Risk management

Italgas has adopted an Internal Control and Risk Management System integrated into the organisational, administrative and accounting structure and, more generally, a corporate governance system that ensures compliance with laws and company procedures, safeguards company assets and contributes to the management of activities, providing solidity to the accounting and financial data processed.

The Enterprise Risk Management (ERM) Department oversees the integrated enterprise risk management process for all Group companies. The main objectives of ERM are to define a homogeneous and transversal risk assessment model, identify priority risks, ensure consolidation of the mitigation actions and developing a reporting system.

The ERM methodology adopted by the Italgas Group is in line with the reference models and the existing international best practices (COSO Framework and ISO 31000). The process for the identification, assessment, measurement and management of the risks is carried out at least annually on the basis of the relevance of the risk and any changes in context.

The activities directly involve all business departments through dedicated meetings that allow to incorporate updates to the information on the description, significance and management of the risks already existing in the portfolio, as well as the detection of new emerging risks. These activities are carried out considering the entire scope of the Group and all the potential applicable events. Risk is assessed using a special assessment scale that sets out the thresholds of relevance for the Group (impact dimensions: economic-financial; operational; legal, governance and compliance; environmental, health and safety; reputational and market) that allow the assignment of a “rating” to each risk and facilitate their prioritisation. For all risks, the risk ownerships are identified and assigned. Management strategies are defined and drilled down into specific actions for dealing with the risk and establishing the relative implementation time.

With reference to strategic risks, the Enterprise Risk Management Department, in coordination with all relevant departments, carries out a specific in-depth analysis of risks, opportunities and uncertainties related to the Strategic Plan. The analysis is conducted using a proprietary Monte Carlo simulation model, based on the information gathered on risks, opportunities and volatility and on related correlations, to generate a multitude of alternative scenarios for the evolution of the variables underlying the Strategic Plan and evaluate their overall impact on the value-creating drivers. In addition, specific “what-if” scenarios are identified in relation to the reference context on which the Strategic Plan is based, and the impacts that these scenarios would have on the strategic agenda are then assessed. The analysis allows estimation of the overall volatility of the defined economic and financial targets and evaluation of the level of resilience of the Strategic Plan. The “Strategic Plan” document, which has been approved by Italgas S.p.A.’s Board of Directors, contains the output of this analysis.

The Enterprise Risk Management Department draws up specific reports on the identification, assessment and management of the risks and shares them with the different company levels. The risks are updated once a quarter, half-year or year, depending on their relevance.
The results found in relation to the main risks and related management plans are presented to the Control, Risk and Related Party Transactions Committee at each updating. Moreover, the mapping of risks and the relative management strategies are presented periodically to the Board of Statutory Auditors and the Supervisory Body of Italgas and to the Boards of Statutory Auditors and the Supervisory Bodies of the Subsidiaries.

The Officer Responsible and the Internal Audit department periodically receive the results of the risk assessments performed by the ERM department.

The reconciliation table below shows the main risks mapped in the ERM process being monitored, the main management methods

Please note that, in spite of the mitigation measures introduced to monitor and prevent relevant risks from arising, Italgas does not rule out the possibility that the occurence of specific events may entail the registration of possible liabilities in the financial statements.

Description

Risk of changes in the regulatory and institutional context in Europe or nationally affecting the natural gas sector. Risk of a penalising update of the rate of return on net invested capital recognised by the Regulator. Focus on Greece: Risk of review by the Greek Regulator of the investment and tariff plans submitted for approval.

Main methods of management

Specific structures for monitoring regulation, legislation and their prospective development plans, including in Europe

Active participation in the consultations called by the Regulator, sharing corporate positions and/or proposals for defining, updating and implementing clear and transparent regulation criteria

Active participation in consultations called by the Italian government or by European community organisations on relevant topics, including the Taxonomy

Guidance aimed at defining unified trade positions

Description

Physical Risk: increased frequency of extremely intense natural events in the places where Italgas operates (more or less prolonged unavailability of assets and infrastructure, increase in repair and insurance costs, service interruption, etc.) with a negative impact on costs, revenues and level of service

Emerging risk: Physical Risk: an increase in average temperatures in the areas where Italgas operates with a possible negative impact on the number of active re-delivery points served and, consequently, on revenues

Emerging risk: Transition Risk: changes in the legislative and regulatory context in terms of greenhouse gas, with the objective of limiting emissions, for instance by introducing measures that require natural gas distributors to acquire certificates to cover emissions, with a negative impact on costs.

