Sustainability management

Corporate governance

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Nornickel’s corporate governance framework is designed to take into account and balance the interests of shareholders, the Board of Directors, managers and employees, as well as other stakeholders.

The Company’s approach to corporate governance, its key principles and the by-laws serving as a basis for an effective governance framework draw on the applicable Russian laws, including the Corporate Governance Code recommended by the Bank of Russia.

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Nornickel’s governance framework relies on the following principles:

• equitable and fair treatment of every shareholder;
• support for the shareholders to let them exercise their rights and lawful interests in the most reasonable and convenient manner;
• professionalism and leadership of the Board of Directors, and involvement of independent directors in governance;
• strategic management by the Board of Directors, its efficient control over executive bodies, and oversight of the risk management and internal control framework;
• sound, bona fide and efficient management of the Company’s day-to-day operations by executive bodies accountable to the Board of Directors and the General Meeting of Shareholders;
• compliance with the Russian laws and the national laws of the countries of operation;
• corporate social responsibility;
• strong business ethics;
• zero tolerance to corruption and effective anti-corruption measures;
• full, transparent, reliable and timely disclosure;
• robust internal controls, internal and external audits;
• active collaboration with investors, creditors, and other stakeholders in order to increase Company’s assets and market capitalisation.

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These principles are reflected in Nornickel’s official documents, including the Charter, Regulations on the Board of Directors, Information Policy Regulations, Anti-Corruption Policy, and other by-laws. All these documents are available on the Company’s website.¹³

Pursuant to MMC Norilsk Nickel’s Charter, its governing bodies are:

• the General Meeting of Shareholders, the Company’s supreme governing body;
• the Board of Directors, a collegial governing body in charge of strategic management of the Company and oversight of its executive bodies’ activities;
• the Management Board and the President that represent the collegial and sole executive bodies of the Company, respectively, and manage its daily operations.

Governance structure 102–18 102–20

The Board of Directors has four committees: Audit and Sustainable Development Committee, Strategy Committee, Budget Committee, and the Corporate Governance, Nomination and Remuneration Committee.

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In overseeing the Company’s management, financial and business affairs, the Board of Directors may instruct the executives on individual matters and monitor implementation of resolutions and tasks. Authorised executives are vested with powers and responsibilities to address economic, environmental and social issues and may delegate their powers to other employees based on their competences and functions.

The Board of Directors meets as and when required, but at least once every six weeks. In 2018, the Board of Directors met on a quarterly basis to review the Company’s financial results, strategy implementation progress, the management’s HSE reports, and operational performance reports. In 2018, the Board of Directors of MMC Norilsk Nickel considered 175 matters, including 79 transaction approvals, 70 corporate governance matters, 11 economic and financial matters, 2 social and environmental matters, and 13 other matters.

The President and the Management Board are the Company’s executive bodies. In the reporting period, the position of the Company’s President was held by Vladimir Potanin who concurrently chaired the Company’s Management Board. As at end of 2018, Vladimir Potanin held the position of the President (CEO before 2015) for 6 years and 13 days.

Operational sustainability management

The governing and executive bodies of MMC Norilsk Nickel and its subsidiaries are in charge of implementing the Company’s sustainability goals and objectives within the scope of their functions and in accordance with the legislation and internal regulations.¹⁴

The Company has created an extensive regulatory framework of over 20 internal documents to help integrate sustainability aspects into the Company’s management practices and day-to-day operations of its functional units.

All executive efforts are coordinated by the Management Board, the President and the following executive committees: the Budget Committee under the Management Board; the Charity Committee, Health, Safety and Environment Committee, Investment Committee, and the Nomination and Remuneration Committee.

Nornickel’s management systems are aligned with best international practices and standards. For many years, the Company has been successfully running the Corporate Integrated Quality and Environmental Management System (CIMS). In 2017, Nornickel kicked off an efficiency improvement programme seeking, among other things, to introduce innovative management approaches.

Operational management 102–18 102–20

Remuneration

Remuneration of members of the supreme governing body

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Principles and mechanics of remunerations due to executives are set out in the Charter, Regulations on the Management Board, and other by-laws of the Company.¹⁶ The system of remunerations applicable in the Company is continuously and directly monitored by the Board of Directors.

The Board of Directors’ annual remuneration is set out in the Remuneration Policy for Members of the Board of Directors¹⁶ approved by the General Meeting of Shareholders. The annual remuneration for non-executive directors includes:

• base remuneration of USD 120,000 for the Board membership;
• additional remuneration of USD 50,000 for membership in a committee of the Board of Directors;
• additional remuneration of USD 150,000 for chairing a committee of the Board of Directors;
• reimbursement of expenses incurred by directors in discharge of their duties.

The Annual General Meeting of Shareholders for 2018 established remuneration for the Chairman of the Board of Directors, an independent director, in the amount of USD 1,000,000 per year, paid on a quarterly basis in equal instalments in roubles at the exchange rate of the Bank of Russia on the last business day of the reporting quarter.¹⁷

According to the Company’s Charter, decisions on remuneration and reimbursement payable to the Company’s President and members of the Management Board are reserved to the Board of Directors. The total remuneration of the President¹⁸ and members of the Management Board¹⁹ consists of the base salary and bonuses (a variable part). Bonuses are linked to the Company’s performance, including both financial (EBITDA, free cash flow) and non-financial indicators (workplace injury rates, labour productivity).

Employee performance management system

Performance management

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The Company put in place the performance management system five years ago, with assessment relying on a variety of key performance indicators (KPIs), including occupational safety, operating efficiency and capital management. In 2018, the KPI-based assessment covered 9,800 employees.

The system helps streamline evaluation criteria, enables the management and employees to align the current year’s priorities with performance indicators of the Company/divisions/subsidiaries and link an employee’s performance to their pay level.

The reporting year saw the Company continue implementing the performance assessment subsystem of the automated enterprise management system. By the year-end, the system ran at 19 Nornickel’s divisions and subsidiaries. In 2019, the Company expects to roll it out across its energy assets and transport divisions.

