#1BAE Systems Governance Seminar - 2 November 2020 COF All statements other than statements of historical fact included in this document, including, without limitation, those regarding the financial condition, results, operations and businesses of BAE Systems and its strategy, plans and objectives and the markets and economies in which it operates, are forward-looking statements. Such forward-looking statements which reflect management's assumptions made on the basis of information available to it at this time, involve known and unknown risks, uncertainties and other important factors which could cause the actual results, performance or achievements of BAE Systems or the markets and economies in which BAE Systems operates to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. BAE Systems undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise. Copyright© 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. 1#2Agenda 1. Welcome and Overview - Sir Roger Carr 2. Board Governance, Culture and Purpose, COVID response - Sir Roger Carr 3. Audit Committee Overview - Stephen Pearce 4. Corporate Responsibility Committee - Ian Tyler 5. Remuneration Committee - Paula Rosput Reynolds 6. 7. 8. Break - Q&A panel session Summary and Wrap Up - Sir Roger Carr Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. BAE SYSTEMS 2#3Welcome and Overview Sir Roger Carr Chairman BAE SYSTEMS 3 Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark.#4Board Governance, Culture and Purpose Sir Roger Carr Chairman Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. BAE SYSTEMS 4#5BAE SYSTEMS Purpose and Culture TEMS We Serve, supply and protect those who serve and protect us in a corporate culture that is performance driven, but values led #IAmTheFuture #BigBangFair #I Am The Future Visit the Future with BAE Systems Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. 5#6Spirit of Governance • We are proud of what we do - we serve and equip those that serve and protect us • • BAE SYSTEMS We aim to inspire and excel in what we do - the technology we develop, the talent we build - from apprentice to boardroom - We place safety above profit - people above process - ethics above outcomes – in a workplace culture that rewards merit and values diversity and cares for the environment We work with our customers in the spirit of partnership - we combine self-interest with nations' interests seek win win solutions - and avoid win lose conflicts - We strive to go the extra mile - in the products that we make - the quality we deliver - and the service we offer We recognise we are entitled to nothing and must earn everything We reward stakeholders and deliver for our customers by honing our competitive edge, selling globally - innovating constantly striving to execute flawlessly - We are clear it is not simply how much money we make - but how we make money that counts we • • We trade responsibly - account conservatively - act with integrity and govern scrupulously We are performance driven and values led Copyright© 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. 9#7BAE SYSTEMS Company Purpose At BAE Systems we equip and support our defence, security and aerospace customers so they can protect people, national security, critical infrastructure and vital information. We have an important role in society because we: help our customers to provide security and safety • contribute to the economic prosperity of the places where our people live and work support high value jobs in our business and in our supply chains value our people and their diversity so they can fulfil their potential in an inclusive and supportive working environment inspire and excel in the work we do - the technologies we develop and the talent we build develop cutting edge technologies to sustain the competitive strength of the Company in global markets care for and support our local communities whilst seeking to reduce the environmental impacts our businesses have around the globe Through careful long-term sustainable management and governance of our business we will continue to create value for all our stakeholders. Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. 7#8Governance . Companies Act S172 Board Leadership Strategy, Investment, Risks, Behaviours Stakeholder Engagement • Board Governance Board Committees • BAE SYSTEMS Code of Conduct ➤ Responsible Trading Principles Internal Controls Risk Framework ➤ Workplace and Operational Environment ➤ Delegated authorities Core Business Processes ➤ Operational Framework and policies - 5 year Integrated Business Plan ➤ Operational Assurance Statement ➤ Life Cycle Management process (incorporates product trading considerations) Robust governance is at the core of our business Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. 