here annual report 2021

HERE Technologies releases annual corporate sustainability report

Company completes multi-year greenhouse gas audit for net zero benchmarking.
Sustainability Advisory Committee and Sustainable Accounting Standards implemented to measure carbon reduction approach and transparency.
HERE increases solutions for governments and industries to reduce air pollution, traffic congestion and commercial fleet emissions.

HERE Technologies, the leading location data and technology platform, today published its annual Sustainability Report, detailing the company’s ambition, activities and progress toward its Environment, Social and Governance approach.

The second annual report focuses on the company’s sustainable business operations and its work with partners globally to help move people, goods, and services more efficiently.

HERE has now completed a comprehensive greenhouse gas inventory from 2019-2021. This is a significant step toward fostering further sustainable practices across the company and determining science-based emissions reductions targets. HERE has also established an internal Sustainability Advisory Committee to drive greater accountability and transparency. In addition, HERE is publishing a wider account of activities under the Sustainable Accounting Standards Board reporting process. This is an industry-based set of reporting standards designed for investors and analysts to get a deeper view of our sustainable business activities.

“HERE has taken a series of important actions to more deeply embed sustainability into our company’s infrastructure, operating environment and corporate values,” said Edzard Overbeek, CEO of HERE Technologies, “In our work with partners across the private and public sectors, we’re seeing remarkable innovation and growing capacity to reduce emissions through more intelligent and efficient supply chains, transportation networks and the electrification of vehicles. HERE is committed to advancing sustainability both inside our business and through collaborations with others to minimize environmental footprints in the mobility of people and goods. ”

Environment

Improving air quality and traffic congestion

In 2021, Transport for London (TfL) , Bosch and HERE came together to measure air quality and target local traffic congestion in Brixton, south London .

HERE installed air quality sensors across Brixton to detect a range of pollutants. Information on road traffic volumes from TfL were combined with traffic speed data from HERE to generate a model of real-time driving behavior and traffic dynamics. A dispersion calculation considered the impact of road network topology and weather on air quality, which HERE used to produce a highly accurate emissions heatmap of Brixton’s town center.

TfL reported that efforts resulted in a marked improvement in localized air quality, smoother traffic flow, reduced traffic congestion and a greater understanding of traffic management and how the wind and weather affects the dispersion of pollutants.

Reducing CO2 emissions in commercial vehicle fleets

HERE is collaborating with leading Swiss retailer Migros on a commercial fleet analytics tool, CO₂ Insights, which predicts the amount of carbon dioxide (CO₂) emitted per vehicle route. Measuring and reducing fleet operators’ emissions is critical to achieving global climate policy commitments and Net Zero targets.

Built on the HERE Routing API, the tool factors in vehicle and fuel type, traffic conditions, and the road networks’ physical attributes, such as curvature, slope and elevation. It recommends the most appropriate commercial vehicle and engine type to produce the least amount of CO₂ for the given route.

CO₂ Insights was developed by Migros and its strategic partner, Empa. Migros has used the tool to investigate the environmental impact of its own fleet and drive the transition from diesel vehicles to alternate fuel options.

Connecting and Creating Community

HERE is proud to have more than 7,000 employees around the world. Approximately 46% of HERE employees are located across Europe and the Americas, with 54% of HERE employees living in the Asia Pacific region. The diversity of people fosters new learnings and innovation at HERE, and despite the global pandemic, HERE Employee Resource Groups (ERGs) continue to enable (virtual and in-person) communities and their allies to connect, be inspired and grow.

The HERE Women’s Initiative Network promotes gender equality and support the career development of our female and non-binary employee.
Unity & Power is committed to the representation and advancement of Black and African culture, communities, and talent.
Vamos aims to foster an inclusive culture of belonging by committing to the representation and advancement of Latinx/Hispanic heritage, and communities.
HERE Pride is focused on allyship, inclusion and uplifting the Lesbian, Gay, Bisexual, Transgender, Questioning, Pansexual, Non-binary, Intersex and Asexual community, both inside and outside the company.

Privacy at HERE

Data privacy is fundamental to HERE and its business. The HERE platform was built for users to always be in control of their data. The HERE Information Security and Privacy Information Management System has achieved and remains in strict compliance with various ISO Certifications.

HERE practices data minimization and pseudonymity for data subjects. The company strives to go beyond regulatory compliance and make privacy an integral part of our corporate culture.

The full 2021 HERE Sustainability Report can be found at https://www.here.com/company/sustainability .

Media Contacts

Jordan Stark +1 312 316 4537 [email protected]

Dr. Sebastian Kurme

+49 173 5153549

[email protected]

About HERE Technologies HERE, the leading location data and technology platform, moves people, businesses and cities forward by harnessing the power of location. By leveraging our open platform, we empower our customers to achieve better outcomes - from helping a city manage its infrastructure or a business optimize its assets to guiding drivers to their destination safely. To learn more about HERE, please visit here.com and 360.here.com .

HERE Technologies releases annual corporate sustainability report

Berlin, GERMANY

Amsterdam, The Netherlands – HERE Technologies, the leading location data and technology platform, today published its annual Sustainability Report, detailing the company’s ambition, activities and progress toward its Environment, Social and Governance approach.

The second annual report focuses on the company’s sustainable business operations and its work with partners globally to help move people, goods, and services more efficiently.

Environment

Improving air quality and traffic congestion In 2021, Transport for London (TfL) , Bosch and HERE came together to measure air quality and target local traffic congestion in Brixton, south London .

Reducing CO2 emissions in commercial vehicle fleets HERE is collaborating with leading Swiss retailer Migros on a commercial fleet analytics tool, CO₂ Insights, which predicts the amount of carbon dioxide (CO₂) emitted per vehicle route. Measuring and reducing fleet operators’ emissions is critical to achieving global climate policy commitments and Net Zero targets.

Connecting and Creating Community HERE is proud to have more than 7,000 employees around the world. Approximately 46% of HERE employees are located across Europe and the Americas, with 54% of HERE employees living in the Asia Pacific region. The diversity of people fosters new learnings and innovation at HERE, and despite the global pandemic, HERE Employee Resource Groups (ERGs) continue to enable (virtual and in-person) communities and their allies to connect, be inspired and grow.

Privacy at HERE Data privacy is fundamental to HERE and its business. The HERE platform was built for users to always be in control of their data. The HERE Information Security and Privacy Information Management System has achieved and remains in strict compliance with various ISO Certifications.

HERE practices data minimization and pseudonymity for data subjects. The company strives to go beyond regulatory compliance and make privacy an integral part of our corporate culture.

The full 2021 HERE Sustainability Report can be found at https://www.here.com/company/sustainability .

Media Contact s Jordan Stark +1 312 316 4537 [email protected]

Dr. Sebastian Kurme +49 173 5153549 [email protected]

HERE Corporate Sustainability Report

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Microsoft Annual Report 2021

Annual report 2021, satya nadella.

Chief Executive Officer

Dear shareholders, colleagues, customers, and partners:

As I write this, people and organizations everywhere continue to struggle with the uncertainty of a pandemic that continues to cause so much suffering. And yet, as I reflect on what has been a very challenging year for so many—one that will be forever remembered as a heartbreaking chapter in our history—I find reasons to be hopeful.

Our mission to empower every person and every organization on the planet to achieve more has never been more urgent or more needed. And every day this past year, I have had the privilege to see it in action, as customers of every size, in every industry, in every part of the world use our platforms and tools to help address their own challenges and opportunities as well as those of their communities and society at-large.

I have had the honor to see how the hard work and commitment of Microsoft’s employees, the ingenuity of our partners, the trust of our customers, and the support of our shareholders translate into strong results. In fiscal year 2021, we delivered $168 billion in revenue, up 18 percent year-over-year. Operating income grew 32 percent to $70 billion. And we continue to create successful new franchises. LinkedIn and our security business both passed $10 billion in annual revenue for the first time.

OUR OPPORTUNITY

For all the disruption and suffering that the pandemic has wrought on our lives and our communities, it has also been the catalyst for an unprecedented digital transformation that is driving massive technological and societal shifts that are creating important new opportunities for our customers and for Microsoft.

Tech as a percentage of total GDP will double from 5 to 10 percent by 2030. But the most notable thing is what will happen to the other 90 percent. Digital transformation that was projected to happen over the next 10 years is happening today.

Microsoft was built for this moment. Our goal is to foster innovation that generates new ecosystems of inventors, partners, developers, creators, changemakers, public servants, frontline workers, and knowledge workers who, together, drive the engines of growth and opportunity in ways that benefit everyone.

Today, it is exciting to see how our platforms and tools are enabling people and organizations to achieve remarkable things that would have been unimaginable even a few years ago.

Here are just a few examples:

NASA’s Mars mission achieved a milestone in space exploration when the small robotic helicopter Ingenuity completed the first powered flight on another planet—a feat that would not have been possible without 12,000 developers on GitHub who contributed code to the open source software that powered the flight.
When a 1,300-foot ship blocked the Suez Canal and disrupted global shipping, our partner Blue Yonder used Microsoft AI technologies to help its customers find alternate sources for more than $500 million worth of products and parts affected by the delay.
Team Rubicon—a nonprofit organization that responds to humanitarian crises around the world— set up 169 COVID-19 response sites across the United States in just 30 days, using Dynamics 365 to manage the deployment of thousands of volunteers.
Surgeons at Mt. Sinai Health System in New York and Kyabirwa Surgical Centre in Uganda have together performed more than 500 surgeries using mixed reality technology that enables doctors in New York to provide annotated recommendations that appear in the field of vision of their Ugandan colleagues—even though they are thousands of miles apart.
Anheuser-Busch InBev—the world’s largest brewer—used Azure Digital Twins to create a comprehensive digital model of its breweries and supply chain. Synchronized with its physical environment, this model replicates the complex relationships between natural ingredients and the brewing process, enabling brewmasters to make adjustments based on real-time conditions.

Across our solution areas, we are delivering platforms and tools that expand our opportunity to help organizations around the world build their own tech intensity.

Applications and Infrastructure

Computing architecture is undergoing radical transformation as the number of connected devices and the volume of data generated at the edge increase dramatically. With more than 60 datacenter regions —including 15 new regions added this year on five continents—we are delivering faster access to data and cloud services while addressing critical data residency requirements.

This year, we expanded our hybrid capabilities to enable organizations to build, manage, and deploy applications anywhere. With Azure Arc , customers can deploy Azure data services on-premises, at the edge, or in multicloud environments. Azure Space is extending Azure capabilities through worldwide satellite-based connectivity. And with Azure for Operators , we provide telecom operators and enterprises with the ultra-low latency cloud computing power at the edge needed for breakthrough scenarios like precision inventory tracking at ports and production lines that automatically adjust to changing demand.

We are also at the forefront of the enterprise metaverse , a new infrastructure layer made possible through the convergence of the digital and physical worlds. By combining the Internet of Things, AI, and mixed reality, this platform layer enables the creation of rich digital twin simulations of real-world processes, places, and things so organizations can monitor complex systems in real time, interact within them using mixed reality, and run simulations to model, analyze, and predict performance.

Data and AI

No asset is more strategic than data. In the next three years, we’ll create more data than we did in the past 10. But our ability to make sense of data is growing more difficult as the volume, velocity, and variety expand. The leading indicator of digital transformation success can be measured by an organization’s ability to build predictive and analytical power.

We offer organizations the ability to ensure their data is being used only for their benefit. Azure Synapse brings together data integration, data warehousing, and big data analytics so organizations can query data on their own terms at any scale. And, new Azure Purview offers organizations comprehensive data management and governance to map all their data, whether it resides on-premises, in the cloud, or in software as a service (SaaS) applications.

