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 due to 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 overseas and accelerating the green transition.

In terms of climate, data from the EU Copernicus observatory saw extreme climate events, record temperatures and rising greenhouse gases globally. In Europe, continuing high temperatures aggravated water issues, with 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.

Last year, Europe adopted certain specifications and significant provisions with regards to corporate sustainability. The Corporate Sustainability Reporting Directive, was in fact 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 2022 led the EU Council to adopt guidelines on the subject. In the context of Regulation 2020/852 ( European Taxonomy), in 2022 the Commission, in the Complementary Delegated Act, amended the Delegated Act on the Climate, introducing activities and associated technical criteria for energy generation, starting with nuclear and natural gas, and increasing the number of potentially environmentally sustainable activities in relation to which companies are asked to determine their eligibility and alignment, as well as identifying correlated economic KPI.

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.

The various provisions (Decree Law 21/2022 - “Price Cuts Decree Law”; Decree Law 50/2022 “Aid Decree Law”; 2023 Budget Law) thereby governed 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.

During 2023, the COP28, held in Dubai, hosted the first global stocktaking, an opportunity to assess the joint effect of Nationally Determined Contributions (NDC). In this context, the parties defined an agreement to accelerate the global transition, promoting the “transition away” formula, and including for the first time in history an explicit reference to moving beyond fossil fuels to reach climate neutrality by 2050 and agreeing to triple the amount of renewable energy and double efforts for energy efficiency.

2023 was a decisive year for future European environmental policies. The European Parliament also approved the Nature Restoration Law, the first European legislation that explicitly aims to restore nature with legally binding targets for member states. In October 2023, during the European Business & Nature Summit in Milan, companies, financial institutions, governments and representations from academia and civil society met to discuss how companies can respect the commitments in the Kunming Montreal Global Biodiversity Framework (GBF) adopted in 2022. The event also saw the launch of the European Business and Nature Charter.

In 2023, the Taskforce on Nature-related Financial Disclosure (TNFD) issued its final document, containing recommendations on nature aimed at organisations, sectors and value chains.

In its Code of Ethics the Acea Group assigns fundamental importance to principles linked to sustainability and the adoption of a climate strategy. In 2023, Acea received validation of its Science Based Targets Initiative (SBTi) for its emission reduction target (by 2032), in line with climate science indications. Also in 2023, the Group participated in the Carbon Disclosure Project (CDP) on climate altering gas emissions and published its second climate-related disclosure following the Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), enriching its projects aimed at identifying risks and analysis of medium/long-term climate scenarios.

In September 2023, Acea received validation of its reduction targets for 2032 for direct and indirect greenhouse gas from the Science Based Targets initiative (SBTi), with respect to base year 2020. The international organisation assessed Acea’s goals in line with the “Well below 2°C” trajectory, the goal established in the 2015 Paris Accords to limit the increase in global temperature with respect to pre-industrial levels.

This decision represents an important acknowledgement of the decarbonisation process begun by the Group to support the energy transition. The targets set are: 56% reduction in emissions per MWh of energy produced (scope 1), 32% reduction in indirect emissions, consequent to electricity use (scope 2), 56% reduction in that deriving from energy production and energy supplies and resales, and a 30% reduction in emissions due to gas distributed and sold to customers.

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 in June 2023 its Acea Group Climate Disclosure 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.

Also note that in 2020-2021 the main companies in the Group began a process of identifying priority physical risks, to be analysed using climate scenarios developed for the areas in which the assets operated are located, with medium/long and long-term projections, including projections of possible variations of the potential associated economic impacts, in relation to the increased probability of extreme event occurrence (increase in frequency and duration). The priority physical risks identified are drought and water stress (mainly for water systems); extreme rainfall and flooding (mainly for power distribution networks); lightning strikes (mainly for power generation assets). To analyse physical risks, two scenarios developed by the Intergovernmental Panel on Climate Change (IPCC) were used. By way of example, the fully consolidated areti SpA assesses and quantifies the effects of climate change (heat waves/drought and flooding) on its assets and the mitigation projects to implement in the Resilience Plan approved by the Regulatory Authority For Energy, Networks and Environment (ARERA).

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.

More specifically, impacts were identified in terms of sensitivity analysis carried out on CGUs, companies and systems by developing the risk analysis, considering the main external variables indirectly impacted by climate change issues (such as the production price index, energy price index and gas price index), potentially able to impact the relevant economic variables (EBITDA).

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. Specifically, extreme events such as floods can cause asset damage and service disruptions (equipment failures, blackouts, etc.) or, for the water network, overflowing of drains connected to wastewater systems and can cause turbidity of water springs. Such impacts may affect the provision of services in compliance with applicable laws and regulations, resulting in the risk of financial penalties. As indicated previously, also thanks to risk mitigation projects implemented, the potential economic/financial impacts associated with physical risks have been hypothesised as unchanged.