8#9Corporate Governance - Overview Stakeholders Shareholder Contact 8 UK, 4 US, 1 Australia 31% Female Board Independent reviews Management dinners* HiPo breakfasts Site visits* Chairman Remco CEO/Executive Informal Board Dinners* Government Contact Regular dialogue with Senior ministers and Political Officials in the UK, US, Australia, KSA and Qatar Committees BAE SYSTEMS RemCo Paula Rosput Reynolds (1) Audit Stephen Pearce Customers / Military leaders Regular dialogue with Senior Military leaders in all customer countries Board dinners Corporate Responsibility Ian Tyler(2) Pension . Employees Close working relationship with pension funds through CFO Formal and informal communication networks USA Special Security Agreement Inc. Board Oversight on behalf of USA government NomCo Sir Roger Carr Notes * To recommence post COVID-19 172 1) To be replaced 1st Jan 2020 by Ian Tyler 2) To be replaced 1st Jan 2020 by Jane Griffiths Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. 9#10Our Response to COVID Play Video Content BAE SYSTEMS 10 Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark.#11Audit Committee Overview Stephen Pearce Chair of the Audit Committee BAE SYSTEMS Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. 11 1=3#12BAE SYSTEMS Audit Committee - Overview The Audit Committee monitors the Company's risk management and internal control systems and reviews their effectiveness. The monitoring and review covers all material controls, including financial, operational and compliance controls Review the policies and procedures for the identification, assessment, management and reporting of risk • Key risks the committee focuses on are; . Revenue/profit recognition/ provisioning Pensions Taxation M&A/Goodwill . • Net Debt • Operations Information management Risk management and internal control systems are underpinned by; . Operational Framework and Code of Conduct Operational Assurance Statements • . Life Cycle Management Monitoring the integrity of the Company's financial statements - "fair, balanced and understandable" Monitoring the independence and effectiveness of internal and external audit and management responses to findings and recommendations. Audit quality both internal and external always a priority Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. 12 12#13BAE SYSTEMS Audit Committee - External Audit . Refresh of Risk management process since 2018 • Deloitte have now completed 2nd full annual audit cycle • Deepening maturity of Deloitte audit work through the year ending 31 December 2019 and into 2020 includes: . . • Business as usual programme of audit work, with structures reviews of Life Cycle Management, IT controls, accounting practices Supporting the transition to a new Group Finance Director and Director, Financial Control Embedding relationship with Internal Audit to optimise audit efficiency and risk coverage Debt, M&A, Pensions • Trends in Audit - Brydon Report, accounting standards • Risk culture - prudence, revenue recognition, goodwill, programme assurance Audit Quality Review . Taking into account COVID-19 13 Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark.#14• . Audit Committee - Relationship With Internal Audit The Role of Internal Audit Internal Audit plays an integral role in the Company's risk management and assurance Framework and provides regular reports to the Audit Committee. Operates in alignment with IIA Code of Practice. The independent assurance that Internal Audit provides is a key element of the Company's governance framework. Taken with management operations and reporting, functional oversight and external audit assurance, Internal Audit provides a service that gives confidence to the Board and amongst the Company's stakeholders. Regular sessions held with the Audit Director without attendance from Senior Management. BAE SYSTEMS Links with the Audit / CR Committee . . Engagement with senior members of the Audit team outside normal regular meetings The annual Internal Audit programme is agreed jointly by the Audit and Corporate Responsibility committees to ensure that the overarching programme covers financial and operational risks and includes the assessment of ethical and reputational risk management and the Company's values. Increasing focus on Information management, IT and supply chain integrity Cyber risk assessment and monitoring Internal Audit Providing assurance - improving performance Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. 14#15Corporate Responsibility Overview Ian Tyler Chair of the Corporate Responsibility Committee BAE SYSTEMS Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. 15#16Focus of the Corporate Responsibility Committee BAE Systems CR Agenda is based on: BAE SYSTEMS • Robust & responsible management of the impacts and risks associated with our operations • • Identifying and responding to emerging and future risks/opportunities to support sustainable performance Ensuring the safety, security & wellbeing of our people • Protecting and enhancing our reputation as a responsible business • Responsible Trading • Governance & regulatory requirements Compliance with export controls Societal Environment Work place safety & wellbeing • • Operational impacts People and community • Use of renewables Anti bribery and corruption. Culture & engagement Low carbon innovation • Diversity & inclusion • Carbon reduction Responsible Procurement Priorities embedded in business operations Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. 