the financial statements of SGS SA, which comprise the balance sheet as at 31 December 2020, the income statement and related notes for the year then ended, including the summary of significant accounting policies. In our opinion the accompanying financial statements as at 31 December 2020, presented on pages 178 to 184, comply with Swiss law and the company’s articles of incorporation. Basis for Opinion We conducted our audit in accordance with Swiss law and Swiss Auditing Standards. Our responsibilities under those provisions and standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the entity in accordance with the provisions of Swiss law and the requirements of the Swiss audit profession and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Report on Key Audit Matters based on the circular 1/2015 of the Federal Audit Oversight Authority Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. SHAREHOLDER INFORMATIONFINANCIAL STATEMENTSCORPORATE GOVERNANCEFINANCIAL STATEMENTSMANAGEMENT REPORTSGS | 2020 Integrated Annual ReportSGS | 2020 Integrated Annual Report 186 FINANCIAL STATEMENTS MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 187 SGS SA Statutory Auditor’s Report for the year ended 31 December 2020 SGS SA Statutory Auditor’s Report for the year ended 31 December 2020 (cid:20)aluation of Investments in subsidiaries and related loans to subsidiaries (cid:11)ey audit matter (cid:9)ow the scope of our audit responded to the (cid:33)ey audit matter (cid:18)he company holds investments in subsidiaries with a carrying value of C(cid:9)F1’980 million as of 31 December 2020 (cid:56)(cid:64)3.(cid:66)(cid:72) of total assets(cid:57). (cid:18)he list of principal Group subsidiaries can be found in the Annual Report on pages 193 to 19(cid:65) (cid:56)Section (cid:64) (cid:55) Material Operating Companies and (cid:19)ltimate (cid:15)arent(cid:57). (cid:18)he company also has loans to subsidiaries amounting to C(cid:9)F1’(cid:64)7(cid:65) million (cid:56)32.(cid:65)(cid:72) of total assets(cid:57). (cid:18)he valuation of these assets is dependent on the ability of these subsidiaries to generate positive cash(cid:54)flows in the future. In accordance with Swiss Law the company values individually each investment and related loans and reviews them annually to identify impairment indicators. An impairment is recorded if the recoverable values of individual investments are lower than the associated carrying values, or if loan balances are no longer considered recoverable from the associated entities. (cid:18)he company implemented a multi(cid:54)step ris(cid:33) assessment to identify investments and loans impairment indicators and prepares a discounted cash flow forecast for each ris(cid:33)y asset identified. (cid:18)he inputs to the impairment testing model which have the most significant impact on the recoverable value include(cid:50) • • • (cid:15)ro(cid:32)ected revenue growth, operating margins and operating cash(cid:54)flows in the years 1(cid:54)(cid:65)(cid:49) Stable long term growth rates in years (cid:66)(cid:54)10 and in perpetuity(cid:49) and Country and business specific discount rates (cid:56)pre(cid:54) tax(cid:57). (cid:18)he annual impairment testing is considered to be a ris(cid:33) area for the Board of Directors and a (cid:33)ey audit matter because the assumptions on which the tests are based are highly (cid:32)udgmental and are affected by future mar(cid:33)et and economic conditions which are inherently uncertain, and because of the materiality of the balances to the statutory financial statements as a whole. Refer to note 2 to the financial statements. We tested the adequate implementation of accounting policies and the design and implementation