Discover the Acea Group online 2019 Sustainability Report

Context analysis and business model

CONTEXT ANALYSIS

Acea Group has an attentive and sustainable operational and economic-financial management, guided by the principles of corporate social responsibility and able to promote the development of the territories it works in. It therefore monitors the scenario of reference, thus identifying and analyzing the factors that be significant for its business, such as competitive, sustainability and regulatory areas that can affect the achievement of strategic goals. Factors outside the Group are supplemented by the context within the Group, in organizational terms and relating to energy and environmental impacts, technological innovations, development of human capital, protection of workers’ health and safety and sustainable and responsible management of the supply chain.

THE ENERGY MARKET AND COMPETITORS

The Acea Group is vertically integrated into the electricity supply chain through independent companies that guarantee neutrality in the management of infrastructure essential for the development of a free energy market, to avoid discrimination in access to commercially sensitive information and cross-subsidization between the various segments of the chain.

In the sales segment there was an extension to 1/1/2022 for the completion of the liberalization of retail sales with the expiry of the protected prices for all types of customers, pending the definition of how to phase out the standard market. Competition among operators will increasingly be characterized by the search for distinctive added-value elements, to be achieved through investments in technological innovation and digitalization to the benefit of the customer.

Technological innovation also plays an important role in the development of the electrical grid-distribution and public lighting industry. In particular, further progress is envisaged in the automation and efficiency of processes and applications in the smart metering, smart grid and smart city areas.

THE INTEGRATED WATER SYSTEM

In the water sector, the main development driver is the progress being made in the regulation by the ARERA, which rewards the efficiency of operators. Similarly to the electrical industry, in fact, the national Authority resolved on the new regulation for the technical quality of the integrated water service starting from December 2017 using a reward/penalty mechanism linked to the compliance with performance standards (service levels) and also an automatic indemnity system for customers which is added to that already defined in relation to contractual quality. There are therefore development opportunities for the service managers that are closely linked to the capacity to adopt developed technological systems, highly efficient disclosure and organizational models, standardized and repeatable, capable of significantly affecting the improvement of performance levels.

THE WASTE MANAGEMENT MARKET

The current situation of production and treatment capacity for waste in the traditional operational areas of the Acea Group and in the neighboring areas shows a high “potential demand” for waste management (disposal in landfills, waste-to-energy, composting and biogas production, sludge and liquid waste treatment, recycling of mixed materials and production of secondary raw materials). This is facilitated by a national regulatory framework that provides incentives, by European directives on the recovery of materials and energy and by the European Union’s policy guidelines on the circular economy (closing the loop), which are being implemented at the national level by virtue of a delegated law that has given the government the obligation to update environmental standards – thus adapting it to the new EU standards – by 2020. Opportunities for developing the sector are therefore highlighted, also facilitated by the availability of new technologies (for example in composting) and by possible forms of industrial integration with other operators.

INSTITUTIONAL INVESTORS

In 2019, the Italian Stock Exchange recorded a positive performance (FTSE Italia Mid Cap +18.3%; FTSE MIB +28.3%) in line with the main European stock markets.

International stock markets have been influenced by, among other things, the new expansionary policies implemented by central banks and the evolution of Brexit and US-China trade relations. In particular, the greater clarity of the policy framework in Great Britain and the framework agreement reached in December between the US and China for the reformulation of duties have helped ensuring greater stability in the markets.

During the year, the growth of ethical investments was recorded and the trend continued – already highlighted in 2018 – towards a progressive change in the strategies adopted by Investors. ESG (Environmental, Social, Governance) values are increasingly considered data to be included along with traditional analyses in the investment decision-making process. Engagement and voting strategies are also increasingly used with the aim of inducing companies towards more sustainable behaviors, thus leading them to make decisions that also take into account social, environmental and good governance issues in their corporate policies. The most common issues include climate change and related matters such as reducing the level of CO2 emissions, efficient management and, where possible, the recycling of natural resources.

The Chief Responsible Investment Officer of Amundi – among the most important investment funds, leader in Europe – highlighted how he intends to influence issuers by: “improving the ESG procedures of companies through: active dialog, engagement as a measure of direction and voting policies”.

