Risk management In Edison, a culture of risk means to share the risk orientation defined by the top management and to integrate in the decisional process the punctual comprehension of the risk profile in pursuit of strategic and profit Group’s objectives. We adopted a special centralized structure for the specific purpose of mapping and monitoring all of the risks related to the Group’s activities with this dual objective: to define risk mitigations which are effective and coherent with the company’s strategy (to limit the volatility of results and protect assets’ value); to develop strategies in order to exploit opportunities on the market (to identify strategic objectives with a balanced risk-reward ratio). The structure of the Group’s Risk Management includes two areas: Energy Risk Management Manage the commodity market risks area Within Risk Management activities and considering the fact that the Edison Group is exposed to the risk of price fluctuations for all energy commodities used by its businesses (mainly electric power, natural gas, petroleum products, environmental securities) and to the foreign exchange risk for energy commodities denominated in foreign currencies, the Company has adopted for some time an Energy Risk Policy. This policy, which defines the governance, monitoring and control environment for these risks, calls for the adoption of specific risk limits in term of Economic Capital, based on the entire portfolio of Group assets and contracts (the “Industrial Portfolio”), measured periodically through the Profit at Risk (statistical measurement of the maximum potential negative variance expected in the event of unfavorable market moves for a given time horizon and confidence interval). Financial derivatives may be used to contain the exposure to the commodity risk within the approved economic capital limits. Within the framework of its core activities, the Edison Group also engages in trading in physical and financial commodities. These activities must be carried in accordance with special procedures and must be segregated in special portfolios (the “Trading Portfolios”), separate from the Industrial Portfolio, which are monitored based on strict risk limits. In this case as well, a maximum limit of Economic Capital is established, measured through the Value at Risk (a statistical measurement of the maximum potential negative variance in the portfolio’s fair value in response to unfavorable markets moves, within a given time horizon and confidence interval) and a stop loss limit. The Board of Directors, based on the mapping of the main business risks, determines each year, when it approves the annual budget, the maximum limit of the Economic Capital both for the Industrial Portfolio and the Trading Portfolios.Objectives One of the objectives of the Group’s risk management activity is to stabilize the cash flows generated by the existing portfolio of assets and contracts and use strategic hedging to protect the Group’s industrial margins from fluctuations caused by the effect of the price risk and the foreign exchange risk on the commodities used. Strategic hedging is carried out by means of financial hedges that are activated gradually during the year, based on market trends and changes in projections of the volumes of physical buy and sell contracts and the production of the Group’s assets. The gradual implementation of strategic hedging helps minimize the execution risk, which refers to the possibility that all hedges will be activated during an unfavorable market phase, the volume risk, which is related to the variability of the underlying items that require hedging based on the best volume projections, and the operational risk, which is related to implementation errors. Moreover, the Group’s policy is designed to minimize the use of financial markets for hedging purposes by maximizing the benefits of the vertical and horizontal integration of its different business segments. Accordingly, the Group makes it a planning priority to physically balance the volumes of physical energy commodities that it will sell in the market on the different due dates, using for this purpose the production assets it owns and its portfolio of medium/long-term contracts and spot contracts. In addition, through the vertical and horizontal integration of the different business segments, the Group pursues a strategy designed to homogenize sources and physical uses, so that the formulas and indexing mechanisms that determine the revenues generated by the sale of energy commodities reflect as much as possible the formulas and indexing mechanisms that govern the costs that the Group incurs to purchase energy commodities in market transactions and to supply its production assets. To manage the price and foreign exchange risk on the remaining exposure of its portfolio of assets and contracts, the Group can use structured hedges executed in the financial markets in accordance with a cash flow hedging strategy. Financial hedges can also be established in response to specific requests by individual business units to lock in, with operational hedging, the margin earned on a single transaction or a limited number of related transactions. Enterprise Risk Management Manage the area of other risks with an impact on the Group’s activities Edison developed an integrated risk management model based on the international principles of Enterprise Risk Management (ERM), the COSO framework (sponsored by the Committee of Sponsoring Organizations of the Treadway Commission) specifically. The main purpose of ERM is: to make the Management aware of the main risks profile and their evolution; to connect risk management activities, decisional procedures and company’s strategy; to assure risk management activities effectively coexist with company’s processes. In pursuit of this objective, Edison adopted a Corporate Risk Model and a risk mapping and risk scoring method that assigns a relevance index to risks based on an assessment of their overall impact, probability of occurrence and level of control. The Corporate Risk Model, which was developed based on best industry and international practices, covers within an integrated framework the types of risks that are inherent in the businesses in which the Group operates and makes a distinction between risks related to the external environment and internal process and strategic risks. The Enterprise Risk Management process is carried out concurrently with the development of the Budget and Strategic Plan by means of a Risk Self-Assessment process, the results of which are presented on predetermined dates at meetings of the Control and Risk Committee and the Board of Directors and are used by the Internal Auditing Department as a source of information to prepare special risk-based audit plans. Working with the support of the Risk Office, the managers of the Company’s business units and departments use a Risk Self-Assessment process to identify and assess the risks that affect the areas under their jurisdiction and provide an initial indication of the mitigating actions they have taken. The results of this process are then consolidated at the central level in a mapping system in which risks are prioritized based on the resulting scores and aggregated to facilitate the coordination of mitigations plans with the aim of managing risks on an integrated basis. Regular updates are performed during the year to monitor the implementation of the identified mitigating actions and assess their potential impact. Visit this page to see the list of risks to which Edison is exposed.