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What are the new elements introduced in the Supplier Code of Conduct that you have just introduced?

The key novelty is that we have officially formalised and institutionalised our relationship with the supplier base through a Code of Conduct. Basically, we codified what we were already doing in practice and turned it into a formal commitment that our suppliers now sign — this is why we’ve called it the “Sustainability Agreement”. The word “agreement” reflects the open dialogue that led to the creation of the Code’s content. It focuses especially on ESG aspects, because sustainability is embedded in the way we do business: the contribution of our supply chain is essential to achieving the goals we have set.
As an extension of our Code of Ethics, the Agreement is fully aligned with what is “material” to Hera. We have been very careful to ensure that all relevant aspects were covered.  

Hera rewards good practices
both during the qualification and during the tenders.

To what extent do you expect to see improvements in supplier behaviour with the implementation of the new Code?

Following the introduction of the new Code of Conduct, I expect to see a progressive improvement in the sustainability performance of the supply chain, which is already used to considering new ESG achievements as a rewarding element.

How have you proceeded in drafting the Agreement?

In practice, we co-created it with our supply chain — we didn’t impose it from above. That’s an innovative element that the Company introduced in the drafting process. An internal team engaged with a group of around twenty suppliers, selected for their relevance in terms of volumes handled and the critical nature of outsourced activities. We then organised a workshop featuring a guided brainstorming session to build the document, which is structured into three distinct sections, following the ESG framework. Each section includes two components: recommended best practices and mandatory requirements — such as social security compliance or the prohibition of child labour — which are also legal obligations.

During supplier qualification and selection, do you take into account the scores from third-party ESG rating platforms?

This was another innovative element of the process. We decided not to refer to the scores of an external provider, but to model the entire assessment on the basis of the criteria most fitting our specific profile as a company, both in terms of the activities we run — let’s keep in mind that Hera provides public utility services — and the commitments that we have made to achieving certain sustainability goals and implementing certain practices.

Therefore, we have declined sustainability
in all crucial stages of our purchasing process.

First of all, we take ESG elements into account at the qualification stage. We have structured an internal rating model on a series of objective parameters that include ESG criteria. Sustainability aspects also affect the selection phase: in most tenders we do not actually follow a criterion of pure economic competitiveness of the offer but apply a scoring model in which the price factor weighs on average around 30 percentage points. The remaining 70 points are overall reserved to technical quality, quality certifications, implementation capacity, and sustainability features. More specifically, in our tenders, 37 points out of 100 on average are reserved to sustainable practices. Having to tender a service that involves the use of vehicles, for example, we will favour, all other things being equal, the operator with a green fleet. Subsequently, we monitor that what was declared in the tender by the supplier is implemented in the execution phase, thus also collecting helpful elements for our sustainability reporting.

How did you come up with these original qualification criteria?

Actually, before we chose to build Hera’s proprietary rating model, we conducted an in-depth study of seven of the leading ESG rating providers available in the market, also considering how they collect information and how they verify it. We also analysed how many of our qualified providers already had one of these ratings. Then, we built a benchmark, considering the third-party ratings that our peers had chosen for their supply chain.

The qualification questionnaire
reflects an assessment mechanism that we have built,
tailored to our needs and the peculiarities of our Supplier Register.

What results did you gather from checking how many suppliers already had third-party ESG ratings?

To point us in the right direction, we conducted a survey as early as two years ago to measure the level of ESG maturity of our supplier base: from the level of ESG Maturity Index resulting from the survey, we realised that only a limited number of suppliers on our Register had third-party ESG ratings. We also understood that most would be struggling to provide answers consistent with the typical structure of external assessment models. Standard questionnaires administered in an undifferentiated way to all companies hardly capture and attribute the correct value to the peculiar aspects of local operators…

What happens after you measure the ESG maturity level of a supplier?

Based on the findings of the ESG Maturity Index level, we help suppliers on a path of growth and improvement in ESG practices and performance. For this purpose, we set up capacity building initiatives reserved to our supply chain, through a free available program called “Hera_Pro-Empower”.
Again, as part of this capacity building activity, we created a Supplier Sustainability School, which offers cycles of seminars in which operators in our supply chain can participate free of charge. In these appointments, we cover topics of highest interest to Hera, such as construction site safety, CSRD, and targeted courses on specific topics, which are the ones that then carry the most weight in scoring for tender purposes.
As part of the package of what we offer suppliers to encourage better ESG performance, we included a number of services that can lead them to achieve, for example, specific certifications at subsidised fees. The companies that have agreed to offer our suppliers these services on competitive terms are incentivised as they can count on the substantial volumes that Hera generates. We have also included a number of services offered by Hera itself, such as green bills or circular waste management.
In our philosophy, meeting certain levels of ESG performance should prove to be an opportunity to grow and strengthen their own competitiveness: something from which Hera then reaps several obvious benefits. There are, of course, some minimum requirements to be met in advance that we have included in the Code of Conduct, such as regularity of contributions or non-exploitation of child labour — which, as we already remarked, are also legal obligations. The suppliers immediately understand that the sooner they strive to achieve better performance the sooner they will be more competitive in the tender process.

