Climate Change Risk Management

In 2019, ERG developed a process to analyse the impact that Climate Change may have on its business.

The project was developed in accordance with the guidelines of the TCFD (Task Force on Climate-related Financial Disclosure) transposed by the European Commission into the "Guidelines on non-financial reporting: Supplement on reporting climate-related information" and required an analysis, with consequent disclosure, of four pillars:

• Governance;
• Strategy;
• Risk Management;
• Metrics & Targets.

Whereas the Group Governance framework in relation to these matters and the strategy were very clear, identifying the risks and opportunities was a much more in-depth task.

The main steps in the process were the following:

1. identification of the reference scenarios;

2. identification of the variables present in the scenarios that could impact ERG's business;

3. identification of the risks and opportunities related to climate change in relation to ERG's business;

4. identification of the corporate functions responsible for the governance, monitoring and management of Climate Change issues;

5. identification of the strategies for managing the risks or achieving the opportunities.

Scenarios were chosen from among those most widely accredited in literature, more specifically:

• one physical scenario developed by the Intergovernmental Panel of Climate Change (IPCC) that shows the response of the Earth's climate to changes in atmospheric concentrations of GHG, in the absence of mitigation measures. In this scenario it is estimated that, if mitigation strategies are not implemented and current production rates continue, emissions of greenhouse gases will cause an average temperature increase of +1.5°C by 2040, and subsequently +2°C, with significant effects for the planet;

two transition scenarios that focus on assumptions of the development of climate policies and technologies to reduce GHG emissions:
- the Below 2 Degree Scenario (B2DS) of the International Energy Agency (IEA), used by the Science Based Target Initiative (SBT) to set the greenhouse gas emission reduction targets;
- the Sustainable Development Scenario (SDS) of the IEA, which uses the Sustainable Development Goals (SDGs) as targets.

The mitigation strategies consistent with the transition scenarios mentioned require that in order to keep the increase in average temperatures below 2.0°C a 25% reduction in emissions would be needed by 2030, reaching net zero around 2070, while for a target of 1.5°C, global CO2 emissions would need to be reduced, compared to 2010, by approximately 45% by 2030, reaching net zero around 2050. The different variables that may impact ERG's business were subsequently identified and classified into Physical (acute and chronic) and Temporary (Regulatory, Market, Reputational, Technology) events.

Equally, the analysis aimed to identify all the opportunities, generated by Climate Change, that could work in the Group's favour. The first fact that emerged from the analysis is that ERG, having already achieved ante litteram the "just transition" towards a decarbonised economy, has already implemented actions and processes that allow it to be resilient and ready to face a predominantly green generation model. The strategy is clear and outlined in the Business Plan: continue the path of growth in the renewables sector increasing, over the 2018- 2022 Plan period, installed capacity in RES by approximately 850 MW (+30%). The governance of the issues relating to Climate Change is divided between Board and Management.

The Board is responsible for strategic guidance, designing the Group's green future, analysing the economic, regulatory and market scenarios in order to identify the best development opportunities while continuing to support the low carbon transition.

The Management is responsible for managing the assets, with an increased focus on issues such as: managing contributions to optimise production, technological development and increasing the efficiency of plants in order to extract the greatest possible value, asset integrity, and the environmental and safety management to ensure business continuity.

In addition, the Governance model implemented by ERG includes a Sustainability Committee that plays a coordinating role with regard to sustainability matters and, more specifically:

• defines the sustainability policies aimed at creating value over time for shareholders and stakeholders;
• examines the sustainability goals and processes; • examines the non-financial reports submitted to the Board of Directors.

These include monitoring the environmental impact of avoided emissions and CO2 saved as a result of production from renewable sources, which are reported annually in the Non-Financial Statement.

Find attached the analysis, in table form, of the risks and opportunities identified, using as a reference the structure proposed by the TCFD and the reference scenarios.

In conclusion, in order to counter Climate Change risks and seize any opportunities, the ERG Group makes its decisions in a "conscious and responsible" manner, implementing a climate strategy (understood as a reduction of industrial impacts) that is closely integrated with business strategy, based on the following actions:

• maintenance and development, both at board and management level, of a culture and a positive approach, that leads the way and is resilient to change, and the ability to evolve and reposition promptly in the context of the energy transition underway, taking maximum advantage of the challenges and opportunities;

• implementation of a plan for the development and production of energy from renewable sources (mainly: Wind, Hydro and Solar) in Italy and abroad, which has made it possible to "eliminate" atmospheric CO2 emissions through the use of "clean technologies" instead of traditional generation;

• pursuit of a strategy focused on territorial and technological diversification, in order to compensate for the negative impacts resulting from climate change;

• continuous monitoring of regulatory developments in the countries in which the Group operates and the establishment and maintenance of effective and long-lasting relations with its stakeholders;

• introduction into the portfolio strategy of bilateral contracts/PPAs for sales of electricity with medium/long-term maturity in order to be able to counteract the greater volatility and any downward pressure on prices that may emerge as a result of the effects linked to Climate Change (many of which with opposing impact on prices during the energy transition period);

• specific communication activities to maintain the Group's high level of reputation among stakeholders, which include, among other things, a structured Corporate Social Responsibility process (sustainability reporting, monitoring of sustainability objectives, ESG rating).