Companhia de Saneamento Básico do Estado de São Paulo SABESP : S&P 06/11/2024 Assessment Report B3 Green Equity

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SABESP

Shades of Green assessment

Sector: Water and Wastewater Utility

June 7, 2024	Region: Brazil

This report was produced by Shades of Green using Shades of Green Methodology.

On December 1, 2022, S&P Global acquired Shades of Green from CICERO.

Executive Summary

SABESP is São Paulo's state-owned water and wastewater utility. SABESP provides water and wastewater treatment services for 58.3% of the municipalities in the state of São Paulo, Brazil, including the state's capital, covering a population of around 28.1 million for water supply and 24.9 million for sewage treatment.

Shading of SABESP 2023 revenue, operating expenses, and capital expenditures

Dark green		Medium green		Light green		Yellow		Red

Figure 1: Shading of revenue, operating costs and capital expenditures for SABESP

In 2023, 97% of SABESP's revenue is shaded Medium Green, with 3% Light Green2.

Most of its revenues are derived from providing sanitation services in the state of São Paulo, Brazil. There are significant environmental benefits of water and wastewater services and most of SABESP's treatment systems are estimated to operate on renewable energy sources3. SABESP has achieved close to 100% coverage of treated water delivery for the municipalities it serves and is expanding sewage coverage to untreated areas. This expansion holds significant environmental importance in terms of pollution prevention and control. The company has recent efforts to improve water supply resilience through the expansion of treatment and storage capacity, however, SABESP still faces some unmitigated exposure to physical risks. The company's sanitation services to high emission industrial sectors are rated as Light Green, while the rest is rated as Medium Green.

1. S&P Global Shades of Green AS is an approved reviewer to assess alignment with the BAV.
2. We have categorized SABESP's revenue exposure by sector using billed volumes. Billed volumes may not directly correlate with revenue representation for each sector due to differing tariffs.

B3 Ações Verdes1

We assess that SABESP meets the requirements for B3 Ações Verdes.

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In 2023, 70.4% of OPEX is shaded Medium Green, 16.2% Light Green, 9.3% Dark Green and 4.1% Yellow. Most OPEX are categorized as Medium Green due to their support in providing sanitation services. Service costs are classified as Light Green because they include vegetation suppression and other services, that while necessary for the delivery of sanitation services, have associated environmental risks. Conversely, expenditures on renewable electricity are categorized as Dark Green. The remaining OPEX pertains to first- generation biofuel, lubricants, and fossil-fuelledelectricity expenses, which despite supporting green services is classified as Yellow due to the high climate risks associated with such products.

CAPEX is evenly split between Dark Green and Medium Green. Investments in sewage coverage expansion, on-siterenewable power generation, water loss reduction, and water reuse projects are categorized as Dark Green. Other investments on maintaining or modernizing existing sanitation systems are Medium Green, in line with the revenue shade. Minimal (0.01%) capex was allocated to flex vehicles, which we consider as Yellow4.

Governance Assessment

SABESP has an adequate oversight of environmental, climate and social issues. The company has clear governance mechanisms to monitor sustainability topics and address potential concerns. Sustainability-relatedcompetence is spread across the organization and sustainability goals are embedded in the variable compensation of all employees. SABESP has fundamental policies in place and has set key targets to reduce its environmental risk exposure. That said, GHG targets are yet to be defined and implemented. Moreover, while potential suppliers are selected based on environmental and social compliance criteria, the engagement with the company's value chain to improve sustainability performance is still nascent.

SABESP's sustainability reporting is improving, with key developments underway. The company's first report following the recommendations of the Task Force on Climate-RelatedFinancial Disclosures will soon be published and in 2023, SABESP began accounting for key scope 3 emission sources. The company is enhancing its well-established long-termwater security studies by incorporating historical river flow and rainfall data alongside future climate scenarios. Overall, we rate the governance structure of SABESP to be Good.

EU Taxonomy

The EU Taxonomy specifies several water and wastewater, as well as nature conservation and restoration activities, that are relevant for SABESP's operations. The share of eligible activities is 100% of revenue, 99% of CAPEX and 95% of OPEX. Ineligible capex and opex activities are fossil fuelled related activity such

as vehicles and machinery acquisition or first-generation biofuel and coal-fired electricity costs.