Economic trends were influenced by many factors, both geopolitical and economic: unresolved conflicts, still far

from a solution, with Russia/Ukraine at the head of the pack, as well as “new” conflicts, such as that between Israel and Hamas. At present, after the shocks of recent years, the global economy is nonetheless normalising, with most of the major imbalances evening out. 2023 saw a substantial loosening of tension on energy markets, given the gradual strengthening of downward trending fundamental: falling demand, mild winter and autumn temperatures and stocks consistently at historically high levels, as well as hydroelectric production and French nuclear availability recovering from the annus horribilis of 2022. Consequently, electricity and gas prices gradually fell until mid-year, converging at the levels seen in mid-2021 - the start of the energy crisis. The scars of this latest and changed global gas supply situation have made European markets very nervous and sensitive to the contingent international and geopolitical tensions that developed in the second half of the year, above all the outbreak of the Israel/Hamas conflict, which impeded further decreases. In its October 2023 World Economic Outlook, the International Monetary Fund predicted slowing global growth, with increasing regional differences and little room for economic policy errors.

Despite the economic resilience seen at the beginning of the year, thanks to progress in reducing inflation with respect to the peaks of the last year, economic activity is still below pre-pandemic objectives, above all in emerging markets and developing economies. As causes of the slowdown, the report indicates the war in Ukraine, growing fragmentation of the economy and other more cyclical aspects such as anti-inflationary monetary policies, elimination of public aid and extreme climate events. Additionally, if the Israel/Hamas conflict expands beyond the Gaza Strip, the consequences could be very serious also in economic terms, beyond the already existing humanitarian and political emergency. Moving on to commodities, during 2023 the Brent registered an average level of $82.22/bbl, down -17% with respect to the previous year. The decrease in prices seen during the first six months of the year reversed course in the third quarter, with daily peaks in September and October 2023 that had not been seen for about a year. The main elements underlying the increase in the autumn can be found in Saudi Arabia and Russia’s confirmation of production cuts through the first quarter of 2024 (-1.3 Mbbl/day) and in the outbreak of the Israel/Hamas conflict, in a strategic area for global crude trading, above all in the case Iran were to join the conflict. Further increasing tensions towards the end of the year were the continuous attacks on ships and containers in the Red Sea by the Houthi, a Yemen rebel group supported by Iran, to which the United States responded with military action. Around 12% of global commerce and 30% of all cargo ships globally pass through this area. Nonetheless, it should be noted that the global macroeconomic situation of economic slowdowns and weak demand continues to weigh down oil prices, for the moment preventing excessive upward movement. The fourth quarter saw an average price level of $83.26/bbl, down -6% with respect to the fourth quarter of 2022, but up +5% with respect to the first nine months of 2023.

It should be remembered that the ESMA Public Statement of 28 October 2022 deals precisely 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 geopolitical situation 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 in response to geopolitical tensions.

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.

For Acea, collaborations, partnerships and business systems represent a crucial driver for the positioning and improvement of the Acea Group in the innovation ecosystem, as well as helping to open new channels offering access to ideas, business and technological opportunities, academic research and new talent.

Acea participates in numerous partnerships and cooperative agreements linked to innovation; in fact, for several years the Group has actively participated in the Italian and international innovation ecosystem, sharing best practices and experiences.

Note to that end, the partnership with InnovUp (formerly Italia Startup), a non-profit that represents the ecosystem of Italian start-ups, including all entities, private and public, that support the development, visibility and growth of the same, to encourage the creation of a new Italian entrepreneurial system, as well as with SEP (Startup Europe Partnership), an Open Innovation programme that puts European scale-ups with corporations, and finally with Open Italy, a co-innovation programme promoted by ELIS and established to help associated corporations meet their needs through start-ups, innovative SMEs, university spin-offs and research centres.

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, Acea was included by the Financial Times and Statista in the special list of “Europe’s Diversity Leaders 2023” and for the second consecutive year received Top Employers Italy Certification, official recognition of the excellence of the company’s HR policies and strategies, and 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.).

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 has always been at the service of the community and the public and therefore puts a high priority on open exchanges with the supply chain to be increasingly efficient in responding to local demands.

The creation of a sustainable chain depends on each company monitoring itself, as well as on agreements between all members in a given chain. Cooperation allows for more transparent and clear relationships, helping to create shared value:

• EcoVadis assessment
• Green purchases
• Reputational due diligence
• Management Systems – Supply Chain Verifications
• Vendor ratings
• Sustainability and safety.

Acea carries out constant awareness campaigns on the subject, with the aim of profoundly affecting the widespread dissemination of a culture of safety involving all its people. It has implemented an advanced risk assessment model, not to mention 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.

Safety seen as strategy, and not only as compliance, is based on the possibility of measuring and monitoring the results in a managerial approach. In the context of the process of continuous improvement that it has undertaken, oriented to the prevention and reduction of injuries, Acea provides all its people with a valid and effective instrument for the purposes of active participation in analysing the trend of indicators; this aspect is often considered a measure of the level of maturity of the culture of safety and the culture of improvement in an organisation. Improvement actions based on the realisation that there are margins to pursue (for example actions to reduce the proportion of some types of injury) and consolidation actions (for example maintaining positive results, growing organisational resilience), represent the natural process of continual improvement in the field of workplace health and safety.