SUSTAINABLE DEVELOPMENT

The 2019 sustainability scenario has been subject to evolutionary pressures from public and private institutions both nationally and internationally. It should, for example, be noted the new direction given by the European Union with the Action Plan to finance sustainable growth, and subsequently with the Green New Deal, which the Commission, chaired by Mrs. Ursula von der Leyen, has placed at the center of its strategy. The latter, closely related to the objectives of the UN Agenda 2030 (SDG), aims at reconciling the economy with the principles of environmental protection and social inclusion, thus shifting the paradigm of the circular economy.. Making the EU climate-neutral in 2050 and decoupling growth from resource consumption and ensuring a balanced social transition are some of the biggest challenges that can be dealt with also thanks to adequate financial investment. This is in sync with the new policy of the European Investment Bank (EIB), which from 2020 plans to align its activities with the objectives of the Paris climate agreement, and from 2021 to interrupt funding for fossil fuel projects. However, notwithstanding strong positions like those of Europe, at an international level a setback was suffered due to the substantial failure of the UN Climate Conference (COP 25) held in December in Madrid, which postponed some important decisions until 2020, including the definition of the rules for the carbon market.

Confirming the European position, national institutions are oriented towards the cross-cutting integration of sustainability and support for the transition to a circular economy. Regulatory interventions have already generated basic measures such as the climate law decree, then converted into law, which introduces, among other things, the transformation of the CIPE into CIPESS (Interministerial Committee for Economic Planning and Sustainable Development), legislation on the end of waste and an investment plan for the Italian Green New Deal outlined in the 2020 finance law. These initiatives should facilitate making up for the delays that our Country is experiencing in the pursuit of the SDGs despite encouraging signs, as noted in the Asvis 2019 report presented in October to the highest Italian institutional offices.

Another sign of the change under way, in this case coming from the production system, was launched by the Business Roundtable, an association that brings together more than 180 of the largest U.S. companies, which by redefining in its statement the purpose of the companies has unequivocally affirmed their role in the creation of long-term value for the benefit of all stakeholders. Similarly, in Italy great attention was paid to the announcement of the updating of the Corporate Governance Code, which will represent a best practice for companies when implementing strategies increasingly oriented towards sustainability: “The primary task of the Board of Directors is to pursue the company’s ‘sustainable success’, where long-term value creation for the benefit of shareholders is achieved taking into account the interests of other stakeholders”.

Taking into account these developments, Acea continues its development by integrating sustainability in its strategies and organization. In this regard, the updates to the Business Plan and the Sustainability Plan for 2019-2022 are particularly worthy of note, with an increase in investments related to sustainability targets of €400 million, equal to half of the entire amount of new investments, for a total value of investments linked to sustainability aspects over the plan period of €1.7 billion. An initial sharing of the program and the main initiatives put in place by the company on sustainable development and innovation with the public and qualified stakeholders was made possible during the year thanks to two important initiatives: Acea Sustainability Day and Acea Innovation Day.

ENVIRONMENTAL AND ENERGY IMPACTS

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, protection of sources, safeguard of the natural areas where the plants and service networks encroach, mitigation of the physical and the external impacts generated in the ecological context of the operating processes. One example is energy generation, where repowering initiatives are constant in order to modernize plants including by pursuing lower environmental impacts in terms of emissions, or the integrated water service, where Acea’s responsible management starts with the supply phase, making it available to people, and concludes with a commitment to return wastewater to the receiving body in the best possible conditions, and again to the environmental services sector linked to waste management, where the commitment to the ecosystem concerns both operational processes and the transformation of waste in a circular economy, as is the case for the treatment of sewerage sludge.

In line with the desire to work while respecting and protecting the surrounding environment, Acea implemented initiatives aimed at better managing the aspects of its activities that have a general impact on the environment and, specifically, on energy, also thanks to the use of advanced systems and technologies.

Management systems: the widespread adoption of environmental and energy management systems is a concrete response on the importance of environmental dynamics for Acea and a managerial tool for continuous improvement in performance.

Mobility management: in this context, the Acea Group has undertaken initiatives to reduce employee travel and to encourage less polluting means of transport.

Carbon Disclosure Project (CDP): Acea publishes its initiatives, communicating them to the international CDP organization, which drafts annual online reports aimed at informing analysts and lenders about the levels achieved by companies in managing risks and opportunities related to the topic of climate change.

Green purchases and environmental awareness development of the supply chain: Acea has set itself the goals of increasingly integrating the assessment of environmental aspects through the implementation of CAMs for the supply of compatible product categories. Moreover, it has committed to assessing its suppliers on an annual basis with regard to the environmental performance of the products/services supplied, and to inform/train contractors and subcontractors regarding the environment.

Energy management: using energy management, Acea Group promotes the improvement of the energy performance of plants and buildings by implementing best procedures to reduce energy consumption and encourage the use of energy from renewable sources.

Acea has included actions to combat climate change in its 2019- 2022 Sustainability Plan, which comprises both mitigation and adaptation actions and monitors the matter and related EU and international developments (the COP – Conference of the parties and European legislation). Environmental issues related to the array of services provided by the Group are included in the Organization and Management Model pursuant to Italian Legislative Decree no. 231/2001.