Table 1: Sector specific metrics for SABESP
		Water Loss	Water	Sewage	Scope 1 & 2	Scope 3 Emissions
		Rate	Coverage Rate	Coverage	Emissions (tonnes	(tonnes CO2e)
					CO2e)
2023		29.5%	98%	93%	1,830,254	400,165
	28.8%	98%	92%	2,001,852	51,441
2022
	27.9%	98%	92%	2,502,218	22,238
2021

4In 2023, according to the Brazilian National Agency of Electric Energy (ANEEL) over 80% of the Brazilian regulated market was running on renewables. SABESP's electricity consumption comes from both the federal government's regulated and free energy markets, where it selects its power provider, as well as from self-generation. SABESP estimates that most electricity in these markets is sourced from renewables, though traceability from the regulated market remains unconfirmed 4We do not illustrate the yellow exposure in the figure above given its minimal representation.

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Contents

Executive Summary	1
SABESP sustainability governance________________________________________________________________ 4
Company description	4
Governance Assessment	4
Sector risk exposure	8
Assessment of SABESP's activities _______________________________________________________________ 9
Key issues and metrics	9
Shading of SABESPs revenue, operating expenses and capital expenditures	14
Terms and methodology________________________________________________________________________ 17
Shading corporate revenue and investments	17
Appendix 1: Referenced documents list ___________________________________________________________ 19
Appendix 2: About Shades of Green ______________________________________________________________ 20

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SABESP sustainability governance

Company description

Companhia de Saneamento Básico do Estado de São Paulo (SABESP) is São Paulo's state-owned water and wastewater utility. The São Paulo State Government is the controlling shareholder with a 50.3% share. The remainder is negotiated in the Brazilian (38.3%) and the New York (11.4%) stock exchanges. The company's activities are mainly comprised of water and sewage services. SABESP provides services to residential, commercial, and industrial private customers, as well as for public services. SABESP also has equity investments in three sanitation companies, as well as in six additional firms operating in the energy, paving, and other sanitation services sectors.

SABESP covers water and wastewater for 58.3% of the municipalities in the state, including the capital, covering a population of around 28.1 million for water supply and 24.9 million for sewage treatment. To supply potable water, SABESP captures surface water and groundwater, treats it using chemical products in its water treatment stations (235 total) and serves it to consumers through its distribution networks. SABESP operates 596 sewage treatment stations, but treatment methods vary by location. Brazil's federal government has recently updated its regulatory framework, requiring by law that 99% of the Brazilian population will have access to drinking water and 90% to sewage treatment and collection by 2033, with expected investments totalling R$800 billion-R$900 billion during the next decade. SABESP has put in place an investment plan and targets to meet this requirement. The company currently serves 62% of the state of São Paulo's population with treated water and sewage treatment and collection. For the municipalities served by the company, SABESP covers an average of 98% of the population for treated water and 93% with sewage treatment.

Governance Assessment

SABESP board and senior management demonstrate adequate awareness of environmental, social and climate concerns. The company's materiality assessment and risk map inform its sustainability strategy. Adequate governance structures are in place for the board to oversee sustainability risks, further bolstered by formalized policies. SABESP's most material topics, such as the universalization of access to water and sewage services, are monitored through key metrics disclosed annually following international standards. However, external verification is not available for a wide range of sustainability-related data.

Nonetheless, the company has recently advanced its reporting practices by improving its scope 3 accounting and by voluntarily adopting TCFD recommendations, as well as reporting on its physical climate risk scenario analysis. The company is enhancing its well-establishedlong-term water security studies by incorporating historical river flow and rainfall data alongside future climate scenarios. That

said, while SABESP has set sustainability targets connected to its core business (increasing treated water and wastewater treatment coverage), GHG targets are yet to be defined and implemented. Moreover, while potential suppliers are selected based on environmental and social compliance criteria, the engagement with the company's value chain, including suppliers, to reduce emissions and improve sustainability performance is still nascent.

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The overall assessment of SABESP's governance structure and processes gives it a rating of Good.

