Independent audits of social and environmental responsibility and business ethics

As previously mentioned, risk management at Pirelli is enterprise-wide and includes the identification, analysis and monitoring of environmental, social, financial and business ethics risks that are directly or indirectly associated with the Company, at Pirelli affiliates or in relations with them, such as sustainability of the supply chain.

Ad hoc assessments are also carried out before entering a specific market, in order to assess any political, financial, environmental and social risks, including those connected with respect of human and labour rights.

Together with constant co-ordination and monitoring at the corporate level, compliance with Pirelli economic, social (especially human rights and labour rights) and environmental sustainability rules is assessed in periodic audits commissioned by Pirelli to specialised independent firms, and by the Pirelli Internal Department. Particular attention is devoted to the sustainability of Pirelli’s sites and the company’s suppliers’sites operating in emerging countries.

The Internal Audit function has been directly involved in the sustainability audit process at Pirelli affiliates and monitoring of supplier compliance recovery plans since 2012. This function stands out for its independence at Pirelli insofar as, aside from the Board of Statutory Auditors, it reports to the Internal Control, Risks and Corporate Governance Committee of Pirelli & C. S.p.A., which is composed only of Independent Directors.

The three-year internal auditing plan covers all Pirelli sites. Normally every audit is carried out by two auditors and takes three weeks on site. The Internal Audit Team received training on the environmental, social and ethical elements of an audit to enable them to carry out an effective, clear and structured audit, grantingPirelli an effective control over all aspects of sustainability.

Both the external and internal auditors conduct their audits on the basis of a check-list of sustainability parameters derived from the SA8000® standard (the reference tool officially adopted by the Group for the management of social responsibility since 2004), from the Pirelli Social Responsibility Policy for Occupational Health, Safety, Rights, and Environment and from the Group Ethical Code.

Third party audits, each lasting an average of two-three days on site, include extensive interviews with workers, management and trade union representatives. The Purchasing Managers and the Sustainability Managers that coordinated local audits of suppliers performed by third party were adequately trained and informed about the audit aims and procedures by the delegated headquarters functions: in this case, Sustainability and the Procurement Department. All managers of the audited affiliates were alsoadequately trained and informed about the audit aims and procedures by the central Sustainability and Industrial Relations functions.

In regard to Pirelli sites, audits were conducted in 2008 at Company facilities in Turkey, Brazil, Venezuela, Argentina, Egypt, China, Romania, Colombia, Mexico and Chile. In 2011 Pirelli commissioned third party audits that covered the production sites in Argentina, Venezuela, Brazil, China, Egypt, Turkey and Romania.

In 2012 the Internal Audit function conducted sustainability audits at Company facilities in Italy, Brazil, Argentina, Venezuela and Turkey and, in 2013, in Argentina, the United States, Romania and Brazil. The audits will continue in Italy, United Kingdom, Egypt and China in 2014.

Although the compliance violations uncovered by the audits were not serious, they were addressed in action plans agreed by the local managers and central management The Internal Audit Department is monitoring the status of implementation of agreed action plans, through specific follow-up measures.

It should be noted that none of the audits revealed any breach of the ILO’s Core Labour Standards, with specific reference to forced labour or child labour, freedom of association and bargaining, and non-discrimination.

With reference to Suppliers’ sites, seventy-two audits were carried out between the end of 2009 and the beginning of 2010, a further 56 were conducted between the end of 2010 and the beginning of 2011, and in the second half of 2012 some 62 new audits on suppliers of raw materials, machinery, logistics and services were started, concluding in 2013. In the majority of cases the audits involved suppliers of Pirelli Tyre operating in ESG risk countries, namely Brazil, Argentina, Egypt, China, Romania, Turkey, and Venezuela, or countries from which Pirelli purchases raw materials, such as Indonesia, India, Malaysia, Thailand, Japan, Russia and Korea. Among the Western countries in which Pirelli conducts its business, audits were carried out on Pirelli Tyre suppliers in Italy, UK, Germany, the Netherlands and the United States.

On the basis of the audit results, Pirelli required a recovery plan to Supplier, designed to prevent, mitigate or remedy any non-compliancefound..The Plan typically envisages specific actions to be implemented by precise deadlines agreed by the parties, in addition to clear identification of the person in charge of the action at the supplier company. Since 2012, the Internal Audit function has also been directly involved in the process of monitoring the implementation status of the suppliers’ compliance plans.

Critically observing the results of the supply-chain audits performed between 2009 and 2013, the observed non-compliances continued to be related to the health and safety management processes, use of overtime and proper implementation of the Environmental Management Systems. However, from one audit cycle to another, their number is steadily decreasing, just as their seriousness has steadily decreased. No violations of human rights or fundamental work rights have been found. There has been no contract termination due to the results of the audits. The recovery plans following the 2013 Audits have been completed.

The achieved results are attributable to the Sustainable Management System adopted by Pirelli, which is extensive and covers all phases of the relationship with the supplier. Over the years, it has allowed constant improvements in the panel of suppliers.

Then, it must be considered that the Pirelli suppliers perceive the importance of compliance with the sustainable management factors, partly in consequence of the engagement of their other customers. This certainly contributes to a virtuous circle of continuous improvement.