And we continue to bring rich AI capabilities directly into the data stack as large-scale models become powerful platforms in their own right. During the past year, our partner OpenAI achieved dramatic advances training models like GPT-3—the largest and most advanced language model in the world—on our Azure AI supercomputer. We exclusively licensed GPT-3 , allowing us to leverage its technical innovations to deliver advanced AI solutions for our customers, as well as create new solutions that harness the power of advanced natural language generation.

Developer Tools

As organizations focus on creating their own technology solutions, they will need standardized tools to modernize existing apps and build new ones.

To address this, we provide a complete chain of software development tools across every cloud and client platform. From Visual Studio to GitHub, we deliver the best tools for moving quickly from idea to code and from code to the cloud. Visual Studio has more than 25 million monthly users, and GitHub is home to over 65 million developers who use it to build, ship, and maintain their software.

At the platform as a service (PaaS) level, new Azure Communication Services enable developers to integrate rich communications APIs into their applications using the same infrastructure that powers Microsoft Teams.

With Azure Mixed Reality Services, digital information can be represented within the context of the three-dimensional world we live in. And Microsoft Mesh enables developers to build immersive, multiuser, cross-platform mixed reality apps. It transforms how people connect holographically with others in a natural way.

And, finally, our comprehensive portfolio of AI tools, frameworks, and infrastructure enables developers to build solutions that comprehend speech, make predictions, provide insights, and support decision-making.

Power Platform

Application development is moving beyond professional developers and into the hands of citizen developers—everyone from domain experts, to designers, marketers, salespeople, customer service professionals, teachers, students, and others.

In the same way that Office revolutionized productivity for knowledge workers, Power Platform—which has over 16 million monthly users—is transforming application development so that anyone can automate workflows, create apps, build virtual agents, and analyze data.

Business Applications

Every organization is looking to digitize their end-to-end operations—from sales and customer service to supply chain management—so they can rapidly adapt to changing market dynamics.

With Dynamics 365, we’re building a new generation of business applications to meet this challenge. New integrations between Dynamics 365 and Teams enable everyone across an organization to view and collaborate on customer records seamlessly within Teams, and to meet, chat, and collaborate within Dynamics 365.

More broadly, we are leading the way with solutions tailored to the needs of key industries. During the past year, we introduced industry clouds for financial services, healthcare, manufacturing, nonprofits, and retail that make it easier for organizations to take advantage of the full power of our tech stack and to utilize new, industry-specific customizations that improve time to value, increase agility, and lower costs.

AI is technology’s most important priority, and healthcare is its most urgent application. And with our pending acquisition of Nuance Communications , we’ll provide ambient clinical intelligence capabilities for healthcare organizations that improve the patient experience and reduce the overwhelming burden of work that physicians struggle with today.

In our rapidly changing digital economy, people need a platform where they can acquire new skills, expand their networks, and connect with employers. The strong success of LinkedIn is a clear indicator of how important this is. In the five years since Microsoft acquired LinkedIn, revenue has nearly tripled and growth has accelerated.

Today, LinkedIn has more than 774 million members and is a leader in B2B advertising, professional hiring, corporate learning, and sales intelligence. From LinkedIn profiles within Office, to LinkedIn Learning courses within Microsoft Viva, and LinkedIn Sales Navigator leads within Dynamics 365, we continue to bring the power of LinkedIn and Microsoft together to transform how people learn, sell, and connect.

Modern Work

The rise of hybrid work will be one of the most profound changes to the way people work in more than a century. To navigate it, organizations will need to embrace flexibility across their entire operating model, including the ways people work, the places they inhabit, and how they manage business process.

Our approach to hybrid work starts with Teams—the only all-in-one solution that supports meetings, calls, chat, collaboration, and business process automation in day-to-day workflow. Over the past year, we introduced hundreds of new features, from new presenter modes to new inclusive meeting experiences, that make it easy for everyone to be full participants in meetings, whether they’re joining from home, the office, a conference room, or a factory floor. Nearly 250 million people use Teams every month.

In this new hybrid work environment, having a digital employee experience platform will be key to business success. This is why we introduced Microsoft Viva , which brings the information, resources, and support employees need to stay connected to each other and their company’s mission directly into the flow of work.

The past year has also made clear how essential PCs are to work, learning, and life at home. With Windows 11 —the biggest update to our operating system in a decade—we’re reimagining everything from the platform to the store to help people and organizations be more productive, connected, and secure, and to build a more open ecosystem for developers and creators. With every new generation of Windows, we also unlock the next generation of hardware innovation across our ecosystem. And I’m excited to see new PCs from Surface and our OEM ecosystem ship with Windows 11 this holiday season that include the latest innovations in touch, pen, and voice, as well as new breakthroughs in both accessibility and sustainability.

And with Windows 365 , we are creating a new category: the cloud PC. By bringing the operating system to the cloud, we’re enabling organizations to stream the full Windows experience to their employees’ personal or corporate device with just a few clicks. This will give organizations greater flexibility and a more secure way to empower employees to be productive and connected, regardless of their location.

The threat landscape has never been more complex or challenging, and security has never been more critical for our customers or society as a whole. In response, we will invest $20 billion over the next five years to advance our security solutions. Our goal is to help every organization strengthen its security capabilities through a Zero Trust architecture built on our comprehensive solutions that span identity, security, compliance, and device management across all clouds and platforms.

Beyond our products, our operational security posture and threat intelligence help customers defend themselves. Last year, we intercepted 30 billion email threats and 31 billion authentication attacks. And as I write this, we are tracking more than 140 groups that pose an active threat to global cybersecurity.

Three billion people around the world play games, which makes gaming the largest category in the entertainment industry. We are expanding our opportunity to reach every one of them.

With Xbox Game Pass, we are transforming how people discover, connect, and engage with games. Great content drives Game Pass’ growth, and our acquisition this year of ZeniMax Media adds some of the world’s most iconic franchises to the service. We also continue to lead in the fast-growing cloud gaming market. Xbox Cloud Gaming is now available on PCs, as well as phones and tablets, and later this year will come to the console.

Introduced in November 2020 , the new Xbox Series S and X are our fastest-selling consoles ever. And we continue to expand our opportunity in the creator economy by adding new ways for players to build and monetize their creations in many of our most popular games.

OUR PURPOSE

As we pursue the opportunities ahead, we also recognize our increased responsibility in a world that will require much more from technology to address its most pressing challenges. To help people and organizations everywhere achieve more, we are focused on four interconnected pillars.

Support inclusive economic opportunity

At Microsoft, we believe that the economic growth we help drive must reach every person, community, and country. This starts with access to broadband. The pandemic has underscored that without it, people lack access to education, healthcare, economic opportunity, and more. We are continuing our efforts to extend broadband access to millions of people in rural and underserved communities in the United States and around the globe. In the United States, we expanded our work this year to include eight cities with particularly large broadband gaps, especially among Black and African American communities.

We must also continue to increase access to digital skills. In June 2020, with tens of millions of people displaced from their jobs due to the pandemic, we brought resources together from across Microsoft, inclusive of LinkedIn and GitHub, to help 25 million people connect to the digital skills for in-demand roles . Together with our partners, we have reached more than 47 million people to date, across 250 countries, but the work doesn’t stop there. We’re helping companies make 250,000 skills-based hires this year—ensuring those who learn digital skills can convert them into jobs and opportunity. For example, through LinkedIn’s new Skills Path pilot, we’re providing tools to help businesses source job candidates in a more equitable way—based on their proven proficiencies.

To build a more inclusive economy, we also have a responsibility to help close the Disability Divide, which impacts more than 1 billion people with disabilities around the world. That’s why in April we announced a new five-year commitment to spur the development of accessible technology, expand opportunities for people with disabilities in the workforce, and build a more inclusive workplace.

And we continue to make our technology affordable and accessible to nonprofit organizations around the world. This year, we provided $2.5 billion in donated and discounted products and services to help 295,000 nonprofits better serve their communities. Our employees donated an additional $214 million (including the company match) to the organizations and causes they care about.

Protect fundamental rights

We support the fundamental rights of all people. This year, we made progress in our work to address racial injustice and inequity . We released our first annual Racial Equity Initiative: Strengthening Our Communities report , which focuses on justice reform, affordable broadband, skills and education, and support for community-based nonprofits. And we continue to improve the representation of our ecosystem by engaging with diverse suppliers, financial institutions, and channel partners. While we’re proud of our progress, we know we have much more work to do to help our communities, increase representation, and strengthen our culture of inclusion to influence broader, systemic change.

We must also protect the institutions and processes of democracy. Through our Democracy Forward Program , we’re working across sectors to safeguard electoral processes and defend against disinformation. And to preserve and protect journalism , we’re helping strengthen local news ecosystems, restore trust in news, and provide cybersecurity and legal security for journalists.

Finally, we continue to stand up for human rights , which includes taking action to prevent modern slavery and human trafficking in our business and supply chain and supporting humanitarian action and emergency response . Last year, we mobilized resources to respond to the Beirut explosion, hurricanes in Central America, wildfires in the United States, and more. To date, we’ve committed cash, technology, and other resources with a value of more than $410 million to support ongoing COVID-19 response efforts.

Commit to a sustainable future

While the pandemic has been the defining issue of the past year-and-a-half, climate change is the challenge of our lifetime. And as a global technology company, we have a particular responsibility to do our part. In January, we released our first annual sustainability report , sharing our progress toward becoming carbon negative, zero waste, and water positive by 2030. In fiscal year 2020, Microsoft reduced its carbon emissions by 587,000 metric tons and purchased the removal of 1.3 million metric tons of carbon. We are building a Planetary Computer to help manage and protect Earth’s natural systems. And we have made a commitment to match 100 percent of our electricity consumption with zero carbon energy purchases 100 percent of the time by 2030.

We also know that solving the carbon problem will require new technology and partnerships. This is why we launched the Microsoft Cloud for Sustainability —to create a new business process category that will help every organization measure, report, and reduce their environmental impact. It’s also why we’re making direct investments through our $1 billion Climate Innovation Fund to help organizations accelerate the development of solutions for carbon reduction and removal technology.

We want our customers and partners to build their own digital capability and become independent with us, not dependent on us. This is not possible without trust. For Microsoft, trust is built on privacy, security, digital safety, the responsible use of AI, and transparency.

Our approach to privacy begins with the belief that people have a right to own their personal data and that companies have a responsibility to collect and use personal data responsibly. This is why we were the first major tech company to support GDPR—the EU’s privacy law that is the standard for privacy legislation around the world—and why we are strong advocates for passage of comprehensive federal privacy legislation in the United States.

It extends to our investments in security, and our belief that the public and private sectors—including tech companies—must be transparent so we can work together on a coordinated global response.

How we develop and use AI is also a critical component of trust. To ensure our AI technologies are used responsibly and to avoid unintended consequences, we take a principled approach built on fairness, reliability and safety, privacy and security, inclusiveness, transparency, and accountability. Our Office of Responsible AI ensures that we put these principles into practice, and our Responsible AI Resources Center shares guidelines and tools to help our customers and the developer community do the same.

Finally, we believe transparency is the foundation of trust, so we continue to offer clear information on how we run our business and work with customers and partners. Our CSR Reports Hub provides detailed information on law enforcement access to data, our environmental data, our political activities, our workforce demographics, and our human rights work.

No one company, industry, or country can solve these challenges alone. While our own actions are important, our most critical contribution will come from sharing our learnings and helping other organizations achieve their own goals for a better future too.

OUR CULTURE

Ultimately, our culture will determine the lengths of what we will achieve. We aspire to create a culture where employees are encouraged to be curious, to experiment, and to share things they learn. This is why we put so much emphasis over the past few years on building a culture that centers on our commitment to a growth mindset .

This growth mindset served us well during the past year of crisis, disruption, and transformation. It drives our passion to obsess about our customers, and to learn about and from them. It has helped us become more empathetic toward our colleagues and enabled us to work together as a team—as One Microsoft. And it underlies our approach to diversity and inclusion.