Competency management

In 2018, the corporate competencies model was used to assess candidates at the recruitment stage, evaluate employee performance and potential, and add them to talent pool. The outcome of evaluating the managerial and leadership potential served as a key criterion for selecting managers with strong career growth prospects.

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In 2018, the Company continued to train the Head Office’s executives and high-potential managers from its facilities based on their individual development plans, with 50 of the latter completing the operating efficiency training at Moscow’s Skolkovo School of Management.

Competency assessment in 2018

Employees covered by assessment in Russia, FTEs

Assessment of the Group companies' employees in Russia, % of average headcount

In 2019, the Company will proceed with the diagnostics and management of professional skill development across its facilities, building a professional competency model for a number of functional and production divisions, defining knowledge and skills requirements for each position, and developing a set of test questions to assess professional competencies of employees.

Risk management framework

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The Company continuously manages risks that affect its strategic and operational goals. These efforts include identification and assessment of external and internal risks in terms of their impact on key financial and non-financial metrics, along with the development and implementation of response and minimisation measures.

The Company’s risk management framework relies on the principles and requirements of Russian and international laws and professional standards, including the Corporate Governance Code recommended by the Bank of Russia, ISO 31000 (Risk Management) and COSO ERM (Enterprise Risk Management — Integrated Framework).

Its approach to risk management is outlined in its Corporate Risk Management Policy, Corporate Risk Management Framework Regulations, Risk Management Regulations, and other by-laws. The Company holds training sessions on risk management for its employees and managers at various levels.

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Nornickel continuously manages its risks in all business areas and at all governance levels. Strategic risks are the responsibility of the Company’s Board of Directors and senior executives who are also in charge of key operational risks, while other significant operational risks are managed by heads of business units and subunits. The corporate risk management framework (CRMF) implementation and improvement initiatives are spearheaded by the Company’s Vice President and Head of Internal Controls and Risk Management and its Risk Management Service. The latter submits its quarterly reports to the Board of Directors’ Audit and Sustainable Development Committee for review.

KEY RISKS OF NORNICKEL 102—15

Nornickel was one of the first metals companies in Russia to start using the business continuity management system and develop relevant plans. The Group companies drafted more than 20 continuity plans for catastrophic production risks to describe interaction procedures for business units, measures to support or resume production, rehabilitate or reconstruct the affected assets in case of adverse events with an extremely low probability.

When it comes to risk management development in 2019, the Company plans to expand the continuity management scope to cover non-production risks, such as IT, security and staffing risks, and improve risk management components in strategic and operational planning, as well as in other areas.

Key risks, risk factors and mitigants

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Insurance

Insurance is one of the most important tools for managing risks and finances and protecting the assets of the Company and its shareholders against any unforeseen losses related to its operations, including due to external hazards.

Nornickel has centralised its insurance function to consistently implement uniform policies and standards supporting a comprehensive approach to managing insurance policies and fully covering every risk at all times. The Company annually approves a comprehensive insurance programme that defines key parameters by insurance type and key project.

We have implemented a corporate insurance programme that covers assets, equipment failures and business interruptions across the Group. Our corporate insurance policies are issued by major Russian insurers in cooperation with an international broker. This helps the Group make sure that its risks are underwritten by highly reputable international re-insurers.

The same principles of centralisation apply to the Group's freight, construction and installation, aircraft and ship insurance arrangements. The Group, as well as its directors and officers, carry business and third-party liability insurance.

To optimise terms of coverage and better manage covered risks, we follow the best mining industry practices.

Corporate security

Nornickel is a global metals and mining leader and a strategically important company in most regions where it operates. This makes corporate security a priority area for the Company that seeks to ensure safe and smooth operation of its facilities.

Development and implementation of group-wide security measures fall under the remit of the Corporate Security Unit, acting in line with the Russian laws, applicable international regulations, internal standards and guidelines.

The corporate security system is structured and managed based on a number of targeted programmes to maintain economic, corporate, information, facility and transportation security along with transparency in procurement and contractor selection. The Company pays special attention to supporting socially significant investment and environmental projects.

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A landmark achievement in 2018 was no confirmed incidents of corruption, which was attained through a comprehensive approach to corporate security and a zero tolerance policy towards corruption.

Nornickel is actively engaged in public-private partnerships to maintain high security levels and enhance social stability at its facilities in the regions of operation.

• Also, the Company is enhancing cooperation with law enforcement and supervisory authorities. Nornickel representatives participate in public and advisory boards of the Ministry of Internal Affairs, Investigative Committee, Transport Prosecutor's Office and the Federal Security Service, and in interagency working groups.
• The Company helped stage the Regional Transport Security Forum attended by the representatives of the Krasnoyarsk Territory Government and Krasnoyarsk Transport Prosecutor's Office.
• In 2018, the Company held four drills and 123 training exercises together with the Federal Security Service, EMERCOM and the Russian Ministry of Defence.
• The Company implemented a comprehensive security framework at the all-weather Bobrovy Log Fun Park (Krasnoyarsk), the main venue of the Winter Universiade 2019.
• Ongoing is the project to set up a system of analytical situation centres to be further integrated with regional Secure City systems.

The reporting year’s milestones include the creation of the National Association of International Information Security actively backed by Nornickel.

In April 2018, Nornickel presented its in-house developed Information Security Charter for Critical Industrial Facilities at the information security forum in Germany and the OSCE’s cyber security conference in Rome. The document was approved by 13 countries.

Going forward, Nornickel plans to set up and finance research grants in international information security.

The reporting year saw the Company adopt a number of key regulations on the information security of Nornickel's assets and operations:

• Freedom of Association Policy;
• Regulation on the Personal Data Protection Commission;
• Regulation on the Commission for Critical Information Infrastructure Categorisation.

