Scenario of reference for ESG (environmental, social, governance) aspects

The war in progress in Ukraine has once again demonstrated the interconnectedness of the global situation, with effects felt throughout the world. In the energy arena, as is well known, extreme consequences were seen following the block in supplies, which provided a push to reopen plants utilising polluting energy sources. The European Union reacted with the REPower EU plan, with the aim of reducing dependence on fossil fuels coming from abroad and accelerating the green transition. The situation in 2022 had a major impact on energy costs for businesses and families, with public institutions preparing protective responses.

In terms of climate, data from the EU Copernicus observatory saw extreme climate events, record temperatures and rising greenhouse gases globally in 2022. In Europe, continuing high temperatures had repercussions for agriculture, river transport and energy management. Extreme drought conditions also led to an increased risk of fires, which led to an unusually high number of episodes in southwest Europe.

The global and national institutional initiatives implemented should be viewed and evaluated in this context. COP27 on the climate, held in Egypt, and COP15 on biodiversity, in Montreal, had objectives which included expanded protected areas and regenerating damaged ecosystems (30% by 2030). Domestically, note the constitutional reform of articles 9 and 41 and the National Climate Change Adaptation Plan.

During the year, Europe adopted certain specifications and significant provisions with regards to corporate sustainability. The Corporate Sustainability Reporting Directive, was published in the EU Official Journal, an update of the Non-Financial Reporting Directive of 2014, which expands the range of companies subject to reporting requirements and introducing significant changes, for example double materiality, preparation of new standards and the inclusion of a disclosure in the Report on Operations. Institutional work on the Directive continued relative to corporate due diligence requirements on environmental protection and human rights within the value chain, which in December led the EU Council to adopt guidelines on the subject. Regulation 2020/852 (“EU Taxonomy”) included in 2022 activities associated with nuclear energy and fossil fuel gasses among those potentially environmentally sustainable, governing the criteria for technical screening. Additionally, in the second year of application, it calls for reporting by companies of correlated economic KPIs in addition to allowable activities to those aligned.

The regulatory context of the Acea Group is wide-ranging and articulated according to the specificity of the businesses handled and the variety of the frameworks within which the legal and regulatory disciplines intervene, which affect the business operations, from administrative authorisation profiles to those protecting the market and competition. Added to such aspects are the specific features of being a listed Company, with the related legal impacts, for example, in terms of regulating communications to the market.

As already noted, tensions on the energy market and the continued COVID-19 health emergency marked the year, above all due to the systemic effects of high energy and raw materials prices, which led to specific legislative actions, initiated by the Draghi government and continued by the new one, aimed at mitigating their effects.

The various provisions (Decree Law 21/2022 “Price Cuts Decree Law”; Decree Law 50/2022 “Aid Decree Law”; 2023 Budget Law) that were implemented to govern the solidarity contributions mechanism borne by entities in the energy sector to limit the effects of high prices for businesses and consumers are also framed in this way.

Also associated with the extraordinary energy situation and significant for its impacts on energy companies, are the provisions on excess profits and suspension of unilateral changes to electricity and gas supply contracts. Relative to the former, Decree Law 4/2022, “Supports-ter Decree Law” established compensation mechanisms for producers using renewable sources which, under certain conditions, can lead to excess profits to be paid to the GSE; relative to the latter, Decree Law 115/2022, “Aid-bis Decree Law” called for companies to halt unilateral changes to energy supply contracts with regards to definition of prices, and the subsequent Decree Law 198/2022, “Thousand Extensions Decree Law” extended the period of validity (30 June), excluding application for expiring contracts.

In 2022, consultation for implementation of Directive (EU) 2020/2184 was requested, on the quality of water destined for human consumption, following which the Council of Ministers in December approved the preliminary examination the Legislative Decree for implementation. Important changes include the revision of regulations intended to protect human health from negative effects deriving from contamination of water intended for human consumption, guaranteeing “health and cleanliness”, also through revision of the relevant parameters and values, definition of hygiene requirements for materials coming into contact with potable water, the introduction of a risk measurement and management approach that is more effective in terms of preventive health, environmental protection and control over water intended for human consumption, also with regard to costs and allocation of resources, strengthening the role of the Water Safety Plans (WSP), and improvement of equitable access for all to safe potable water and public information on water intended for human consumption.

