European taxonomy

Enel welcomes the development of the EU taxonomy regulation 2020/852, as it provides a standardized, science-based classification system to identify environmentally sustainable economic activities.
The EU taxonomy regulation acts as an important enabler to promote sustainable investments and accelerate the decarbonization of the European economy, while at the same time creating reliability and transparency for investors and supporting companies in planning the Net Zero transition.
Enel is committed to reporting on the implementation of Article 8 of the EU taxonomy regulation 2020/852. Furthermore, the Company is committed on implementing the requirements and criteria in all delegated acts issued by the European Commission by the time of publication of the Sustainability Report. Specifically, this report has been adjusted based on the following regulations:

• Delegated Regulation (EU) 2021/2139 of 4 June 2021 (Climate Delegated Act);
• Delegated Regulation (EU) 2021/2178 of 6 July 2021 (Disclosures Delegated Act);
• Delegated Regulation (EU) 2022/1214 of 9 March 2022 (Complementary Climate Delegated Act);
• Delegated Regulation (EU) 2023/2485 of 27 June 2023 amending the Climate Delegated Act;
• Delegated Regulation (EU) 2023/2486 of 27 June 2023 (Environmental Delegated Act).

In particular, concerning the Climate Delegated Act, which lays out the criteria for verifying the contribution to climate mitigation and adaptation, Enel welcomes the different thresholds defined in the EU taxonomy regulation on the basis of climate and environmental sciences, such as the specific emission limit of 100 gCO2eq/kWh (taking the whole life cycle into consideration) to measure the substantial contribution to achieving the climate change mitigation objectives established for most power generation technologies, in that it stems from a solid process based on a robust scientific foundation.
However, there are some activities that, although not covered under the EU taxonomy, are critical to ensuring the wellbeing of European citizens, especially in the short and medium term, while contributing to sustainable development in the long term.
The EU taxonomy Climate Delegated Act has not explicitly included the segment relating to retail power sales (with NACE code D35.1.4), on the assumption that it does not provide a substantial contribution to climate change mitigation. Nevertheless, retail power constitutes a fundamental segment of the power value chain. The exclusion of such activity from the definition of a sustainable power system hinders the key role of the EU market liberalization and ultimately the efforts and value of a decarbonized end use energy consumption. Furthermore, electrification, powered by renewable energy, is the most efficient and cost-effective solution to tackle climate change as it is clean, affordable, and high performing, as well as being the only path for a truly clean energy system. Nevertheless, sustainable electrification of end energy uses requires not only clean technologies in power generation, but also power retail companies to offer renewable electricity to end customers to satisfy their energy demand.
For the reasons stated above, Enel is convinced that the EU taxonomy should explicitly consider retail power activity as an eligible activity for which alignment should rely on the same criteria available for electricity production activities.
In this way, power sales to end customers would be linked to the production source, promoting retailers to sell power from sustainable sources. This fact is even more relevant in integrated utilities that, even though operating in the power production and power retail segments with different companies within the same Group, run the business model following a comprehensive and unique view of the whole power value chain.
On the other hand, on 27 June 2023, an important step forward was taken for the completion of the formative process through the publication of the new Delegated Regulation (EU) 2023/2486, so-called Environmental Delegated Act, which sets out the technical screening criteria also for the remaining four objectives concerning the sustainable use and protection of water and marine resources, the transition to a circular economy, the prevention and reduction of pollution, and the protection and restoration of biodiversity and ecosystems. Despite the relevant role of this Delegated Act for the overall sustainable development of the European Union, the impact on the electricity sector is much limited as most of the identified business activities do not fall within the sector, as opposite as the Climate Delegated Act. However, few non-core business activities performed by Enel have been identified due to their contribution to two environmental objectives (the protection and restoration of biodiversity and ecosystem and circular economy), although all of them with a marginal impact in terms of financial metrics. Going beyond the disclosure requirements of the taxonomy, Enel has included the Capex alignment percentage as one of the key performance indicators of the Sustainability-Linked Financing Framework used to define the Company’s sustainable financial instruments for the second consecutive year. With this important move forward, Enel reinforces the role of the taxonomy as a driver to promote sustainable investment decisions and show how sustainability can be fully integrated into the financial landscape. Consequently, Enel confirmed its target on the proportion of Capex aligned to the EU taxonomy equal to or higher than 80% for the period 2024-2026, according to the new Strategic Plan presented during the Capital Markets Day in November 2023.