Key strategies, policies, and targets

SABESP has adequate policies in place to manage its environmental risks related to water and wastewater, addressing issues such as water pollution and biodiversity loss, which are relevant for the sector. However, these policies do not fully encompass climate transition and physical risks. The Environmental Policy is the main guideline for environmental compliance. In addition, the entity has recently updated its long-term corporate strategy to include a sustainability dimension, which connects to strategic objectives, metrics and targets to the United Nations Sustainable Development Goals.

SABESP integrates sustainability aspects into other of its policies, such as its Code of Conduct, which applies to its suppliers. The company has clearly mapped its stakeholders and has an engagement strategy, which includes determinations on frequency and expectations of the interactions with each stakeholder group. This process has supported the company's materiality assessment, which resulted in 11 priority material topics covering environmental, social and governance aspects.

The company has set public environmental targets to increase treated water and sewage coverage in the municipalities its serves and reduce water loss rates. The company has also set objectives on increasing alternative solutions for sludge disposition and afforestation and reintroduction of native species in the areas surrounding the company's basins. These targets are aimed at reducing the company's environmental risk exposure. For instance, alternative solutions for sludge disposition should reduce the company's direct methane emissions. Moreover, SABESP aims to create a GHG reduction roadmap by 2025 and foresees initial engagement with SBTi within the same timeframe, but the current lack of public GHG reduction targets limits a stronger assessment.

Governance structure

SABESP has put in place different bodies to oversee sustainability-related issues within the organization. Its Environmental Policy sets clear responsibilities for both operational and strategic levels over topics ranging from the implementation of the environmental management systems to stakeholder dialogue.

Moreover, a Sustainability and Innovation Committee is elected by the Board and coordinated by the Superintendency of Sustainability and Corporate Governance. The Committee is composed of four board members, including the board's chairwoman, and meets monthly. Relevant topics discussed by the Committee are scaled up to SABESP's board deliberation, when deemed necessary.

Overall, members of the Board of Directors, Executive Board and Advisory Board have demonstrated sustainability-related background and have active participation in the structure and oversight of the company's risk map, which includes sustainability elements. The company has a variable compensation program for employees, including management levels, based on a set of targets related to corporate, operational, individual, and departmental dimensions. We view positively that corporate targets, which are valid across the organization, include sustainability-related components, such as the index of coverage of sewage services and number of fatalities. Moreover, each department has an additional layer of specific targets, which frequently include ESG- related topics.

Supply chain

SABESP requires suppliers to follow its ethical and responsible standards through its Integrity Program and its Code of Conduct, which are publicly available. Suppliers are specifically targeted in relevant sections of the document that are applicable to their scope. Although suppliers are not directly trained by SABESP on ethical and responsible standards, third party workforce contracts include a mandatory training clause. Additionally, a Procurement Policy is in place and institutes a Procurement Committee, which among other attributions, has the

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responsibility to develop suppliers. SABESP also promotes symposiums to strengthen potential development opportunities and partnerships that are aligned with the company's strategy.

The selection of suppliers follows a due diligence process to verify their integrity, requiring demonstrated compliance with environmental and social regulation. For example, SABESP has an exclusion list in place for suppliers with a proven track record of child, forced, degrading and discriminatory labour practices based on registries of the Ministry of Labour. In addition, given its dependence on building materials, SABESP has an exclusion criterion for suppliers involved in illegal logging practices. According to the company, no significant non-compliance events have occurred in the past.

SABESP does not have an outsourced workforce and establishes contracts for all additional service needs identified, such as the construction of water and wastewater treatment plants, which are subject to the regular supplier screening process. That said, the company has not yet set quantitative environmental criteria, such as life- cycle emissions thresholds for building materials suppliers, which we view as a limitation of its due diligence process. However, we acknowledge that SABESP faces limitations to impose stricter requirements to its suppliers, given that alignment to the state government general principles must be preserved. Even so, the company has developed alternative mechanisms to stimulate improvement on their sustainability performance, such as demanding construction suppliers to report on their GHG emissions inventory and show proof of following adequate social conduct.

Environmental risk management

ESG risks are identified and monitored through SABESP's overall risk management system, following COSO- ERM and ISO 31000. This process involves the Board, executive bodies and the Audit Committee and is monitored by the Risk Management Commission every two months. We highlight that this system was recently assessed by a third party as advanced.