16#17CR Committee - Progress & Direction 2010 BAE SYSTEMS 2014 2018 2020 2021 Responsible Trading How we trade (Woolf Report) What we trade Who we trade with Workplace Safety Process Compliance Risk Reduction Safety Culture Employment Proposition Supplier Assurance 50% reduction in recordable incidents Health & Wellbeing 2010-2020 COVID-19 D&I Strategy D&I initiatives Focused Employee Voice objectives to progress diversity Inclusion Workplace Culture Environment Data Assurance Divisional Initiatives Social Agenda Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. Corporate Carbon Objectives 17 17#18BAE SYSTEMS Corporate Responsibility Committee - how it works The Committee provides review and oversight of the Company's CR Agenda, through - • . • . Established annual rolling agenda focused on responsible trading policy, anti-bribery & corruption, safety & wellbeing, environment, diversity & inclusion Assurance of compliance with corporate policy & process through • Direct engagement with line management, employees and employee groups • Review of performance metrics • • Review of Internal Audit programme and findings Site visits (see below) Other indicators (e.g. Employee Opinion Surveys, external benchmarking surveys) Setting CR objectives for the CEO and providing recommendation to RemCo on performance rating Annual site visits to confirm effective implementation of corporate approach at business level (visits to date: US Shipyards, UK Munitions, UK Submarines, UK Air, India, MBDA (UK), US Electronic Systems, US Ordnance) Direct employee engagement during site visits & meetings with High Potential employees. Attendance at Trade Union and other employee events (e.g. Graduate Conference) • Approving external reporting (through Annual Report) and external assurance report Sustainability Agenda fundamental to the success of our business Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. 18#19CR Committee - 2020 Progress and Direction 2020 Update: Specific objectives to be introduced focused on: • Progressing clear carbon objectives Driving inclusion & workplace culture in the workplace Employee engagement & wellbeing . Third party & supply chain supply chain • Social value and contribution to UN SDGS Safety improvements and progress on gender diversity to become 'qualifiers' for executive award 2020 additionally has seen a focus on: • Covid safe operations • Employee engagement and well-being Diversity and Inclusion - Black Lives Matter Looking ahead: On-going Covid related priorities Action on climate change - including meeting TCFD reporting requirements • Societal impacts - prosperity agenda • Well being and engagement BAE SYSTEMS Continued Commitment to Robust Governance, Standards and Assurance Copyright© 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. 19 10#20Corporate Responsibility Committee BAE SYSTEMS Play Video Content 20 Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark.#21Remuneration Committee Overview Paula Rosput Reynolds Chair of the Remuneration Committee BAE SYSTEMS Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. 21 21#22The Remuneration Committee Philosophy and Remit • • BAE SYSTEMS Our remit has expanded over the last several years, partly in response to government policy and stakeholder input. But the Committee has deepened its approach because we believe that well- designed remuneration can be a tool of culture change and progressive improvement in company performance. We establish and administer detailed goals which form the basis for remuneration of the Executive Directors and the members of the Executive Committee. We also ensure that the incentives we set for short and long-term incentives cascade appropriately throughout the wider workforce. We seek to assure that the remuneration for the wider workforce is consistent with market trends, with regulation, and is non-discriminatory with respect to gender, ethnicity and other personal attributes not related to performance. We meet periodically, as do all board members, with the wider workforce and with high-potential employees to engage in candid dialogue. The Remco chair actively seeks input from shareholders in advance of policy changes and major decisions on remuneration. Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. 222#23Issues on Our Agenda in 2020 • BAE SYSTEMS Obtaining shareholder input on an ongoing basis, rather than merely seeking your votes • Discussing quantum and fairness of pay • Recasting the reward system to align with strategy in a meaningful way • Balancing of financial and non-financial incentives • How performance in safety and D&I should be recognized • Analysis of peer groups for TSR purposes • Equalising pension allowances • Calibrating reward given exigencies of Covid 23 Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark.#24BAE SYSTEMS • Policy Revisions Approved in 2020 Safety and D&I measure within non-financial annual incentive will apply as a 'downward' underpin if performance is not achieved at high level expected . Changes to metrics applicable to award of Performance Shares (LTI): • Addition of a cash-generation measure to recognize importance of a secure dividend to the investor proposition (25% of reward) . • Addition of a Strategic progress measure (25%); areas of progress discussed with shareholders TSR component reduced (50% to 25%) Recommitment to EPS growth metric (3/5/7%) Pension contribution of 8% into a defined contribution scheme for new hires in line with the wider UK workforce; CEO pension allowance fixed in monetary terms and to be reviewed on an ongoing basis Introduction of five year time period for achieving Minimum Shareholding Requirement and confirmation of consequences of not meeting it • Establishment of a formal post-cessation shareholding policy for top executives Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. 224#25BAE SYSTEMS Balance of Incentives Annual Incentive Financial based on PLC targets and also include relevant sector targets for Executive Committee members Non financial includes the underpinning elements of Diversity and Inclusion and Safety 3 strategic metrics: - Advancing technology LTI - Improve operational effectiveness - Improve efficiency and competitiveness Financial Non Financial Earnings Growth Cash TSR ■Strategic Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. 25#26BAE SYSTEMS RemCo Response to COVID-19 Affirmed policy that rewards will be paid only if performance meets targets . • No extraordinary support from governments; dividends continue to be paid. So rewards programs continue to operate and pay out only if performance targets are achieved over one and three year periods ⚫ No adjustment to previously-adopted performance conditions for annual bonuses or in-flight LTIP awards have been undertaken. Committee will review executive pay in the Q1 2021, when complete information on the Group's operational and financial performance for 2020 is available. Continued encouragement to all plan participants to "keep eyes on the ball." • LTI Grants Were Priced in a Volatile Market with discretion invoked • • 2020 March LTI grants were delayed by several weeks for Remco to understand Covid-related market volatility, prevailing grant values and regulatory environment regarding rewards Committee included provision in grant language regarding its future discretion in the event that there is a misalignment between pay and performance at time of vesting Communications with shareholders providing data on pattern of grant prices over time; strike prices. were within the range of previous years' grants Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. 26#27RemCo Looking Ahead • Finalizing details of strategic progress for 2021: Project adherence Capital Efficiency • Digitization BAE SYSTEMS · ESG Metrics - What will be appropriate and meaningful in the business? How do we build on what we have already? Program for retaining and advancing high potential employees into roles of increasing responsibility Wider workforce considerations in the "new normal" Delivering value in the reward function: People spend and workforce analytics; personalization and governance Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. 27 22#28Break BAE SYSTEMS Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. 28 88#29Panel Session Q&A BAE SYSTEMS Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. 29 29#30On the panel from BAE Systems • Our speakers Sir Roger Carr - Chairman BAE SYSTEMS Stephen Pearce - Non Executive Director and Chair of Audit Committee ➤ Ian Tyler - Non Executive Director and Chair of the Corporate Responsibility Committee Paula Rosput Reynolds - Non Executive Director and Chair of the Remuneration Committee Additionally on the Q&A panel and in attendance ➤ Chris Grigg - Senior Independent Director Jane Griffiths - Non Executive Director and Chair of the CR Committee from Jan 1 2020 Dame Elizabeth Corley - Non Executive Director Nicole Piasecki - Non Executive Director ➤ Charles Woodburn - CEO Martin Cooper - Director, Investor Relations Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. 30 30#31Summary and Wrap Up Sir Roger Carr Chairman BAE SYSTEMS Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. 31#32Supplementary Information BAE SYSTEMS Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. 