Corporate security focus areas

Information technologies

Nornickel leverages information technologies (IT) to continuously improve its production and business processes. While constructing new capacities and expanding the existing ones, the Company introduces advanced automatic systems to boost process efficiency, safety and manageability, optimise costs and increase productivity. Overall, the reporting year saw the Company implement over 40 IT projects, including:

• the Technology Breakthrough operating excellence initiative;
• Mining Control projects to allow for the online control of mining operations;
• the Economics and Finance Unit’s strategic IT initiatives.

In 2018, the Company launched the SAP operations control centre to support the systems running at the Company’s facilities.

The centre helped deliver the following y-o-y improvements in the SLA²⁰ performance for key support services: ERP²¹ — 97% (+5%), HCM²² — 94% (+1%), UCS²³ — 99.5% (+2.5%). The vendor SAP helps the centre align its operations with best global practices to achieve a key goal of performing on par with leading SAP support centres over the next three years.

The Company’s cutting-edge IT platform facilitates the introduction of advanced technologies and opens up new digitalisation opportunities. Nornickel runs pilot projects to implement potentially effective digital tools and solutions. 2018 saw the launch of Nornickel Digital Lab, a platform that helped test more than 10 technologies, including simulation modelling, optical character recognition, big data and internet of things. In 2019, the lab will expand its scope of work to add new projects to the pipeline and pilot launch the designed solutions.

Economic efficiency

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Economic efficiency is essential for the Company to meet its strategic goals and deliver on its commitments to shareholders, employees, local communities and other stakeholders.

In 2018, the Company embarked on the second stage of its ambitious environmental programme, launching initiatives to upgrade infrastructure, accelerate digitalisation, etc. A year before, we had completed the construction of Bystrinsky GOK and reconfigured production capacities. Coupled with shifting deadlines for a number of investment projects, this helped reduce our CAPEX by 22% to USD 1.6 bn. In 2019, the Company will make investment decisions on a number of promising growth projects. We also expect to see further positive effects from our programme to increase labour productivity. We estimate our CAPEX for 2019 at USD 2.2–2.3 bn.

Thanks to higher output and metal prices, the Company's consolidated revenue went up by 28% to USD 11.7 bn, while EBITDA rose by 56% to USD 6.2 bn driven by stronger revenues, the launch of Bystrinsky GOK and a decrease in operating costs as a result of our ongoing efforts to improve operating efficiency. EBITDA margin stood at 53%, which is one of the best results among global diversified metals and mining companies.

The Company honoured its commitments, providing timely and full payments to the budgets of all levels. Tax and non-tax payments²⁴ to budgets of various levels totalled RUB 115.6 bn, increasing by RUB 15.3 bn y-o-y.

The Company’s stable financial position is confirmed by investment grade ratings from Moody’s, and S&P Global and Fitch.

In January 2018, Moody’s upgraded Nornickel’s credit rating to Ваа3 (investment grade) and raised its outlook from stable to positive following an increase in Russia’s country ceilings for foreign currency debt to the same Baa3 level and a change in the outlook on Russia’s rating from stable to positive.

Also, Nornickel received the highest creditworthiness rating according to the Russian national scale (ruAAA, outlook stable) from the RAEX (Expert RA) rating agency.

As at the year-end, the Company had credit ratings from the three leading international rating agencies and the Russian RAEX:

• Fitch Ratings: BBB—/Stable;
• Standard & Poor’s: BBB—/Stable;
• Moody’s: Baa3/Positive;
• Expert RA: ruААА/Stable.

In February 2019, Moody’s upgraded Nornickel’s credit rating to Ваа2, outlook stable, following an increase in Russia’s country ceilings for foreign currency debt to the same Baa2 level and an upgrade in Russia’s sovereign credit rating to Baa3 (investment grade), outlook stable.

Financial highlights

Direct economic value generated and distributed²⁷ 201–1

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In 2018, budgets of various levels saw the Group companies pay RUB 39.6 mln in fines under 334 imposed sanctions, including 29 for environmental impact, 22 for breach of labour laws, and 283 imposed on other grounds.

Stakeholder engagement

Stakeholders and interaction mechanisms

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MMC Norilsk Nickel bases its interaction with stakeholders around making an ongoing dialogue with various groups a part of the Company’s day-to-day operations, all in accordance with the AA1000AP,²⁹ AA1000SES³⁰ and GRI standards. Nornickel’s key stakeholders are employees, shareholders, investors, business partners, national and local government authorities, local communities, Russian and international non-profit organisations. The Company identifies stakeholders based on the extent to which they interact, share interests and communicate with Nornickel.

Stakeholder engagement principles and procedures are set out in MMC Norilsk Nickel’s Business Ethics Code.³¹

The Transparency Policy of MMC Norilsk Nickel aims to provide stakeholders with complete and accurate information about the Company’s activities and ensure proper feedback.

Stakeholder map³²

Dialogue with shareholders and investors

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The authorised capital of MMC Norilsk Nickel is made up of 158,245,476 ordinary shares with an aggregate market value of USD 29.7 bn as at 31 December 2018. The Company’s ordinary shares are traded mostly on the Moscow Exchange, while ADRs are traded in the electronic trading system of OTC markets of the London Stock Exchange.

The reporting year saw minor changes in the shareholding structure. Olderfrey Holdings Ltd, the Company’s major shareholder, increased its holding by 4.2% to 34.6% as at the year-end. The shares of the other major shareholders — UC Rusal Plс and Crispian Investments Ltd — remained unchanged at 27.8% and 4.2%, respectively. The shares and ADRs in free float accounted for 33.4%, owned by institutional and private investors from Europe, Asia, the USA, Russia and elsewhere.

In 2018, the Investor Relations Department kept diversifying the shareholder base and attracting new shareholders, organising over 350 meetings with institutional investors and an Investor Day in London followed by a road show in Europe and the USA.

