International Comparative Legal Guide – Environmental, Social, & Governance Law 2022 edition – Italian Chapter
1. Setting the Scene – Sources and Overview
1.1 What are the main substantive ESG-related regulations?
While there is no separate set of ESG-related regulations, the Italian legal framework includes several pieces of major legislation that relate to ESG sustainability and to Benefit Corporations. There is a long legal tradition in Italy on ESG issues arising from the 1948 Constitution that has a strong civic and human rights component. In 2016, Italy adopted the Italian National Action Plan on Business and Human Rights for 2016–2021, undertaking the implementation of the 17 Sustainable Development Goals (“SDGs”) and encouraging companies to realise the goal of decent work for all, as set out in SDG 8 (Decent Work and Economic Growth) and to enhance the use of indicators of quality, sustainable development, equality and gender.
Law 208/2015 introduced to the Italian legislative framework the Società Benefit as a new legal status for Italian companies. Società Benefit are for-profit businesses that include common benefits both for society and the environment in their mission, pursue one or more aims of common benefit, and operate in a responsible, sustainable and transparent manner towards communities, territories and the environment, as well as cultural and social assets and activities, bodies and associations and other stakeholders. Società Benefit are subject to ESG mandatory disclosures and enjoy some beneficial fiscal treatment. In Italy, there are more than 1,000 registered Società Benefit, of which 120 have achieved an official certification from B Lab.
1.2 What are the main ESG disclosure regulations?
EU law, such as the SFDR on the establishment of a frame-work to facilitate sustainable investment, is directly applicable to Italian market operators. Further ESG disclosure regulations especially addressed to banks are expected to be enacted at European level in the coming years. The national legislative provisions on ESG disclosure listed below apply to corporate entities (financial and non-financial), pension funds and asset managers.
1) Legislative Decree 254/2016 (“Decree 254/2016”) on the disclosure of non-financial information, which requires public-interest entities (“PIEs”) to disclose sustainability information into the reporting cycle. This Legislative Decree implemented EU Directive 2014/95 in Italy; the criteria to define PIEs (as listed and defined under Article 16 of Legislative Decree 39/2010) are entities that have, on an individual or consolidated basis, during the financial year, an average number of employees greater than 500 and that, at the end of the financial year, have exceeded (with respect to individual or consolidated data) at least one of the following limits: (a) total net asset value: €20 million; and (b) total net income from sales and services:€40 million. Article 16 of Legislative Decree 39/2010, as amended by Legislative Decree 135/2016, defines PIEs as: (a) Italian companies issuing securities admitted to trading on regulated Italian and European markets; (b) banks; (c) insurance companies; and (d) reinsurance companies, with registered office in Italy.
The Decree sets out the requirement for PIEs to draw up an annual, non-financial statement (“NFS”) containing information regarding the entity’s development, performance, position, and the impact of the entity’s operations on environmental, social, employment, human rights, anti-corruption, and bribery matters relevant to the nature and operations of the entity. A description of the compliance programme implemented pursuant to Decree 231/2001 should also be included alongside the relevant outcome and risk areas. The NFS may be included in the directors’ management report of the annual financial statements or may be filed with the Companies’ Register as a stand-alone report ancillary to the annual financial statements.
A PIE’s directors, members of the supervisory board and auditors may be fined, depending on their role and the circumstances, from €20,000 to €150,000 if the NFS (i) is not filed, (ii) does not comply with Decree 254/2016’s provisions, or (iii) provides untrue or incomplete information (unless the conduct is criminally relevant). Decree 254/2016 was implemented by Regulation issued by CONSOB, the Italian financial markets regulator, with Resolution 20276 of 18 January 2018. In order to address the risk of greenwashing, CONSOB issued further guidance on the requirements of disclosure of non-financial information in Resolution 21850 of 19 May 2021.
2) Legislative Decree 147/2018 on the activity and super-vision of pension funds. This Legislative Decree implemented the European Pensions Directive (IORP II –EU 2016/2341) in Italy and highlights that sustainability issues are important for the investment policy and risk management of pension funds. Therefore, these funds are required to declare whether they take ESG criteria into account in their investment choices and how they integrate them into risk management. In particular, the law refers to the reporting of ESG issues in the areas of governance, investment policies, risk assessment and management and information to members and potential members based on the “comply or explain” principle. 3) Legislative Decree 49/2019 Italian laws implementing the Shareholder Rights Directive (2007/36/EC) and the Shareholder Rights Directive II (EU/2017/828). The Shareholder Rights Directive has the objective of encouraging an approach to and greater activism on the part of institutional investors in the exercise of voting rights associated with participation in the share capital of the invested companies. The expected effect is to foster dialogue between investors and issuers on company policies that are part of medium- to long-term objectives.
1.3 What voluntary ESG disclosures, beyond those required by law or regulation, are customary?
Pursuant to Law Decree 1/2012, Italian companies can apply, on a voluntary basis, to obtain a Legal Compliance Rating (Rating di Legalità) issued by the Italian Antitrust Authority, which requires that the applicant notify the Authority of certain violations of primary and secondary legislation. The level of the actual rating is also contingent upon adoption by the applicant company of voluntary governance and consumer codes and of internal codes addressing corporate social responsibility, anti-corruption issues, criminal liability under Decree 231/2001 and the risk of dealing with counterparties linked to criminal organisations. Among the voluntary disclosures more frequently introduced by Italian non-financial corporates are the climate-related financial disclosures by the Task Force on Climate-related Financial Disclosures (“TCFD”) and the Carbon Disclosure Project (“CDP”) generally published within the annual Sustainability Report. For asset managers, investment companies and service providers, the most common voluntary disclosure is the Transparency Report required by the Principles for Responsible Investment (“PRI”) framework. A voluntary disclosure is also the Green Framework, a document introduced by the Green, Social and Sustainability-linked (“GSS”) Bonds Principles published by the International Capital Market Association (“ICMA”) for companies approaching the bond or loan market with a sustainability-related debt instrument. Once the disclosure is adopted, the content and structure of the document shall be in line with the Green Bond Principles (“GBPs”).