Emerging risk: Transition risk: technological evolution that may have a negative impact on the number of active re-delivery points served with a negative impact on revenues and the level of expected investments

Emerging risk: Transition Risk: uncertainty of the role of natural gas in the future energy mix with a negative impact on costs, revenues and level of expected investments

Main methods of management

Operational countermeasures as described in the “Service continuity: malfunctioning, accidents or extraordinary events” risk that mitigate impacts and/or reduce response times in the event of extreme natural events are outlined.

Targets for reducing net greenhouse gas emissions:
I) by 2030: reduction of Scope 1 & 2 emissions by 42% and reduction of Scope 3 emissions by 33%, compared to 2020 values
II) by 2050, the target of Net Carbon Zero

Target to reduce net energy consumption by 33% by 2030, compared to 2020 values

Italgas, in the absence of a specific reference for the Oil&Gas sector within the SBTi initiative, nonetheless aims to align itself with the references expressed by SBTi for the cross-sector long-terms target for Net-Zero (90% emissions reduction target). In light of this threshold, the Group is defining approaches and initiatives aimed at decarbonising its operations and supply chain; any remaining S1&2 and S3 emissions that could not be reduced at the net-zero target by 2050 will be neutralized also thanks to the use of carbon removal initiatives (Offsetting, e.g., purchasing carbon credits and/or Investing in permanent carbon removal)

Use of Picarro Surveyor technology, currently the most advanced technology in the field of gas network monitoring activities, with significant benefits in terms of speed of execution, extent of the areas being controlled and three times greater sensitivity of detection of gas in the air than those currently used by sector operators (parts per billion versus parts per million)

Process of converting the network into digital infrastructure to enable the distribution of gas other than methane, such as hydrogen, biomethane and e-gas

Joining the UN Global Compact and the OGMP 2.0 of the UNEP

Carrying out energy efficiency projects through the subsidiary Geoside

Actions intended to promote the development and dissemination of biomethane and power-to-gas technology

Climate Risk Assessment – Physical and Transitional Risks

Italgas’ strategy is profoundly influenced by climate change: the analyses of climate scenarios and related Impacts, Risks and Opportunities (IRO) are constantly considered while drafting of the Strategic Plan. The identification and assessment of climate-related IROs is part of the double materiality analysis, which considered significant impacts from an inside-out perspective and significant risks/opportunities from a financial perspective. Climate change risks and opportunities are integrated into Italgas Enterprise Risk Management System (see “Overview of Enterprise Risk Management Model”).

To ease risk identification related to Climate Change, Italgas performs a specific analysis based on physical and transition scenarios identifying a list of risk/opportunity events applicable to Italgas. Climate Risk / Opportunity analysis involves ERM Function, Strategy Function, Sustainability Function as well as the relevant Risk Owners. Climate Change Risk and Opportunities are reported to Control and Risk Committee, Sustainability Committee and Board of Directors.

Given the long timeframe that has to be considered to fully take into the account of occurrence and/or impact of such events, climate risks and opportunities are assessed within the 7-year Strategic Plan timeframe and beyond.

As part of the financial materiality assessment, the following climate-related risks/opportunities were identified as significant:

i) Risk of negative developments in the technological and market environment: Declining significance of gas as an energy carrier for the residential sector

ii) Opportunities to enable the use of renewable gas in order to meet residential demand

Both of these events are considered Climate-related Transition Risks.