22 32#33BAE SYSTEMS Overview of 2020 remuneration policy Performance shares Annual incentive Base salary UK Executive Directors Performance shares Vests in year 5 subject to three-year EPS, TSR, cash generation and strategic progress metrics and two- year holding period Compulsory bonus deferral into DBP One-third deferred in shares for 3 yrs Cash based element Two-third paid in cash immediately Performance shares Restricted shares Annual incentive US Executive Directors Performance shares Vests in years 3,4 and 5 subject to three-year EPS, TSR, cash generation and strategic progress metrics; vested shares released in one-thirds Restricted shares Vests subject to three year service condition with additional two-year clawback period deferral into DBP One-third deferred in shares for 3 yrs Cash based element Two-thirds paid in cash immediately Base salary Year 0 Year 1 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 2 Year 3 Year 4 Year 5 • • • Annual incentive subject to one-third compulsory deferral. LTI delivered entirely in Performance Shares. Performance shares vest subject to 3 year performance conditions (25% on each of EPS growth, relative TSR, cash generation and strategic objectives). Further 2 year holding period before release. Application of reasonable discretion on vesting outcomes. MSR of 300% for CEO; 200% for GFD to be achieved within 5 years. Post-cessation shareholding requirement of 100% MSR for 2 years. . • • • • Annual incentive subject to one-third compulsory deferral. LTI delivered in Performance Shares (298% of salary) and Restricted Shares (150% of salary). Performance shares vest subject to 3 year performance conditions (25% on each of EPS growth, relative TSR, cash generation and strategic objectives). Vested shares released in three equal tranches at end of years 3,4 and 5. Restricted shares vests end of year 3 + additional 2 year clawback period. Application of reasonable discretion on vesting outcomes. MSR of 425% to be achieved within 5 years. Post-cessation shareholding requirement of 300% salary for 1 year. Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. 33#34BAE SYSTEMS Sustainability Agenda • Our Sustainability Agenda is fundamental to the success of our business. Sustainability is embedded into our Operational Framework & Policies and overseen by a robust Board Governance structure and implemented through our Code of Conduct, Responsible Trading Principles, Internal Controls, Risk Framework, and Delegated Authorities. • We recognise that we can make a valuable contribution towards the UN Sustainable Development Goals (SDGs) that we can influence. Our current agenda supports 8 of the goals. PEACE JUSTICE 16 AND STRONG INSTITUTIONS 3 GOD HEALTH AND WELLBEING W 16 PEACE, JUSTICE AND STRONG INSTITUTIONS Our Priorities & Contribution to the SDGs People Safety & Wellbeing Ethics & Business Conduct Community Human Rights Responsible Supply Chain QUALITY EDUCATION DENDER EQUALITY DECENT WORK AND ECONOMIC GROWTH 12 RESPONSIBLE CONSUMPTION AND PRODUCTION 3 GOOD HEALTH QUALITY AND WELL-BEING Technology and R&D EDUCATION 5 GINGER EQUALITY 16 PLACE JUSTICE AND STRONG INSTITUTIONS: PARTNERSHIPS 17 FOR THE GOALS 8 DECENT WORK AND ECONOMIC GROWTH M PARTNERSHIPS FOR THE GOALS Environment & Climate Change 13 MATE ACTION https://www.baesystems.com/en/our-company/sustainability Copyright© 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. 34 34#35BAE SYSTEMS Our Approach to Environment & Climate Change We are committed to high standards of environmental management and undertake activities with the aim of reducing the environmental impact of our operations, products and supply chain. • We monitor and report our emissions at Group-level, in compliance with the UK government's Carbon Reduction Commitment and the Australian National Greenhouse Energy Reporting System Our Products Our Operations Maintaining high environmental management standards Reducing emissions & enhancing disclosure https://www.baesystems.com/en/our-company/sustainability Our Actions & Progress • All major manufacturing sites certified to ISO 14001 • Reduction in mains water (14%) and abstracted water(16%) in 2019 • Recycling of waste increased by 18% in 2019 • Our global carbon footprint in 2019: 1.103 million tonnes of CO2 equivalent (-5% vs 2018) • Moving towards 60% sourcing of renewable energy across the UK estate • More than 10,000 solar panels live in UK and Sweden Our Commitments Committed to high standards of environmental management Establish net zero timeline and report by 2022 in line with the recommendations of the Task Force on Climate- related Financial Disclosures (TCFD) Investing in low carbon innovation • Investment in development of hybrid propulsion technologies • Apply lifecycle assessment to maximise potential for reuse and remanufacture of our products • Member of the International Aerospace Environment Group Formal review of environmental and climate related risks this year Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. 