A map classifies risks based on nature and criticality using information collected from internal systems and the engagement with external stakeholders, being a key tool to define investment priorities. As an example, the response to climate-related risks led to investments towards increasing the capacity of water reservoirs, as well as resilience measures and technological developments for the monitoring of water resources. We observe a robust integration of long-term water security considerations into the company's decision-making process and day-to-day operations. However, we have yet to see more substantial evidence of the company's management of climate transition risks and other physical climate risks, such as flooding and soil erosion events. We highlight that although SABESP has developed an environmental management system based on ISO 14001 and aims to implement it in all its stations by the end of 2024, only a small portion of its units is officially certified, which we view as a challenge to the company, given the high number of units it has under management.

Social risk awareness

SABESP has identified key social material topics through its materiality assessment, being the universalization of access to water and basic sanitation the first in relevance. This has led the company to set targets to increase coverage of services, decrease water loss rates and implement new water and sewage connections. Community relations and positive social impact are also mapped as a material topic and mainly relate to the company's investments to build infrastructure that generates value and respects community's needs. SABESP has a significant exposure to informal settlements (favelas) in municipalities with medium to low human development indices, which have developed into neighbourhoods. Consequently, the company has made dedicated efforts to enter and maintain stable services in these areas.

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We consider the most material social risk for water and wastewater utilities to be its relationship with local communities, access and affordability and customer safety. Social risks, including the ones mentioned, are identified under SABESP's overall risk management system and SABESP reports on a variety of social programs, such as the Community Participation Program. The company also reports daily on water quality and security levels. The Sustainability and Governance Superintendency oversees the convergence of social programs developed by each unit into a broader social strategy, although we highlight that key developments under a consolidated program are yet to be monitored. The company includes key social issues in different policies, mainly guided by its Integrity Program and related to regulatory compliance in labour and human rights aspects, such as prohibiting forced and child labour.

SABESP adopts a social tariff, a benefit provided to low-income and vulnerable single-family households proposed by the regulator and applied voluntarily by the municipalities. It consists of a discount in water and sewage service bills to increase access and affordability to basic sanitation and reaches almost 1 million families in the state of São Paulo. We note that the company follows a systematic process set by the regulator every four years to determine tariff increases and that the National Water Agency determines that all regular tariff adjustments must be subject to public consultations. It is also positive that SABESP explains the mechanism for tariff adjustments, as well as any planned increases, in its annual sustainability report.

Reporting

SABESP's annual sustainability reporting is based on international standards, such as the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB). Moreover, the issuer has performed a materiality assessment based on these standards to determine its most material sustainability topics, for which it reports on the key metrics and qualitative information. However, except for GHG emissions, we note that no external verification of other sustainability data was carried out, although the company has plans to do so in the near term.

We highlight SABESP's recent efforts in improving scope 3 accounting by including emissions associated with the purchase of lime and hydrogen peroxide, which are key to treatment processes, and the emissions from uncollected effluents in its latest inventory. We view this favourably, but it is important to note that scope 3 emissions are still not fully accounted for, such as emissions from the production of all chemicals purchased for water and wastewater treatment.

The company has recently adopted the Task Force on Climate-related Financial Disclosures (TCFD) recommendations, which is a relevant step, given that regulation will require Brazilian public companies to formally disclose sustainability and climate-related data through IFRS in 2026. This timeframe will allow for SABESP to enhance its climate-related reporting practices by addressing the lack of quantification of financial impacts stemming from climate-related risks and opportunities.

SABESP also reports on its adoption of climate scenarios (RCP 4.5 and 8.5 until 2100) and the application of regional and global climate models to identify its exposure to physical climate risks. In addition, the company briefly mentions its approach to adaptation by listing initiatives to increase the efficiency, resistance, and flexibility of its infrastructure, such as a water loss reduction program. We note that the company provides publicly available daily updates on the water availability and rainfall rates in its water basins and publicly reports on any potential drought exposure a quarterly basis via the Brazilian National Water Agency's Drought Monitor. In addition, it discloses its efforts to develop studies on water security that evaluate potential impacts of climate change on water availability, which will be concluded by the end of 2024. Therefore, a more robust reporting of such aspects is yet to be seen.