In 2022, the delegated law on restructuring regulations for local public services was implemented with Legislative Decree 201/2022, which restructured the regulations, included among the objectives of the National Recovery and Resilience Plan (NRRP), to promote competitive dynamics that help improve the quality of public services and the results of management in the interest of citizens and users.

Also worthy of note is the preliminary approval on 16 December 2022 by the Council of Ministers of the Legislative Decree scheme to renew the Public Contract Code, intended to simplify regulations relative to public tenders and concessions to ensure efficient realisation of the same. The Code will apply to new proceedings starting on 1 April 2023. From 1 July 2023, abrogation of the previous Code is envisaged (Legislative Decree 50 of 18 April 2016) and application of the new norms, also for proceedings in progress.

The natural environment is the scenario where the activities of the Group are performed and is to be preserved with a responsible and efficient use of resources, protecting sources, safeguarding the natural areas where the plants and service networks encroach, mitigating the physical and the external impacts generated in the ecological context of the operating processes.

In November 2022, COP27 was held in Sharm el-Sheikh. Negotiations were focussed on five themes: decarbonisation, climate adaptation, nature, food and water. The Conference ended with the issuing of the Sharm el-Sheikh Implementation Plan. This agreement maintains that ratified in the Glasgow Climate Pact (COP26), which included the commitment by signatory countries to keep global temperatures below an increase of 1.5°C with respect to pre-industrial levels and highlighted the need for a transition to a system based on renewable sources, with a reduction in the use of fossil fuels. Efforts to gradually eliminate coal were encouraged, favouring low-emission sources and promoting the elimination of fossil fuel subsidies. At the national level (Nationally Determined Contributions - NDC), countries which have not yet presented their decarbonisation commitments were encouraged to do so, while those that already have were asked to update them by the end of 2023. The main change involves the introduction of the “loss and damage” principle, which calls for the payment of indemnities to the most vulnerable developing countries for climate damage suffered. This principle will be implemented through the establishment of a specific Fund.

With reference to the issue of greenhouse gas emissions, again in 2022 Acea participated in the Carbon Disclosure Project – CDP, receiving a B grade and positioning the Company in the Management class. In 2022, in addition to publishing its first 2021 Climate Disclosure, based on the TCFD recommendations, Acea moved forward with a new project intended to enrich the identification of risks and medium/long-term climate scenario analysis.

Sensitivity to the evolution of climate change and its effects on the businesses managed is a well-established theme at international level, which is also reflected in a greater demand for information in the annual financial report. Although there is no international accounting standard governing how the impacts of climate change are to be considered in the preparation of financial statements, the IASB has issued certain documents to support IFRS-adopters in meeting this stakeholder disclosure requirement. Similarly, ESMA, in its European Common Enforcement Priorities, highlighted that issuers should consider climate risks in the preparation of IFRS financial statements to the extent that they are significant regardless of whether or not these risks are explicitly provided for in the relevant accounting standards.

The Acea Group describes its considerations on actions associated with mitigation of climate change effects, as well as adaptation to climate change in its non-financial statement (prepared in compliance with the GRI Standard which also includes the information called for under Regulation 2020/852 in relation to the two climate objectives mitigation and adaptation). In this context, considering the sectors of activity in which the Group operates through its investees, the Acea Group, in continuing to define updated future plans that are currently being developed and prepared, has identified certain risks arising from the current process of mitigation and adaptation.

The following is a summary of the considerations made by management with reference to the aspects considered significant for the purposes of preparing the financial statements in the sectors of activity in which it operates.

With reference to the short term, the management does not detect any significant specific impacts deriving from climate-related risks, to be considered in the application of the accounting standards. In all the relevant sectors of activity, the Group pursues excellence in service provision; this entails an ongoing commitment to the development of adequate infrastructures and the evolution of their management, with the application of technological innovation and digitalisation, as well as the preservation and protection of water resources, the development of electricity generation capacity from renewable sources, the energy efficiency of production processes, the pursuit of a circular economy approach and the implementation of controls on commodities supplied to customers.

