CORPORATE RESPONSIBILITY REPORT

Arla Foods Ingredients Arla Foods Ingredients CORPORATE RESPONSIBILITY REPORT 2 15 Arla Foods Ingredients Supplement

2 3 Contents Building our culture for responsible growth Food manufacturers must work hard to obtain consumer loyalty and trust. This makes it an absolute necessity for all of us in the food industry not only to focus on our quality standards when we manufacture and deliver our products but also on our entire approach to our operations. Responsibility is the core of successful business growth. During 215, we have continued to develop Arla Foods Ingredients in this direction. Focus on our quality culture At an investment level, the technology installed in our new dry-blend lactose and hydrolysate facilities in Denmark enables us to meet the very highest food safety demands that face us today the demands of our customers in the infant formula industry. But technology alone cannot attain these standards. The true test lies in our habits and behaviour. For this reason, one of our major priority areas is the continuous improvement of our quality culture. The newly published Arla Foods Ingredients quality principles describe how we secure this in all aspects of our production. Optimising our use of resources In addition to raising our safety and quality standards, our use of the latest technology is improving our ability to utilise our primary raw material whey while optimising our use of energy and water resources. Our new approach to reporting environmental figures from our production facilities should reflect this in the coming years. 3 Foreword 4 Responsible company 6 Confidence in products 8 Care for the environment 1 Responsible relations Cooperation on standards and research Beyond our own walls, we support the development of food industry standards that promote transparency in the supply chain and honest marketing towards consumers. One example is the new Codex standard for whey permeate powders, which is now scheduled for implementation by mid-217. Together with our parent company, Arla Foods, and two of Denmark s leading universities, in 215 we established the Arla Foods Dairy Health & Nutrition Excellence Centre. A primary aim is to support best-in-class research to document the health benefits of specific dairy components. Our external research activities also extend to environmental improvement projects focused on sustainable water use. Here, we are cooperating with research institutes and other companies to develop technology that will cut the food industry s water consumption considerably. Building our culture for responsible growth Good growth through a responsible supply chain Food safety and health are at the top of our agenda We set goals to make more with fewer resources Strong relations start on the inside Strategy for affordable food As we have seen in 215, external cooperation partnerships are a source of inspiration for our business strategy. Following our contribution to Project Peanut Butter s clinical studies of malnutrition treatment, we have become engaged in the GAIN Nordic Partnership a multi-sector platform that seeks to make affordable, nutritious food available to low-income families. This has encouraged us to supplement our strategy with a new affordable food pillar, focused on nutritious solutions for consumers living on just a few dollars a day. The commercial viability of these solutions is key to their sustainability. We invite you to read about our responsible business journey in our 215 Corporate Responsibility Supplement. Should you have any comments, questions or ideas about future cooperation opportunities, please do get in touch. Henrik H Andersen Arla Foods Ingredients CEO

4 5 Responsible company Good growth through a responsible supply chain Our commitment to good growth requires us to secure a transparent and ethical supply chain. It also calls on us to help shape the international standards that ensure the high quality and safety of the food products on store shelves. At Arla Foods Ingredients, we invest time and resources in both. Our approach is that what is best for the consumer is typically best for our business. Easy access to supply chain data The Supplier Ethical Data Exchange (Sedex) is one of the channels we use to make information about our supply chain accessible to our customers. During 215, our whey processing plant Danmark Protein became the latest of our factories to undergo a Sedex Members Ethical Trade Audit (SMETA). While not a certification process, this documents many areas of interest to our customers: labour standards, health & safety, the environment and business practices. This makes it easier for customers to assess whether we comply with their requirements. Sustainable approval from Unilever Some of our customers have their own supply chain stan dards. This includes Unilever with the Unilever Sustain able Agriculture Code. In November 215, Unilever approved both Arla Foods Ingredients and Arla Foods as sustainable dairy suppliers following a thorough evaluation of the milk production that gives us our main raw material. Arla Foods Ingredients senior manager Henrik Hjortshøj drove the sustainability dialogue with Unilever. Today it s a must that our value chain is sustainable all the way from the farmer. Sustainability can really bring a company together, he says, with reference to the close, cross- organisational teamwork with Arla Foods during the approval process. The Unilever approval covers all products based on milk from Denmark, Germany, Sweden and the UK. Sedex audit at Danmark Protein Unilever sustainable supplier approval Whey permeate codex New standard for whey permeate Milk production is a resource-intensive business. This is why one of our goals is to make the best possible use of our raw material. That includes making high quality ingredients from the whey permeate that remains after the protein has been filtered out. In summer 215, the Codex Alimentarius Commission approved the initial draft of the first international standard for the composition, quality and safety of whey permeate powders. At Arla Foods Ingredients, we have supported the working group that has drafted the standard. The intention is to avoid unfair trading practices and the misleading of consumers. Although whey permeate represents a useful alternative to other, more expensive milk solids, the lack of an international standard has stopped many countries from allowing its use in food and beverage products. Even in countries where whey permeate is approved, many companies have been reluctant to use it before there is global consensus on how it should be labelled. The new Codex standard is scheduled for implementation by July 217. China sets high standards Consumers in China can look forward to buying safer food products in the years head. In October 215, the Chinese government enforced its toughest food safety law yet in an effort to raise consumer confidence in locally produced foods. The tighter legislation is joined by an ambition to expand the range of high quality products available on store shelves. Our dialogue with China s National Dairy Standardisation Centre plays a role in shaping standards for some of the new dairy ingredients that are making their way onto the Chinese market, says business development manager Jakob Madsen Pedersen. Apart from the potential business opportunities the stan dards provide for Arla Foods Ingredients and other suppliers, the approval of dairy ingredients brings new nutritional benefits to Chinese consumers. ISO TECHNICAL STANDARD Natural Via the Danish Dairy Board, Arla Foods Ingredients has provided input for a new ISO technical standard, which will define natural food ingredients. The aim of the new standard is to facilitate trade and support business-to-business communication. It will not apply to product communication towards consumers. DAIRY LEGISLATION Mexico Today it s a must that our value chain is sustainable all the way from the farmer. We play an active role in the Mexican national dairy processors association CANILEC and the national organisation for dairy product standardisation ONNPROLAC. This involves participating in the commenting round when the Mexican government proposes changes to local food legislation related to dairy products.