1.4 Are there significant laws or regulations currently in the proposal process?
To date, a large part of the ESG legislation applicable in Italy has been derived from EU law. This trend is expected to continue, due to the European Green Deal. The applicability of the “Do No Significant Harm” test for all projects funded by NextGenerationEU will trigger a collective effort by public and private entities to disclose and report ESG risks and factors identified by the EU Taxonomy (Italy being the biggest recipient of funds among the EU Member States). However, a number of initiatives are currently being considered at governmental level to boost Energy Efficiency Mortgage Loans, to develop social housing, to allow considerable investment in research and development for circular economy activities, to name a few. These initiatives are part of the draft Sustainable Finance Action Plan for Italy that was presented to the stakeholders on 8 November 2021. Recently, the Constitutional Affairs Committee approved new drafts of Articles 9 and 41 of the Italian Constitution introducing, respectively, the principle of protection of “environment, biodiversity and of ecosystems, also in the interest of new generations” (Article 9), and a general prohibition for entrepreneurial activities to be carried out in a manner that could hinder “health and the environment” (Article 41). The amendment to Article 9 also introduces the concept of animal protection, providing that law will regulate the matter. The Constitutional Affairs Committee substantially approved the wording of Article 9 originally debated in 2008 and failed to recognise the evolution of the international and EU concept of sustainable development, falling short of referring to “sustainable development”. Furthermore, this amendment does not extend to the establishment of a fundamental right to “a healthy environment” or to “a fundamental right to sustainable development”; it simply sets a policy, albeit of constitutional ranking. Although one could well argue that this proposed constitutional amendment does not go far enough, it represents a significant policy step. In addition, given that the protection afforded by the Constitutional Court in this area remains broad, the absence of a fundamental right in the Constitution has limited impact in practice. The EU Climate Law, once adopted, will have an important impact on domestic decarbonisation policies; however, what is still lacking is the enactment of legislation requiring public and private entities to carry out a carbon assessment and to define a carbon budget, which would trigger a pathway to decarbonisation, aligned with “Fit for 55” and net zero target.
1.5 What significant private sector initiatives relating to ESG are there?
The most prominent local private initiatives for the promotion of ESG issues are linked to global or European initiatives such as the Forum for Sustainable Finance and the Global Compact Network Italy Foundation (“GCNI”). The Forum for Sustainable Finance is a non-profit association with a multi-stakeholder membership base, including financial operators and other organisations interested in the environmental and social impact of investments. The Forum’s mission is to promote knowledge and practice of sustainable investment, with the aim of spreading the integration of ESG criteria into financial products and processes. The Forum is a member of Eurosif, the leading European association for the promotion and advancement of sustainable and responsible investment across Europe, for the benefit of its members. The GCNI has been active since 2002 and became legally established as the GCNI in 2013. It was created with the primary aim of contributing to the development in Italy of the United Nations Global Compact, an initiative for the promotion of the culture of corporate citizenship promoted and managed on a global scale by the United Nations. Since 2015, other local initiatives have been established whose promoters include not only private but also public institutions. The most notable of these initiatives is the Alleanza Italiana per lo Sviluppo Sostenibile (“ASviS”), created in 2016 to raise awareness of the importance of the 2030 Agenda for sustainable development and to mobilise people to achieve the SDGs.
2. Principal Sources of ESG Pressure
2.1 What are the views and perspectives of investors and asset managers toward ESG, and how do they exert influence in support of those views?
Italian institutional investors and asset managers have generally adopted UN PRI guidelines and have been actively involved in various soft law initiatives. Generali, Eurizon and Amundi, the largest asset investors and managers in the Italian market, are committed to applying ESG and UN PRI to their management funds and regularly contribute to the UN Environment Programme Finance Initiative and other initiatives. Generali is the only Italian investor that has joined the Net-Zero Asset Owner Alliance and the only Italian insurance company that is a member of the Net-Zero Insurance Alliance. More recently, Intesa Sanpaolo, UniCredit and Banca Ifis joined the Net-Zero Banking Alliance. In 2021, Generali set the target of €8.5–9.5 billion new green and sustainable investments by 2025, with year-end 2020 as the baseline. On the underwriting side, Generali committed to no longer underwrite risks associated with the exploration and production of fossil fuels from tar sands or shale deposits (oil and gas) or extracted in the Arctic Zone, both onshore and offshore. According to the recent “Reaching Net Zero by 2050” report by Accenture, only 23% of Italian listed companies have pledged to net zero and they aim to reach it, on average, by 2041. Assogestioni, the association of Italian asset managers, adopted in 2013 its stewardship principles, which refer to those set by the Code for External Governance approved by the European Fund and Asset Management Association. Even before the adoption of the European Pensions Directive (IORP II – EU 2016/2341), the largest Italian pension funds have been applying sustainability criteria when considering investments since the UN PRI were launched, and the Cometa pension fund paves the way in this respect. While stewardship is a concept generally understood by the investor community, this has not led to investee companies adopting a clear statement of purpose or a strategy pursuing such purpose. According to CONSOB, in 2020, only seven companies (five in 2019), still all in the energy/oil and gas industry, fully addressed in their NFS their strategy issues that generate value in the short and long term and describe the connections between financial and non-financial matters. Among these companies, just one company mentioned materiality analysis as a pillar of its strategic plan. The latest Stewardship Report by Assogestioni also indicates that several non-fossil fuel investee companies after several interactions are just beginning to accept the need to adopt carbon emissions science-based targets and that they are willing to engage in ESG matters. Assogestioni recently launched the Shareholder Director Exchange principles, which set out best practice for engagement with directors. Investors appear to be quite attentive to compliance with disclosure requirements by corporates. There is less evidence of investors exerting actual influence on corporates’ management in order to ensure their engagement with other stakeholders. This is also confirmed by a recent report prepared by CONSOB, which indicates that, in 2020, only 83 (70 in 2019) of the 151 listed companies that have filed an NFS have actually engaged with other stakeholders. As of 1 November 2021, 34 Italian companies have joined the Science Based Targets initiative (“SBTi”) (one in 2019 and 11 in 2020), which shows that the need for a carbon budget is rapidly gaining traction, but this is still limited to large corporates.