With reference to the medium/long term, the management, while continuing to define updated development plans which are currently being prepared, does not foresee any further specific considerations to be taken into account in the application of the accounting standards for the preparation of the financial statements.

It should be noted that the assessment and, more specifically, the quantification of climate-related risks requires the application of climate scenario analyses — an activity that the Group has launched, publishing its Acea Group Climate Disclosure 2021 in June 2022, based on the TCFD recommendations. However, it is also exposed to assumptions about highly uncertain future developments, such as future technological developments, government actions, regulatory initiatives or even developments in international political balances.

For the principal sectors in which the Group operates, actions to contain risks linked to climate change have been made concrete through investments in infrastructure to prevent and/or mitigate the impacts arising primarily from physical risks.

Management has assessed that these investments do not reduce or modify the expectation of the economic benefits associated with the use of the assets recorded under tangible fixed assets, as they have regulatory relevance and are therefore subject to specific reimbursement mechanisms. Therefore, a critical review of the useful life of fixed assets on the balance sheet was not necessary.

With specific reference to the sale of commodities, the Group monitors the useful life of the customer base and the related accounting assessments as a potential effect of reputational risk.

With reference to the existence of risks of asset impairment, management has considered that, although actions to mitigate/adapt to climate risk entail the need to plan maintenance/evolution of plants in order to guarantee the quality of service, the safety of managed assets and the maintenance of their performance - these activities are in any case considered within the scope of the cash flow forecast used as the basis for determining value in use.

Finally, it is highlighted that legislation introduced in response to climate change could result in new obligations that did not previously exist.

Trends in raw material purchase costs along with hedging derivatives require a careful policy of monitoring requirements and price hedging. Trends in the cost of commodities as a result of the effects of climate change could make certain sales contracts costly. In addition, the unavailability of commodities could make cash flow hedges from highly probable future transactions ineffective.

Finally, with particular reference to regulated sectors, the presence of chronic physical risks could lead to a reduction in service quality resulting in liabilities for penalties.

The conflict between Russia and Ukraine has generated serious repercussions not only at the humanitarian level, but also at the economic level, with a considerable impact on the global financial markets. The consequent sanctions imposed by governments all over the world on the Russian economy and the countermeasures adopted by Russia contributed to the strong upward pressure on raw material prices (with particular reference to energy, metals and agricultural products) and the significant difficulties in trade activities at the international level.

The notable increase in inflation generated by the conflict leads us to consider a probable change in the monetary policy of the main central banks around the world towards greater restrictiveness and austerity, as done by the ECB in relation to the increase in interest rates and the purchase of the public debt of the Member States. This change of direction generates inevitably an increase in financial interest rates, to consequently impact the real economy, the investments made by individual companies, their production levels and the employment rate.

It is therefore clear that the effects of the conflict on the global economic-financial conditions can be seen not only in companies whose investments or operating activities are mainly located in Russia, Belarus and/or Ukraine or that maintain commercial relationships with third companies operating in these countries, but all companies, as they find themselves in a greatly weakened economic-financial environment with rising interest rates.

It is necessary to note that on this point the ESMA Public Statement of 28 October 2022 deals with the effects of the Russian invasion of Ukraine on 2022 financial statements prepared following the standard IAS34. The Statement therefore has the objective of providing to the administrative and control bodies of regulated companies a series of recommendations on the process of producing the accounting disclosure, with particular emphasis on the controls necessary to check for any impairment (impairment tests) of non-financial assets.

The Statement stresses that the change of strategic, commercial and financial approach of companies following the conflict increased considerably the risk of significant impacts on the carrying amount of balance sheet assets and liabilities. The Statement therefore suggests reviewing and possibly updating the considerations made for the year-end financial statements, in particular the assumptions and the hypotheses on which the calculation of the prospective flows is based and the other elements that contribute to the estimate of the recoverable value.