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Sector risk exposure

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Physical climate risks. Water, stormwater, and wastewater utilities operate fixed assets that span large service territories, making them highly exposed to physical climate risks. Acute events such as extended drought periods can put a strain on water supply. Meanwhile, floods can damage water and wastewater pipelines and other infrastructure, causing network service disruptions for large populations. Flooding can also result in water contamination which increases water treatment costs. Utilities also face chronic physical climate risks, such as sea-level rise and changing precipitation patterns, which may require significant investment to maintain sufficient water quantity and quality for the customer base. For example, SABESP faced significant impacts of a severe drought that hit the state of São Paulo in 2014 and caused severe disruptions, demanding contingency actions.

Transition risks. Due to the profound changes needed to limit global warming to 2ºC, transition risk affects all sectors. SABESP is exposed to transition risks from its treatment process, which is energy intensive. As more advanced treatment techniques are applied, significant increases in energy intensity can occur. Moreover, while water and wastewater management and treatment are important from a climate perspective, both to reduce emissions and improve resiliency, some by-products of treatment processes occur, such as methane and NOx releases while waste is treated (if not captured). In addition, as essential infrastructure, reliability is a main concern and demands the use of back-up power, which normally comes from a fossil-fuel source.

Environmental risks. Water supply and quality issues may result from multiple factors, including infrastructure quality and resulting water lost during extraction and transportation as well as factors related to physical climate risks. The potential overflow of untreated sewage and stormwater into water bodies used as water extraction points can also be an issue for both operator and ultimately, customers. In addition, pollution is a material stakeholder concern for water utilities, given the risk of contaminating bodies of water. Pollution from agricultural runoff and industrial discharge in water basins is also a relevant concern. In addition, for water utilities, pollution in source water can affect the availability and useability of supply.

Social risks. Access to safe water and sanitation is broadly considered a human right, and universal access is one of the UN Sustainable Development Goals. Service disruptions or steep price increases may be exacerbated by the new regulatory requirements, the energy transition, and the physical aspects of climate change. Customer affordability is key stakeholder concern, as utility bills can affect households' purchasing power and the competitive strengths of local industries. Contaminated water and poor sanitation systems in turn contribute to long-term health conditions, and these customer health and safety events can, when severe, undermine public trust. Moreover, community impacts are acute due to how close networks are to where people live and work and sharing resources where drought conditions are present can introduce tough trade-offs among community stakeholders.

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Assessment of SABESP's activities

Key issues and metrics

Water

The company sources nearly all the required water volume for its supply from rivers and reservoirs, with only a minor portion extracted from groundwater sources (6% of water withdrawals over the past 2 years). These raw water reservoirs are replenished through the damming of river and stream water, redirection of flow from nearby rivers, or a blend of both methods. The company operates around 235 water treatment stations, with the nine largest ones, located in the state's capital (municipality of São Paulo; RMSP), accounting for approximately 70% of all produced treated water. In the municipalities in the countryside of the state of São Paulo, the main source of water is from rivers, but the company also taps into well water. In the coastal region, water is primarily sourced from rivers and mountain springs.

Historically, the state of São Paulo's sources water quality from both underground and surface sources are considered good. However, high rates of population growth, increasing urbanization, and unplanned development in certain areas of the RMSP have diminished both the quantity and quality of available water in the catchment areas, particularly affecting the southern zone of the RMSP. Presently, the company's treated water meets the specifications established in the recommendations made by the National Health Foundation (FUNASA), the Brazilian Association of Technical Standards and the American Water Works Association (AWWA). Additionally, efforts are underway to restore the quality of water distribution networks and invest in treatment system enhancements to ensure water quality and availability for the years ahead.

SABESP's water loss rates compare favourably with the Brazilian national average (30% for SABESP compared to 40% for the national average). Although the rate increased slightly in 2023 to 29.5% from 27.9% in 2021, it still performs better than the company's historical rate, which was over 30% before 2020. The recent increase can be attributed to losses from fraud (unauthorized consumption or unbilled meter/unmetered consumption) in newly connected areas in irregular settlements and meter under-registration due to the aging of these devices. In municipalities such as Lins or Taboão da Serra, with a higher GDP per capita than the state average (US$10,000), the rate drops to 10%-17%, ranking among the best rates in Brazil. The company has implemented a Water Loss Reduction Program that adheres to best practices in retrofits and metering, among other initiatives. Additionally, the company has secured green loans for the implementation of its water loss reduction program (with R$1 billion outstanding).