Responsible investment

In recent years, the sustainable development agenda has been gaining ground, with an increasing number of investors and asset managers focusing on responsible investment. In 2018, the Company held around 20 target meetings with investors whose investments were primarily driven by environmental, social and governance (ESG) factors. In order to improve relations with responsible investors and agencies that evaluate companies using ESG criteria, the Company created a separate section on the corporate website with all pertinent information: https://www.nornickel.com/investors/esg/.

ESG assessment: the largest ratings and initiatives

Our key ESG achievements in 2018:

• in December 2018, the Company’s score in Sustainalytics' ESG rating went up to 69 against 58 in 2017;
• in December 2018, ISS affirmed Nornickel's Environmental and Corporate Governance ratings at 4, and Social — at 3 (1 and 10 standing for low and high risk, respectively);
• in June 2018, the FTSE index score was confirmed at 3.1 out of 5.

Dialogue with employees

Social partnership framework

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Nornickel’s companies run a social partnership framework aimed at reconciling interests of employees and employers on matters pertaining to the regulation of social and labour relations. The Company performs its obligations in compliance with the Labour Code of the Russian Federation, collective bargaining agreements, and joint resolutions. It has in place the Freedom of Association Policy approved by the Board of Directors.

In regulating labour relations, employee interests are represented by social and labour councils and trade union organisations. The Company has collective decision-making bodies representing the employer, employees and trade unions, including collective bargaining commissions, labour dispute commissions, social benefits commissions/committees, social insurance commissions, health and safety commissions/committees, social and labour relations committees, etc.

Trade Union of MMC Norilsk Nickel Employees, an interregional public organisation that includes territorial trade unions and trade unions of the Group companies, represents the Group's employee interests on an interregional level. The trade unions of transport and logistics divisions are members of the Yenisey Basin Trade Union of Water Transport Workers (Krasnoyarsk, Russia).

All the Group’s major facilities located in the Norilsk Industrial District and Murmansk Region have put in place social and labour councils that represent the employees who are not trade union members. Chairs of the local councils make up the Social and Labour Council of MMC Norilsk Nickel and the Social and Labour Council of Kola MMC.

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The Group companies have signed 21 collective bargaining agreements covering 81% of Nornickel's average headcount. As at the end of 2018, 10.8% of Nornickel's total headcount were members of trade unions, while 78% joined social and labour councils.

The absence of strikes and lockouts involving the Company's employees highlights the effectiveness of interactions and Nornickel's social policy, in general.

In order to develop interregional social partnership, Interregional Cross-Industry Association of Employers “Union of Entities of the Copper and Nickel and Supporting Industries” involving six of the Group’s Russian companies was established in 2018. In November 2018, the Association of Employers and the Trade Union of MMC Norilsk Nickel Employees interregional public organisation initiated collective negotiations to develop and sign an interregional cross-industry agreement for the key players of the copper and nickel and supporting industries for 2019–2022. The signing is slated to take place in 2019.

Employee engagement survey

In 2018, for a second consecutive year, Norilsk Nickel Group organised a series of activities to manage employee engagement. The core initiative is a survey called “Let Everyone Be Heard. What Do You Think?” that includes questionnaires and focus groups, covering around 75,000 employees and 32 businesses of Nornickel. Its results are subject to review, action planning and implementation at all governance levels, from facilities to the Group as a whole.

Based on the completed survey, the Company compiled a series of initiatives to increase employee engagement and motivate staff to boost their performance. These initiatives are grouped as follows: top management, the employer's brand value, success factors, performance management, and career opportunities.

Initiatives to increase employee engagement

Offices for operating, social and labour relations

In addition to the Corporate Trust Service, the Company launched offices for operating, social and labour relations back in 2003. They are primarily tasked with response to employee queries, control of their processing, and prompt resolving of conflicts. The offices regularly monitor the staff’s social status, enabling us to solve reported issues in a timely manner. In 2018, the Group's units in the Norilsk Industrial District ran 24 offices that received over 52,000 queries and requests mostly from employees (78%), former employees (21%) and local communities (1%).

Queries by topic in 2018, %

Dialogue with authorities and non-profit organisations

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Norilsk Nickel Group's guiding principles in cooperating with government bodies, local authorities and non-profit organisations are strict compliance with Russian laws, regional and municipal regulations and the social responsibility principle, collaboration, and mutual respect of interests.

Following the information transparency principle, Nornickel maintains an open dialogue with the authorities to build constructive and effective cooperation. The Company is represented in 21 committees, commissions, expert and working groups established by government bodies in association with the business community, thus supporting socially important projects. Representatives of the Company take part in parliamentary sessions and round table discussions organised by the Federation Council and State Duma of the Federal Assembly of the Russian Federation, Government of the Russian Federation, Russian Union of Industrialists and Entrepreneurs, Chamber of Commerce and Industry of the Russian Federation, Association of Managers interregional public organisation, etc.

Nornickel is an active participant of conferences, forums and business events involving policymakers and government officials, and drafts hands-on proposals to optimise and develop the legal framework.

Starting 2017, the Company’s top management attends regional authorities’ public meetings to report on the results and plans of Nornickel. In January 2018, the Company presented its results and plans on implementing investment projects to the Economic Council headed by the Murmansk Region's Governor.

Over the past year, the Company backed large international and domestic conferences and forums:

• International Forum “The Arctic: Territory of Dialogue” (Arkhangelsk, official partner);
• Krasnoyarsk Economic Forum (Krasnoyarsk, general partner);
• Nevsky International Ecological Congress (St Petersburg, partner);
• St Petersburg International Economic Forum (St Petersburg, partner);
• Eastern Economic Forum (Vladivostok, business programme partner);
• ECOTECH International Exhibition and Forum (Moscow, official partner);
• Murmansk International Business Week (Murmansk, partner).

Cooperation agreements

In 2018, Nornickel signed a number of agreements with regional and local authorities as well as major Russian companies. The agreements covered a wide range of social and economic issues, including infrastructure projects.