We know that as we become more representative of the communities where we live and work, and the people around the world who we aspire to serve, we become better at helping everyone on the planet achieve more. Diversity and inclusion continues to be a core priority for every employee at Microsoft and is incorporated into our performance and career development approach. To accelerate the inclusion journey for employees, as well as our ecosystem, we hosted Include 2021 , a global event focused on diversity and inclusion, and continue to invest in shared understanding by publishing resources and learnings broadly. And in the first year of our commitment to address inequity and racial injustice, we are well on our way to doubling the number of Black and African American, Hispanic, and Latinx employees in leadership positions at Microsoft in the United States by 2025.

Care is the new currency for every leader, and we’ve built a new framework to help our managers strengthen their teams and deliver success through empowerment and accountability. Our managers strive to model our culture and values in their actions, to coach their teams to define objectives and adapt and learn, and to care deeply for their employees, seeking to understand their capabilities, ambitions, and invest in their growth.

Although it may be difficult to imagine in this time of immeasurable hardship and deep uncertainty, I see boundless possibility ahead. I am encouraged because of the power of you, our shareholders, our employees, our partners, our customers, and everyone who has continued to work hard to make the world a better place in the face of constraints. And if we continue to pursue our mission, I am certain that we will collectively achieve so much more together.

I couldn’t be more optimistic.

Satya Nadella Chairman and Chief Executive Officer October 12, 2021

Financial Review

Issuer purchases of equity securities, dividends, and stock performance, share repurchases and dividends.

Share Repurchases

On September 20, 2016, our Board of Directors approved a share repurchase program authorizing up to $40.0 billion in share repurchases. This share repurchase program commenced in December 2016 and was completed in February 2020.

On September 18, 2019, our Board of Directors approved a share repurchase program authorizing up to $40.0 billion in share repurchases. This share repurchase program commenced in February 2020, following completion of the program approved on September 20, 2016, has no expiration date, and may be terminated at any time. As of June 30, 2021, $8.7 billion remained of this $40.0 billion share repurchase program.

We repurchased the following shares of common stock under the share repurchase programs:

Shares repurchased during fiscal year 2021 and the fourth quarter of fiscal year 2020 were under the share repurchase program approved on September 18, 2019. Shares repurchased during the third quarter of fiscal year 2020 were under the share repurchase programs approved on both September 20, 2016 and September 18, 2019. All other shares repurchased were under the share repurchase program approved on September 20, 2016. The above table excludes shares repurchased to settle employee tax withholding related to the vesting of stock awards of $4.4 billion, $3.3 billion, and $2.7 billion for fiscal years 2021, 2020, and 2019, respectively. All share repurchases were made using cash resources.

Our Board of Directors declared the following dividends:

The dividend declared on June 16, 2021 was included in other current liabilities as of June 30, 2021.

STOCK PERFORMANCE

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among Microsoft Corporation, the S&P 500 Index and the NASDAQ Computer Index

$100 invested on 6/30/16 in stock or index, including reinvestment of dividends. Fiscal year ending June 30.

Note About Forward-Looking Statements

This report includes estimates, projections, statements relating to our business plans, objectives, and expected operating results that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including the following sections: “Business”, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially. We describe risks and uncertainties that could cause actual results and events to differ materially in “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Quantitative and Qualitative Disclosures about Market Risk” in our fiscal year 2021 Form 10-K. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date they are made. We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise.

Embracing Our Future

Microsoft is a technology company whose mission is to empower every person and every organization on the planet to achieve more. We strive to create local opportunity, growth, and impact in every country around the world. Our platforms and tools help drive small business productivity, large business competitiveness, and public-sector efficiency. They also support new startups, improve educational and health outcomes, and empower human ingenuity.

We bring technology and products together into experiences and solutions that unlock value for our customers. Our ecosystem of customers and partners has stepped up to help people and organizations in every country use technology to be resilient and transform during the most trying of circumstances. Amid rapid change we’ve witnessed technology empower telehealth, remote manufacturing, and new ways of working from home and serving customers. These capabilities have relied on the public cloud, which is built on the investments we have made over time.

We are living in the new era of the intelligent cloud and intelligent edge, which is being sharpened by rapid advances in distributed computing, ambient intelligence, and multidevice experiences. This means the places we go and the things we interact with will increasingly become digitized, creating new opportunities and new breakthroughs. In the next phase of innovation, computing is more powerful and ubiquitous from the cloud to the edge. Artificial intelligence (“AI”) capabilities are rapidly advancing, fueled by data and knowledge of the world. Physical and virtual worlds are coming together with the Internet of Things (“IoT”) and mixed reality to create richer experiences that understand the context surrounding people, the things they use, the places they go, and their activities and relationships. A person’s experience with technology spans a multitude of devices and has become increasingly more natural and multi-sensory with voice, ink, and gaze interactions.

What We Offer

Founded in 1975, we develop and support software, services, devices, and solutions that deliver new value for customers and help people and businesses realize their full potential.

We offer an array of services, including cloud-based solutions that provide customers with software, services, platforms, and content, and we provide solution support and consulting services. We also deliver relevant online advertising to a global audience.

Our products include operating systems, cross-device productivity applications, server applications, business solution applications, desktop and server management tools, software development tools, and video games. We also design and sell devices, including PCs, tablets, gaming and entertainment consoles, other intelligent devices, and related accessories.

The Ambitions That Drive Us

To achieve our vision, our research and development efforts focus on three interconnected ambitions:

Reinvent productivity and business processes.
Build the intelligent cloud and intelligent edge platform.
Create more personal computing.

Reinvent Productivity and Business Processes

At Microsoft, we’re providing technology and resources to help our customers navigate a remote environment. We’re seeing our family of products play key roles in the ways the world is continuing to work, learn, and connect.

Our growth depends on securely delivering continuous innovation and advancing our leading productivity and collaboration tools and services, including Office, Dynamics, and LinkedIn. Microsoft 365 brings together Office 365, Windows, and Enterprise Mobility + Security to help organizations empower their employees with AI-backed tools that unlock creativity, increase teamwork, and fuel innovation, all the while enabling compliance coverage and data protection. Microsoft Teams is enabling rapid digital transformation by giving people a single tool to chat, call, meet, and collaborate. Microsoft Viva is an employee experience platform that brings together communications, knowledge, learning, resources, and insights powered by Microsoft 365. Microsoft Relationship Sales solution brings together LinkedIn Sales Navigator and Dynamics to transform business to business sales through social selling. Dynamics 365 for Talent with LinkedIn Recruiter and Learning gives human resource professionals a complete solution to compete for talent. Microsoft Power Platform empowers employees to build custom applications, automate workflow, and analyze data no matter their technical expertise.

These scenarios represent a move to unlock creativity and discover new habits, while simplifying security and management. Organizations of all sizes have digitized business-critical functions, redefining what they can expect from their business applications. This creates an opportunity to reach new customers and increase usage and engagement with existing customers.

Build the Intelligent Cloud and Intelligent Edge Platform

In the new remote world, companies have accelerated their own digital transformation to empower their employees, optimize their operations, engage customers, and in some cases, change the very core of their products and services. Partnering with organizations on their digital transformation during this period is one of our largest opportunities and we are uniquely positioned to become the strategic digital transformation platform and partner of choice; their success is our success.

Our strategy requires continued investment in datacenters and other hybrid and edge infrastructure to support our services. Azure is a trusted cloud with comprehensive compliance coverage and AI-based security built in.

Our cloud business benefits from three economies of scale: datacenters that deploy computational resources at significantly lower cost per unit than smaller ones; datacenters that coordinate and aggregate diverse customer, geographic, and application demand patterns, improving the utilization of computing, storage, and network resources; and multi-tenancy locations that lower application maintenance labor costs.

The Microsoft Cloud is the most comprehensive and trusted cloud, providing the best integration across the technology stack while offering openness, improving time to value, reducing costs, and increasing agility. Being a global-scale cloud, Azure uniquely offers hybrid consistency, developer productivity, AI capabilities, and trusted security and compliance. We see more emerging use cases and needs for compute and security at the edge and are accelerating our innovation across the spectrum of intelligent edge devices, from IoT sensors to gateway devices and edge hardware to build, manage, and secure edge workloads. With Azure Stack, organizations can extend Azure into their own datacenters to create a consistent stack across the public cloud and the intelligent edge. Our hybrid infrastructure consistency spans security, compliance, identity, and management, helping to support the real-world needs and evolving regulatory requirements of commercial customers and enterprises. Azure Arc simplifies governance and management by delivering a consistent multi-cloud and on-premises management platform. Security, compliance, identity, and management underlie our entire tech stack. We offer integrated, end-to-end capabilities to protect people and organizations. In April 2021, we entered into a definitive agreement to acquire Nuance Communications, Inc., a cloud and AI software provider with healthcare and enterprise AI experience. The acquisition will build on our industry-specific cloud offerings.

We are accelerating our development of mixed reality solutions with new Azure services and devices. Microsoft Mesh enables presence and shared experiences from anywhere through mixed reality applications. The opportunity to merge the physical and digital worlds, when combined with the power of Azure cloud services, unlocks the potential for entirely new workloads and experiences which we believe will shape the next era of computing.

The ability to convert data into AI drives our competitive advantage. Azure SQL Database makes it possible for customers to take SQL Server from their on-premises datacenter to a fully managed instance in the cloud to utilize built-in AI. Azure Synapse Analytics, a limitless analytics service, brings together data integration, enterprise data warehousing, and big data analytics for immediate business intelligence and machine learning needs. We are accelerating adoption of AI innovations from research to products. Our innovation helps every developer be an AI developer, with approachable new tools from Azure Machine Learning Studio for creating simple machine learning models, to the powerful Azure Machine Learning Workbench for the most advanced AI modeling and data science. From GitHub to Visual Studio, we provide a developer tool chain for everyone, no matter the technical experience, across all platforms, whether Azure, Windows, or any other cloud or client platform.

Create More Personal Computing

We strive to make computing more personal by putting people at the core of the experience, enabling them to interact with technology in more intuitive, engaging, and dynamic ways. Microsoft 365 is empowering people and organizations to be productive and secure as they adapt to more fluid ways of working and learning. The PC has been mission-critical across work, school, and life to sustain productivity in a remote everything world.

Windows 10 serves the enterprise as the most secure and productive operating system. It empowers people with AI-first interfaces ranging from voice-activated commands through Cortana, inking, immersive 3D content storytelling, and mixed reality experiences. Our ambition for Windows 10 monetization opportunities includes gaming, services, subscriptions, and search advertising. In June 2021, Microsoft announced the next generation of Windows – Windows 11. Windows 11 builds on the strengths of productivity, versatility, and security on Windows 10 today and adds in new experiences that include powerful task switching tools like new snap layouts, snap groups, and desktops; new ways to stay connected through chat; the information you want at your fingertips; and more. Windows also plays a critical role in fueling our cloud business and Microsoft 365 strategy, and it powers the growing range of devices on the “intelligent edge.”

Microsoft Edge is our fast and secure browser that helps protect your data, with built-in shopping tools designed to save you time and money. Organizational tools such as Collections, Vertical Tabs, and Immersive Reader help you make the most of your time while browsing, streaming, searching, sharing, and more.

We are committed to designing and marketing first-party devices to help drive innovation, create new device categories, and stimulate demand in the Windows ecosystem. The Surface family includes Surface Book 3, Surface Laptop Go, Surface Go 2, Surface Pro 7, Surface Laptop 4, Surface Pro X, Surface Studio 2, and Surface Duo.