How do you check compliance with Code requirements during contract execution?

At Hera, we have a monitoring system that is always active, from the moment the supplier operates in the field. Through a highly structured and digitised mechanism of control of the operating chain, we can conduct audits not only on suppliers but also on subcontractors and sub-suppliers. We also implement physical on-site audits, operated by us directly or by third parties, with higher frequency for the most critical operators. Thus, at any given time we have an accurate picture of who is working, on which site, and for which contractor. In addition, three years ago we revised the vendor management model: therefore, now, each category of procurement is classified by level of criticality — high, medium or low — whose parameters range from spending volumes by category to quality, safety, environment, business continuity and impact on Hera’s end-customer. Unlike other sectors, our business is deeply rooted in the territories where we operate — and so is our supply chain, which is strongly anchored in those same local areas.

This proximity itself helps
to control the activities carried out.

Data from the end of 2024 tells us that, of about 5,500 qualified suppliers, about 60% are based in Hera's operating area. Even narrowing our observation to the 4,700 suppliers with an active contract, we find that more than 60% of outsourced volumes involve suppliers based in our reference territories.

What happens in case through the monitoring activities you realise that the supplier has not been compliant with a specific requirement of the Code?

In the new Code of Conduct we have explicitly regulated what happens in case we detect a breach of requirements. We first determine the level of non-compliance, which can be serious or very serious. This finding then leads to a recovery plan, during which we work alongside the supplier. In the event, for example, we detect that a supplier's employees are not wearing protective helmets at work at all times, after notifying the breach, we initiate a series of follow-ups on the adoption of compliant behaviour, and then hopefully close the process successfully and be able to continue working with the supplier. If, on the other hand, we fail to observe the systematic adoption of correct behaviour during the recovery plan, we would be entitled to terminate the contract early, while having some time to identify an alternative supplier

How do you manage the risk of having to replace a supplier who has not met the minimum requirements?

We always tend to prefer dual sourcing or multiple sourcing. In practice, we always include multiple lots when we call for tenders with the aim of limiting our dependence on a single supplier.

What are the aspects on which Hera is most at risk in its relationship with the supply chain?

With 97% being Italian suppliers and only 3% from countries in the Developed West, Hera does not face one of the most important risks typically associated with the supply chain: the country-risk. However, two other relevant risk categories remain. The first is related to Health & Safety: in 2024, we have reached about 17 million hours worked by our contractors — a volume for which, statistically, a certain number of injuries may occur. Therefore, the supplier injury index is at the top of our monitoring, with data collection taking place systematically. Due to higher awareness, training, and monitoring activities in the field, this index has been steadily declining over the past three years: from 22.8 in 2022, it decreased to 22.3 in 2023 and then dropped significantly, to 16.6, in 2024.
Since the activities we outsource are highly labour-intensive, a second key risk category that we manage concerns ensuring that our suppliers provide fair and adequate working conditions, including proper wages and social security contributions. On these matters, we are uncompromising: if our checks reveal delays in contribution payments, for example, we withhold our payments to the supplier until the contributory position is fully settled.

What about environmental risks?

We are also very diligent in this area, using a checklist-based mechanism, particularly to verify waste disposal certifications. Perhaps, also due to the operational capabilities we can bring to support the companies in our supply chain, we do not believe that any real impactful risks for Hera can emerge on this front.

What is the typical lifecycle of one of Hera’s supplier?

Some historical suppliers have been on our Register since Hera was established. The lifecycle is generally quite long, despite the initially limited size of some companies, which have nevertheless had the opportunity to grow overtime.

How important is it to strengthen relationships with suppliers?

Having a loyal and committed supply base is, in our view, a key strength. When we faced the pandemic or the energy crisis, if we hadn’t already built long-standing relationships with our suppliers on solid foundations, we would have risked losing many of them. Instead, even during the most critical phases of those crises, we experienced no disruptions in the supply of core goods and components, nor in the delivery of services or ongoing construction works. We were also able to carry out all the investments funded by the NRRP (National Recovery and Resilience Plan) precisely by relying on our long-term suppliers, who see Hera as their customer of choice.

Having an engaged supplier to us
means ensuring continuity and solidity to our operations.

This strong bond also means having ample credibility when formulating the future targets of the Business Plan, since these operators are informed during the conventions about our next steps and made responsible for implementing them for their own part.
As a provider of public services, which require very tight response times in emergencies, we certainly cannot afford to constantly switch from one supplier to another.

We’ve talked about strong partnerships in areas closely tied to core business operations. Does Hera also gain momentum in terms of technological innovation through relationships with external companies?

For certain aspects of specialised know-how, it is only natural that we seek a form of “cross-pollination” and a win-win relationship with the innovative skills and expertise of our suppliers. In niche technologies, such as smart meters, we have successful cases of mixed teams, with a key contribution from our suppliers. Moreover, to develop high-impact innovation projects with external partners, the supplier must know us well and be deeply aligned with our priorities — once again, a clear example of how the supply chain can generate value only within the context of a strong and long-term relationship.
 

Related content: Supplier sustainability agreement