Relocation programme

Since 2011, the Company has been contributing to a long-term targeted federal programme to relocate people living in Norilsk and Dudinka to other Russian regions with favourable climate conditions.

The programme envisages relocation, in the span of 10 years, of over 11,000 families. The Company participates in the programme as a benefactor, with its donation totalling RUB 8.3 bn. Since the launch of the programme, the Company has contributed a total of RUB 6,991 bn to the Krasnoyarsk Territory budget, including RUB 0.830 bn in 2018.

During 2011–2018, 7,107 families purchased apartments on the “mainland” and moved there, including 5,847 families from Norilsk and 1,260 families from Dudinka.³³

Public-private cooperation on corporate security

As part of its responsibilities, the Company’s Corporate Security Unit actively liaises with government agencies. One of the key forms of interaction is the Unit’s participation in industry conferences, forums, and business meetings with direct involvement of the legislative and executive authorities.

Also, the Company is enhancing cooperation with law enforcement and supervisory authorities. Nornickel representatives participate in public and advisory boards of the Ministry of Internal Affairs, Investigative Committee, Transport Prosecutor's Office and the Federal Security Service, and in interagency working groups.

In 2018, the Company systematically collaborated with:

• the Federal Security Service of the Russian Federation on anti-terrorism and anti-sabotage security of the Company's critical infrastructures (fuel and energy utilities, transport infrastructure, etc.);
• the Ministry of Internal Affairs of the Russian Federation to prevent stealing of products and materials containing precious and non-ferrous metals, maintain security at public events and take addiction prevention measures;
• the Federal Customs Service of Russia to prevent cross-border smuggling of metal-bearing materials;
• the Ministry of the Russian Federation for Civil Defence, Emergencies and Elimination of Consequences of Natural Disasters (EMERCOM) to drill emergency response plans and disaster relief operations;
• the Federal Security Service and the Ministry of Defence of the Russian Federation to organise multi-service tactical training sessions on the Taimyr Peninsula;
• the Ministry of Foreign Affairs of the Russian Federation to foster international information security.

Environmental dialogue

Measures for reducing MMC Norilsk Nickel’s environmental footprint are constantly on the agenda of the Company and its stakeholders. In the course of the year, both internal and public events feature environmental discussions.

In 2018, the following items were on the agenda of various forums and platforms:

• sustainable development of regions;
• preservation of ecosystems across the footprint of production sites;
• improvement of environmental laws and regulations;
• promotion of best practices in environmental protection;
• the Company’s environmental programmes and initiatives;
• industrial ecology problems.

At Nornickel’s milestone event for the year — Investor Day 2018 in London on 19 November — the Company presented its long-term development programme, which sets out environmental protection as one of the strategic priorities.

Ecology was also at the top of the agenda at multiple international and domestic forums backed by Nornickel and attended by government representatives, captains of industry, investors, experts, and analysts:

• Environment Protection and Sustainable Development in the North VII environmental forum;
• VIII International Forum Arctic: Today and the Future;
• Arctic Days in Moscow federal forum.

MMC Norilsk Nickel maintains active dialogue with various levels of the government and the professional community on matters of application and improvement of the regulatory framework governing environmental protection. In 2018, the most significant venues for this dialogue were:

• parliamentary sessions of the State Duma Committee on Ecology and Environmental Protection devoted to Improvement of the Government Policy on Air Protection;
• meetings of the joint working group made up of the Federal Service for the Oversight of Consumer Protection and Welfare (Rospotrebnadzor) and the Russian Union of Industrialists and Entrepreneurs (RSPP) representatives to discuss draft regulations on establishing and changing sanitary protection zones;
• the Environmental Aspects of Industrial Development international conference devoted to law enforcement in regard to approved informational and technical reference books on the best available technologies;
• the Environmental Legislation: Problems and Implementation Practices workshop.

Over the years, Nornickel has successfully used volunteer movements to promote dialogue on environmental protection with its employees and local communities. Russia declared 2018 the Year of Volunteer, and the Company launched its third Let’s Do It environmental marathon. It spanned Norilsk, Monchegorsk, the Pechengsky District, and Moscow, as well as the Trans-Baikal Territory that hosted the marathon for the first time.

In June 2018, Nornickel held an environmental campaign to mark the World Environment Day as a way to reduce the plants’ environmental footprint. The smelting capacities of Nadezhda Metallurgical Plant were suspended for 60 minutes, and Kola MMC idled its smelting and conversion department of the Metallurgical Shop at the Monchegorsk site for the same amount of time. In the town of Nickel, one-hour shut downs were arranged on three ore-thermal furnaces and two converters of Kola MMC’s smelting shop.

In late 2018, Nornickel’s two main production sites Polar Division and Kola MMC joined the Zero Negative Environmental Impact campaign, with Kola MMC idling the operation of the smelting and conversion section and three ore-thermal furnaces on 29 November. Polar Division joined the environmental campaign on 1 December. Nadezhda Metallurgical Plant's smelting shop idled its second processing line for three days, and the operation of slag cleaning furnace No. 3 was suspended for seven days.

Dialogue in public non-financial reporting 102–43 102–46

Each year starting from 2003, the Company has been engaging in dialogues with stakeholders while drafting sustainability reports. Since 2014, these dialogues have been staged as part of the We Are the City! social technologies forum.

The dialogues held during the preparation of the 2018 Sustainability Report included discussion points related to identifying the goals and targets within the UN’s 2030 Sustainable Development agenda that were most relevant for the Company’s operations and non-financial reporting.

These dialogues took place in Norilsk and Monchegorsk and were attended by Nornickel employees, local authorities and members of the general public. The forum helped identify the UN Sustainable Development Goals and targets most relevant for the Company and the regions where it operates.

Supply chain management

102–9
Supply chain is a set of interrelated resources and processes leveraged by Nornickel to create value all the way from obtaining goods, materials and services to delivering end products to the consumers. Supply chain management at Nornickel seeks to ensure continuous operation of the Group companies, high product quality and reliability of shipments to customers.