By means of a process overseen by the CEO and Top Management, involving the relevant Functions at corporate and Country level, as well as all Business Lines, a five-step process is in place to analyze the applicability of the EU taxonomy regulation throughout the entire value chain and in all countries where the Company operates.

1. Identification of eligible economic activities: Enel has identified all activities within the Group’s portfolio that are included in the Climate Delegated Act, the Complementary Delegated Act and in the newly published Environmental Delegated Act on the remaining four objectives. The process was conducted by taking into consideration all six objectives, even though the Group is mostly exposed to climate change mitigation and adaptation objectives while marginally to the other four objectives. Namely, only the following minor activities related to protection and restoration of biodiversity and ecosystem and circular economy were identified as eligible even though they are not material for the Group: “sale of spare parts” and “conservation, including restoration, of habitats, ecosystems and species”.

2. Analysis of substantial contribution:

2.1 Climate change mitigation: eligible activities identified in the previous phase have been thoroughly analyzed for their compliance with the specific technical screening criteria established to measure their substantial contribution to climate change mitigation. The analysis was carried out following the criteria both in the Climate Delegated Act and Complementary Delegated Act, namely:

a. Technological analysis for power generation activities. The threshold of 100 gCO2eq/kWh measured on a life cycle basis was met according to the following technological approach:

- coal and liquid fossil fuels: technology excluded from the EU taxonomy regulation;
- gas: the compliance with the  threshold  of 100 gCO_2eq/kWh set  out in the Complementary Delegated  Act has been analyzed in all of the gas power plants, while the potential compliance with the alternative criteria set out in the Delegated Act for electricity production from gas has  also been checked;
- nuclear: Enel has analyzed the eligibility of the three different activities related to electricity production from nuclear identified  in the Complementary Delegated Act according to the nuclear assets portfolio in Spain;
- wind, solar and battery storage: these are exempt from the carbon intensity threshold verification due to their substantial contribution to climate change mitigation;
- hydroelectric power: the carbon intensity threshold was verified only in power plants with a power density below 5 W/m^2. All power plants with a power density above 5 W/m², as well as flowing water plants and pumped storage plants, are exempt from the threshold verification;
- geothermal: the threshold was verified by carryingout life cycle assessments certified by independent third parties.

b. Analysis at country, region and system level for the transmission and distribution of electricity. Compliance with the following technical screening criteria was analyzed in all countries where Enel distributes electricity:

- the Distribution System Operator (DSO) is part of the European interconnected system; or
- non-European DSOs belong to countries with more than 67% of newly enabled generation capacity in the system is below the     generation threshold value of 100 gCO2eq/kWh measured on a life cycle basis in accordance with electricity generation               criteria, over period 2018-2022 (data made available by national authorities over a rolling fiveyear period prior to the                       preparation of the 2021 Sustainability Report); or
- the average emission factor of the non-European DSO network is below the threshold value of 100 gCO_2eq/kWh measured on  a life cycle basis in accordance with electricity generation criteria, in the period 2018-2022.
Infrastructure dedicated to creating a direct connection or expanding an existing direct connection between a substation or                grid and a power production plant that is more greenhouse gas intensive than 100 gCO_2eq/kWh measured on a life cycle basis            has been identified and excluded from the eligible aligned DSOs activities.

c. Product cluster level analysis for Enel X Global Retail (Business Line). A comprehensive analysis of the Enel X portfolio was performed, classifying eligible activities into the sectors identified in the Climate Delegated Act, such as construction and real estate, transportation, or professional, scientific, and technical activities.

2.2 Climate change adaptation: none of the business activities performed by the Group can be considered as enabling activities for climate adaptation as they do not provide adaptation solutions in accordance with Article 11 (1) (b) of the taxonomy regulation, hence no revenues can be considered eligible for this target. Nevertheless, some business activities performed by the Group are considered adapted as they include adaptation solutions in accordance with Article 11 (1)(a) of the taxonomy regulation. In this case capital expenditures and operational expenditures devoted to the adaptation solutions may be accounted for the climate adaptation objective. In the case of Enel, most of the adaptation solutions are inherent part of the design or refurbishment of assets that themselves are aligned to climate change mitigation objective, making it difficult to distinguish Capex/Opex from each of the two climate objectives (mitigation and adaptation). Therefore, and following the guidelines set out in the European Commission Notice 2023/305 full Capex and Opex figures have been reported under climate change mitigation objective only as this is the prevalent objective for the Group, hence avoiding any potential double counting. Further information on Enel’s approach to climate adaptation can be found in chapter “Zero emissions ambition and just transition” of the 2023 Sustainability Report and in chapters “Group strategy“ and “Risk management“ of the 2023 Integrated Annual Report.