The ESMA then recalls that in order to assess the existence of possible indications of impairment of non-financial assets included in the scope of IAS 36 (Impairment Testing), it is necessary to consider all the information sources, of both an external and an internal nature, to assess whether the effects of the invasion of Ukraine by Russia represent possible indications of impairment of the said assets. The Statement also stresses that the considerable increase in the general level of uncertainty caused by the conflict requires a careful assessment (in the context of estimating the recoverable value using the Value in Use method) of the forecast financial data used. To this end, the ESMA believes that, according to the type of asset to be tested and the related level of risk, it may be necessary to develop multiple scenarios around the forecast data considered, supported by reasonable and realistic parameters and estimation inputs. Again in this sense, there must in any case be consistency between the forecast data used and the assumptions associated with the same for the value checks, and between the choices and strategic plans formulated by companies following the conflict.

With reference to the discount rate used for the estimate of the recoverable value, the Statement stresses and recalls that the same must reflect the current market conditions and the specific risk characteristics associated with the specific assets subject to impairment tests (excluding the risk of assets already reflected in the forecast flows). The Statement stresses finally that the risks associated with the phenomena of rising market interest rates and the inflation rate could have an impact also on the discount rate to be used for the purpose of estimating the recoverable value of the assets to reflect the said phenomena, unless the said risks are already reflected in the calculation of the forecast flows used.

The Innovation Model calls for development of national and international partnerships, with players in the innovation ecosystem active in sectors of strategic interest to the Group, to activate privileged channels of access to ideas, business and technological opportunities, academic research and identify new talents to innovate business, processes and corporate products.

In this context, worthy of note are, for example, the continuation of Acea’s participation in Zero Accelerator, to support the best innovative start-ups and SME developing technological projects and solutions in the greentech sector, as well as the House of Emerging Technologies in Rome, the first permanent living lab for ideas relating to the future Rome Smart City. Also in its relations with public entities collaborative initiatives are promoted to share research and innovation commitments. This includes, for example, the Acea Elabori Labsharing project developed in cooperation with ENEA, intended to take advantage of their respective assets and share laboratories technologies and high level know how to support environmental research and monitoring through an approach open to innovation and sustainability.

In 2022, Acea launched and inaugurated, through its partner Mind the Bridge, an Innovation Antenna in Silicon Valley with the aim of creating relationships between the company, its business units and innovators in Silicon Valley, intercepting emerging technology with a significant impact on the sectors in which the Group conducts business.

Acea also works with the academic world and with specific Observatories, such as the Observatories for Digital Innovation, Startup Intelligence and Space Economy, all belonging to the Politecnico di Milano.

For every organisation people represent a fundamental asset to remain competitive in a changing economic and social context. Acea listens to the needs of its people and develops a People Strategy, structured into projects and initiatives.

Every year Acea prepares an Equality & Care Plan that identifies goals and associated projects for diversity and inclusion and corporate welfare. In 2022, the Group developed an Equality, Diversity and Inclusion Policy and established an Equality, Diversity and Inclusion Committee, which will guide the process of cultural evolution to promote and disseminate a corporate culture on the subject. It also appointed an Equality, Diversity and Inclusion Manager, responsible for coordinating activities to prepare and monitoring an operating plan for the initiatives, also to support the Committee. Acea SpA also obtained gender parity certification, UNI/PdR 125:2022. Also note that in 2022 Acea was included by the Financial Times and Statista in the list of “Europe’s Diversity Leaders 2023”. Finally, for the second consecutive year, Acea obtained Top Employers Italy Certification, official recognition of corporate excellence in terms of HR policies and strategies, as well as implementation of the same.

Acea has developed an integrated corporate welfare system, based on listening to employees and their needs and structure around six fundamental pillars: health, psycho/physical well-being, family, reconciliation measures, economic assistance and complementary social security. Numerous initiatives have been implemented to support these pillars, including preventive medicine campaigns, support services for psycho/physical well-being and support for parents. These areas are shared with a Bilateral Committee, consisting of representatives from Group companies and the Unions.