The Company continuously improves the efficiency of its supply chain by adopting best practices and standards and through business process automation.

Key elements of Nornickel's supply chain

Supply

Given the diverse businesses and geography of operations of Norilsk Nickel Group, the supply management function is designed to fully cater to the Company's resource needs in a timely and efficient manner securing seamless operation of all production units and negotiating the best available procurement terms.

The importance of supply management at Nornickel is dictated by the impact it has on:

• achievement of the Company's strategic goals. The supply function plays a crucial role in the programme to enhance efficiency and cut costs;
• occupational health and safety. The quality of sourced products and timely supplies have a material impact on occupational health and are directly linked to the workplace safety;
• 103–2
  environment. An environmental impact is exerted throughout the life cycle of sourced products (production, transportation, storage, use and disposal) and is directly linked to demand planning, inventory management and logistics;
• financial performance of Nornickel across the footprint. As Nornickel is the only or key customer for many local businesses, partnership with the Group does not only give suppliers an opportunity to ensure seamless operation of their enterprises, but also provides incentives for further growth.

Nornickel pays close attention to developing relations with manufacturers of equipment and materials, as they ensure the Company’s ability to meet its strategic targets. Nornickel is committed to working with more local suppliers. To this end, it developed a centralised pilot testing procedure enabling it to phase out imported equipment with that manufactured locally. As at the end of 2018, Nornickel had 57 ongoing and 15 completed pilot tests. The Company established cross-functional commissions to determine promising directions for scheduled pilot tests aimed at achieving import substitution.

Supply management

As at the end of 2018, the Company had 457 domestic and 35 foreign suppliers.

Nornickel strives to create an environment of shared culture, visions and values in its relationships with suppliers. An ESG clause is incorporated into the standard agreement with suppliers and contractors. The Company adheres to a number of codes of conduct applied by its business partners and devised by foreign manufacturers. There is also ongoing work to develop Nornickel's Charter for Suppliers that is expected to be signed by the Company's suppliers and contractors.

Our procurement team together with experts from other departments are looking into alternative technologies (alternative fuel and energy sources) that can reduce the Company's environmental footprint and cut costs. The results of this can already be used in procurement. The current tender procedure, in particular, includes a criterion of the supplier’s readiness to participate in the Company’s alternative energy initiatives.

Requirements planning and supply management

Procurement requirements are determined based on production plans and the needs of other business lines. At the planning stage, the Company defines health, safety and environment, as well as other mandatory and optional product and supplier requirements, including availability of certificates, permits, and licences. The resulting data are used to create a material and technical procurement plan.

Accurate planning and availability of stock are key to uninterrupted operations at the Nornickel Group. At the same time, the Company pursues inventory optimisation to minimise its working capital.

Nornickel’s procedure for requirements planning and inventory management is governed by the Internal Regulation on Procurement Plan Development, Review and Approval, as well as the Implementation Standard of Inventory Management System for Materials and Supplies at MMC Norilsk Nickel.

The process of planning and inventory management is fully automated.

Supplier selection

The Company applies a life cycle costing approach to selecting suppliers, which includes the costs of ownership and subsequent utilisation, and follows formalised procedures which are based on the following principles:

• equal competitive opportunities for suppliers;
• comparison of business proposals from qualified suppliers according to pre-approved, objective and measurable criteria;
• division of procurement functions and responsibilities by roles;
• phased process of procurement decision-making;
• approval of the qualification-based selection results and the winner by the collective procurement body comprising representatives from various departments.

Compliance with the above supplier selection principles ensures transparency in decision-making and maximises the Company's benefits by helping to reasonably choose the best available offer.

Procurement process

The Company's procurement activities are based on formalised procedures and policies, Business Ethics Code of MMC Norilsk Nickel, the Company's Anti-Corruption Policy, Regulation on the Product Procurement Procedure, and other by-laws of the Company.

In 2018, eight Nornickel’s divisions amended their procurement procedures to reflect the changes in Federal Law No. 223-FZ On Procurement of Goods, Work and Services By Certain Types of Legal Entities dated 18 July 2011. The documents provide a framework for small and medium-sized businesses (SMEs) to compete for procurement contracts and set the minimum threshold of annual procurement contracts to be concluded with SMEs.

Procurement activities can be either centralised or organised independently by the Head Office, branches or Group enterprises. Depending on the expected purchase price, procurement can be organised either as a bidding (tender), simple procurement, or simplified procurement. Procurement procedures may involve collective procurement bodies, such as the Tender Committee, Tender Commissions of the Head Office, Procurement and Tender Commissions of the Group companies.

Stronger competition and procurement automation

To handle its centralised procurement activities, Nornickel uses SAP SRM, an automated system for supplier relationship management. Apart from that, the Company leverages independent bidding platforms, such as Fabrikant.ru and B2B-Centre. These solutions help improve the transparency of supplier selection and enhance the competitive environment as part of the procurement procedures.

Supplier feedback channels

To maintain an ongoing dialogue with suppliers, the Company's website has a dedicated Suppliers page, which provides key information on the Group's procurement principles and procedures and planned material requirements. The page also features announcements and invitations to participate in the Company's tenders.

In 2018, the Company staged a supplier conference that featured discussions on Nornickel's procurement procedures, requirements to suppliers and contractors, and MMC Norilsk Nickel's technological development strategy.

The Company's procurement experts take an active part in the activities of the professional community in relation to the respective procurement areas, attend industry exhibitions and participate in conferences organised by manufacturers and suppliers as part of these exhibitions.

Control of non-financial factors in supplier relations 103–2

Product quality and supply reliability

Norilsk Nickel Group has achieved utmost efficiency in its production operations to provide the volumes, quality, and product range³⁵ that meet the needs of society while also fully complying with all applicable laws and HSE requirements.