2.2 What are the views of other stakeholders toward ESG, and how do they exert influence in support of those views?
A number of public institutions such as CONSOB and the Bank of Italy have created teams of experts focused on the analysis of non-financial risks and especially of climate change. Their regular technical reports on the Italian banking and financial system’s response to these issues represent a key point of reference for market participants and they exercise an important moral suasion. The Ministry of Economy, Cassa Depositi e Prestiti and SACE are actively working on defining a national Sustainable Finance Action Plan that would boost NextGenerationEU funding. Private individuals in Italy have been historically concerned about air and sea pollution and about the impact caused by climate change on Italy’s biodiversity, which is quite unique in the Northern Hemisphere. Stakeholders tend to exert influ-ence mainly through NGOs such as Legambiente and Greenpeace and through associations such as ASviS, Forum per la Finanza Sostenibile, and WWF Italia. Legambiente is a non-profit association of citizens who care about the protection of the environment in all its forms, the quality of life, a fairer, more just and more supportive society. Legambiente’s mission is based on scientific environmentalism. The association is also very active in training and educational projects. The Forum per lo Sviluppo Sostenibile is a shared working space where the subjects from civil society and practices of sustainability can emerge, bringing together public policies and social energies. The objective of the Forum is to accompany the implementation of the National Sustainable Development Strategy and the 2030 Agenda through the active participation of actors promoting actions and policies in favour of sustainability. In 2020, WWF launched the Leaders Pledge for Nature programme that committed to reverse biodiversity loss by 2030 for sustainable development, which was also endorsed by Italy. WWF Italia has had a longstanding tradition of activity in the country since 1966. In 2005, the WWF Foundation was established with the scope to disseminate the culture of environmental protection and put pressure on political leaders and governments on biodiversity.
2.3 What are the principal regulators with respect to ESG issues, and what issues are being pressed by those regulators?
CONSOB is responsible for investigating and sanctioning infringements of the non-financial disclosure regulation of corporates (financial and non-financial). The European supervisory authorities (the European Banking Authority (“EBA”), the European Securities and Markets Authority (“ESMA”) and the European Insurance and Occupational Pensions Authority (“EIOPA”)) have recently introduced sustainability as an integral part of their mandate to promote the integrity and stability of financial markets and ensure investor protection. EBA and EIOPA will be supported by the national supervisory authorities (the Bank of Italy for less significant financial institutions and the Institute for the Supervision of Insurance (“IVASS”) for insurance companies). They highlight the need for transparency and oversight of ESG-related aspects, the role of ESG ratings, ESG benchmarks and ecolabels as crucial aspects to mainstreaming sustainable finance. The Ministry for Ecological Transition (former Ministry of the Environment and Protection of Land and Sea) has the primary competence in environmental regulation. Scientific agencies with a regulatory role include the National Institute for Environmental Protection and Research (Istituto Superiore per la Protezione e la Ricerca Ambientale).
2.4 Have there been material enforcement actions with respect to ESG issues?
In January 2020, Eni, the Italian oil giant, which is incidentally very focused on ESG issues and on transition towards decarbonisation, was fined €5 million by the Italian Competition Authority for having launched a misleading marketing campaign for its Diesel+ fuel. The Authority held that Eni was deceiving customers by causing confusion between a Diesel+ component (Hydrotreated Vegetable Oil (“HVO”) made of crude palm oil and derivatives), which Eni called Green Diesel, and the Diesel+ fuel itself, as it had induced customers to assume that Diesel+ as a whole (rather than just the HVO component) had a positive carbon emissions benefit. The Authority indicated that trans-port diesel is, “by its nature”, highly polluting and cannot be considered “green”. This was the first case of reported green-washing in Italy. Eni announced initially that it would challenge the decision before the Administrative Court, but then, in April 2020, paid its fine.
2.5 What are the principal ESG-related litigation risks, and has there been material litigation with respect to ESG issues, other than enforcement actions?