STANDARDS IN THE REFERENCE MARKETS AT A LOCAL, NATIONAL AND SUPRA-NATIONAL LEVEL

The regulatory context of Acea is wide-ranging and articulated according to the specificity of the businesses handled – water, energy and environment – and the variety of the frameworks within which the legal and regulatory disciplines intervene, which affect the business operations, from administrative authorization profiles to those protecting the market and competition. Added to such aspects is the peculiarity of the nature of listed Company, with the related legal impacts, for example, in terms of regulating communications to the market. The regulatory scenario is therefore analysed from a multidisciplinary viewpoint, applying a 360˚ overview and continuous interpretative analysis, in order to detect developments of particular significance, thus identifying and assessing risks and opportunities in terms of strategy and operating management. The revision of the regulatory framework governing the procurement sector, with amendments to the new Code of Public Contracts, is one of the most important issues of the year.

REGULATION OF THE SECTOR AUTHORITY

Since 2015, the Regulation Authority for Energy, Networks and the Environment (ARERA) has defined the regulation of the contractual quality of the integrated water service (RQSII), thus establishing specific and general levels of contractual quality that are homogeneous throughout the territory In December 2019 with resolution 547/2019, ARERA updated – from 1 January 2020 – the current regulations by broadening the scope of the regulation and integrating what is already envisaged in terms of billing, check of meters, execution time of complex works, methods of recording, procedures and parties obliged to report. The same measure also includes, also for contractual quality, an incentive system (bonuses/penalties) to be recognized from 2022 on the basis of the performance achieved by operators in each of the two previous years (2020 and 2021). For the technical quality of the water service, regulated since 2017, from January 2019 operators have been required to record and archive the data envisaged in Resolution 917, and from 2020 the first quantification of bonuses/penalties will be calculated on the basis of the performance achieved in the years 2018 and 2019. Finally, Resolution 580/2019 “Approval of the water tariff method for the third regulatory period MTI – 3” of 27 December 2019, which partially added the incentive mechanism envisaged in the regulation of technical quality and specified the methods for covering the bonuses envisaged by the incentive mechanisms identified in the RQSII (as updated by Resolution 457/2019) and in the RQTI.

With reference to the technical quality of the electricity industry, in 2018 ARERA introduced a mechanism of bonuses/penalties (Resolution 668/2018/R/eel) to encourage distribution companies to invest in actions to make the network more resilient to the stresses resulting from severe weather events. In 2019 this mechanism was implemented with Resolution 534/2019/R7eel, which published the resilience-building measures relating to the 2019-2021 plans eligible for a bonus and/or penalty, and, among these, that of the Areti distribution company.

The Authority also launched (Resolution 467/2019/R/eel) an experimental regulation for the modernization of buildings’ old riser cables, thus offering a contribution financed by distribution fees to promote the renewal of old electrical systems inside apartment complexes, improving their safety and efficiency, with reimbursements to the complex for any construction works implemented. With regard to commercial aspects, the 2020 Budget Law approved in 2019 introduced new guidance regarding incorrect billing and adjustments in all regulated sectors, which significantly change the previous regulation. The application definition should be available during 2020.

DEVELOPMENT AND TECHNOLOGICAL INNOVATION

At Acea, the Innovation, Technology & Solutions Function reports directly to the CEO and has the task of ensuring a model of innovation for the Group through the implementation of processes and approaches typical of open innovation, with the involvement of internal and external stakeholders as defined by the Industrial Plan. In this context, the dissemination of a culture of innovation has been encouraged by involving all Group employees in specific initiatives; partnerships have been established at a national and international level with the aim of strengthening Acea’s positioning in the innovation ecosystem and identifying new business opportunities; innovative solutions (proof of concept) from start-ups and SMEs have been analyzed and tested.

DEVELOPMENT OF HUMAN CAPITAL

People are the most important resource and they are given the tools and skills necessary to respond effectively to the challenges of the business during the main stages of corporate life: selection, welcoming, training, rewarding and development.

Entrepreneurship, teamwork and action are the three driving values of the Leadership Model upon which the Group’s initiatives are based to achieve the goals of the strategic plan and the sustainability plan. The Human Resources Function works on skills and improvement of people management and development processes in three different ways:

• professional development, managerial growth, training and development of skills;
• involvement of people in the Group’s identity;
• inclusion and organizational well-being, thus recognizing the strategic value of diversity and workers’ health and safety.