The assessment of the resilience of the Group’s strategy to mitigate and adapt to climate change was developed following an analysis based on climate scenarios that best represent the context in which Italgas operates, both transitional and physical, qualitative and quantitative, which are publicly available and do not exclude any physical or transitional risks of climate scenarios. The analysis helps identify and assess potential business impacts, and define the responses and actions needed to manage these risks and opportunities. Details of the scenarios used in the resilience analysis are provided below.

Regarding Physical Climate Change Risks, our climate scenario analysis is based on a third-party climate model that allows to obtain the evolution of main physical parameters, up to 2050, under RCP 1.9, 2.6, 4.5, 8.5 scenarios in all the local areas (up to municipal level) already served by Italgas or in those areas the Group plans to serve in the future. Physical parameters considered by the model include, for example, heating degree days and days with heavy rainfalls. Their potential impacts are then assessed on key business variables (e.g. active redelivery points), as well as considering potential damages to Group Top Locations and overall gas infrastructure (upstream and downstream of the distribution).

Regarding Transition Climate Change Risks, they are analyzed on several third parties climate and energy related scenarios with each Process Owner, as for Italgas ERM model described in the section “Overview of Enterprise Risk Management Model”. In particular, the following risks have been considered: risks associated to potential changes in National and European regulation, risks associated to non-compliance with regulation or failure to intercept/transpose new regulation falling under the scope of application, risks associated with technological changes, risks related to energy efficiency certificates, risks associated to environmental protection. Considerations of impacts include the overall gas infrastructure (upstream, own operations and downstream relative to distribution).

Description

Risk of not being awarded concessions in the planned areas, or being awarded concessions with less favourable conditions.

Risk of higher management costs borne by the Group with respect to its operating standards in case of concessions awarded in ATEMs (Minimum Territorial Areas) previously managed entirely or partially by other operators.

Risk of legal and/or arbitration disputes with possible negative effects on the business and the equity, economic and financial position of the Italgas Group deriving from the complexity of the legislation that governs the expiry of the concessions held by Italgas.

Risk that the redemption value of the concessions for which, following the assignment process, a third party is an assignee is lower than the value of the RAB.

Main methods of management

The existing legislation states that, in the event of failure to be awarded concessions previously managed, the outgoing operator is entitled to the redemption value for the networks it owns.

Specific procedures that govern the pre-tender activities, including calculation of the redemption value, and participation in area tenders

Monitoring of legislative changes and evaluation of the potential impacts on the tender process

Planning of the Tender calendar and the bidding strategy integrated into the Group’s Strategic Plan.

Critical analysis of the quality of the tender bid and implementation of improvement measures, including through use of external experts, organisations and universities

Description

Risk of negative changes in the geopolitical context and/or atypical events with potential tensions on the financial markets, impacts on operating continuity and/or on health and safety of staff and/or on the supply chain.

Main methods of management

Group Security Operation Center (G-SOC) and central platform for correlation of information from security systems

Travel security and operational intelligence platform

Integrated Security Cloud Command Center and Physical Security Information Management

With reference to the conflicts in Russia/Ukraine and Israel/Palestine, the following is confirmed:

i) the absence of production activities and staff located in the countries involved

ii) intensification of controls and monitoring of the supply chain, conforming that there are no first or second level suppliers involved in the areas affected, which impact on the Group’s operating continuity

iii) there are no significant critical aspects in view of the non-renewal by Ukraine of the Russian gas transit agreement

Description

Risk of potential losses arising from counterparties failing to fulfil their obligations or delayed payment of amounts owed with negative effects on the financial results and financial position of the Italgas Group.