To expand usage and deepen engagement, we continue to invest in content, community, and cloud services as we pursue the expansive opportunity in the gaming industry. We have broadened our approach to how we think about gaming end-to-end, from the way games are created and distributed to how they are played, including cloud gaming so players can stream across PC, console, and mobile. We have a strong position with our large and growing highly engaged community of gamers, including the March 2021 acquisition of ZeniMax Media Inc., the parent company of Bethesda Softworks LLC, one of the largest, privately held game developers and publishers in the world. Xbox Game Pass is a community with access to a curated library of over 100 first- and third-party console and PC titles. Xbox Cloud Gaming is Microsoft’s game streaming technology that is complementary to our console hardware and gives fans the ultimate choice to play the games they want, with the people they want, on the devices they want.

Our Future Opportunity

In a time of great disruption and uncertainty, customers are looking to us to accelerate their own digital transformations as software and cloud computing play a huge role across every industry and around the world. We continue to develop complete, intelligent solutions for our customers that empower people to stay productive and collaborate, while safeguarding businesses and simplifying IT management. Our goal is to lead the industry in several distinct areas of technology over the long-term, which we expect will translate to sustained growth. We are investing significant resources in:

Transforming the workplace to deliver new modern, modular business applications to improve how people communicate, collaborate, learn, work, play, and interact with one another.
Building and running cloud-based services in ways that unleash new experiences and opportunities for businesses and individuals.
Applying AI to drive insights and act on our customer’s behalf by understanding and interpreting their needs using natural methods of communication.
Using Windows to fuel our cloud business, grow our share of the PC market, and drive increased engagement with our services like Microsoft 365 Consumer, Teams, Edge, Bing, Xbox Game Pass, and more.
Tackling security from all angles with our integrated, end-to-end solutions spanning security, compliance, identity, and management, across all clouds and platforms.
Inventing new gaming experiences that bring people together around their shared love for games on any devices and pushing the boundaries of innovation with console and PC gaming by creating the next wave of entertainment.

Our future growth depends on our ability to transcend current product category definitions, business models, and sales motions. We have the opportunity to redefine what customers and partners can expect and are working to deliver new solutions that reflect the best of Microsoft.

In March 2020, the World Health Organization declared the outbreak of COVID-19 to be a pandemic. The COVID-19 pandemic continues to have widespread and unpredictable impacts on global society, economies, financial markets, and business practices, and continues to impact our business operations, including our employees, customers, partners, and communities. Refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion regarding the impact of COVID-19 on our fiscal year 2021 financial results. The extent to which the COVID-19 pandemic impacts our business going forward will depend on numerous evolving factors we cannot reliably predict. Refer to Risk Factors in our fiscal year 2021 Form 10-K for a discussion of these factors and other risks.

Corporate Social Responsibility

Commitment to Sustainability

We work to ensure that technology is inclusive, trusted, and increases sustainability. We are accelerating progress toward a more sustainable future by reducing our environmental footprint, advancing research, helping our customers build sustainable solutions, and advocating for policies that benefit the environment. In January 2020, we announced a bold commitment and detailed plan to be carbon negative by 2030, and to remove from the environment by 2050 all the carbon we have emitted since our founding in 1975. This included a commitment to invest $1 billion over four years in new technologies and innovative climate solutions. We built on this pledge by adding commitments to be water positive by 2030, zero waste by 2030, and to protect ecosystems by developing a Planetary Computer. We also help our suppliers and customers around the world use Microsoft technology to reduce their own carbon footprint.

In January 2021, we announced that in fiscal year 2020 we reduced Microsoft’s carbon emissions by 586,683 metric tons. We purchased the removal of 1.3 million metric tons of carbon from 26 projects around the world. Furthermore, we shared a commitment to transparency by subjecting the data in our annual sustainability report to third-party review and to accountability by including progress on sustainability goals as a factor in determining executive pay.

The investments we make in sustainability carry through to our products, services, and devices. We design our devices, from Surface to Xbox, to minimize their impact on the environment. Our cloud and AI services and datacenters help businesses cut energy consumption, reduce physical footprints, and design sustainable products. We also pledged a $50 million investment in AI for Earth to accelerate innovation by putting AI in the hands of those working to directly address sustainability challenges. We are committed to playing our part to help accelerate the world’s transition to a more economically and environmentally sustainable future for us all.

Addressing Racial Injustice and Inequity

Our future opportunity depends on reaching and empowering all communities, and we are committed to taking action to help address racial injustice and inequity. With significant input from employees and leaders who are members of the Black and African American community, our senior leadership team and board of directors announced in June 2020 that we had developed a set of actions to help improve the lived experience at Microsoft and drive change in the communities in which we live and work. These efforts include increasing our representation and strengthening our culture of inclusion by doubling the number of Black and African American people managers, senior individual contributors, and senior leaders in the United States by 2025; evolving our ecosystem with our supply chain, banking partners, and partner ecosystem; and strengthening our communities by using data, technology, and partnerships to help address racial injustice and inequities of the Black and African American communities in the U.S. and improve the safety and wellbeing of our employees and their communities.

Over the last year, we have collaborated with partners and worked within neighborhoods and communities to launch and scale a number of projects and programs including: expanding our existing justice reform work with a five-year, $50 million sustained effort, expanding access to affordable broadband and devices for Black and African American communities and key institutions that support them in major urban centers, expanding access to skills and education to support Black and African American students and adults to succeed in the digital economy, and increasing technology support for nonprofits that provide critical services to Black and African American communities.

We have more than doubled our percentage share of transaction volume with Black- and African American-owned financial institutions and increased our deposits with Black- and African American-owned minority depository institutions, enabling increased funds into local communities. Additionally, we have seen growth in our Black- and African American-owned supplier base and in Black- and African American-owned technology partners in the Microsoft Partner Network, and we launched the Black Channel Partner Alliance community to support partners onboarding to the Microsoft Cloud and to unlock partner benefits for co-selling with Microsoft.

We acknowledge we have more work ahead of us to address racial injustice and inequity, and are applying many of the programs above to help other underrepresented communities.

Investing in Digital Skills

With a continued focus on digital transformation, Microsoft is helping to ensure that no one is left behind, particularly as economies recover from the COVID-19 pandemic. We announced in June 2020 that we are expanding access to the digital skills that have become increasingly vital to many of the world’s jobs, and especially to individuals hardest hit by recent job losses. Our skills initiative brings together learning resources, certification opportunities, and job-seeker tools from LinkedIn, GitHub, and Microsoft Learn, and is built on data insights drawn from LinkedIn’s Economic Graph. We also invested $20 million in key non-profit partnerships through Microsoft Philanthropies to help people from underserved communities that are often excluded by the digital economy.

Over 42 million people across every continent have accessed free training through our skills initiative. The effort surpassed its initial goals and has been expanded with a new emphasis on connecting learners with jobs that help put their new training to use and connecting employers with skilled job seekers they might not find in traditional networks.

HUMAN CAPITAL RESOURCES

Microsoft aims to recruit, develop, and retain diverse, world-changing talent. To foster their and our success, we seek to create an environment where people can do their best work – a place where they can proudly be their authentic selves, guided by our values, and where they know their needs can be met. We strive to maximize the potential of our human capital resources by creating a respectful, rewarding, and inclusive work environment that enables our global employees to create products and services that further our mission to empower every person and every organization on the planet to achieve more.

As of June 30, 2021, we employed approximately 181,000 people on a full-time basis, 103,000 in the U.S. and 78,000 internationally. Of the total employed people, 67,000 were in operations, including manufacturing, distribution, product support, and consulting services; 60,000 were in product research and development; 40,000 were in sales and marketing; and 14,000 were in general and administration. Certain of our employees are subject to collective bargaining agreements.

Our Culture

Microsoft’s culture is grounded in the growth mindset. This means everyone is on a continuous journey to learn and grow. We believe potential can be nurtured and is not pre-determined, and we should always be learning and curious – trying new things without fear of failure. We identified four attributes that allow growth mindset to flourish:

Obsessing over what matters to our customers.
Becoming more diverse and inclusive in everything we do.
Operating as one company, One Microsoft, instead of multiple siloed businesses.
Making a difference in the lives of each other, our customers, and the world around us.

Our employee listening systems enable us to gather feedback directly from our workforce to inform our programs and employee needs globally. 88% of employees globally participated in our fiscal year 2021 MS Poll engagement survey, which covers a variety of topics such as inclusion, pay and benefits, and learning and development. Throughout the fiscal year, we also collect nearly 75,000 Daily Pulse employee survey responses. During fiscal year 2021, our Daily Pulse surveys gave us invaluable insights into ways we could support employees through the COVID-19 pandemic and addressing racial injustice. In addition to poll and pulse surveys, we gain insights through onboarding and exit surveys, internal Yammer channels, employee Q&A sessions, and AskHR Service support.

Diversity and Inclusion

At Microsoft we have an inherently inclusive mission: to empower every person and every organization on the planet to achieve more. We think of diversity and inclusion as core to our business model, informing our actions to impact economies and people around the world. There are billions of people who want to achieve more, but have a different set of circumstances, abilities, and backgrounds that often limit access to opportunity and achievement. The better we represent that diversity inside Microsoft, the more effectively we can innovate for those we seek to empower.

We strive to include others by holding ourselves accountable for diversity, driving global systemic change in our workplace and workforce, and creating an inclusive work environment. Through this commitment we can allow everyone the chance to be their authentic selves and do their best work every day. We support multiple highly active Employee Resource Groups for women, families, racial and ethnic minorities, military, people with disabilities, or who identify as LGBTQI+, where employees can go for support, networking, and community-building. As described in our 2020 Proxy Statement, annual performance and compensation reviews of our senior leadership team include an evaluation of their contributions to employee culture and diversity. To ensure accountability over time, we publicly disclose our progress on a multitude of workforce metrics including:

Detailed breakdowns of gender, racial, and ethnic minority representation in our employee population, with data by job types, levels, and segments of our business.
Our EEO-1 report (equal employment opportunity).
Disability representation.

Total Rewards

We develop dynamic, sustainable, and strategic programs with the goal of providing a highly differentiated portfolio to attract, reward, and retain top talent and enable our employees to do their best work. These programs reinforce our culture and values such as collaboration and growth mindset. Managers evaluate and recommend rewards based on, for example, how well we leverage the work of others and contribute to the success of our colleagues. We monitor pay equity and career progress across multiple dimensions.

As part of our effort to promote a One Microsoft and inclusive culture, we expanded stock eligibility to all Microsoft employees as part of our annual rewards process. This includes all non-exempt and exempt employees and equivalents across the globe including business support professionals and datacenter and retail employees.

In our 2020 Diversity and Inclusion Report, we reported that all racial and ethnic minority employees in the U.S. combined earn $1.006 for every $1.000 earned by their white counterparts, that women in the U.S. earn $1.001 for every $1.000 earned by their counterparts in the U.S. who are men, and women in the U.S. plus our ten other largest employee geographies (Australia, Canada, China, France, Germany, India, Ireland, Israel, Japan, and United Kingdom) combined earn $1.000 for every $1.000 by men in these countries. Our intended result is a global performance and development approach that fosters our culture, and competitive compensation that ensures equitable pay by role while supporting pay for performance.

Wellness and Safety

Microsoft is committed to supporting our employees’ well-being and safety while they are at work and in their personal lives.

We took a wide variety of measures to protect the health and well-being of our employees, suppliers, and customers during the COVID-19 pandemic. We made substantial modifications to employee travel policies and implemented office closures so non-essential employees could work remotely. We continued to pay hourly service providers such as cleaning and reception staff who may have otherwise been furloughed. We implemented a global Paid Pandemic School and Childcare Closure Leave to support working parents, added wellbeing days for those who needed to take time off for mental health and wellness, implemented on-demand COVID-19 testing and vaccinations on our Redmond, Washington campus, and extended full medical plan coverage for coronavirus testing, treatment, and telehealth services. We also expanded existing programs such as our Microsoft CARES Employee Assistance Program and family backup care.