As part of its training processes, the Group has established the Acea Business School Academy that provides courses on managerial, position, governance and digital issues, serving the entire group and designed with qualified partners (universities, business schools, research centres, etc.). Additionally, investment in digital skills continued in 2022.

Aware of the positive contribution that sustainable supply chain management can offer to protecting the environment, Acea is committed to defining purchasing methods that include intrinsic characteristics of the products and aspects of the process that limit environmental impact and foster initiatives aimed at minimising waste, reusing resources and protecting the social aspects involved in the procurement of goods, services and works. In tackling this green procurement issue, Acea has been using the minimum environmental criteria in force for several years, including non-compulsory bonus aspects in its tender procedures.

Acea recognises the value of the companies in its supply chain that have chosen to be certified in the quality, environment, safety and energy schemes and has launched initiatives to develop and promote companies that demonstrably apply sustainability criteria, invest in safety training for their workers and use environmentally friendly means to carry out their activities.

Acea carries out second party audits on its suppliers to raise awareness and support continuous improvement of the supply chain. The direct involvement of suppliers and the opportunities for discussion created during periodic audits make it possible to measure the level of awareness of emerging sustainability issues and provide an opportunity to jointly consider paths to improvement. Additionally, Acea has established contractual standards that expressly require adhesion to and compliance with both the Organisational Control Model 231 (if suppliers have not already provided themselves with one), and the Antitrust and Consumer Protection Regulation Compliance Manual - General Principles, as well as the Anti-corruption Policy adopted by Acea.

As part of increased monitoring of its supply chain, in 2022 Acea extended the Group Vendor Rating system, which includes a bonus indicator for aspects associated with social and environmental sustainability (Ecovadis), as a tool for analysing, assessing and monitoring supplier performance. In 2022, the number of suppliers evaluated with Ecovadis increased significantly.

Also note that following the increase in the costs of construction materials seen in the last year, in Decree Law 50 of 17 May 2022 legislators took action to attenuate negative effects on the economic system. In particular, the Decree Law establishes the possibility for contractors to request an increase in the prices agreed upon at the time of the tender from the contracting entity, while the contracting entity can request access to a specifically established national fund for a precise amount to cover the greater cost. In the case that requests exceed the amount of the fund, these will be divided proportionally among the eligible. Access to the Fund for price adjustments of works not financed, entirely or partially, by NRRP/PNC resources can be obtained with reference to the SALs for work carried out between 1 January 2022 and 31 July 2022 and/or 1 August and 31 August 2022.

Safety as a strategy, not to be observed only for compliance purposes, is based on the desire to promote the widespread dissemination of a safety culture, involving all employees, and on the possibility of measuring and monitoring results. To this end, Acea runs awareness-raising campaigns on the issue and has adopted an advanced risk assessment model and implemented control and mitigation measures. Acea has also launched a number of initiatives to raise awareness of and involvement in the issues discussed above with its contractors and sub-contractors, key business partners throughout the entire value chain. A Group RSPP Coordination Committee is active, with the aim of sharing the results of safety performance, experiences, good practices and sustainable solutions to prevent accidents in the company. The Group has adopted the H&S (Health and Safety) Dashboard as a tool to obtain data on workplace health and safety performance. It is updated constantly with graphs that improve analysis of the data provided by the companies of the Group.

In line with Law 4 of 15 January 2021 and the requirement to protect the psycho/physical health of its employees in the workplaces envisaged under article 28 of Legislative Decree 81/08, Acea guarantees an inclusive, integrated and centred approach to gender perspectives to prevent and eliminate violence in the workplace. In this sense, the Risk Assessment Document was updated and supplemented with regards to this aspect, with more specific risk assessments for all homogeneous groups and identification of measures intended to prevent and, if necessary, contain the risk in workplaces.

The Coronavirus Prevention Committee has been active since 2020, the Group body responsible for carefully monitoring the epidemiological situation and developments in the emergency situation, evaluating the most appropriate actions in the exclusive interest of health, safety and prevention for all employees of the Acea Group.