Main methods of management

Rules for user access to the gas distribution service established by the Regulator and set out in the Network Codes that establish the rules regulating the rights and obligations of the parties involved in the process of providing said services, and lay down contractual conditions that reduce the risk of non-compliance by customers, such as the provision of bank or insurance guarantees

Strong reliability of gas distribution customers as at 31 December 2024: i) in Italy, on average, 97.4% of trade receivables relating to gas distribution are settled by the due date and over 99.0% within the following 4 days; ii) in Greece, on average, 95.0% of trade receivables are settled by the due date and approximately all within the following 4 days

Description

Risk of fluctuations in interest rates, impacting the market value of the Company’s financial assets and liabilities and its net financial expense. The risk that an extended period of inflation lower than the Group’s forecasts could have adverse effects in the long-term on the RAB value and expected regulated revenues. Risk of an unexpected increase in the inflation rate with possible adverse effects on expected costs

Main methods of management

Process for the preparation and monitoring of the financial and management plan, control and reporting of Financial Risks

High incidence of fixed-rate financial and bond debts (as at 31 December 2024, 85.4% of the gross financial debt was at a fixed rate and 14.6% was at floating rate)

Mix of external financial resources

Monitoring of the main economic and financial indicators, including financial structure indices used by rating agencies, liquidity indicators, debt mix/composition, risk indicators of counterparty liabilities, and of certain key parameters, such as the ratio between debt and the RAB

Description

Countermeasures as described in the “Changes in Interest rate, inflation and deflation” risk

Risk that new financial resources may not be available (funding liquidity risk) or that the company may be unable to convert assets into cash on the market (asset liquidity risk), meaning that it cannot meet its payment commitments. This may affect profit or loss should the company incur extra costs to meet its commitments or, in extreme cases, lead to insolvency and threaten the company’s future as a going concern

Main methods of management

Adequate level of cash held in current accounts and fixed-term deposits with leading banks

The EMTN programme, in addition to funding from the banking system, which presently allows issue of the remaining bonds worth a nominal € 4.4 billion to be placed with institutional investors

Description

Risk of a downgrade in Italgas’ credit rating due to worsening in the economic and financial parameters or due to a downgrade of the rating of the Italian Republic, which, based on the methodologies adopted by the rating agencies, could trigger a downward adjustment in Italgas’ rating

Main methods of management

Countermeasures as described in the “Changes in Interest rate, inflation and deflation” risk

Constant dialogue with rating agencies

Description

Risk of failure to comply with financial covenants for existing loans (in some cases only when this non-compliance is not remedied within a set time period, and the occurrence of other events, such as cross-default events, some of which are subject to specific threshold values), which could result in Italgas’ failure to comply and could trigger the early repayment of the relative loan

Main methods of management

Absence of financial covenants and/or collateral in the loan agreements (as at 31 December 2022, there were no loan agreements with these characteristics, except for the EIB loan taken out by Toscana Energia, for an original nominal amount of € 90 million and some credit lines granted to Greek operating companies that require compliance with certain financial covenants)

Monitoring of compliance with the following types of contractual clauses:
(i) negative pledge undertakings, pursuant to which Italgas and its subsidiaries are subject to limitations regarding the creation of real rights of guarantee or other restrictions concerning all or part of the respective assets, shares or goods;
(ii) pari passu and change of control clauses;
(iii) limitations on some extraordinary transactions that the company and its subsidiaries may carry out (as at 31 December 2022, these commitments appear to have been respected)

Description

Risk of increased levels of malfunctioning of remote-reading meters with lost/failed reading of the use and/or requiring replacement or regeneration

Main methods of management

Adoption of Nimbus, the new generation smart meter (prototype released in November 2023, tested in the field in 2024 and installed on a wide scale from 2025)

Maintenance of an adequate fund to cover malfunctions

Issue of adequate guarantees by suppliers

Resolution ARERA/DINE 01/2023 which requires, for G4/G6 smart meters produced by 2016 and installed by 2018, the recognition of the residual value

Audits on suppliers and supply tests

Description

Risks of malfunctioning and unforeseeable distribution service disruptions from unintended events, such as accidents, breakdowns or malfunctioning of equipment or control systems, the underperformance of plants, and extraordinary events such as explosions, fires, earthquakes, landslides or other similar events beyond Italgas’ control

Main methods of management

Third Party Liability Insurance and Asset Protection coverage Procedures and systems for emergency management, emergency plans with measures defined to make facilities safe and guarantee  service continuity

Health and safety procedures, communication campaigns, training and meetings

Scheduled gas leakage detection

Command and Control Centre for Plants and Networks (CIR)

Integrated Centre for Supervision (ICS) active 24/7 which makes it possible to monitor the status of the network remotely using remote monitoring systems, manage requests for prompt intervention, identify the places that require intervention and monitor the progress of making conditions safe

Facility and asset safety and network monitoring systems

Gradual adoption of DANA – Digital Advanced Network Automation – the network command and control system.