The main ESG-related litigation risk relates to greenwashing that may lead to breach of disclosure and of fiduciary duties by the company’s directors, which would allow, under certain circumstances, for shareholders and creditors to bring a derivative or a direct action against the directors. Greenwashing could also trigger extra contractual and fiduciary liability attributable to the issuer (and its directors) to the extent that it falsely alleges ESG credentials in its offering prospectuses to the market. Incidentally, EU Prospectus Regulation 2017/1129 does not require issuers to specify a green use of proceeds or their green credentials or to continue to apply ESG standards; however, it is expected that, as part of the EU Taxonomy, specific mandatory requirements will be set in this respect for issuers when publishing their prospectuses. CONSOB invites issuers to disclose, based on IOSCO Principle 16, when ESG matters are considered material, the impact or potential impact on their financial performance and value creation, as well as to provide insight into the governance and oversight of ESG-related material risks. The other potential risk for corporates could arise in connection with their omission to file and with the filing of an incorrect or misleading NFS required following the implementation of Directive 2014/95/EU by Decree 254/2016. In 2020, all 151 Italian companies with ordinary shares listed on the Italian Stock Exchange, including three firms that could potentially benefit from a size-related exemption, published an NFS. According to CONSOB, in line with previous years, most of the firms published only the report required by Decree 254/2016, also in the form of a Sustainability Report (137 cases). Eleven firms (nine in 2018) integrated financial and non-financial information either in an Integrated Report or by releasing an Integrated Report together with an NFS or by publishing an Integrated Report alongside a Sustainability Report (two firms). In addition, three issuers circulated both an NFS and a Sustainability Report. Obviously, other litigation risks could arise from non-compliance with environmental, governance and employment legislation in force. In 2021, the first lawsuit against the Italian State for “climate inaction” was launched by more than 200 plaintiffs. The lawsuit, initiated as part of the Giudizio Universale Campaign (The Last Judgement), is one of many climate cases initiated by civil society in more than 40 countries around the world. The lawsuit was filed with the Civil Court of Rome against the State (represented by the Presidency of the Council of Ministers). The legal action is being promoted as part of an awareness-raising campaign to underline the global scope of the climate challenge and the need for urgent action. The plaintiffs were assisted by a legal team composed of lawyers and university professors, founders of the Rete Legalità per il Clima. The general objective of the legal initiative is to ask the Court to declare that the Italian State is responsible for failing to tackle the climate emergency and that the efforts made are insufficient to meet the long-term temperature goal set by the Paris Agreement, resulting in the violation of numerous fundamental rights. Among the arguments of the lawsuit, the following elements are crucial: the relationship between human rights and climate change; and the need to recognise a human right to a stable and secure climate.
The specific requests made by the plaintiffs to the judge are:
- Declaring that the Italian State is responsible for failing to tackle the climate change emergency.
- Ordering the State to reduce greenhouse gas emissions by 92% by 2030 compared to 1990 levels, applying the principle of equity and the principle of common but differentiated responsibilities (Fair Share), i.e., taking into account Italy’s historical responsibilities in greenhouse gas emissions and its current technological and financial capabilities.
2.6 What are current key issues of concern for the proponents of ESG?
The first key issue is that ESG could be perceived by some companies as a mere compliance exercise to please investors and that corporate governance may not be fit for purpose. Out of 151 companies that filed their NFS in 2020, there was induction of management on ESG issues in 32 cases, while 73 had Sustainability Committees in office. Only 39 of them integrated ESG principles in their Board of Director’s guidelines and just 37 applied ESG principles when making their decisions. About half of the companies failed to refer to SDGs in their NFS, although they all adopted the framework of the Global Reporting Initiative Sustainability Reporting Standards. It is likely that these numbers will significantly increase by the end of 2021 after Borsa Italiana’s new Code of Corporate Governance has entered into force. Significantly, all 151 reports include a materiality analysis. Material topics were represented through a materiality matrix in 121 cases, while in the remaining 30 reports, firms provided either a list or a table. Also, promotion of ESG is inevitably linked to finance. The number of green, blue, social and sustainability-linked bonds and loans by Italian issuers and borrowers is still on the low side when compared with other major European countries. Another issue relates to the actual prospects of effective engagement with stakeholders and especially with young generations. This is because corporates’ efforts to involve youth in the ESG debate remain limited. Italy has one of the highest number of NEETs (“Not in Education, Employment, or Training”) in the EU and some of its young generations tend to be slightly disenchanted and less empowered than those of other European countries. However, the issue is recognised, and actions are being taken to address it. Since September 2020, sustainable development is mandatorily taught in Italian schools that follow an SDG-led educational methodology. Universities are increasingly offering green and sustainable finance courses to under-graduates and post-graduates. The recent involvement of Italian public and private institutions in the 2021 “Pre-COP26” conferences, which included meetings with young generations and the new Italian Government’s commitment to fight climate change in the interest of new generations, is an important step; however, no legislation or policies have yet been adopted on the participation of civic society in climate change issues, unlike citizens’ assemblies in the UK or France.
3. Integration of ESG into Business Operations and Planning
3.1 Who has principal responsibility for addressing ESG issues? What is the role of the management body in setting and changing the strategy of the corporate entity with respect to these issues?