of (cid:33)ey controls regarding the valuation of investments in subsidiaries and related loans. We challenged the impairment testing conducted by the company. We tested the impairment model valuations for the recoverable amounts of investments and loans to subsidiaries on a sample basis by critically assessing the methodology applied and assessing the reasonableness of the underlying (cid:33)ey assumptions and (cid:32)udgements. In particular, we performed the following procedures(cid:50) • We tested mathematical accuracy of the impairment models and the accuracy of extraction of inputs from source documents(cid:49) • We challenged the significant inputs and (cid:33)ey assumptions and (cid:32)udgements used in the impairment testing models for investments, specifically the discount rates and the five year pro(cid:32)ected revenues and margins(cid:49) and • We developed our independent expectations of recoverable value by performing additional sensitivity testing of (cid:33)ey assumptions. We evaluated the appropriateness and completeness of the related disclosures in the financial statements. Based on the audit procedures performed above, we consider management’s estimates of the assessment of the recoverable value of investments in, and loans to, subsidiaries along with related financial statement disclosures to be appropriate. Responsibility of the Board of Directors for the Financial Statements (cid:18)he Board of Directors is responsible for the preparation of the financial statements in accordance with the provisions of Swiss law and the company’s articles of incorporation, and for such internal control as the Board of Directors determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Board of Directors is responsible for assessing the entity’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Board of Directors either intends to liquidate the entity or to cease operations, or has no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Statements Our ob(cid:32)ectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Swiss law and Swiss Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users ta(cid:33)en on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located at the website of E(cid:22)(cid:15)ER(cid:18)suisse(cid:50) http(cid:50)(cid:53)(cid:53)expertsuisse.ch(cid:53)en(cid:53)audit(cid:54)report(cid:54)for(cid:54)public(cid:54)companies. (cid:18)his description forms part of our auditor’s report. SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 188 FINANCIAL STATEMENTS MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 189 SGS SA Statutory Auditor’s Report for the year ended 31 December 2020 Report on Other Legal and Regulatory Requirements In accordance with article 728a paragraph 1 item 3 CO and the Swiss Auditing Standard 890, we confirm that an internal control system exists which has been designed for the preparation of financial statements according to the instructions of the Board of Directors. We further confirm that the proposed appropriation of available earnings complies with Swiss law and the company’s articles of incorporation. We recommend that the financial statements submitted to you be approved. Deloitte SA Matthew Sheerin Licensed Audit Expert Auditor in Charge Aurelie Darrigade Licensed Audit Expert Geneva, 23 February 2021 3. Historical Data 3.1. SGS Group – Five-Year Statistical Data Consolidated Income Statements FOR THE YEAR ENDED 31 DECEMBER (CHF million) REVENUE Salaries and wages Subcontractors’ expenses Depreciation, amortization and impairment Gain on business disposal Other operating expenses OPERATING INCOME (EBIT) Financial income Financial expenses Share of proﬁt of associates and joint ventures PROFIT BEFORE TAXES