6 7 Confidence in products Our new quality principles set out the standards that apply to all our food ingredients. PROTEIN QUALITY Heat During 215, two of our research projects focused on the effect of heat treatment on the functionality and nutritional quality of whey protein. Read about them on the opposite page. CERTIFICATION 21 Since August 215, all of the ingredients we produce in Denmark have been both halal and kosher approved. Prior to obtaining our own certification, we supervised the halal/kosher certification of the 21 dairies in Denmark, Germany, Sweden and the UK that supply whey to our whey processing plant. Food safety and health are at the top of our agenda In our experience, customer demands for food safety are often higher than today s international standards. Discussions with our customers from the infant formula industry, for example, suggest that their safety requirements are approaching those of the pharmaceutical industry. We take these expectations seriously at Arla Foods Ingredients and incorporate them in our own food safety targets. Answering questions about safety Our new quality principles answer many of the questions we receive from customers about food safety. Published in autumn 215, they set out the standards that apply to all food ingredients produced at Arla Foods Ingredients factories, including joint ventures, in Argentina, Denmark and Germany. The food safety management systems at all factories are certified according to FSSC 22 or an equivalent standard approved by the Global Food Safety Initiative. Study of heat s effect on protein quality While heat treatment is a necessary food safety measure, it can impact the nutritional and functional quality of whey proteins. A whey pasteurisation project at our R&D facility in Denmark is looking at ways to minimise loss of protein functionality when pasteurising. Pasteurisation has to take place at the right temperature. We have been investigating the protective effect of protein concentration and lactose in an ingredient, says R&D manager Kristian Raaby Poulsen. The goal is to ensure our products have unchanged functio n - ality after pasteurisation. Pilot trials of the initial findings are currently in progress. Reduced heat boosts protein bioactivity From a research cooperation between University of Copenhagen, Danish Dairy Research Foundation and Arla Foods Ingredients, the findings of another study indicate that the bioactivity of whey proteins increases when heat treatment is reduced. According to our paediatric research scientist Anne B Lau Heckmann, this has important implications for formula - fed infants, who need bioactive proteins to support the development of a healthy digestive system. It s a new way of thinking that could potentially be applied to all our protein products to improve their bioactivity, she says. Further research is required to explore the findings and ensure the lower processing temperature can be applied without food safety concerns. In the long-term, these findings could improve the nutritional quality of infant formula for newborns who do not have access to breast milk. Excellence centre for dairy research To promote best-in-class research in the dairy field, Arla Foods Ingredients and Arla Foods have partnered with the University of Copenhagen and Aarhus University to establish the Arla Foods Dairy Health & Nutrition Excellence Centre. The initial research focus is within three categories: To prevent/remedy metabolic syndrome To prevent/remedy malnutrition To enhance immune defence/response The centre s first three funded research projects were launched in the spring, investigating the role of proteins in weight management, protein-rich diets for people with Type 2 diabetes, and improved extraction of milk fat globule membrane. The 216 funding round will prioritise research related to satiety, catch-up growth and gastrointestinal inflammation. In addition to supporting research, the centre aims to develop a competency platform for knowledge sharing, training and education for all partners. Publication of new quality principles Research into protein quality after heat treatment New excellence centre for dairy health & nutrition