Environmental and quality-related goals and objectives are in line with the Company's strategic goals and formulated in the management's resolutions based on annual Corporate Integrated Management System performance reviews. To achieve the goals and objectives, the Company develops plans and programmes and then implements them, monitors the status of target parameters, and assesses performance.

In 2018, Nornickel's management systems successfully passed a surveillance audit, while the systems of Gipronickel Institute and Norilsk Nickel Harjavalta were subjected to recertification audits. As part of the second surveillance audit, Kola MMC migrated to the new ISO 9001:2015 and ISO 14001:2015 standards. A total of 104 employees (14 in the Head Office and 90 in the Group companies) underwent training in quality management.

The Company has in place the Corporate Integrated Quality and Environmental Management System (CIMS).

Corporate Integrated Management System (CIMS)

102–2
Saleable products offered by MMC Norilsk Nickel’s Polar Division include copper cathodes, technical selenium (powder), platinum group metal concentrates (powder), crude silver (powder), commercial lump sulphur, tellurium for thermoelectrical materials (bars) and copper-nickel converter matte (bars). M00k copper cathodes (GOST 859-2014 and GOST 546-2001) are certified in the GOST R certification system for compliance with the applicable product regulations and are registered on the London Metal Exchange under the NORILSK brand.

Kola MMC’s commercial products (electrolytic nickel, carbonyl nickel powder, carbonyl nickel pellets, electrolytic copper, electrolytic cobalt, cobalt concentrate, precious metal concentrates, and sulphuric acid) do not require mandatory certification and are not certified against Russian regulatory standards. Products are labelled in accordance with the GOST and TU requirements. At the same time, Kola MMC’s cathode nickel brands of SEVERONICKEL COMBINE H-1Y and SEVERONICKEL COMBINE H-1 are registered on the London Metal Exchange and Shanghai Futures Exchange. In the reporting year, nickel cathodes were registered on the London Metal Exchange under the NORNICKEL brand.

Commercial products offered by Norilsk Nickel Harjavalta Oy include nickel cathodes, nickel briquettes, nickel powder, nickel salts, cobalt salts, and ammonium sulphate. Nickel brands of NORILSK NICKEL HARJAVALTA CATHODES and NORILSK NICKEL HARJAVALTA BRIQUETTES are registered on the London Metal Exchange.

In terms of sustainable development, the prospective application areas for Nornickel metals include lithium-ion batteries, electric engines for vehicles, autocatalysts, electronics industry, hydrogen fuel cells and healthcare.

The Company's production processes comply with the applicable technological safety requirements as confirmed by obtained government licences.

Information on the consumer properties of each product (including any associated hazards or lack thereof) is provided in the relevant specifications and contractual documentation. Compliance with the applicable requirements is ensured through the product quality assurance procedures involving the issuance of all statutory documents.

Labelling requirements to inform the consumers of potential health effects and hazards are set out in the relevant specifications. All the documents are issued by authorised bodies in line with the applicable regulations of the Russian Federation.

Production units assess the quality of all relevant product categories and make related disclosures as required by the applicable regulations. The impact on consumers' health and the environment is assessed for all categories of saleable goods and some semi-finished products, with 21 Information Cards for Potentially Hazardous Chemical and Biological Substances having been completed so far. To ensure safe transportation of saleable products offered by the Group (including Polar Division, Kola MMC, Norilsk Nickel Harjavalta Oy and GRK Bystrinskoye), 31 Product Safety Certificates have been issued, including 14 REACH-compliant certificates.

The Company's products are made in compliance with the requirements of the international regulations, both current and becoming effective within a three-year period, concerning the handling of chemicals. These regulations govern the registration, evaluation and authorisation of chemicals and are primarily aimed at providing consumers and supply chain participants with information on the safe handling and the impact on the health of people, animals and environment (REACH (EU), K-REACH (South Korea), TSCA (USA), WHMIS (Canada), KKDIK (Turkey)).

The Company's goods are labelled to keep the customers and carriers informed about key properties of the products (including those meant for exports). The labelling rules are set out in product-specific regulations and take into account the GOST 14192-96 (Labelling) requirements and contractual obligations. To ensure compliance with EU Regulation No. 1272/2008 on Classification, Labelling and Packaging of Substances and Mixtures, Nornickel ordered protective labels to be updated for tellurium.

In 2018, the Company faced no fines for failure to comply with product supply rules and requirements.

Sales policy

102–4 102–6
In sales, the Company focuses on building long-term strategic relationships with key market players. The Company’s customer base includes 434 companies, mostly industrial consumers. Nornickel sells its products on all key markets, with its footprint spanning 34 countries as at the end of 2018.

When it comes to nickel products, the sales strategy focuses on achieving a balance between supplies to stainless steel manufacturers and to other industry stakeholders.

As the world’s largest producer of palladium, the Company continues to implement the strategy of entering into direct long-term contracts with end consumers to ensure sustainable and strong demand for platinum group metals.³⁶

Customer satisfaction monitoring

Consumers of the Company's key products are surveyed to assess their satisfaction on an annual basis, while buyers of sulphuric acid are asked to complete relevant questionnaires once every three years. Compliance with contractual obligations is audited and analysed on an ongoing basis.

The main criterion for customer satisfaction is maintaining or exceeding the target satisfaction level at 2.5 points (out of 3 points). Key customer satisfaction surveys must cover at least 50% of the Company’s total product sales. According to the 2018 survey, the customer satisfaction level stood at 2.73 points.

In 2018, the Company received 38 complaints and grievances about its product or service quality and achieved out of court settlement for 36 of them by meeting the demands of consumers (18 complaints were deemed unfounded). As at 31 December 2018, two grievances were being processed, with remedial action plans developed to address all 18 well-grounded and 10 rejected grievances.

Markets and production volumes³⁷

Revenue from key metal sales in 2018 by region, %

Feedstock and materials usage, kt

* semi-finished products and concentrates purchased from third-party suppliers; reused tailings.