35#36BAE SYSTEMS | Responsible & sustainable operations Our Operations Our Suppliers • . Employee safety & wellbeing are our priority Our productivity rate was 27% higher than UK national average in 2018 (1) We engage with over 22,000 suppliers worldwide We contributed £9.3 billion to the UK's GDP in 2018 and helped create over 120,000 FTE jobs (1) A workplace culture upholding high standards of ethics, safety and inclusion Positively contributing to social & community impact Responsible supply chains & open innovation Our Actions & Progress • Speak-up policy with >160 Ethics officers and a 24-hour Ethics helpline • Detailed policies on bribery and anti-corruption and industry-leading standards • Executive sponsored Employee Resource Groups to support inclusion ⚫ c.700 apprentices and 500 graduates in UK in 2019; engaging children and young adults in STEM subjects • Community Investment Policy - contributed >£11m to local, national and international charities in 2019 • Support through technology, materials, and facilities for Covid Response Supplier relations governed by our Responsible Supplier Principles & Product Trading Policy that specifically considers Human Rights impacts • Funded 50+ innovative SMEs to access and mature future capability for our business Our Commitments Year on year reduction in safety incidents (linked to Exec remuneration) Roll out annual Business Conduct scenario-based training to all employees Increase representation of women and other minorities Extend supplier audit program to further embed Supplier Principles (1) Source: Oxford Economics - The contribution of BAE Systems to the UK Economy - published September 2019 Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. 36#37BAE SYSTEMS Engagement with external agencies • We proactively engage with external rating agencies and other third parties as a means of benchmarking and identifying where we need to improve. • These groups include: MSCI Sustainalytics ISS - ESG Dow Jones Sustainability Index Transparency International Workforce Disclosure Initiative Individual investment funds BAE SYSTEMS PLC (BA) Industry: Aerospace & Defense Country: United Kingdom BAE Systems was upgraded in October, 2019. ESG Rating history MSCI ESO Rating history data over the last five years or since records began MSCI ESG RATINGS AA MA BAE Systems is a leader among 39 companies in the aerospace & defense Industry. ESG Rating distribution Universe: MSCI ACWIndex constients aerospace & defense, 5:39 A BBB 888 AJA B ཏྲཱ ཏྲཱ ན སྠཽ ཟླ མ 8 23% 580% 1870 13% AMA LEADER GOC Dec-15 Nov-16 Dec-17 Dec-18 Oxs-19 CCC BO 800 A AA LAGGARD AVERAGE SUSTAINALYTICS Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. CDP DISCLOSURE INSIGHT ACTION 37 32#38BAE SYSTEMS Employment Support & Advice Code of Conduct Code of Conduct applies globally to all employees, directors, and wholly owned subsidiaries. Controlled JV's are expected to uphold substantially equivalent standards • Embedded into the due diligence process for suppliers • • Expressly prohibits bribery and other forms of corrupt conduct Mandated Business Integrity training during induction with annual line manager lead face-to-face training thereafter Reviewed every three years to ensure best practice Ethics Helpline Code of Conduct makes clear that the first point of call is a colleague, manager, HR or Legal • Alternatively there is an Ethics Helpline and network of Ethics Officers • 160 Ethics Officers across the Company who receive regular training and provide day to advice and guidance on ethical matters Ethics Helpline - lines are open 24/7, anonymity if required, externally independently run Ethics reporting reviewed at a business level (in quarterly business reviews) and corporately at the Ethics Review Board and Corporate Responsibility Committee Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. 38#39BAE SYSTEMS • • Product Trading Policies The policy applies to BAE Systems plc, its wholly owned subsidiaries and all other companies and entities controlled by BAE Systems plc have a substantially equivalent policy applicable. Our Product Trading Policy helps our line leaders and employees apply the Responsible Trading Principles in practice. It requires them to assess business opportunities according to the level of risk associated with: The type of product and its intended use. The end user The country of sale • Product Trading Evaluation Criteria Does the Product fulfil its intended purpose and match the customer's stated requirement? Does the Product conform to BAE Systems Product Safety Policy? Is the Product able to distinguish planned from unintended targets? Is it proportionate to the role and necessary for its intended purpose? Can it reasonably be anticipated that the Product will be controlled or prohibited in the foreseeable future? Is the Product an entirely new class of weapon or capability? Is there a significant, specific, and foreseeable risk of the Product being diverted or transferred to an unapproved user or utilised for an unauthorised purpose? Does the Product create a significant lasting adverse environmental or health impact over and above that reasonably necessary in its manufacture, storage, deployment, use, or disposal? Can the Product's end use reasonably be expected to violate civil liberties or human rights? Can customers be reasonably expected to maintain and use the Product safely through life? Is there a reasonable or foreseeable risk that the customer or end user may be subject to regime change or that foreign policy changes such that the reputation of the Company might become damaged? Is the Company able to supply the Product? Copyright© 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. 