The scope of directors’ fiduciary duties covers the carrying out of (i) any management activity (both under ordinary and extraordinary administration) in accordance with the law and the company’s by-laws, (ii) the functioning of the company’s organisation, and (iii) the activities necessary to achieve the “corporate object” of the company, i.e., the carrying out of a specific business. Directors’ decisions fall within the remit of business judgment rule, and they cannot be challenged before the courts unless such decisions are found to be clearly unreasonable or irrational. While courts and doctrine, when considering the scope of directors’ fiduciary duties, in some instances have integrated the corporate object concept with a higher concept of “interest” or “benefit”, this approach has been mainly applied to the potential liability of directors arising in the context of intra-group transactions rather than to the attainment of a corporate aim to tackle ESG issues. The principal responsibility for disclosing ESG issues lies with the directors in companies that have adopted the monistic system (which is the prevailing governance system applied in Italy). There is no separate set of legal norms expressly compel-ling directors to address, on a day-to-day basis, the ESG issues that have arisen, e.g., in the NFS or raised by the stakeholders. Hence, under Italian law, there is no directors’ duty as such to change the strategy of the company to address ESG risks. Obviously, to the extent that an ESG issue triggers a potential breach of applicable legislation (e.g., related to waste management and environmental protection or duty to pay social contributions for the benefit of their employees), there would be a direct to act and a corresponding liability of the directors. However, the entry into force in 2019 of a new Article 2086 of the Italian Civil Code (which was originally included in Article 375 of the new Insolvency Code (Codice della Crisi ) whose entry into force has been halted due to the pandemic) has introduced new duties for entrepreneurs and directors to set up organisational, administrative and accounting structures that are adequate to the size and nature of the relevant enterprise. These structures are set up to avoid the rising of a crisis impinging on its economic and financial balance, considering the impact on cash flows as well as to protect the going concern of the business. This provision has de facto introduced a duty on directors to apply best governance practices that are aimed at reducing financial risks (directly affecting the corporate’s economic and financial balance) but also non-financial risks and factors that could ultimately impinge on the going concern of the business. Notably, the Italian Corte di Cassazione, in Decision Nos 5 of 3 January 2019 and 301 of 9 January 2019, has held that directors are bound to comply with the voluntary code adopted by the corporate they manage. In addition, a decision of the Court of Rome (8 April 2020) on directors’ duties not to unreasonably depart from voluntary codes is particularly relevant as it potentially leads the way to a higher standard of diligence deriving from compliance with voluntary codes (including those related to ESG). The content of the provisions included in the voluntary codes entered into by the relevant corporate could then become particularly significant in defining directors’ liability arising from an unreasonable failure to deal with non-financial risks. For example, to the extent a voluntary code requires the adoption of a strategy to address ESG risks, a director would not be able to depart lightly from such duty. In addition, ESG issues also affect the scope of the potential criminal liability of companies. The above-mentioned Decree 231/2001 governs the administrative liability of companies (including foreign ones according to a recent ruling of the Italian Corte di Cassazione No. 11626 of 7 April 2020) for crimes committed or attempted by directors or employees in the interest or to the advantage of the company. Decree 231/2001 states that a company cannot be held liable and hence avoid penalties if, prior to the occurrence of the crime, it both adopted and effectively implemented organisational, risk management and control systems (the “231 Model”) designed to prevent this kind of crime and has established a body for monitoring their functioning and compliance (the “231 Body”)). While the 231 Model would normally address the processes and methodology that directors and employees need to adopt to manage the risk of certain ESG liability arising, this does not arguably translate into a specific duty to carry out an overall mapping of ESG risks and develop an ESG strategy accordingly. Arguably, the application of the new Article 2086 of the Italian Civil Code, when applied together with Decree 231/2001, should require directors to map ESG risks or at least have in place appropriate organisation, administrative and accounting structures capable of carrying out the mapping. Hence, in the summer of 2021, Confindustria, the association of Italian entrepreneurs, issued updated guidelines for the preparation of the 231 Model indicating the need for an integrated approach to risk management and compliance where non-financial risks highlighted in the NFS are also addressed together with all other risks. Borsa Italiana’s new Code of Corporate Governance, which entered into force on 1 January 2021, provides that “[t]he board of directors leads the company by pursuing its sustainable success”, which is defined as “the purpose that guides the actions of the board of directors and that consists of creating long-term value for the benefit of the share-holders, taking into account the interests of other stakeholders relevant to the company”. The Code also sets forth that the Board of Directors defines the strategies of the company and its group in order to pursue its sustainable success and to monitor its implementation. The adoption by Italian listed companies of the principles of the Code of Corporate Governance is voluntary, albeit subject to the so-called “comply or explain” rule. Incidentally, to date, only Snam S.p.A. (“Snam”), the giant gas transmission company, has updated its by-laws to expressly pursue “sustainable success”. By applying a risk-integrated approach, directors of listed companies adhering to the Code of Corporate Governance would first need to specifically address reputational, operational and funding risks related to ESG issues, which may also be raised by the internal statutory auditors or by external auditors. Secondly, especially in a context where lenders, investors, suppliers and customers are exerting influence on the company, they ought to take action to address such issues in accordance with the principle of proportionality, after having taken into account their individual expertise and knowledge of such issues and the detriment that such issues would be causing to the company, e.g., in terms of impairment to reach out to new markets, the need to change its supply chain, and the inability to increase its funding. Thirdly, directors of listed companies would need to have sound reasons for not addressing key ESG issues affecting the company or for not establishing mechanisms for engaging with and involving internal and external stakeholders in identifying, preventing and mitigating sustainability risks and impacts as part of their business strategy.
3.2 What governance mechanisms are in place to supervise management of ESG issues? What is the role of the board and board committees?
It is becoming increasingly popular for Italian listed compa-nies to have the Board of Directors appoint a Sustainability Committee (Comitato di sostenibilità), which could also be entrusted with risk management issues, made of independent and non- executive directors who provide recommendations and advice to the Board of Directors on ESG matters, including prepara-tion of the company’s strategic plan, assessment and monitoring of the implementation of the sustainability policy and of initia-tives in the ESG space, and monitoring of the inclusion of the company in sustainability indexes. In addition, following the adoption of a 231 Model, the 231 Body is required to effectively monitor how the company seeks to avoid criminal conduct by employees and/or directors on ESG matters, such as prevention of corruption and health and safety in the workplace.