Taxes PROFIT FOR THE YEAR Proﬁt attributable to: Equity holders of SGS SA Non-controlling interests OPERATING INCOME MARGINS IN % AVERAGE NUMBER OF EMPLOYEES 2020 5 604 (2 797) (352) (517) 63 (1 206) 795 12 (66) 1 742 (237) 505 480 25 14.2 2019 6 600 (3 357) (386) (548) 268 (1 495) 1 082 18 (79) (4) 1 017 (315) 702 660 42 16.4 2018 6 706 (3 422) (387) (317) – (1 634) 946 20 (58) – 908 (218) 690 643 47 14.1 2017 6 349 (3 193) (394) (338) – (1 530) 894 14 (57) – 851 (187) 664 621 43 14.1 2016 5 985 (3 009) (368) (336) – (1 456) 816 8 (53) – 771 (185) 586 543 43 13.6 89 098 94 494 96 492 93 556 89 626 SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 190 FINANCIAL STATEMENTS MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 191 3.2. SGS Group – Five-Year Statistical Data Consolidated Statements of Financial Position AT 31 DECEMBER (CHF million) Property, plant and equipment Right-of-use assets Goodwill Other intangible assets Investments in joint-ventures, associates and other Deferred tax assets Other non current-assets TOTAL NON-CURRENT ASSETS Inventories Unbilled revenues and work in progress Trade receivables Other receivables and prepayments Current tax assets Marketable securities Cash and cash equivalents TOTAL CURRENT ASSETS TOTAL ASSETS Share capital Reserves Treasury shares EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF SGS SA Non-controlling interests TOTAL EQUITY Loans and other ﬁnancial liabilities Lease liabilities Deferred tax liabilities Deﬁned beneﬁt obligations Provisions TOTAL NON-CURRENT LIABILITIES Loans and other ﬁnancial liabilities Lease liabilities Trade and other payables Provisions Current tax liabilities Contract liabilities Other creditors and accruals TOTAL CURRENT LIABILITIES TOTAL LIABILITIES TOTAL EQUITY AND LIABILITIES 2020 872 590 1 651 333 34 161 154 2019 926 611 1 281 187 35 174 149 2018 969 – 1 224 202 36 203 133 3 795 3 363 2 767 57 160 856 188 77 9 1 766 3 113 6 908 8 1 282 (230) 1 060 74 1 134 2 390 470 53 136 88 45 195 953 219 77 9 1 466 2 964 6 327 8 1 536 (30) 1 514 81 1 595 2 199 490 23 151 91 46 226 969 214 94 9 1 743 3 301 6 068 8 1 851 (191) 1 668 75 1 743 2 110 2 30 119 89 2017 1 002 – 1 238 222 36 168 137 2 803 46 293 1 068 236 104 10 1 383 3 140 5 943 8 2 036 (125) 1 919 86 2 005 2 095 1 45 143 73 2016 972 – 1 195 246 38 165 122 2 738 41 249 997 252 88 9 975 2 611 5 349 8 2 243 (478) 1 773 80 1 853 1 735 1 42 154 76 3 137 2 954 2 350 2 357 2 008 863 151 658 85 140 189 551 2 637 5 774 6 908 38 154 638 74 145 155 574 1 778 4 732 6 327 412 – 685 21 127 112 618 1 975 4 325 6 068 45 – 647 35 151 97 606 1 581 3 938 5 943 55 – 598 44 166 86 539 1 488 3 496 5 349 3.3. SGS Group – Five-Year Statistical Share Data (CHF unless indicated otherwise) 2020 2019 2018 2017 2016 SHARE INFORMATION REGISTERED SHARES Number of shares issued Number of shares with dividend rights PRICE High Low Year-end Par value KEY FIGURES BY SHARES Equity attributable to equity holders of SGS SA per share in circulation at 31 December Basic earnings per share1 Dividend per share ordinary Total dividend per share DIVIDENDS (CHF MILLION) Ordinary2 TOTAL 7 565 732 7 469 238 7 565 732 7 552 390 7 633 732 7 550 707 7 633 732 7 551 408 7 822 436 7 538 507 2 843 1 974 2 670 1 2 689 2 213 2 651 1 2 683 2 170 2 210 1 2 541 2 051 2 541 1 2 317 1 734 2 072 1 141.91 200.37 220.86 254.16 235.22 64.05 80.00 80.00 87.45 80.00 80.00 84.54 78.00 78.00 82.41 75.00 75.00 71.54 70.00 70.00 598 598 604 604 589 589 566 566 528 528 1. Calculation of the basic earnings per share (weighted average for the year) is disclosed in note 11 of SGS Group Results. 2. As proposed by the Board of Directors. 