Total feedstock and materials usage: 23,102,873 kt

Including non-renewable feedstock and materials: 100%

Including reused feedstock and materials: 2.9%

Dialogue with business partners

Nornickel has always paid close attention to building effective cooperation with business partners both in the course of joint projects and at various economic and industry forums.

The Company's expertise and solid track record in creating powerhouse industrial businesses that leverage cutting-edge technologies have laid the groundwork for successful implementation of projects with partners in both traditional and emerging industries.

In 2018, Nornickel and Russian Platinum signed a framework agreement on strategic partnership to set up a joint venture (JV) for developing disseminated ore deposits in the Norilsk Industrial District. The JV aims to establish one of the world's largest PGM producers with the output of 70–100 t of PGMs per year.

Dedicated to meeting the growing demand for battery materials used in electric vehicles, the strategic partnership between BASF and Nornickel became a landmark event for achieving SDGs and supporting green economy. As part of the long-term agreement, the Company will supply nickel and cobalt feedstock for battery production in Europe.

Nornickel forms a key link in creating a global mechanism to ensure reliability of precious metals supplies. In this area, the Company successfully collaborates with the International Platinum Group Metals Association (IPA), where it chairs the Security Committee, and with the United Nations Interregional Crime and Justice Research Institute (UNICRI). In particular, the Company’s cooperation with UNICRI and IPA yielded a draft UN resolution on combating illegal production and trafficking of precious metals.

Developed by the Company’s Office for Chemical Forensic Analysis, the procedure for identifying the origin of precious metals in any product crossing the border gained international recognition. In the future, these unique identification methods can become an international best practice (following appropriate validation by the European Network of Forensic Science Institutes).

In terms of both infrastructure and methodology, Nornickel makes a significant contribution to the promotion of responsible consumption in the segment of precious metals and metal-bearing products. In 2018, as part of the International Nickel Institute’s programme, Nornickel and other producers jointed efforts to systematically update the data on the nickel and nickel-containing products life cycles.

As a member of the International Information Security Research Consortium, Nornickel can participate in crafting of the global information security agenda.

Innovations

R&D plays a key role in implementing Nornickel’s strategic priorities such as reducing the environmental impact, improving production efficiency and setting stage for the Company’s sustainable development in medium and long run.

Today, Nornickel operates two business units responsible for the production development and upgrade. These are Gipronickel Institute, one of Russia's largest research and engineering centres for mining, metallurgy, concentration and processing of minerals, and Nornickel Digital Lab established in 2018 to focus on research in information technologies. The Company also hires Russian and foreign R&D and engineering companies and Russian universities to carry out its projects.

To improve the quality of decisions related to research and technology, the Company established an R&D Panel back in 2013.

Gipronickel Institute comprises four divisions in St Petersburg, Norilsk, Monchegorsk and Chita. In terms of facilities and equipment, the Institute is on a par with the most technologically advanced international peers. In 2018, updated design documents drafted by the Institute for Bystrinsky GOK were approved by Russia’s State Expert Review Board (Glavgosexpertiza). The draft provides for the plant to be constructed in 49 steps.

In its everyday activities, Gipronickel Institute concentrates on the development of standard operating procedures for key shop areas, such as ore mining, concentration, pyrometallurgy and hydrometallurgy.

Nornickel Digital Lab set up in 2018 has already delivered a number of projects and created prototypes for digital systems. These include a copper electrolysis short circuit detection system, a digital twin of Copper Plant's main aisle to streamline in-shop logistics, and others. Currently, there are about one hundred initiatives in the lab’s pipeline.

On 16 October 2018, Nornickel and Skolkovo Foundation signed a partnership agreement providing for Nornickel Digital Lab to be housed in the Skolkovo Innovation Centre. The lab will track new technologies and business models, collect, classify and analyse digital initiatives, and prototype solutions based on digital technologies. According to the agreement, the Company will invest RUB 350 mln in the laboratory over 2019–2021.

Transparency

Enhanced transparency and information availability are the key guiding principles of MMC Norilsk Nickel in all of its pursuits. The Company has put in place the Information Policy Regulations and Procedure for the Interaction between MMC Norilsk Nickel’s Officers and Russian and International Mass Media (updated in 2018), which govern its material disclosures to stakeholders and serve as a testament to Nornickel’s commitment to go beyond the mandatory disclosure requirements of the Russian law and regularly inform the public about its strategy and mission, policies, key events and performance, as well as make clear the Company’s position on certain topics.

In its application of the information policy, the Company is guided by the principles of regularity, timeliness, accessibility, reliability, completeness, balance, and impartiality, all the while taking appropriate measures to ensure protection of its information resources. The key annual disclosure events aimed at the target audiences are publication of the sustainability and annual reports and presentation of Nornickel’s updated strategy and its implementation progress at Investor Day.

The key channels used to relay information to the public, investment and expert communities are publications on the Company’s official website www.nornickel.com, press conferences, briefings, conference calls, and meetings with stakeholders. Nornickel takes care with its media relations, making sure to provide the Company’s position on events (including emergencies) that call for comments from the Company’s representatives, press conferences, briefings, or press releases.

Over the past year, the number of media publications about Nornickel increased by over 27% compared to 2017. In total, Russian outlets mentioned the Company 95,820 times. This rise in coverage was spread out across all of the Group's geographies, with the outlets focusing mainly on the social and production activities of the Company, its environmental and sporting initiatives, as well as charitable projects and support for local communities.

Media coverage peaked in February, April and September of 2018. Throughout the year, Russian outlets reported on the Company’s investing activities, agreements with the Murmansk Region and Trans-Baikal Territory, support of Universiade-2019, and the launch of the Sulphur Project, as well as social and charitable programmes and initiatives of Nornickel.

An important focus area of 2018 was the continued enhancement of the Company's social media presence in light of the step-up in coverage of Nornickel’s social and charitable projects and especially the 2019 Winter Universiade in Krasnoyarsk, where the Company acted as the general partner.