3.3 What compensation or remuneration approaches are used to align incentives with respect to ESG?
According to Borsa Italiana’s Code of Corporate Governance, executive directors’ and top management’s remuneration should have a significant variable component that is linked to the payment of the variable components, which are (i) predetermined, measurable and predominantly linked to the long-term horizon, and (ii) consistent with the company’s strategic objectives and with the aim of promoting its sustainable success, and including non-financial parameters, where relevant. The remuneration of non-executive directors is not related to financial performance objectives, except for a non-significant part. Snam, the Italian gas transmission and storage group, introduced objectives connected with sustainability targets that have overall weight of 20% of the short-term variable component of the remuneration of the Chief Executive Officer, and the long-term variable components of the remuneration of the top management of the group. Short-term performance objectives include: the frequency and severity of accidents of employees and contractors; the inclusion and maintenance of Snam in the main sustainability stock indices, such as the Dow Jones Sustainability Index, FTSE4Good, and in ESG ratings such as CDP Climate Change; and reforestation projects in the national territory. Long-term objectives include equal representation in terms of gender diversity in the management team and the reduction of natural gas emissions.
3.4 What are some common examples of how companies have integrated ESG into their day-to-day operations?
Examples of ESG integration in daily activities of financial and non-financial companies vary according to the reference framework/principles adopted or pledge signed by individual companies. Larger groups tend to develop more complex and comprehensive sustainability strategies; therefore, ESG integration goes from basic, non-financial reporting to more complex climate change disclosures, supply chain assessment, and definition of ESG-linked remuneration policies, to the use of sustain-able finance instruments (GSS bonds/loans). Snam is one of the companies that has embarked in a comprehensive sustainability strategy where the company has committed to a number of objectives: reaching net zero carbon by 2040; ESG-linked remuneration of top management; integrated sustainability reporting; and TCFD reporting framework adoption, to name a few. Among a series of initiatives aimed at promoting an energy-saving culture and minimising its indirect emissions (also known as Scope 3 emissions), Snam has implemented: (1) the adoption of green procurement criteria for the procurement of goods and services; (2) sustainable mobility activities; (3) the implementation of energy-saving activities for employees (company shuttles, public transport subsidies, smart working and the use of videoconferencing systems for meetings); and (4) the launch of the CDP Supply Chain programme (formerly the Carbon Disclosure Project).
4.1 To what extent do providers of debt and equity finance rely on internally or externally developed ESG ratings?
Lack of transparency of ESG rating methodologies and significant differences in valuations among Sustainability Rating Agencies (“SRAs”) or ESG data providers contribute to increasing scepticism by investors towards ESG ratings. SRAs are still unregulated entities; hence, they have no governance or transparency obligations as far as comparability, quality and disclosure of their ratings are concerned. Therefore, despite good availability of externally developed ESG ratings, debt and equity providers seem to prefer to develop in-house expertise to build more sophisticated and nuanced ESG strategies; equity investors especially use ESG ratings as benchmarks together with many other ESG metrics. However, in case of debt (GSS bonds or loans) providers, they also rely on ESG ratings but more often on external reviews or verifications, such as second-party opinions and/or assurance reports (see question 4.5). Comparability of ESG ratings will improve with the increase in the standardisation of non-financial data contained in non-financial reports, an objective that is pursued by two EU directives: the Non-Financial Reporting Directive dated 2014, to be amended by the proposed Corporate Sustainability Reporting Directive, and the Sustainable Finance Disclosure Regulation, which entered into effect in March 2021. Credit Rating Agencies (“CRAs”) have an obligation to disclose the impact of ESG risk factors on the creditworthiness of issuers. The Italian market is well served by both SRAs and CRAs. SRAs operating in Italy include MSCI, Vigeo Eiris, ISS, Sustainalytics, Refinitiv, RobecoSAM, and FTSE Russell. These players offer ESG ratings, data analysis, and indices (governance/carbon). CRAs operating in Italy that disclose ESG risk factors in their credit rating opinions, in addition to the major international agencies like S&P, Moody’s, Fitch, and DBRS, include quite a few challenger rating agencies like Scope, Cerved, CRIF Ratings, and modeFinance.
4.2 Do green bonds or social bonds play a significant role in the market?
According to a study published by SustainAdvisory srl, at the end of September 2021, the cumulative outstanding amount of GSS bonds issued by Italian entities amounted to €48.8 billion for a total of 73 instruments issued. Between 2017 and 2019, Italy’s GSS bond volumes tripled, while in 2020, due to the COVID-19 pandemic, volumes dropped by 28% compared to the 2019 level. Green is the dominant theme of Italian bond issues followed by sustainability and social bonds. Social bonds appeared on the Italian market in 2017 and grew noticeably in 2020 in response to the COVID-19 pandemic. More than 60% of Italian GSS bonds are originated by non-financial corporates, 13% by banks, 3% by insurance companies, and 19% by the public sector. Non-financial corporates are dominated by utilities (Enel, Hera, Iren, Acea, Eni) or infrastructure companies (Terna, Snam, Ferrovie dello Stato). The second-largest issuer after Enel is the Italian Government: with the inaugural green bond in the BTP format, Italy placed €8.5 billion in March 2021. The bond is designed to support public expenditures with positive environmental impacts. Through the issue of a Sovereign Green Bond (“SGB”), Italy will finance public expenditures intended to contribute to the achievement of one or more of the environmental objectives of the EU Sustainable Finance Taxonomy. In addition, the use of proceeds will help Italy support the 2030 UN SDGs. The SGB framework aligns with the GBPs issued by the ICMA in June 2018 and, as much as possible, with the draft EU Green Bond Standard. To be eligible under this framework, expenses must fall within the definition of one of the following green sectors: renewable electricity and heat; energy efficiency; clean transport; pollution prevention/control and a circular economy; protection of the environment and biological diversity; and research. There is an ongoing debate on the use of social impact bonds for the construction of social infrastructures (such as schools and hospitals) and social housing, and this could lead to new issuances in the public finance space, especially if policy measures address the increased credit risk associated with these projects. Notwithstanding the issuance of the SGB, the GSS debt issuance by Italian companies and public bodies is still well below the GSS bond volume issued in France and Germany, the two largest markets for green, social and sustainable debt in Europe.