3.4. SGS Group Share Information SHARE TRANSFER SGS SA has no restrictions as to share ownership, except that registered shares acquired in a ﬁduciary capacity by third parties may not be registered in the shareholders’ register, unless a special authorization has been granted by the Board of Directors. MARKET CAPITALIZATION At the end of 2020 market capitalization was approximately CHF 20 201 million (2019:CHF 20 057 million). Shares are quoted on the SIX Swiss Exchange. SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 192 FINANCIAL STATEMENTS MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 193 3.5. Closing Prices for SGS & the SMI 2019-2020 SGS SA 2 900 2 800 2 700 2 600 2 500 2 400 2 300 2 200 2 100 2 000 1 900 1 800 1 700 1 600 1 500 1 400 1 300 J F M A M J 2019 J A S O N D J F M A M J A S O N D J 2020 HIGH PRICE CLOSING LOW PRICE SWISS MARKET INDEX (MONTHLY CLOSE) SMI 12 000 11 750 11 500 11 250 11 000 10 750 10 500 10 250 10 000 9 750 9 500 9 250 9 000 8 750 8 500 8 250 8 000 4. Material Operating Companies and Ultimate Parent The disclosure of legal entities is limited to entities whose contribution to the Group revenues in 2020 represent at least 1% of the consolidated revenues, but includes, in addition, the main operating legal entity in every country where the Group has permanent operations, even when such legal entities represent less than 1% of the Group consolidated revenues. This deﬁnition of materiality excludes dormant companies, pure sub-holding companies or entities used solely for the detention of assets. Country Albania Algeria Angola Argentina Argentina Australia Austria Azerbaijan Bangladesh Belarus Belgium Botswana Brazil Name and domicile SGS Automotive Albania sh.p.k., Tirana SGS Qualitest Algérie SpA, Alger SGS Serviços Angola, Luanda SGS Argentina SA, Buenos Aires ITV SA, Buenos Aires SGS Australia Pty. Ltd., Perth SGS Austria Controll-Co. Ges.m.b.H., Vienna Société Générale de Surveillance Azeri Ltd., Baku SGS Bangladesh Limited, Dhaka SGS Minsk Ltd., Minsk SGS Belgium N.V., Antwerpen SGS Botswana (Proprietary) Limited, Gaborone SGS Industrial – Instalaçaões, Testes e Comissionamentos Ltda Sao Paulo Bulgaria SGS Bulgaria Ltd., Soﬁa Burkina Faso SGS Burkina SA, Ouagadougou Cambodia Cameroon Canada Chile China China Colombia Congo Croatia SGS (Cambodia) Ltd., Phnom Penh SGS Cameroun SA, Douala SGS Canada Inc., Missisauga SGS Minerals S.A., Santiago de Chile SGS-CSTC Standards Technical Services Co. Ltd., Beijing SGS-CSTC Standards Technical Services Co. Ltd., Shanghaï SGS Colombia SAS, Bogota SGS Congo SA, Pointe-Noire SGS Adriatica, w.l.l., Zagreb Czech Republic SGS Czech Republic s.r.o., Praha Democratic Republic of Congo SGS Minerals RDC SARL, Lubumbashi Denmark Ecuador Egypt Estonia Finland France Georgia Germany Germany Ghana SGS Danmark A / S, Glostrup Hvidovre Consorcio SGS – Revisiones Técnicas SGS Egypt Ltd., Cairo SGS Estonia Ltd., Tallinn SGS FIMKO,Helsingfors SGS France SAS, Arcueil SGS Georgia Ltd., Batumi SGS Germany GmbH, Hamburg SGS Institut Fresenius GmbH, Taunusstein Ghana Community Network Services Limited, Accra Great Britain SGS United Kingdom Limited, Ellesmere Port Greece Guam SGS Greece SA, Peristeri SGS Guam Inc., Guam Guatemala SGS Central America SA, Guatemala-City Guinea-Conakry SGS Guinée Conakry SA ,Conakry Issued capital currency Issued capital amount % Held by group Direct/ indirect ALL DZD USD ARS ARS AUD EUR USD BDT USD EUR BWP BRL BGN XOF KHR XAF CAD CLP USD CNY COP XAF HRK CZK USD DKK USD EGP EUR EUR EUR USD EUR EUR GHS GBP EUR USD GTQ GNF 190 000 100 50 000 000 30 000 230 603 536 1 500 000 200 000 185 000 100 000 10 000 000 20 000 35 995 380 1 000 91 266 840 5 010 000 601 080 000 4 000 000 000 10 000 000 20 900 000 29 725 583 703 3 966 667 180 000 000 135 546 166 036 1 