8 9 Care for the environment All of our plants have initiatives underway to minimise our energy and water use. Global system for environmental reporting Ongoing initiatives minimise resource consumption Cooperative research on water reuse

1 11 Annual water consumption at Danmark Protein Annual energy consumption at Danmark Protein Care for the environment m 3 /tonne 12 1 8 6 4 2 213 214 215 MWh/tonne 4 3.5 3 2.5 2 1.5 1.5 213 214 215 We set goals to make more with fewer resources At Arla Foods Ingredient, we naturally pursue the same environmental goals as our parent company, Arla Foods. We also recognise that, due to our products nature, our production processes are among the most resource-intensive in the group. To counter this, we dedicate research efforts to developing new ways to reduce our water and energy consumption. All new plant investments are similarly designed for minimal environmental impact. New reporting system for environmental performance During 215, we started work on setting new targets for environmental performance at our four sites, three of which are joint ventures. Our first step is to establish a global system for reporting environment, health and safety data. Implemented from 1 January 216, this will allow us to make meaningful comparisons between sites. The targets will be set during 216 and will provide the basis for a new global environmental strategy, which will be developed later in the year. Ongoing focus on energy and water use Expansions in production capacity and an increasingly specialised product mix will always impact our energy and water consumption. This is particularly apparent at our Danmark Protein and Biolac sites in Denmark and Germany respectively, while consumption at our AFISA plant in Argentina is relatively unchanged. Only 215 data is available so far for our new ArNoCo plant in Germany. All of our plants have initiatives underway to minimise our energy and water use. For example, Danmark Protein, Biolac and AFISA are working on heat recovery projects that will direct excess heat from one process to another. Opportunities to recycle water extracted from whey or from other process steps, such as cleaning, are also continuously in focus. An overview of energy and water consumption at each site is shown opposite. From 216, our new reporting system will ensure site data is comparable. We expect this to support best practice sharing, improving our performance further. Research to optimise water recycling Five research institutes and 14 companies have invested in a five-year project the DRIP Partnership initiated by Innovation Fund Denmark to develop pioneering technology that will cut food industry use of drinking water by 15-3%. As one of the participating companies, Arla Foods Ingredients is exploring the reuse of water from CIP (cleaning in place) systems. We are often asked to take part in water recycling research, as this is something we are committed to, says Kristian Raaby Poulsen, R&D manager for separation and drying. Our water reuse research is conducted at our plant in Denmark and is intended to produce results of value to industry as a whole. In cooperation with the University of Copenhagen, we are contributing to the REWARD project for sustainable reuse of water in the food and bioprocessing industries, which runs from 214 to 218. Here, the aim is to develop basic knowledge for more intelligent utilisation of process water without compromising safety. A third ongoing project is in-house. Kristian Raaby Poulsen explains: Our CIP processes are always an obvious target for optimisation of water consumption. With this postdoctoral research project, we want to find a way to measure when processing equipment is thoroughly clean and possibly shorten our cleaning processes as a result. Support for dairies in Argentina In Argentina, we support local whey suppliers with filtration equipment to remove up to two-thirds of the water from the whey prior to transportation to our processing plant. This reduces transport costs and greenhouse gas emissions and ensures our suppliers most of them small, family-owned cheese dairies a higher price for the whey they deliver. We also work with the dairies to improve their production processes a win-win investment that results in better cheese and higher quality whey. m 3 9, 8, 7, 6, 5, 4, 3, 2, 1, The ongoing expansion of our whey processing plant in Denmark has increased energy and water consumption overall. In 214, the process of starting up our new dry-blend lactose plant contributed to higher consumption per tonne of product produced. With the plant now fully operational and further improvements in place, consumption per tonne went down in 215. Total annual water consumption at all sites 213 214 215 Danmark Protein AFISA Biolac ArNoCo RAW MATERIAL WASTE Closer to zero Scheduled to go into operation in 216, our new hydrolysate facility is designed to meet the requirements of infant nutrition. Due to the high microbiological standards, the by-product of the process will primarily be of food grade quality and useful in the production of other ingredients. A very small fraction will go to biogas production. MWh Total annual energy consumption at all sites 3, 25, 2, 15, 1, 5, ENERGY MANAGEMENT 213 214 215 Danmark Protein AFISA Biolac ArNoCo site data is currently not comparable site data is currently not comparable ISO 51:211 Germany s National Accreditation Body ( DAkkS) certified our joint venture plant Biolac according to the ISO 51:211 standard in autumn 215. The certification recognises energy management systems that promote continuous improvement within energy performance, including energy efficiency, use and consumption.