Smart Maintenance: GIS model for the intelligent maintenance of Italgas networks.

Scheduled gas leakage detection

Description

Risks of cyber attacks on the IT (Information Technology), OT (Operational Technology) and IoT (Internet of Things) sectors

Main methods of management

Specific insurance coverage of the risks related to cybersecurity

Bludigit ISO 27001 certification

Group Policy on Integrated Security, Resilience and Crisis Management, Cybersecurity organisational and operational model, business continuity, network and information security, and emergency and crisis management

Security measures to protect endpoints, access, information

Specific training on cyber risks, common vulnerabilities, phishing and spam and phishing simulations

Secure Product Development Lifecycle process, regular IT and OT vulnerability assessment and penetration tests

Real-time monitoring of IT and OT systems using the Security Information and Event Management (SIEM)

Leading sector suppliers with maximum levels of security defined and monitored

“Cybersecurity Awareness for third parties”

Cyber Threat Intelligence

Description

Risk of incidents and/or injuries involving employees and partner companies. Risk that Italgas may incur costs or liability, including to a significant extent, arising from any environmental damage, including in consideration of changes in legislation on protecting the environment and the possible occurrence of disputes. Risks associated with the spread of pandemics or new diseases that have repercussions on health and safety, on the operating context and on the resulting economic and financial framework of reference of Italgas.

Main methods of management

Insurance policies for “individuals” (professional and non-professional accidents, death by illness)

HSE system in compliance with the reference standards, certified according to international legislation for aspects of health, safety, environment, quality and energy efficiency

Monitoring of HSE legislation

Digital applications for reporting and recording “near misses” and for waste management

Communication campaigns and HSE awareness meetings , training sessions with suppliers/contractors on HSE topics and for creating standardised operating procedures

Internal procedures that involve specific measures with regard to suppliers/contractors in case of HSE non-compliance

Audits on suppliers during qualification and normal activities

Activities to promote health and well-being

Specific operating measures that may be activated in the event of a need to minimise contacts

With particular reference to reclamation activities:
– Specific provision to cover the estimated liabilities in relation to the formalities required by the law in effect
– Reclamation process of contaminated sites, which defines the tasks, operating procedures and indications in operations of waste removal, land analysis, establishing safe conditions and/or reclamation of sites contaminated by previous activities
– Audits on sites being reclaimed, carried out internally and by third parties

Description

Risks associated with the development of human resources, including risk of resources in key roles leaving, lack of technical and specialist know-how, increase in the age of company personnel, drop in the level of satisfaction and/or increase in workplace disputes

Main methods of management

Top Employers certification

Italgas Academy, Training courses in partnerships with universities, Multimedia with group training initiatives in the “Excellence”, “People” and “Innovation” areas

Knowledge transfer system

I-Grow Programme and Smart Rotation System

Succession plan for senior roles

Personnel scouting and recruitment process, performance management system and development plans for resources

Italgas Human Rights Policy

Italgas Diversity and Inclusion Policy

UNI/PdR 125:2022 certification for gender equality

Survey on corporate climate extended to all Group employees

Welfare system of welfare

Description

Risk of non-compliance of the commercial levels of service for services to sales companies and/or risk of delayed or partial compliance with the obligations assumed, such as execution of the investments plan related to concessions involving obligations borne by the concession holder

Main methods of management

Continuous monitoring of Key Performance Indicators on commercial processes, Operating procedures and instructions for Commercial Management of the Service

Capexforce software for digital oversight of the investment process

Surveys at sales companies

Mapping the existing concession obligations, monitoring and activating the network technical units for prompt interventions