39#40BAE SYSTEMS Key Anti-Corruption Policies within the Operational Framework • Advisers Policy • • • Community Investment Policy Conflicts of Interest Policy Export Control Policy Facilitation Payments Policy Fraud Prevention Policy Gifts and Hospitality Policy Lobbying and Political Donations Policy Offset Policy Our policies are reviewed annually with changes approved at Board Level Our policies include processes for risk-based due diligence, internal and external approvals and on going monitoring . Procurement Policy • Product Trading Policy • Pursuit of Export Opportunities Policy Risk Management Policy https://www.baesystems.com/en/download-en/20200121113819/1434636829917.pdf Copyright© 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. 40#41BAE SYSTEMS Advisers Policy Covers appointment and management of third parties engaged to influence, promote or assist our sales and marketing efforts or the strategic development of the Company · Appointment managed by central Business Conduct Compliance/International Compliance team • • All Advisers assessed to ensure no apparent risk of corrupt or unethical behaviour, a clear business case and compelling justification for proposed remuneration Third party due diligence report and on-site interview by BCC team. All appointments reviewed and assessed by Business Development Adviser Compliance panel chaired by independent legal counsel On going monitoring, reporting and due diligence review • Central oversight and approval of payments • Re-appointment every two years. Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. 41#42BAE SYSTEMS • Facilitation Payments Policy Facilitation payments prohibited for both employees or others on their behalf Any request for a facilitation payment must be declined and reported to the Legal Department Any request must be recorded in a facilitation payment register Conflicts of Interest Policy • All employees to ensure their personal interests do not compromise their duties to the Company Notification requirement if actual, perceived or potential conflict of interest arises • All conflicts reported to Business Chief Counsel, recorded in a conflicts of interest register and on the employee's personnel file • Remedial steps required to address conflicts of interest Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. 42 42#43BAE SYSTEMS Gifts and Hospitality Policy • • . G&H can only be occasional, appropriate, reasonable and in accordance with applicable laws G&H must be for a legitimate business reason and never connected with obtaining of an inappropriate advantage If involving Government customers it must comply with their rules The policy sets out clear financial limits and approval levels G&H at certain levels needs to be recorded in a gifts and hospitality register Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. 43 43#44BAE SYSTEMS Training All employees receive Code of Conduct training on induction and annual face to face refreshers thereafter Enhanced anti-corruption training is provided through biennial online Integrity In Business Dealings training depending on function and role Those engaged with the appointment, monitoring or payment of Advisers are required to do face-to-face advanced training on risks, red flags and processes to address risk Offset Policy • • . • Offset must be undertaken in accordance with our Code of Conduct and with clear levels of ownership and executive oversight Offset must be consistent with customers offset policies and proportionate to the value of related contracts Risk both financial and non-financial are clearly assessed and mitigated Offset proposals are subject to rigorous review and approvals process which includes risk based anti- corruption due diligence Certain offset is subject to review by external panel chaired by independent legal counsel Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. 44#45Our approach to Trade Controls BAE SYSTEMS • Clear management commitment to trade controls compliance through Export Control Policy • • • • A comprehensive set of Trade Controls procedures and internal controls designed to ensure compliance with all applicable export controls and sanctions (including financial sanctions and embargos) Additional business policies and procedures to assess country risk before we pursue export opportunities Supporting tools and guidance, including trade control screening software and guidance to support the business with risk assessments Mandatory third party screening of all counterparties including suppliers, contractors, joint venture partners, customers and job applicants Flow down of trade control requirements to supply chain through standard terms and conditions Mandatory export control training on induction and at regular intervals depending on seniority or job role Rolling self-assurance testing of our trade control compliance processes and annual programme of specific trade control audits Copyright 2020 BAE Systems. All Rights Reserved. BAE SYSTEMS is a registered trademark. 45 45