12 13 Responsible relations New strategy for affordable foods Support for clinical studies in Malawi High participation in employee engagement survey

14 15 Responsible relations Strong relations start on the inside A good working environment is the best pre-condition for building trusting relationships with customers and other external partners. By the same token, the way we approach the local communities where we operate and global challenges, such as malnutrition, contributes to the job satisfaction of our employees. These are areas we have continued to invest in during 215. Engagement score mirrors our challenges At 96%, the level of participation in our annual employee engagement survey was extremely encouraging indicating wide, shared interest in Arla Foods Ingredients as a workplace. The results also reflect the fact that 215 was another challenging and eventful year. Overall the average employee engagement score was slightly lower compared to 214. In response, we are now stepping up initiatives to ensure all employees experience Arla Foods Ingredients as an agile organisation where work tasks and company strategy are closely aligned. On the topics of work-life balance and the benefits of diversity, we were pleased to see that the average score improved. Both are important contributors to the successful continuous development of our global organisation. Affordable food for low-income consumers A number of studies have shown that sources of animal protein such as milk are essential to a child s normal growth and development. But, for families living on a few dollars a day, milk is often either too expensive or unavailable. Ingredients such as whey protein and whey permeate can help bring dairy nutrition within reach. At Arla Foods Ingredients, we have initiated an affordable foods strategy that targets consumers at the bottom of the pyramid. The aim is to provide long-term value for consumers and businesses in developing markets, our partners and our business. We contribute to affordable food products in two ways: By sponsoring clinical studies that investigate the value of whey ingredients in supplementary foods for moderately malnourished children and young women. Through our membership of the GAIN Nordic Partnership, a multi-stakeholder initiative initially focused on strengthening the dairy value chain in Ethiopia. Clinical studies of whey in supplementary foods Founded and led by US paediatrician Dr Mark Manary, Project Peanut Butter is conducting clinical studies of supplementary food with whey ingredients in Malawi. The goal is to determine whether the addition of whey ingredients may speed up recovery from moderate acute malnutrition. The first study of 2,1 children aged six-3 months gave positive results. Recovery was 6% higher when whey ingredients were added to supplementary food consisting of a nutritious peanut butter paste. During 215, more than 3 pregnant malnourished women have taken part in a second Malawian study, where they have received a specially developed peanut-based supplement. The study is testing whether the addition of dairy protein, whey and micronutrients to the women s diet can lead to reduced stunting in infants. Arla Foods Ingredients has supported the two studies with supplies of whey permeate and whey protein concentrate respectively. GAIN Nordic solutions in Ethiopia As a member of the GAIN Nordic Partnership, Arla Foods Ingredients has developed two affordable food solutions for low-income consumers in Ethiopia. The solutions a nutrient supplement for porridge and a nutritionally enriched snack are the outcome of GAIN Nordic s investigation of malnutrition, subsidised by Denmark s development cooperation, Danida. Both solutions are based on an evaluation of foods that are already widely consumed by the Ethiopian population, are easy to enrich and that could be locally produced. In cooperation with local manufacturers, preparations are underway to pilot test the enriched snack among young women. There is evidence that a large proportion of women aged 15 to 49 are anaemic and that their generally low energy intake impacts both their own wellbeing and that of their children, says Charlotte Sørensen, who drives Arla Foods Ingredients participation in GAIN Nordic. The idea is to benefit women s health by incorporating key nutrients in a low-priced snack. The pilot test will investigate the acceptability of the snack before work begins on the distribution and marketing strategy. BAROMETER 1 8 6 4 2 Employee engagement 85% 214 83% 215 I am able to maintain a healthy balance between my work life 1 and my home life 8 6 4 75% 78% 2 214 215 In my team, we benefit from diversity (background, 1 competences, etc.) 8 6 4 2 79% 83% 214 215 Source: Barometer 215 COMMUNITY PROJECT $1, Every year, the Arla Foods Ingredients joint venture plant in Porteña, Argentina sets aside $1, for local community projects. Initiatives supported by the plant include the construction of a building to house a new operating theatre at the local hospital. The town basketball team, fire brigade, police and local school children have also benefited. Whey protein and whey permeate can help make dairy nutrition affordable for low-income families.

16 About Arla Foods Ingredients Arla Foods Ingredients is a global leader in natural whey ingredients for infant, sports and medical nutrition, health foods and the dairy, beverage, ice cream, bakery, meat and culinary sectors. Our portfolio includes functional and nutritional whey proteins, milk minerals, lactose and permeate, produced at our plant in Denmark or by one of our joint ventures in Argentina, Germany and the UK. Arla Foods Ingredients is a subsidiary of Arla Foods, a global cooperative dairy company owned by dairy farmers in Denmark, Sweden, the UK, Germany, Belgium, the Netherlands and Luxembourg. Quality starts here Our trademark is the quality we provide for our customers in every aspect of our offering. Arla Foods Ingredients Group P/S Sønderhøj 1-12 826 Viby J Denmark Office: + 45 89 38 1 Email: ingredients@arlafoods.com www.arlafoodsingredients.com