In addition to the extraordinary steps and programs relating to COVID-19, our comprehensive benefits package includes many physical, emotional, and financial wellness programs including counseling through the Microsoft CARES Employee Assistance Program, flexible fitness benefits, savings and investment tools, adoption assistance, and back-up care for children and elders. Finally, our Occupational Health and Safety program helps ensure employees can stay safe while they are working.

Learning and Development

Our growth mindset culture begins with valuing learning over knowing – seeking out new ideas, driving innovation, embracing challenges, learning from failure, and improving over time. To support this culture, we offer a wide range of learning and development opportunities. We believe learning can be more than formal instruction, and our learning philosophy focuses on providing the right learning, at the right time, in the right way. Opportunities include:

Personalized, integrated, and relevant views of all learning opportunities on our internal learning portal, our external learning portal MS Learn, and LinkedIn Learning that is available to all employees worldwide.
In-the-classroom learning, learning “pods,” our early-in-career Aspire program, and manager excellence communities.
On-the-job “stretch” and advancement opportunities.
Managers holding conversations about employees’ career and development plans, coaching on career opportunities, and programs like mentoring and sponsorship.
Customized manager learning to build people manager capabilities and similar learning solutions to build leadership skills for all employees including differentiated leadership development programs.
New employee orientation covering a range of topics including company values, culture, and Standards of Business Conduct, as well as ongoing onboarding program.

Our employees embrace the growth mindset and take advantage of the formal learning opportunities as well as thousands of informal and on-the-job learning opportunities. In terms of formal on-line learning solutions, in fiscal year 2021 our employees completed over 5 million courses, averaging over 18 hours per employee. Given our focus on understanding core company beliefs and compliance topics, all employees complete required learning programs like Standards of Business Conduct, Privacy, Unconscious Bias, and preventing harassment courses. Our corporate learning portal has over 100,000 average monthly active users. All of our approximately 23,000 people managers must complete between 25-30 hours of required manager capability and excellence training and are assigned ongoing required training each year. In addition, all employees complete skills training based on the profession they are in each year.

New Ways of Working

The global pandemic has accelerated our capabilities and culture with respect to flexible work. Microsoft has introduced a Hybrid Workplace Flexibility Guide to better support managers and employees as they adapt to new ways of working that shift paradigms, embrace flexibility, promote inclusion, and drive innovation. Our ongoing survey data shows employees value the flexibility related to work location, work site, and work hours, and while many indicate they intend to return to a worksite once conditions permit, they also intend to adjust hours or spend some portions of workweeks working remotely. We are focused on building capabilities to support a variety of workstyles where individuals, teams, and our business can be successful.

OPERATING SEGMENTS

We operate our business and report our financial performance using three segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. Our segments provide management with a comprehensive financial view of our key businesses. The segments enable the alignment of strategies and objectives across the development, sales, marketing, and services organizations, and they provide a framework for timely and rational allocation of resources within businesses.

Additional information on our operating segments and geographic and product information is contained in Note 19 – Segment Information and Geographic Data of the Notes to Financial Statements.

Our reportable segments are described below.

Productivity and Business Processes

Our Productivity and Business Processes segment consists of products and services in our portfolio of productivity, communication, and information services, spanning a variety of devices and platforms. This segment primarily comprises:

Office Commercial (Office 365 subscriptions, the Office 365 portion of Microsoft 365 Commercial subscriptions, and Office licensed on-premises), comprising Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance, and Skype for Business.
Office Consumer, including Microsoft 365 Consumer subscriptions and Office licensed on-premises, and Office Consumer Services, including Skype, Outlook.com, and OneDrive.
LinkedIn, including Talent Solutions, Marketing Solutions, Premium Subscriptions, Sales Solutions, and Learning Solutions.
Dynamics business solutions, including Dynamics 365, comprising a set of intelligent, cloud-based applications across ERP, CRM, Customer Insights, Power Apps, and Power Automate; and on-premises ERP and CRM applications.

Office Commercial

Office Commercial is designed to increase personal, team, and organizational productivity through a range of products and services. Growth depends on our ability to reach new users in new markets such as frontline workers, small and medium businesses, and growth markets, as well as add value to our core product and service offerings to span productivity categories such as communication, collaboration, analytics, security, and compliance. Office Commercial revenue is mainly affected by a combination of continued installed base growth and average revenue per user expansion, as well as the continued shift from Office licensed on-premises to Office 365.

Office Consumer

Office Consumer is designed to increase personal productivity through a range of products and services. Growth depends on our ability to reach new users, add value to our core product set, and continue to expand our product and service offerings into new markets. Office Consumer revenue is mainly affected by the percentage of customers that buy Office with their new devices and the continued shift from Office licensed on-premises to Microsoft 365 Consumer subscriptions. Office Consumer Services revenue is mainly affected by the demand for communication and storage through Skype, Outlook.com, and OneDrive, which is largely driven by subscriptions, advertising, and the sale of minutes.

LinkedIn connects the world’s professionals to make them more productive and successful and transforms the way companies hire, market, sell, and learn. Our vision is to create economic opportunity for every member of the global workforce through the ongoing development of the world’s first Economic Graph, a digital representation of the global economy. In addition to LinkedIn’s free services, LinkedIn offers monetized solutions: Talent Solutions, Marketing Solutions, Premium Subscriptions, Sales Solutions, and Learning Solutions. Talent Solutions provide insights for workforce planning and tools to hire, nurture, and develop talent. Marketing Solutions help companies reach, engage, and convert their audiences at scale. Premium Subscriptions enables professionals to manage their professional identity, grow their network, and connect with talent through additional services like premium search. Sales Solutions help companies strengthen customer relationships, empower teams with digital selling tools, and acquire new opportunities. Finally, Learning Solutions, including Glint, help businesses close critical skills gaps in times where companies are having to do more with existing talent. LinkedIn has over 750 million members and has offices around the globe. Growth will depend on our ability to increase the number of LinkedIn members and our ability to continue offering services that provide value for our members and increase their engagement. LinkedIn revenue is mainly affected by demand from enterprises and professional organizations for subscriptions to Talent Solutions, Learning Solutions, Sales Solutions, and Premium Subscriptions offerings, as well as member engagement and the quality of the sponsored content delivered to those members to drive Marketing Solutions.

Dynamics provides cloud-based and on-premises business solutions for financial management, enterprise resource planning (“ERP”), customer relationship management (“CRM”), supply chain management, and other application development platforms for small and medium businesses, large organizations, and divisions of global enterprises. Dynamics revenue is driven by the number of users licensed and applications consumed, expansion of average revenue per user, and the continued shift to Dynamics 365, a unified set of cloud-based intelligent business applications, including Power Apps and Power Automate.

Competition

Competitors to Office include software and global application vendors, such as Apple, Cisco Systems, Facebook, Google, IBM, Okta, Proofpoint, Slack, Symantec, Zoom, and numerous web-based and mobile application competitors as well as local application developers. Apple distributes versions of its pre-installed application software, such as email and calendar products, through its PCs, tablets, and phones. Cisco Systems is using its position in enterprise communications equipment to grow its unified communications business. Google provides a hosted messaging and productivity suite. Slack provides teamwork and collaboration software. Zoom offers videoconferencing and cloud phone solutions. Skype for Business and Skype also compete with a variety of instant messaging, voice, and video communication providers, ranging from start-ups to established enterprises. Okta, Proofpoint, and Symantec provide security solutions across email security, information protection, identity, and governance. Web-based offerings competing with individual applications have also positioned themselves as alternatives to our products and services. We compete by providing powerful, flexible, secure, integrated industry-specific, and easy-to-use productivity and collaboration tools and services that create comprehensive solutions and work well with technologies our customers already have both on-premises or in the cloud.

LinkedIn faces competition from online professional networks, recruiting companies, talent management companies, and larger companies that are focusing on talent management and human resource services; job boards; traditional recruiting firms; and companies that provide learning and development products and services. Marketing Solutions competes with online and offline outlets that generate revenue from advertisers and marketers, and Sales Solutions competes with online and offline outlets for companies with lead generation and customer intelligence and insights.

Dynamics competes with cloud-based and on-premises business solution providers such as Oracle, Salesforce.com, and SAP.

Intelligent Cloud

Our Intelligent Cloud segment consists of our public, private, and hybrid server products and cloud services that can power modern business and developers. This segment primarily comprises:

Server products and cloud services, including Azure; SQL Server, Windows Server, Visual Studio, System Center, and related Client Access Licenses (“CALs”); and GitHub.
Enterprise Services, including Premier Support Services and Microsoft Consulting Services.

Server Products and Cloud Services

Azure is a comprehensive set of cloud services that offer developers, IT professionals, and enterprises freedom to build, deploy, and manage applications on any platform or device. Customers can use Azure through our global network of datacenters for computing, networking, storage, mobile and web application services, AI, IoT, cognitive services, and machine learning. Azure enables customers to devote more resources to development and use of applications that benefit their organizations, rather than managing on-premises hardware and software. Azure revenue is mainly affected by infrastructure-as-a-service and platform-as-a-service consumption-based services, and per user-based services such as Enterprise Mobility + Security.

Our server products are designed to make IT professionals, developers, and their systems more productive and efficient. Server software is integrated server infrastructure and middleware designed to support software applications built on the Windows Server operating system. This includes the server platform, database, business intelligence, storage, management and operations, virtualization, service-oriented architecture platform, security, and identity software. We also license standalone and software development lifecycle tools for software architects, developers, testers, and project managers. GitHub provides a collaboration platform and code hosting service for developers. Server products revenue is mainly affected by purchases through volume licensing programs, licenses sold to original equipment manufacturers (“OEM”), and retail packaged products. CALs provide access rights to certain server products, including SQL Server and Windows Server, and revenue is reported along with the associated server product.

Enterprise Services

Enterprise Services, including Premier Support Services and Microsoft Consulting Services, assist customers in developing, deploying, and managing Microsoft server and desktop solutions and provide training and certification to developers and IT professionals on various Microsoft products.

Azure faces diverse competition from companies such as Amazon, Google, IBM, Oracle, VMware, and open source offerings. Our Enterprise Mobility + Security offerings also compete with products from a range of competitors including identity vendors, security solution vendors, and numerous other security point solution vendors. Azure’s competitive advantage includes enabling a hybrid cloud, allowing deployment of existing datacenters with our public cloud into a single, cohesive infrastructure, and the ability to run at a scale that meets the needs of businesses of all sizes and complexities. We believe our cloud’s global scale, coupled with our broad portfolio of identity and security solutions, allows us to effectively solve complex cybersecurity challenges for our customers and differentiates us from the competition.

Our server products face competition from a wide variety of server operating systems and applications offered by companies with a range of market approaches. Vertically integrated computer manufacturers such as Hewlett-Packard, IBM, and Oracle offer their own versions of the Unix operating system preinstalled on server hardware. Nearly all computer manufacturers offer server hardware for the Linux operating system and many contribute to Linux operating system development. The competitive position of Linux has also benefited from the large number of compatible applications now produced by many commercial and non-commercial software developers. A number of companies, such as Red Hat, supply versions of Linux.

We compete to provide enterprise-wide computing solutions and point solutions with numerous commercial software vendors that offer solutions and middleware technology platforms, software applications for connectivity (both Internet and intranet), security, hosting, database, and e-business servers. IBM and Oracle lead a group of companies focused on the Java Platform Enterprise Edition that competes with our enterprise-wide computing solutions. Commercial competitors for our server applications for PC-based distributed client-server environments include CA Technologies, IBM, and Oracle. Our web application platform software competes with open source software such as Apache, Linux, MySQL, and PHP. In middleware, we compete against Java vendors.