SUSTAINABLE MANAGEMENT OF THE SUPPLY CHAIN

At the service of the territory and the public, Acea is fully mindful of the virtuous partnership that can be established with the supply chain. In fact, it attributes greater value and reliability to contractors that have certified quality, environmental, safety, energy and social responsibility management systems and provides a self-assessment questionnaire on these issues for the majority of suppliers that register for qualification systems. In terms of green procurement, Acea applies the Minimum Environmental Criteria in its tender specifications and is working to extend this same approach to product categories that are not yet mentioned in the relevant Ministerial Decrees. With the aim of raising awareness and supporting the continuous improvement of the supply chain, Acea also carries out second-party checks and strict safety inspections at the construction sites. This brings to light good practices and, at the same time, identifies shared paths towards growth and improvement.

SAFETY AND HEALTH AT WORKPLACE

Acea works hard to instill a widespread safety culture, involving all its employees and the supply chain. It therefore carries out targeted awareness campaigns addressed both internally and to contractors, directly involving people, in the belief that it is necessary to set up effective tools for the prevention of accidents. For this purpose, it has also implemented an advanced risk assessment model, not to mention control and mitigation measures. Acea’s “Vision” of workplace safety – which is the prelude to the preparation of a model of Safety Governance – and the theoretical and practical tools to achieve it have been defined together with top management. The Holding Company set up a Group RSPP Coordination Committee, which meets quarterly in order to, among other things, share the results of safety performance analyses and experiences and good procedures. A special H&S Dashboard was also prepared and it has become a shared tool for the reporting of occupational health and safety performance.

THE BUSINESS MODEL

The implemented business model (chart no. 3) is based on an organizational structure wherein the Holding performs the role of steering and coordination of the Companies that make up the Group. Moreover, Acea SpA offers managerial support by means of management and legal, logistic, technical, financial and administrative services. Acea SpA’s organizational macrostructure consists of corporate functions and industrial segments to which the operating companies report (see chart no. 4).

CHART NO. 3 – ACEA’S BUSINESS MODEL

CHART NO. 4 – ACEA SPA ORGANISATION CHART AS AT 31.12.2019

Through Companies that it has equity investments in and for which it plays the role of industrial entity of reference, the Acea Group is involved in the 4 chains of activities already mentioned and shown below. The business activities are broken down in the strategic Plan (see the section titled Integrated strategy reading), which defines corporate development guidelines based on the assessments of opportunities offered by the market, the regulatory and social context of reference, the governance system and a careful identification and weighting of the risks that can impede the achievement of the goals. When performing activities and supplying services, Acea Group pays the greatest attention to its interactions with the natural environment and relations with stakeholders, thus managing the corporate activities in a manner that is consistent with the principles of sustainable development.

WATER SUPPLY CHAIN: INTEGRATED WATER SERVICE

The water supply chain: starting from a careful analysis of springs and groundwater and the potential impacts of operational processes on them – for example, by defining and monitoring water districts and preparing water balances – Acea checks and guarantees the quality of water during collection and distribution in compliance with the regulatory standards envisaged for end uses. The same care is devoted to wastewater and advanced treatment phases to recover useful material and return the resource to the environment in the best possible conditions for its natural cycle to resume.

ENERGY SUPPLY CHAIN: PRODUCTION AND DISTRIBUTION INFRASTRUCTURE

Production and distribution of electricity: Acea produces energy at hydroelectric plants, waste-to-energy plants, thermoelectric plants (high-efficiency cogeneration), anaerobic digestion plants (biogas) and photovoltaic plants, for a total generation from renewable sources of about 70%. Users receive electricity thanks to the distribution grid managed and developed by Acea. The digital and innovative development in the services, stimulated and required by a constantly evolving market, commits the Distributor to tend towards smart city solutions. This is accompanied by a resilient management of the networks by which it is possible to support a future shift and increase in the uses of the electrical vector.

ENERGY SUPPLY CHAIN: TRADING AND SALES

Sale of energy and gas: the purchase of commodities (energy and gas) takes place by means of bilateral contracts or exchanges on market platforms (Electronic stock exchange) where Acea Energia supplies itself in order to resupply clients according to its respective commercial policies. The Company develops relations with the customers, based on their type, by means of increasingly more innovative and digital contact channels, however retaining traditional tools such as the telephone and public counters. The promotion of its products takes place through pull channels (shop, website, branches) as well as through sales agencies that are selected, trained and their commercial procedures monitore.

ENVIRONMENTAL SUPPLY CHAIN: CIRCULAR ECONOMY

Waste valorization and circular economy: the environmental supply chain has as its objective the valorization of waste through the reduction of volumes, their treatment, conversion into biogas, transformation into compost for agriculture and floriculture and recycling into material that is reusable in production processes. In particular, with a view to circular economy, Acea exploits the integration into water activities to recover sludge from water purification and send it for treatment to become compost, also committing itself to the growth of its market position and operational capacity through plant acquisition and development projects.

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