2.3 Other environmental objectives: the analysis of the alignment of the two minor activities related to protection and restoration of biodiversity and ecosystem and circular economy was not performed for the purpose of the 2023 Sustainability Report and will be disclosed next year in coherence with the timeline established in the Environmental Delegated Act.

3. Assessment of the principle of Do No Significant Harm (DNSH) to other objectives: an analysis of existing environmental procedures was carried out to verify compliance with the DNSH quality criteria for each type of technology (for power generation), region (for transmission and distribution) and product cluster level (for activities of the Enel X Global Retail Business Line), adapted to the specific requirements set out for each of the following environmental objectives:

- climate change mitigation: applicable only for those activities that are eligible for climate adaptation or any of the other four objectives. In this case, the criteria are considered met as the same activities performed by Enel that might contribute to climate adaptation definitely contribute to climate mitigation, meaning that they meet the technical screening criteria of climate mitigation, which are equivalent or more demanding than the corresponding DNSH criteria on climate mitigation;
 - adaptation to climate change: analysis of global procedures (including emerging and restoration procedures), assessment of physical climate risks and solutions and adaptation plans in place covering all applicable activities related to power generation, transmission and networks and Enel X Business Line;
 - sustainable use and protection of waters and marine resources: analysis of water related procedures, authorizations, environmental impact assessments, national regulations and water management plans. The analysis was limited to power generation activities, as it is not applicable to other Business Lines;
 - transition to a circular economy: analysis of waste management plans, procurement requirements and circular economy projects and plans covering all activities applicable to the generation, transmission and distribution of electricity and to the products of the Enel X Business Line;       
 - pollution prevention and control: analysis of global procedures and national regulations concerning all applicable activities from power generation, transmission and networks. In addition, specific pollutants were further analyzed, including electromagnetic radiation and PCBs for transmission and networks, and emissions from power generation activities for air quality;
 - protection and restoration of biodiversity and eco-systems: analysis of global procedures and national regulations covering all applicable activities from power generation, transmission and distribution.

4. Assessment of the minimum social safeguards: Group’s human rights due diligence process covers the entire perimeter of Enel. Its commitment to respect human rights is grounded in the United Nations framework “Protect, Respect and Remedy”, set out in the Guiding Principles on Business and Human Rights, and in the OECD Guidelines for Multinational Enterprises. Since 2013, Enel has adopted a specific Human Rights Policy reflecting its commitment, which was updated in 2021 to take into account the evolving international frameworks of reference and its operating, organizational and managerial processes. The content of the policy refers to internationally recognized human rights, understood, at a minimum, as those expressed in the International Bill of Human Rights and the principles concerning the fundamental rights set out in the International Labour Organization conventions underlying the Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy.
For the approach to human rights, phases in the due diligence process, and communication of findings and (possible) remediation plans, please see the chapter “Managing human rights”.

         The following table illustrates the approach to the minimum safeguards criteria.

5. Calculation of financial metrics: the corresponding financial metrics were associated with each economic activity according to the classification made in steps 1-4, collecting the relevant financial information from the Group’s accounting system. In addition, some proxies have been performed for specific activities when financial information was not available in the accounting system (described in the section on the calculation of financial metrics). Through this process, Enel has classified all economic activities along its value chain for their contribution to the climate change mitigation objective, which is the most relevant for the Group, according to the following three categories: eligible aligned, eligible non-aligned, and non-eligible. However, it is important to note that activities classified as eligible aligned from a climate change mitigation perspective also include adaptation solutions (mainly in the design and construction phase of assets) and are therefore also eligible aligned for this other objective.

Consequently, the existence of the third category “non-eligible” makes it impossible to achieve a business model that is fully aligned with the criteria of the EU taxonomy regulation, even though these non-eligible activities might not cause any harm to the EU’s environmental objectives.