Our database, business intelligence, and data warehousing solutions offerings compete with products from IBM, Oracle, SAP, and other companies. Our system management solutions compete with server management and server virtualization platform providers, such as BMC, CA Technologies, Hewlett-Packard, IBM, and VMware. Our products for software developers compete against offerings from Adobe, IBM, Oracle, and other companies, and also against open-source projects, including Eclipse (sponsored by CA Technologies, IBM, Oracle, and SAP), PHP, and Ruby on Rails.

We believe our server products provide customers with advantages in performance, total costs of ownership, and productivity by delivering superior applications, development tools, compatibility with a broad base of hardware and software applications, security, and manageability.

Our Enterprise Services business competes with a wide range of companies that provide strategy and business planning, application development, and infrastructure services, including multinational consulting firms and small niche businesses focused on specific technologies.

More Personal Computing

Our More Personal Computing segment consists of products and services that put customers at the center of the experience with our technology. This segment primarily comprises:

Windows, including Windows OEM licensing (“Windows OEM”) and other non-volume licensing of the Windows operating system; Windows Commercial, comprising volume licensing of the Windows operating system, Windows cloud services, and other Windows commercial offerings; patent licensing; Windows IoT; and MSN advertising.
Devices, including Surface and PC accessories.
Gaming, including Xbox hardware and Xbox content and services, comprising digital transactions, Xbox Game Pass and other subscriptions, video games, third-party video game royalties, cloud services, and advertising.
Search advertising.

The Windows operating system is designed to deliver a more personal computing experience for users by enabling consistency of experience, applications, and information across their devices. Windows OEM revenue is impacted significantly by the number of Windows operating system licenses purchased by OEMs, which they pre-install on the devices they sell. In addition to computing device market volume, Windows OEM revenue is impacted by:

The mix of computing devices based on form factor and screen size.
Differences in device market demand between developed markets and growth markets.
Attachment of Windows to devices shipped.
Customer mix between consumer, small and medium businesses, and large enterprises.
Changes in inventory levels in the OEM channel.
Pricing changes and promotions, pricing variation that occurs when the mix of devices manufactured shifts from local and regional system builders to large multinational OEMs, and different pricing of Windows versions licensed.
Constraints in the supply chain of device components.

Windows Commercial revenue, which includes volume licensing of the Windows operating system and Windows cloud services such as Microsoft Defender Advanced Threat Protection, is affected mainly by the demand from commercial customers for volume licensing and Software Assurance (“SA”), as well as advanced security offerings. Windows Commercial revenue often reflects the number of information workers in a licensed enterprise and is relatively independent of the number of PCs sold in a given year.

Patent licensing includes our programs to license patents we own for use across a broad array of technology areas, including mobile devices and cloud offerings.

Windows IoT extends the power of Windows and the cloud to intelligent systems by delivering specialized operating systems, tools, and services for use in embedded devices.

MSN advertising includes both native and display ads.

We design and sell devices, including Surface and PC accessories. Our devices are designed to enable people and organizations to connect to the people and content that matter most using Windows and integrated Microsoft products and services. Surface is designed to help organizations, students, and consumers be more productive. Growth in Devices is dependent on total PC shipments, the ability to attract new customers, our product roadmap, and expanding into new categories.

Our gaming platform is designed to provide a variety of entertainment through a unique combination of content, community, and cloud. Our exclusive game content is created through Xbox Game Studios, a collection of first-party studios creating iconic and differentiated gaming experiences. We continue to invest in new gaming studios and content to expand our IP roadmap and leverage new content creators. These unique gaming experiences are the cornerstone of Xbox Game Pass, a subscription service and gaming community with access to a curated library of over 100 first- and third-party console and PC titles.

The gamer remains at the heart of the Xbox ecosystem. We continue to open new opportunities for gamers to engage both on- and off-console with both the launch of Xbox Cloud Gaming, our game streaming service, and continued investment in gaming hardware. Xbox Cloud Gaming utilizes Microsoft’s Azure cloud technology to allow direct and on-demand streaming of games to PCs, consoles, and mobile devices, enabling gamers to take their favorites games with them and play on the device most convenient to them.

Xbox enables people to connect and share online gaming experiences that are accessible on Xbox consoles, Windows-enabled devices, and other devices. Xbox is designed to benefit users by providing access to a network of certified applications and services and to benefit our developer and partner ecosystems by providing access to a large customer base. Xbox revenue is mainly affected by subscriptions and sales of first- and third-party content, as well as advertising. Growth of our Gaming business is determined by the overall active user base through Xbox enabled content, availability of games, providing exclusive game content that gamers seek, the computational power and reliability of the devices used to access our content and services, and the ability to create new experiences through first-party content creators.

Search Advertising

Our Search business, including Bing and Microsoft Advertising, is designed to deliver relevant online advertising to a global audience. We have several partnerships with other companies, including Verizon Media Group, through which we provide and monetize search queries. Growth depends on our ability to attract new users, understand intent, and match intent with relevant content and advertiser offerings.

Windows faces competition from various software products and from alternative platforms and devices, mainly from Apple and Google. We believe Windows competes effectively by giving customers choice, value, flexibility, security, an easy-to-use interface, and compatibility with a broad range of hardware and software applications, including those that enable productivity.

Devices face competition from various computer, tablet, and hardware manufacturers who offer a unique combination of high-quality industrial design and innovative technologies across various price points. These manufacturers, many of which are also current or potential partners and customers, include Apple and our Windows OEMs.

Xbox and our cloud gaming services face competition from various online gaming ecosystems and game streaming services, including those operated by Amazon, Apple, Facebook, Google, and Tencent. We also compete with other providers of entertainment services such as video streaming platforms. Our gaming platform competes with console platforms from Nintendo and Sony, both of which have a large, established base of customers. We believe our gaming platform is effectively positioned against, and uniquely differentiated from, competitive products and services based on significant innovation in hardware architecture, user interface, developer tools, online gaming and entertainment services, and continued strong exclusive content from our own first-party game franchises as well as other digital content offerings.

Our search business competes with Google and a wide array of websites, social platforms like Facebook, and portals that provide content and online offerings to end users.

We have operations centers that support operations in their regions, including customer contract and order processing, credit and collections, information processing, and vendor management and logistics. The regional center in Ireland supports the European, Middle Eastern, and African region; the center in Singapore supports the Japan, India, Greater China, and Asia-Pacific region; and the centers in Fargo, North Dakota, Fort Lauderdale, Florida, Puerto Rico, Redmond, Washington, and Reno, Nevada support Latin America and North America. In addition to the operations centers, we also operate datacenters throughout the Americas, Europe, Australia, and Asia, as well as in the Middle East and Africa.

To serve the needs of customers around the world and to improve the quality and usability of products in international markets, we localize many of our products to reflect local languages and conventions. Localizing a product may require modifying the user interface, altering dialog boxes, and translating text.

Our devices are primarily manufactured by third-party contract manufacturers. For the majority of our products, we have the ability to use other manufacturers if a current vendor becomes unavailable or unable to meet our requirements. However, some of our products contain certain components for which there are very few qualified suppliers. For these components, we have limited near-term flexibility to use other manufacturers if a current vendor becomes unavailable or is unable to meet our requirements. Extended disruptions at these suppliers could lead to a similar disruption in our ability to manufacture devices on time to meet consumer demand.

RESEARCH AND DEVELOPMENT

Product and Service Development, and Intellectual Property

We develop most of our products and services internally through the following engineering groups.

Cloud and AI , focuses on making IT professionals, developers, and their systems more productive and efficient through development of cloud infrastructure, server, database, CRM, ERP, management and development tools, AI cognitive services, and other business process applications and services for enterprises.
Experiences and Devices , focuses on instilling a unifying product ethos across our end-user experiences and devices, including Office, Windows, Enterprise Mobility + Security, and Surface.
AI and Research , focuses on our AI innovations and other forward-looking research and development efforts spanning infrastructure, services, applications, and search.
LinkedIn , focuses on our services that transform the way customers hire, market, sell, and learn.
Gaming, focuses on developing hardware, content, and services across a large range of platforms to help grow our user base through game experiences and social interaction.

Internal development allows us to maintain competitive advantages that come from product differentiation and closer technical control over our products and services. It also gives us the freedom to decide which modifications and enhancements are most important and when they should be implemented. We strive to obtain information as early as possible about changing usage patterns and hardware advances that may affect software and hardware design. Before releasing new software platforms, and as we make significant modifications to existing platforms, we provide application vendors with a range of resources and guidelines for development, training, and testing. Generally, we also create product documentation internally.

We protect our intellectual property investments in a variety of ways. We work actively in the U.S. and internationally to ensure the enforcement of copyright, trademark, trade secret, and other protections that apply to our software and hardware products, services, business plans, and branding. We are a leader among technology companies in pursuing patents and currently have a portfolio of over 65,000 U.S. and international patents issued and over 21,000 pending worldwide. While we employ much of our internally-developed intellectual property exclusively in our products and services, we also engage in outbound licensing of specific patented technologies that are incorporated into licensees’ products. From time to time, we enter into broader cross-license agreements with other technology companies covering entire groups of patents. We may also purchase or license technology that we incorporate into our products and services. At times, we make select intellectual property broadly available at no or low cost to achieve a strategic objective, such as promoting industry standards, advancing interoperability, supporting societal and/or environmental efforts, or attracting and enabling our external development community. Our increasing engagement with open source software will also cause us to license our intellectual property rights broadly in certain situations.

While it may be necessary in the future to seek or renew licenses relating to various aspects of our products, services, and business methods, we believe, based upon past experience and industry practice, such licenses generally can be obtained on commercially reasonable terms. We believe our continuing research and product development are not materially dependent on any single license or other agreement with a third party relating to the development of our products.

Investing in the Future

Our success is based on our ability to create new and compelling products, services, and experiences for our users, to initiate and embrace disruptive technology trends, to enter new geographic and product markets, and to drive broad adoption of our products and services. We invest in a range of emerging technology trends and breakthroughs that we believe offer significant opportunities to deliver value to our customers and growth for the Company. Based on our assessment of key technology trends, we maintain our long-term commitment to research and development across a wide spectrum of technologies, tools, and platforms spanning digital work and life experiences, cloud computing, AI, devices, and operating systems.

While our main product research and development facilities are located in Redmond, Washington, we also operate research and development facilities in other parts of the U.S. and around the world. This global approach helps us remain competitive in local markets and enables us to continue to attract top talent from across the world.

In addition to our main research and development operations, we also operate Microsoft Research. Microsoft Research is one of the world’s largest corporate research organizations and works in close collaboration with top universities around the world to advance the state-of-the-art in computer science and a broad range of other disciplines, providing us a unique perspective on future trends and contributing to our innovation.

We generally fund research at the corporate level to ensure that we are looking beyond immediate product considerations to opportunities further in the future. We also fund research and development activities at the operating segment level. Much of our segment level research and development is coordinated with other segments and leveraged across the Company. We plan to continue to make significant investments in a broad range of research and development efforts.

DISTRIBUTION, SALES, AND MARKETING

We market and distribute our products and services through the following channels: OEMs, direct, and distributors and resellers. Our sales force performs a variety of functions, including working directly with commercial enterprises and public-sector organizations worldwide to identify and meet their technology and digital transformation requirements; managing OEM relationships; and supporting system integrators, independent software vendors, and other partners who engage directly with our customers to perform sales, consulting, and fulfillment functions for our products and services.

We distribute our products and services through OEMs that pre-install our software on new devices and servers they sell. The largest component of the OEM business is the Windows operating system pre-installed on devices. OEMs also sell devices pre-installed with other Microsoft products and services, including applications such as Office and the capability to subscribe to Office 365.