Regarding water demand control measures, in the occurrence or expectation of severe droughts, SABESP participates in meetings with water resource managers, users, Basin Committees, and experts in the field, although we note that the organization of such meetings falls under the responsibility of federal and state government agencies. The group defines water use conditions, which includes scaling back, reducing, or suspending withdrawals.

Waste

The sewage treatment process used by SABESP varies according to the characteristics of each region served. In the RMSP, the most used process is disposing the treated sludge in landfills. In some cases, in the company treats the leachate (liquid that drains or leaches from a landfill). Meanwhile, in the countryside, treatment generally involves stabilization ponds. In the coastal region, the majority of collected sewage undergoes treatment and disinfection before being discharged into rivers and the Atlantic Ocean through submarine outfalls, in accordance

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with environmental legislation. SABESP has not yet achieved universalization of sewage collection and treatment services in the municipalities it operates; however, it has a goal to reach 97% coverage by 2025. Irregular occupations, illegal discharge of residential and industrial sewage, environmental degradation of preservation areas are challenges faced by SABESP, especially in the RMSP.

The company's waste-to-energy generation and resource recovery solutions are under development, but still nascent. Since 2018, the Company has been producing Sabesfértil, an organic agricultural fertilizer, per day in the municipality of Botucatu. It is produced through the drying process of sludge. SABESP's Franca Wastewater Treatment Plant converts biogas generated during sewage treatment into biomethane for use as vehicle fuel. The system currently fuels 40 vehicles in SABESP's fleet in the municipality of Franca. Furthermore, SABESP is investing in R&D projects to reduce the disposal of sludge in landfills. Two projects are underway: one uses advanced plasma technology to turn sewage sludge into a glass-like material, reducing its weight by 25% and making it suitable for construction. The other project employs solar-powered drying to decrease sludge moisture from 80% to 20%.

For the broader wastewater treatment operation, SABESP has recently conducted studies in some stations in the RMSP and others in the countryside. Different solutions will be executed depending on the characteristics of the locations but are expected to include electricity generation or the production of organic fertilizers or organomineral fertilizers. The company currently does not have active waste-to-energy projects.

Biodiversity and land use

The urbanized nature of RMSP, covering 5% of the state's area but housing 50% of the state's population and accommodating 70% of SABESP's water treatment stations, presents biodiversity maintenance and improvement challenges for the company. However, SABESP also sources water from basins outside of the RMSP that have intact areas for which SABESP tries to contribute with their preservation. The company's Green Belt Program recovers vegetation coverage lost for agriculture and preserves native forest around the reservoirs. The Program has recovered and maintained a total area of 330 square kilometers, with 94% vegetative cover, equivalent to 1.6% of the remaining Atlantic Forest in the state of São Paulo. For example, the Cantareira system (which supplies 30% of SABESP users' demand) had its vegetation coverage index expanded from 61% in the 1980s to 80% in 2022.

Nevertheless, SABESP faces the dilemma of expanding sewage operations to prevent pollution from harming ecosystems, while also needing to cut vegetation or intervene in native forest areas. In these instances, besides seeking authorization from the environmental agency, SABESP is obliged to designate compensation areas as part of the licensing processes for any system. To ensure adherence to these requirements, SABESP has implemented a corporate program formalized with São Paulo state's environmental agency, Companhia Ambiental do Estado de São Paulo (CETESB), which outlines reforestation efforts through the planting and maintenance of one million seedlings of native regional species over the next 10 years.

Climate Resilience

SABESP has adequate identification of physical climate risks using climate scenarios and is enhancing its well- established long-term strategy to ensure sufficient water availability for the state of São Paulo until 2050. However, the company has yet to show a track record of the effectiveness and readiness of its adaptation plan for extreme weather events. In 2023, the company coastal assets and clients were impacted from heavy rainfall, which caused landslides, damaging the company's treatment stations and water distribution systems. The company has been exposed recurrent droughts that occurred in the state of São Paulo during the 2013/2014 and 2021/2022 periods.

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