Constant dialogue with contracting parties

Description

Risks associated with the availability and cost of materials, services and supplies, the operating capacity and scalability and the reputational and compliance reliability (including respect for human rights) of the suppliers and contractors of the Group

Main methods of management

Planning of procurement, analysis and monitoring of department KPIs

Supplier qualification process which provides for specific reputational checks, including regarding ESG

On-site technical and ESG checks for the Qualification purposes of Suppliers deemed Critical/ Strategic

“Supplier Code of Ethics”

Standardised tender processes and regulations

ESG reward criteria during the tender phase, ESG audits and implementation of the Action Plan

Anti-mafia audits in tender procedures relating to special sectors

Supplier performance evaluation, including in terms of sustainability, integrated into the vendor management module

Procurement diversification and scouting activities for innovative assets, produced with alternative materials

Anti-Bribery Policy and “Cybersecurity” for third parties”

Description

Risk of non-compliance with legislation at European, national, regional and local level with which Italgas must comply in relation to the activities that it carries out and/or risk of failure to intercept and transpose new regulations falling under the scope of application

Main methods of management

Internal control and risk management system and areas of responsibility defined in terms of compliance

Code of Ethics, Model 231, Policy for the prevention of and fight against corruption, ISO 37001 anti-bribery certification

ISO 37301 compliance system certification

Training for personnel on compliance issues

Analysis and monitoring of the reputational requirements of the Group’s counterparties

“Supplier Code of Ethics”

Description

Emerging risk, the potential effects of which for the company and/or the industry refer to a medium- to long-term time horizon, associated with the evolution of the AI Models (Machine Learning and Generative Artificial Intelligence) commercially available, whose time-to-market and functionalities could be unforeseeable, and on the adoption and use by the Group. These models, in case they are not properly trained (i.e. external data reliability), managed, updated and monitored, may result in unreliability in terms of quality, controllability, interpretability of outputs and potentially lead to decision-making errors, with negative consequences on the group’s cost and investment profile.

Main methods of management

Presence of a dedicated department (Group Artificial Intelligence Office) aimed at:

• leading the transformation resulting from the introduction of Artificial Intelligence in all business processes, ensuring change management
• coordinating the various stakeholders involved in the deployment within the Group, to foster effective and sustainable use of the technologies
• overseeing the implementation – from the scouting stages of AI solutions and applications to the prioritization of projects and their delivery –, structuring the roadmap
• coordinating the overall digital transformation plan of the Group’s activities

Models currently adopted by the Group provide probabilistic outputs (they not take decision autonomously): decision-making responsibilities are assigned to the business owner, that review the output generated by the models.

Model training carried out in the development phase and periodically updated based on proprietary data verified with business owner;

Testing in the development phase of both the overall model and individual outputs, both on parameter characteristics and relative relevance;

Monitoring of model performance level in terms of accuracy and reliability.

Description

Emerging risk, the potential effects of which for the company and/or the industry are referred to a medium-term time horizon, associated with the worsening of ESG performance in the supply chain, due to the potential difficulty of Group suppliers to adapt and comply with future ESG regulatory requirements. Given the relevance of Small-Medium-Enterprises in our supply chain, the risk impact is to be meant as the possible difficulty of finding suppliers with ESG standards adequate to future regulatory evolutions (e.g. CSRD, CS3D, CBAM as well as today unknown evolutions) with operational impacts (e.g., execution delays, replacement costs), reputational impacts, and / or worsening of Group performance related to indirect emissions (e.g., Scope 3 emissions).

Main methods of management

ESG Reporting is a mandated requirement in the Group supplier qualification process.

Assessment and Development plans for Strategic Suppliers to identify areas for improvement and actions and to monitor the performance in the short and long term.

Carried out periodic monitoring towards suppliers with special focus on certain ESG issues, such as, GHG emissions, respect for Human Rights and gender equality.

Training and Awareness Courses aimed at Suppliers, on ESG issues, also conducted with the support of a third party – on Energy management, D&I, Social Responsibility, HSE.