There are two broad categories of OEMs. The largest category of OEMs are direct OEMs as our relationship with them is managed through a direct agreement between Microsoft and the OEM. We have distribution agreements covering one or more of our products with virtually all the multinational OEMs, including Dell, Hewlett-Packard, Lenovo, and with many regional and local OEMs. The second broad category of OEMs are system builders consisting of lower-volume PC manufacturers, which source Microsoft software for pre-installation and local redistribution primarily through the Microsoft distributor channel rather than through a direct agreement or relationship with Microsoft.

Many organizations that license our products and services transact directly with us through Enterprise Agreements and Enterprise Services contracts, with sales support from system integrators, independent software vendors, web agencies, and partners that advise organizations on licensing our products and services (“Enterprise Agreement Software Advisors” or “ESA”). Microsoft offers direct sales programs targeted to reach small, medium, and corporate customers, in addition to those offered through the reseller channel. A large network of partner advisors support many of these sales.

We also sell commercial and consumer products and services directly to customers, such as cloud services, search, and gaming, through our digital marketplaces and online stores. In fiscal year 2021, we closed our Microsoft Store physical locations and opened our Microsoft Experience Centers. Microsoft Experience Centers are designed to facilitate deeper engagement with our partners and customers across industries.

Distributors and Resellers

Organizations also license our products and services indirectly, primarily through licensing solution partners (“LSP”), distributors, value-added resellers (“VAR”), and retailers. Although each type of reselling partner may reach organizations of all sizes, LSPs are primarily engaged with large organizations, distributors resell primarily to VARs, and VARs typically reach small and medium organizations. ESAs are also typically authorized as LSPs and operate as resellers for our other volume licensing programs. Microsoft Cloud Solution Provider is our main partner program for reselling cloud services.

We distribute our retail packaged products primarily through independent non-exclusive distributors, authorized replicators, resellers, and retail outlets. Individual consumers obtain these products primarily through retail outlets. We distribute our devices through third-party retailers. We have a network of field sales representatives and field support personnel that solicit orders from distributors and resellers, and provide product training and sales support.

Our Dynamics business solutions are also licensed to enterprises through a global network of channel partners providing vertical solutions and specialized services.

LICENSING OPTIONS

We offer options for organizations that want to purchase our cloud services, on-premises software, and SA. We license software to organizations under volume licensing agreements to allow the customer to acquire multiple licenses of products and services instead of having to acquire separate licenses through retail channels. We use different programs designed to provide flexibility for organizations of various sizes. While these programs may differ in various parts of the world, generally they include those discussed below.

SA conveys rights to new software and upgrades for perpetual licenses released over the contract period. It also provides support, tools, training, and other licensing benefits to help customers deploy and use software efficiently. SA is included with certain volume licensing agreements and is an optional purchase with others.

Volume Licensing Programs

Enterprise Agreement

Enterprise Agreements offer large organizations a manageable volume licensing program that gives them the flexibility to buy cloud services and software licenses under one agreement. Enterprise Agreements are designed for medium or large organizations that want to license cloud services and on-premises software organization-wide over a three-year period. Organizations can elect to purchase perpetual licenses or subscribe to licenses. SA is included.

Microsoft Product and Services Agreement

Microsoft Product and Services Agreements are designed for medium and large organizations that want to license cloud services and on-premises software as needed, with no organization-wide commitment, under a single, non-expiring agreement. Organizations purchase perpetual licenses or subscribe to licenses. SA is optional for customers that purchase perpetual licenses.

Open agreements are a simple, cost-effective way to acquire the latest Microsoft technology. Open agreements are designed for small and medium organizations that want to license cloud services and on-premises software over a one- to three-year period. Under the Open agreements, organizations purchase perpetual licenses and SA is optional. Under Open Value agreements, organizations can elect to purchase perpetual licenses or subscribe to licenses and SA is included.

Select Plus

Select Plus agreements are designed for government and academic organizations to acquire on-premises licenses at any affiliate or department level, while realizing advantages as one organization. Organizations purchase perpetual licenses and SA is optional.

Microsoft Online Subscription Agreement

Microsoft Online Subscription Agreements are designed for small and medium organizations that want to subscribe to, activate, provision, and maintain cloud services seamlessly and directly via the web. The agreement allows customers to acquire monthly or annual subscriptions for cloud-based services.

Partner Programs

The Microsoft Cloud Solution Provider program offers customers an easy way to license the cloud services they need in combination with the value-added services offered by their systems integrator, managed services provider, or cloud reseller partner. Partners in this program can easily package their own products and services to directly provision, manage, and support their customer subscriptions.

The Microsoft Services Provider License Agreement allows hosting service providers and independent software vendors who want to license eligible Microsoft software products to provide software services and hosted applications to their end customers. Partners license software over a three-year period and are billed monthly based on consumption.

The Independent Software Vendor Royalty program enables partners to integrate Microsoft products into other applications and then license the unified business solution to their end users.

Our customers include individual consumers, small and medium organizations, large global enterprises, public-sector institutions, Internet service providers, application developers, and OEMs. Our practice is to ship our products promptly upon receipt of purchase orders from customers; consequently, backlog is not significant.

AVAILABLE INFORMATION

Our Internet address is www.microsoft.com. At our Investor Relations website, www.microsoft.com/investor, we make available free of charge a variety of information for investors. Our goal is to maintain the Investor Relations website as a portal through which investors can easily find or navigate to pertinent information about us, including:

Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after we electronically file that material with or furnish it to the Securities and Exchange Commission (“SEC”) at www.sec.gov.
Information on our business strategies, financial results, and metrics for investors.
Announcements of investor conferences, speeches, and events at which our executives talk about our product, service, and competitive strategies. Archives of these events are also available.
Press releases on quarterly earnings, product and service announcements, legal developments, and international news.
Corporate governance information including our articles of incorporation, bylaws, governance guidelines, committee charters, codes of conduct and ethics, global corporate social responsibility initiatives, and other governance-related policies.
Other news and announcements that we may post from time to time that investors might find useful or interesting.
Opportunities to sign up for email alerts to have information pushed in real time.

We publish a variety of reports and resources related to our Corporate Social Responsibility programs and progress on our Reports hub website, www.microsoft.com/corporate-responsibility/reports-hub, including reports on sustainability, responsible sourcing, accessibility, digital trust, and public policy engagement.

The information found on these websites is not part of, or incorporated by reference into, this or any other report we file with, or furnish to, the SEC. In addition to these channels, we use social media to communicate to the public. It is possible that the information we post on social media could be deemed to be material to investors. We encourage investors, the media, and others interested in Microsoft to review the information we post on the social media channels listed on our Investor Relations website.

Discussion & Analysis

Management’s discussion and analysis of financial condition and results of operations.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of Microsoft Corporation. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying Notes to Financial Statements. This section generally discusses the results of our operations for the year ended June 30, 2021 compared to the year ended June 30, 2020. For a discussion of the year ended June 30, 2020 compared to the year ended June 30, 2019, please refer to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended June 30, 2020.

We generate revenue by offering a wide range of cloud-based and other services to people and businesses; licensing and supporting an array of software products; designing, manufacturing, and selling devices; and delivering relevant online advertising to a global audience. Our most significant expenses are related to compensating employees; designing, manufacturing, marketing, and selling our products and services; datacenter costs in support of our cloud-based services; and income taxes.

As the world continues to respond to COVID-19, we are working to do our part by ensuring the safety of our employees, striving to protect the health and well-being of the communities in which we operate, and providing technology and resources to our customers to help them do their best work while remote.

Highlights from fiscal year 2021 compared with fiscal year 2020 included:

Commercial cloud revenue increased 34% to $69.1 billion.
Office Commercial products and cloud services revenue increased 13% driven by Office 365 Commercial growth of 22%.
Office Consumer products and cloud services revenue increased 10% and Microsoft 365 Consumer subscribers increased to 51.9 million.
LinkedIn revenue increased 27%.
Dynamics products and cloud services revenue increased 25% driven by Dynamics 365 growth of 43%.
Server products and cloud services revenue increased 27% driven by Azure growth of 50%.
Windows original equipment manufacturer licensing (“Windows OEM”) revenue increased slightly.
Windows Commercial products and cloud services revenue increased 14%.
Xbox content and services revenue increased 23%.
Search advertising revenue, excluding traffic acquisition costs, increased 13%.
Surface revenue increased 5%.

On March 9, 2021, we completed our acquisition of ZeniMax Media Inc. (“ZeniMax”), the parent company of Bethesda Softworks LLC, for a total purchase price of $8.1 billion, consisting primarily of cash. The purchase price included $768 million of cash and cash equivalents acquired. The financial results of ZeniMax have been included in our consolidated financial statements since the date of the acquisition. ZeniMax is reported as part of our More Personal Computing segment. Refer to Note 8 – Business Combinations of the Notes to Financial Statements for further discussion.

Industry Trends

Our industry is dynamic and highly competitive, with frequent changes in both technologies and business models. Each industry shift is an opportunity to conceive new products, new technologies, or new ideas that can further transform the industry and our business. At Microsoft, we push the boundaries of what is possible through a broad range of research and development activities that seek to identify and address the changing demands of customers and users, industry trends, and competitive forces.

Economic Conditions, Challenges, and Risks

The markets for software, devices, and cloud-based services are dynamic and highly competitive. Our competitors are developing new software and devices, while also deploying competing cloud-based services for consumers and businesses. The devices and form factors customers prefer evolve rapidly, and influence how users access services in the cloud, and in some cases, the user’s choice of which suite of cloud-based services to use. We must continue to evolve and adapt over an extended time in pace with this changing environment. The investments we are making in infrastructure and devices will continue to increase our operating costs and may decrease our operating margins.

Our success is highly dependent on our ability to attract and retain qualified employees. We hire a mix of university and industry talent worldwide. We compete for talented individuals globally by offering an exceptional working environment, broad customer reach, scale in resources, the ability to grow one’s career across many different products and businesses, and competitive compensation and benefits. Aggregate demand for our software, services, and devices is correlated to global macroeconomic and geopolitical factors, which remain dynamic.

Our devices are primarily manufactured by third-party contract manufacturers, some of which contain certain components for which there are very few qualified suppliers. For these components, we have limited near-term flexibility to use other manufacturers if a current vendor becomes unavailable or is unable to meet our requirements. Extended disruptions at these suppliers could lead to a similar disruption in our ability to manufacture devices on time to meet consumer demand.

Our international operations provide a significant portion of our total revenue and expenses. Many of these revenue and expenses are denominated in currencies other than the U.S. dollar. As a result, changes in foreign exchange rates may significantly affect revenue and expenses. Weakening of the U.S. dollar relative to certain foreign currencies increased reported revenue and did not have a material impact on reported expenses from our international operations in fiscal year 2021.

Refer to Risk Factors in our fiscal year 2021 Form 10-K for a discussion of these factors and other risks.

In fiscal year 2021, the COVID-19 pandemic continued to impact our business operations and financial results. Cloud usage and demand benefited as customers accelerate their digital transformation priorities. Our consumer businesses also benefited from the remote environment, with continued demand for PCs and productivity tools, as well as strong engagement across our Gaming platform. We saw improvement in customer advertising spend and savings in operating expenses related to COVID-19, but experienced weakness in transactional licensing. The COVID-19 pandemic may continue to impact our business operations and financial operating results, and there is uncertainty in the nature and degree of its continued effects over time. Refer to Risk Factors in our fiscal year 2021 Form 10-K for a discussion of these factors and other risks.

Seasonality

Our revenue fluctuates quarterly and is generally higher in the second and fourth quarters of our fiscal year. Second quarter revenue is driven by corporate year-end spending trends in our major markets and holiday season spending by consumers, and fourth quarter revenue is driven by the volume of multi-year on-premises contracts executed during the period.