4.3 Do sustainability-linked bonds play a significant role in the market?
Italy is home to the largest sustainability-linked bond corporate issuer: Enel. Enel was the first company to launch, through its subsidiary, Enel Finance International NV, an SDG-linked bond, formally opening a new market segment for sustainability- linked instruments; not only green bonds, but bonds linked to the entire strategy centred on the goals of the UN’s 2030 Agenda (SDGs) with measurable targets – specifically, the reduction of direct CO2 emissions by 70% compared with 2017 levels by year 2030, a goal that has also been certified by the SBTi. Given an initial discount on the interest rate, if Enel fails to meet the target, the bondholder will receive an increase of 25 basis points on the interest rate. Since 2019, Enel Finance International NV has issued a total of €10.5 billion of sustainability-linked bonds. In October 2021, Enel placed the world’s largest-ever sustainability-linked bond in all currencies, a multi-tranche US$4 billion in the US and international markets, overtaking its previous record of the €3.25 billion sustainability-linked bond issued in June 2021. In consideration of the presence of this giant issuer, the Italian sustainability-linked bond market is highly concentrated. At the end of 3Q21, sustainability-linked bonds accounted for 42.4% of total GSS bonds issued in the Italian market with 21 instruments listed on the Italian Stock Exchange for a total of €16.6 billion. Enel accounts for 63.2% of the sustainability-linked bond volume. Other sustainability-linked bond issuers include financial institutions and other energy and utility companies.
4.4 What are the major factors impacting the use of these types of financial instruments?
Green bonds represent a considerable innovation through their focus on green use of proceeds, tracking, impact reporting and external reviews. They have provided bond investors with an unprecedented degree of transparency; furthermore, in today’s market, they satisfy ESG requirements and green investment mandates and therefore facilitate the diversification and commitment of the investor base. Issuing green bonds enhances the issuers’ reputation and is an effective way to develop and implement a credible sustainability strategy to investors and the general public by clarifying how proceeds raised will contribute to a pipeline of tangible environmental projects. On the other hand, investors have limited scope for legal enforcement of green integrity. Despite a common view of the economic benefits for issuers, created by the imbalance between investor demand and insufficient supply from issuers, it is often observed that such price benefit/advantage can be offset by greater transaction costs linked to the need for complex external review procedures and reporting requirements. The GSS debt market in Europe and Italy is growing at a rate of 25% per year and is expected to continue to grow. The current major driver of growth is the deployment, at EU level, of the €750 billion NextGenerationEU recovery plan established to support Member States hit by the COVID-19 pandemic. At least 30% of NextGenerationEU resources are dedicated to expenditures compliant with the Paris climate accord and in line with the objectives of the European Green Deal, the EU flagship initiative to address climate change and achieve carbon neutrality by 2050. The catalyst for future growth will be the outcome of the COP26 negotiations in Glasgow. Italy is the largest beneficiary of the European recovery package, with c. €200 billion of allocations. The national plan (Piano Nazionale di Resilienza e Ripresa, “PNRR”) that the Italian Government submitted to the EU describing the strategy concerning investments to be made under the NextGenerationEU package defines six areas of intervention, including the green revolution and ecological transition, and the infrastructures for sustainable transportation. Together, these two areas will absorb about 43% of the available funds and will create green and sustainable assets. Although NextGenerationEU does not provide any direct support to the private sector, it can be expected that public spending will be a strong leverage for private investments that will find the most adequate financial instruments in the GSS debt market. Social bonds are on the rise but are mostly linked to the funding of SME support due to the pandemic; the Italian PNRR will pursue many social objectives, like education, health, inclusion, culture, and therefore there will be more opportunities to increase and diversify the use of this instrument.
4.5 What is the assurance and verification process for green bonds? To what extent are these processes regulated?
The verification and/or assurance processes are one of the external reviews recommended by the bonds and loans frame-works (the GBPs, the Climate Bond Initiative Standards, and other similar international initiatives) that, in connection with the issuance of a green bond or programme, the issuers request to confirm the alignment of their bond or bond programme with the core components of the principles/standards. The verification/assurance process should not be confused with other external types of reviews like the second-party opinion, certification, or credit rating/scoring. These recommendations are recognised as market best practices and, so far, are voluntary and unregulated. The verification or assurance process is an independent verification against a designated set of criteria, typically pertaining to business processes, environmental criteria, and/or evaluation of the environmentally sustainable features of underlying assets funded by the proceeds of the green bond. It can also refer to the issuer’s internal tracking method for use of proceeds, allocation of funds from green bond proceeds, statement of environmental impact, or alignment of reporting with a particular framework. Green bonds issued in the Italian market are structured under the GBP framework by the ICMA. The assurance/verification report can be provided by approved verifiers/audit service providers referring to the common audit standard (ISAE 3000). With the introduction of the EU Green Bond Standard frame-work, these processes are expected to change. The EU Green Bond Standard will largely reflect the ICMA GBPs; however, the European standard will provide for greater transparency and disclosure requirements, more-focused application, and a supervision regime for external reviewers. While the standard will remain voluntary, once adopted, it requires much more stringent criteria of application. The EU Green Bond Standard frame-work will be aligned to the EU Taxonomy’s environmental objectives, do no significant harm, social safeguards, and technical screening criteria; therefore, the “green assets” will be more clearly identified, and the spectrum of activities that can be funded will be broader as it will also include working capital and refinancing needs. As far as the supervision or regulation of controls is concerned, the current regulation proposal designates ESMA as responsible for the application of the framework through the creation of a centralised accreditation scheme for external reviewers/verifiers while the publication of the review/verification report will become mandatory.