510 000 000 1 300 000 7 707 000 50 000 700 000 25 000 1 500 000 42 174 260 000 3 172 613 80 000 1 210 000 7 490 000 1 978 604 8 000 000 301 731 25 000 4 250 000 50 000 000 100 100 49 100 100 100 100 100 100 100 100 100 100 100 100 100 98.9 100 100 85 85 100 100 100 100 100 100 100 100 100 100 100 100 100 100 52 100 100 100 100 100 I D I D I I D D D D D D D D D D D D I I I D D I I D I I D I I I D I I I I D D D D SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 194 FINANCIAL STATEMENTS MANAGEMENT REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 195 Country Name and domicile Issued capital currency Issued capital amount % Held by group Direct/ indirect Guinea-Equatorial Hong Kong Hungary India Indonesia Iran Ireland Italy Ivory Coast Japan Jordan Compañia de Inspecciones y Servicios G.E., Malabo SGS Hong Kong Limited, Hong Kong SGS Hungária Kft., Budapest SGS India Private Ltd., Mumbai P.T. SGS Indonesia, Jakarta SGS Iran (Private Joint Stock) Limited, Tehran SGS Ireland (Holdings) Limited, Dublin SGS Italia S.p.A., Milan Société Ivoirienne de Contrôles Techniques Automobiles et Industriels SA, Abidjan SGS Japan Inc., Yokohama SGS (Jordan) Private Shareholding Company, Amman Kazakhstan Kenya SGS Kazakhstan Limited, Almaty SGS Kenya Limited, Mombasa Korea (Republic of) SGS Korea Co., Ltd., Seoul Kuwait SGS Kuwait W.L.L Lao (People’s Democratic Republic) SGS (Lao) Sole Co., Ltd., Vientiane Latvia Lebanon Liberia Lithuania Madagascar Malaysia Mali Mauritius Mexico Moldova Mongolia Morocco SGS Latvija Limited, Riga SGS (Liban) S.A.L., Beirut SGS Liberia Inc, Monrovia SGS Klaipeda Ltd., Klaipeda Malagasy Community Network Services SA, Antananarivo Petrotechnical Inspection (Malaysia) Sdn. Bhd., Kuala Lumpur SGS Mali Sàrlu, Kayes SGS (Mauritius) LTD, Phoenix SGS de Mexico, SA de C.V., Mexico SGS (Moldova) SA, Chisinau SGS-IMME Mongolia LLC, Ulaanbaatar SGS Maroc SA, Casablanca Mozambique SGS MCNET Moçambique Limitada, Maputo Myanmar Namibia Netherlands New Zealand Nigeria Norway Oman Pakistan Panama SGS (Myanmar) Limited, Yangon SGS Inspection Services Namibia (Proprietary) Limited, Windhoek SGS Nederland B.V., Spijkenisse SGS New Zealand Limited, Auckland-Onehunga SGS Inspection Services Nigeria Limited, Lagos SGS Norge A / S, Austrheim SGS Minerals (FZC) LLC, Sohar SGS Pakistan (Private) Limited, Karachi Laboratorios Contecon Urbar Panama Papua-New-Guinea SGS PNG Pty. Limited, Port Moresby Paraguay Peru Philippines Poland SGS Paraguay SA, Asunción SGS del Perú S.A.C., Lima SGS Philippines, Inc., Manila SGS Polska Sp.z o.o., Warsaw XAF HKD HUF INR USD IRR EUR EUR XOF JPY JOD KZT KES KRW KWD LAK EUR LBP LRD EUR MGA MYR XOF MUR MXN MDL MNT MAD MZN MMK NAD EUR NZD NGN NOK OMR PKR USD PGK PYG PEN PHP PLN 10 000 000 200 000 518 000 000 960 000 350 000 51 100 100 100 100 50 000 000 99.99 62 500 2 500 000 200 000 000 100 000 000 100 000 228 146 527 2 000 000 15 617 540 000 50 000 2 444 700 000 118 382 30 000 000 100 711 576 10 000 000 750 000 300 000 000 100 000 281,068,828 488 050 1 787 846 388 17 982 000 343 716 458 300 000 100 250 000 10 522 190 200 000 804 000 500 000 2 300 000 760 000 2 1 962 000 000 43 081 182 24 620 000 27 167 800 100 100 95 100 50 100 100 100 49 100 100 99.97 100 100 70 100 100 100 100 100 55 100 80 100 100 100 100 49 100 100 100 100 100 100 100 100 100 D D I D D D I I D D D D D D D D I D D I D D D D D D I D I D I I D D I D D I I D D D I Country Portugal Qatar Romania Russia Saudi Arabia Senegal Serbia Sierra Leone Singapore Slovakia Slovenia South Africa Spain Spain Sri Lanka Sweden Switzerland Name and domicile SGS Portugal – Sociedade Geral de Superintendência SA, Lisboa SGS Qatar WLL,Doha SGS Romania SA, Bucharest AO SGS Vostok Limited, Moscow SGS