5. Impact of COVID-19
5.1 Has COVID-19 had a significant impact on ESG practices?
The outbreak of COVID-19 generated major turmoil in the Italian financial market. A massive and coordinated intervention by the Government and banks through a State-guaranteed lending scheme resulted in orderly management of the situation. A grace period (on interest and capital) was granted to businesses and retail customers that would submit such a request to the lending bank. The Italian Government provided financial support to businesses and individuals that were forced to close down or stop working during the lockdown periods. This emergency support package was partially funded by financial institutions through the issuance of social bonds. Social bonds will continue to grow and be applied to purposes correlated to the post-pandemic recovery plan launched by the EU to support the private sectors of Member States and mitigate the unemployment risk of private individuals employed in sectors highly impacted by the pandemic crisis. COVID-19 has accelerated and exacerbated problems that required quick reorganisation of priorities in favour of solutions that have been a catalyst for ESG adoption. Some of the solutions for working arrangements during COVID-19, primarily remote working or smart working, will continue even after the emergency is over. Smart working conditions in Italy will be contractually regulated for all Public Administration employees for the first time with the approval of the 2021 budget law. Among other measures, a mobility manager will be appointed to review working time schedules that allow more efficient and sustainable commuting solutions. Also in the private sector, mainly in the service industry, smart working played an important role during the lockdown periods of the pandemic. Smart working options are now permanent features of employment contracts. A positive outcome of remote working during the pandemic was the repopulation of southern regions of the country by young, educated people that had previously emigrated to northern regions or abroad, escaping a sluggish job market and lack of opportunities. Between March and December 2020, when most of the restrictions were in place, the net south-north migration nearly halved compared with the same period in the previous year. This phenomenon was rebranded “south working”, defining a concept of regained work-life balance. With 48% of ultra-broadband infrastructure investments in southern Italy as part of the recovery plan, the north-south gap will have a chance to decrease and “south working” might become a permanent change in the Italian job market.
6.1 What are the material trends related to ESG?
Material trends of the “E” factor are linked to the decarbonisation of industrial sectors with a special focus on transportation, a circular economy and biodiversity preservation. As mentioned in question 2.3, in 2021, the Ministry of the Environment and Protection of Land and Sea was renamed the Ministry for Ecological Transition to underly the strategic role that the institution will play in the transition from a fossil fuel-based system to a decarbonised economy. The budget for the “Green Revolution and Ecological Transition” within the PNRR allocates a total of €68.6 billion with the main goals of improving the sustainability and resilience of the economic system and ensuring a fair and inclusive environmental transition. The “S” factor is primarily connected to the impacts of the pandemic; therefore, the focus is on inclusivity and social cohesion, reduction of the welfare gap between north and south, and enhancement of gender equality. The PNRR has allocated €82 billion to the south that can be distributed according to geographical criteria (i.e., 40%) and provides for significant investments in young people and women. Regarding the “G” factor, the implementation of the European Sustainable Finance strategy will be the focus of the private and public sectors. The disclosure and reporting regulations, the concepts of the EU Taxonomy, will permeate any present and future investment processes. Financial institutions will be dealing with the incorporation of ESG factors and risks in regulatory and supervisory frameworks for credit institutions.
6.2 What will be the longer-term impact of COVID-19 on ESG?
While COVID-19 state aid in the form of guaranteed loans, grants, convertible bonds and equity investments being made available by the Government have not been directed so far towards a transition to decarbonisation and a circular economy, a substantial part of the NextGenerationEU recovery package funds will be deployed to support greener, more digital and more resilient infrastructures. As described in question 4.4 above, Italy has one of the largest recovery packages (€200 billion) to deploy to accelerate the ecological transition and make the country more sustainable in the longer term through the decarbonisation of polluting sectors. The Government’s plan will help repair the immediate economic and social damage brought by COVID-19, will reduce economic and social imbalances between the north and south of the country that have been exacerbated by the pandemic, and will facilitate the energy and technological transition with a focus on social justice, gender inequalities and inclusivity. The modernisation of the economy will require a deep reskilling of the human capital. It is planned that outdated production paradigms will shift to a knowledge-based economy, which will in turn will create demand for “green jobs” and new skills. Therefore, in the immediate future, there will be an acceleration in the offer of highly technical education and training. Most importantly, the longer-term impact of the pandemic will be the increased sense of urgency towards ESG issues, such as climate change, loss of biodiversity, and water pollution. The real-life experience of a global crisis and, on the other hand, the evidence of positive effects of reduced economic activity due to long quarantine periods and social distancing, contributed to boosting the public opinion that neglecting the environmental impacts of human activity can compromise the ability of future generations to meet their needs.