Inspection Services Saudi Arabia Ltd., Jeddah SGS Sénégal SA, Dakar SGS Beograd d.o.o., Beograd SGS (SL) Ltd., Freetown SGS Testing and Control Services Singapore Pte Ltd., Singapore SGS Slovakia spol.s.r.o., Kosice SGS Slovenija d.o.o. – Podjetje za kontrol blaga, Ljubljana SGS South Africa (Proprietary) Limited, Johannesburg SGS Española de Control SA, Madrid SGS Tecnos, SA, Sociedad Unipersonal, Madrid SGS Lanka (Private) Limited, Colombo SGS Sweden AB, Göteborg SGS Société Générale de Surveillance SA, Geneva Switzerland SGS SA, Geneva Taiwan Tanzania Thailand Togo Tunisia Turkey SGS Taiwan Limited, Taipei African Assay Laboratories (Tanzania) Ltd, Dar Es Salaam SGS (Thailand) Limited, Bangkok SGS Togo SA, Lomé SGS Tunisie SA, Tunis SGS Supervise Gözetme Etud Kontrol Servisleri Anonim Sirketi, Istanbul Turkmenistan SGS Turkmen Ltd., Ashgabat Uganda Ukraine United Arab Emirates SGS Uganda Limited, Kampala SGS Ukraine, Foreign Enterprise, Odessa SGS Gulf Limited Dubai Airport Free Zone Branch United States United States Uruguay Uzbekistan Vietnam Zambia Zimbabwe SGS North America Inc., Wilmington Maine Pointe LLC, Duxbury SGS Uruguay Limitada, Montevideo SGS Tashkent Ltd., Tashkent SGS Vietnam Ltd., Ho Chi Minh City SGS Inspections Services Ltd., Lusaka SGS Technical Services (PTY) Ltd, Harare (Branch ofﬁce) Issued capital currency Issued capital amount % Held by group Direct/ indirect EUR QAR RON RUB SAR XAF EUR SLL SGD EUR EUR ZAR EUR EUR LKR SEK CHF CHF TWD TZS THB XOF TND TRY USD UGX USD – USD USD UYU USD USD ZMK – 500 000 200 000 100 002 18 000 000 1 000 000 35 000 000 66 161 200 000 000 100 000 19 917 10 432 452 000 500 240 000 92 072 034 9 000 000 1 500 000 100 000 7 565 732 100 49 100 100 75 100 100 100 100 100 100 100 100 100 100 100 100 62 000 000 2 000 100 100 20 000 000 99.99 10 000 000 50 000 6 550 000 50 000 5 000 000 400 000 – 73 701 996 10’000 1 500 50 000 288 000 16 944 000 – 100 50 100 100 100 100 – 100 60 100 100 100 100 – I D I D D D I D D I I I I I D I I Ultimate parent company I I D D D I D D I – I I D D D I – SGS | 2020 Integrated Annual Report SGS | 2020 Integrated Annual Report 196 SHAREHOLDER INFORMATION Shareholder information SGS SA CORPORATE OFFICE 1 place des Alpes P.O. Box 2152 CH – 1211 Geneva 1 t +41 (0)22 739 91 11 f +41 (0)22 739 98 86 e sgs.investor.relations@sgs.com www.sgs.com STOCK EXCHANGE LISTING SIX Swiss Exchange, SGSN STOCK EXCHANGE TRADING SIX Swiss Exchange COMMON STOCK SYMBOLS Bloomberg: Registered Share: SGSN.VX Reuters: Registered Share: SGSN.VX Telekurs: Registered Share: SGSN ISIN: Registered Share: CH0002497458 Swiss security number: 249745 INVESTOR RELATIONS SGS SA Toby Reeks SGS SA 1 place des Alpes P.O. Box 2152 CH – 1211 Geneva 1 t +41 (0)22 739 99 87 m +41 (0)79 641 83 02 www.sgs.com ANNUAL GENERAL MEETING OF SHAREHOLDERS Tuesday, 23 March 2021 Geneva, Switzerland 2021 HALF-YEAR RESULTS Monday, 19 July 2021 INVESTOR DAYS Thursday and Friday 27-28 May 2021 DIVIDEND PAYMENT DATE Ex-date: Thursday 25 March 2021 Record date: Friday 26 March 2021 Payment date: Monday 29 March 2021 MEDIA RELATIONS Daniel Rüfenacht SGS SA 1 place des Alpes P.O. Box 2152 CH – 1211 Geneva 1 t +41 (0)22 739 94 01 m +41 (0)78 656 94 59 www.sgs.com PROJECT MANAGEMENT John Coolican Paula Ordoñez DESIGN AND PRODUCTION Radley Yeldar London, United Kingdom PRINTED BY Next Communication SA Le Mont-sur-Lausanne, Switzerland Printed on 100% recycled Balance Silk Carbon offset certiﬁcation by myclimate SGS | 2020 Integrated Annual Report LEARN MORE ABOUT HOW WE ARE ENABLING A BETTER, SAFER AND MORE INTERCONNECTED WORLD www.sgs.com SGS is a registered trademark of SGS Société Générale de Surveillance SA

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