Change in Accounting Estimate

In July 2020, we completed an assessment of the useful lives of our server and network equipment and determined we should increase the estimated useful life of server equipment from three years to four years and increase the estimated useful life of network equipment from two years to four years. This change in accounting estimate was effective beginning fiscal year 2021. Based on the carrying amount of server and network equipment included in property and equipment, net as of June 30, 2020, the effect of this change in estimate for fiscal year 2021 was an increase in operating income of $2.7 billion and net income of $2.3 billion, or $0.30 per both basic and diluted share.

Reportable Segments

We report our financial performance based on the following segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. The segment amounts included in MD&A are presented on a basis consistent with our internal management reporting. All differences between our internal management reporting basis and accounting principles generally accepted in the United States of America (“GAAP”), along with certain corporate-level and other activity, are included in Corporate and Other.

Additional information on our reportable segments is contained in Note 19 – Segment Information and Geographic Data of the Notes to Financial Statements.

We use metrics in assessing the performance of our business and to make informed decisions regarding the allocation of resources. We disclose metrics to enable investors to evaluate progress against our ambitions, provide transparency into performance trends, and reflect the continued evolution of our products and services. Our commercial and other business metrics are fundamentally connected based on how customers use our products and services. The metrics are disclosed in the MD&A or the Notes to Financial Statements. Financial metrics are calculated based on GAAP results and growth comparisons relate to the corresponding period of last fiscal year.

Our commercial business primarily consists of Server products and cloud services, Office Commercial, Windows Commercial, the commercial portion of LinkedIn, Enterprise Services, and Dynamics. Our commercial metrics allow management and investors to assess the overall health of our commercial business and include leading indicators of future performance.

Productivity and Business Processes and Intelligent Cloud

Metrics related to our Productivity and Business Processes and Intelligent Cloud segments assess the health of our core businesses within these segments. The metrics reflect our cloud and on-premises product strategies and trends.

Metrics related to our More Personal Computing segment assess the performance of key lines of business within this segment. These metrics provide strategic product insights which allow us to assess the performance across our commercial and consumer businesses. As we have diversity of target audiences and sales motions within the Windows business, we monitor metrics that are reflective of those varying motions.

SUMMARY RESULTS OF OPERATIONS

Adjusted net income and adjusted diluted earnings per share (“EPS”) are non-GAAP financial measures which exclude tax benefits related to an India Supreme Court decision on withholding taxes in fiscal year 2021. Refer to the Non-GAAP Financial Measures section below for a reconciliation of our financial results reported in accordance with GAAP to non-GAAP financial results. See Note 12 – Income Taxes of the Notes to Financial Statements for further discussion.

Revenue increased $25.1 billion or 18% driven by growth across each of our segments. Intelligent Cloud revenue increased driven by Azure. Productivity and Business Processes revenue increased driven by Office 365 Commercial and LinkedIn. More Personal Computing revenue increased driven by Gaming.

Cost of revenue increased $6.2 billion or 13% driven by growth in commercial cloud and Gaming, offset in part by a reduction in depreciation expense due to the change in estimated useful lives of our server and network equipment.

Gross margin increased $18.9 billion or 20% driven by growth across each of our segments and the change in estimated useful lives of our server and network equipment. Gross margin percentage increased with the change in estimated useful lives of our server and network equipment. Excluding this impact, gross margin percentage decreased slightly driven by gross margin percentage reduction in More Personal Computing. Commercial cloud gross margin percentage increased 4 points to 71% driven by gross margin percentage improvement in Azure and the change in estimated useful lives of our server and network equipment, offset in part by sales mix shift to Azure.

Operating expenses increased $2.0 billion or 4% driven by investments in cloud engineering and commercial sales, offset in part by savings related to COVID-19 across each of our segments, prior year charges associated with the closing of our Microsoft Store physical locations, and a reduction in bad debt expense.

Key changes in operating expenses were:

Research and development expenses increased $1.4 billion or 8% driven by investments in cloud engineering.

Sales and marketing expenses increased $519 million or 3% driven by investments in commercial sales, offset in part by a reduction in bad debt expense. Sales and marketing included an unfavorable foreign currency impact of 2%.

General and administrative expenses were relatively unchanged, driven by prior year charges associated with the closing of our Microsoft Store physical locations, offset in part by an increase in certain employee-related expenses and business taxes.

Operating income increased $17.0 billion or 32% driven by growth across each of our segments and the change in estimated useful lives of our server and network equipment.

Current year net income and diluted EPS were positively impacted by the tax benefit related to the India Supreme Court decision on withholding taxes, which resulted in an increase to net income and diluted EPS of $620 million and $0.08, respectively.

Revenue, gross margin, and operating income included a favorable foreign currency impact of 3%, 3%, and 4%, respectively.

SEGMENT RESULTS OF OPERATIONS

Revenue increased $7.5 billion or 16%.

Office Commercial products and cloud services revenue increased $4.0 billion or 13%. Office 365 Commercial revenue grew 22% driven by seat growth of 17% and higher revenue per user. Office Commercial products revenue declined 23% driven by continued customer shift to cloud offerings and transactional weakness.
Office Consumer products and cloud services revenue increased $474 million or 10% driven by Microsoft 365 Consumer subscription revenue, on a strong prior year comparable that benefited from transactional strength in Japan. Microsoft 365 Consumer subscribers increased 22% to 51.9 million.
LinkedIn revenue increased $2.2 billion or 27% driven by advertising demand in our Marketing Solutions business.

Operating income increased $5.6 billion or 30%.

Gross margin increased $6.5 billion or 18% driven by growth in Office 365 Commercial and LinkedIn, and the change in estimated useful lives of our server and network equipment. Gross margin percentage increased with the change in estimated useful lives of our server and network equipment. Excluding this impact, gross margin percentage decreased slightly driven by a sales mix shift to cloud offerings, on a low prior year comparable impacted by increased usage.
Operating expenses increased $839 million or 5% driven by investments in commercial sales, cloud engineering, and LinkedIn.

Revenue, gross margin, and operating income included a favorable foreign currency impact of 2%, 3%, and 4%, respectively.

Revenue increased $11.7 billion or 24%.

Server products and cloud services revenue increased $11.2 billion or 27% driven by Azure. Azure revenue grew 50% due to growth in our consumption-based services. Server products revenue increased 6% driven by hybrid and premium solutions, on a strong prior year comparable that benefited from demand related to SQL Server 2008 and Windows Server 2008 end of support.
Enterprise Services revenue increased $534 million or 8% driven by growth in Premier Support Services.

Operating income increased $7.8 billion or 43%.

Gross margin increased $9.7 billion or 29% driven by growth in Azure and the change in estimated useful lives of our server and network equipment. Gross margin percentage increased with the change in estimated useful lives of our server and network equipment. Excluding this impact, gross margin percentage was relatively unchanged driven by gross margin percentage improvement in Azure, offset in part by sales mix shift to Azure.
Operating expenses increased $1.9 billion or 12% driven by investments in Azure.

Revenue increased $5.8 billion or 12%.

Windows revenue increased $933 million or 4% driven by growth in Windows Commercial. Windows Commercial products and cloud services revenue increased 14% driven by demand for Microsoft 365. Windows OEM revenue increased slightly driven by consumer PC demand, on a strong prior year OEM Pro comparable that benefited from Windows 7 end of support. Windows OEM Pro revenue decreased 9% and Windows OEM non-Pro revenue grew 21%.
Gaming revenue increased $3.8 billion or 33% driven by growth in Xbox content and services and Xbox hardware. Xbox content and services revenue increased $2.3 billion or 23% driven by growth in third-party titles, Xbox Game Pass subscriptions, and first-party titles. Xbox hardware revenue increased 92% driven by higher price of consoles sold due to the Xbox Series X|S launches.
Search advertising revenue increased $788 million or 10%. Search advertising revenue excluding traffic acquisition costs increased 13% driven by higher revenue per search and search volume.
Surface revenue increased $302 million or 5%.

Operating income increased $3.5 billion or 22%.

Gross margin increased $2.8 billion or 10% driven by growth in Windows, Gaming, and Search advertising. Gross margin percentage decreased driven by sales mix shift to Gaming hardware.
Operating expenses decreased $752 million or 6% driven by prior year charges associated with the closing of our Microsoft Store physical locations and reductions in retail store expenses and marketing, offset in part by investments in Gaming.

Gross margin and operating income included a favorable foreign currency impact of 2% and 3%, respectively.

OPERATING EXPENSES

Research and Development

Sales and Marketing

General and Administrative

General and administrative expenses include payroll, employee benefits, stock-based compensation expense, severance expense, and other headcount-related expenses associated with finance, legal, facilities, certain human resources and other administrative personnel, certain taxes, and legal and other administrative fees.

OTHER INCOME (EXPENSE), NET

The components of other income (expense), net were as follows:

We use derivative instruments to manage risks related to foreign currencies, equity prices, interest rates, and credit; enhance investment returns; and facilitate portfolio diversification. Gains and losses from changes in fair values of derivatives that are not designated as hedging instruments are primarily recognized in other income (expense), net.

Interest and dividends income decreased due to lower yields on fixed-income securities. Interest expense decreased due to a decrease in outstanding long-term debt due to debt maturities. Net recognized gains on investments increased due to higher gains on equity securities. Net gains on derivatives decreased due to lower gains on foreign currency contracts.

INCOME TAXES

Effective Tax Rate

Our effective tax rate for fiscal years 2021 and 2020 was 14% and 17%, respectively. The decrease in our effective tax rate was primarily due to tax benefits from a decision by the India Supreme Court on withholding taxes in the case of Engineering Analysis Centre of Excellence Private Limited vs The Commissioner of Income Tax, an agreement between the U.S. and India tax authorities related to transfer pricing, final Tax Cuts and Jobs Act (“TCJA”) regulations, and an increase in tax benefits relating to stock-based compensation.

We have historically paid India withholding taxes on software sales through distributor withholding and tax audit assessments in India. In March 2021, the India Supreme Court ruled favorably for companies in 86 separate appeals, some dating back to 2012, holding that software sales are not subject to India withholding taxes. Although we were not a party to the appeals, our software sales in India were determined to be not subject to withholding taxes. Therefore, we recorded a net income tax benefit of $620 million in the third quarter of fiscal year 2021 to reflect the results of the India Supreme Court decision impacting fiscal year 1996 through fiscal year 2016.

Our effective tax rate was lower than the U.S. federal statutory rate, primarily due to earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland and Puerto Rico, tax benefits relating to stock-based compensation, and tax benefits from the India Supreme Court decision on withholding taxes.

The mix of income before income taxes between the U.S. and foreign countries impacted our effective tax rate as a result of the geographic distribution of, and customer demand for, our products and services. In fiscal year 2021, our U.S. income before income taxes was $35.0 billion and our foreign income before income taxes was $36.1 billion. In fiscal year 2020, our U.S. income before income taxes was $24.1 billion and our foreign income before income taxes was $28.9 billion.

Uncertain Tax Positions

We settled a portion of the Internal Revenue Service (“IRS”) audit for tax years 2004 to 2006 in fiscal year 2011. In February 2012, the IRS withdrew its 2011 Revenue Agents Report related to unresolved issues for tax years 2004 to 2006 and reopened the audit phase of the examination. We also settled a portion of the IRS audit for tax years 2007 to 2009 in fiscal year 2016, and a portion of the IRS audit for tax years 2010 to 2013 in fiscal year 2018. In the second quarter of fiscal year 2021, we settled an additional portion of the IRS audits for tax years 2004 to 2013 and made a payment of $1.7 billion, including tax and interest. We remain under audit for tax years 2004 to 2017.

As of June 30, 2021, the primary unresolved issues for the IRS audits relate to transfer pricing, which could have a material impact in our consolidated financial statements when the matters are resolved. We believe our allowances for income tax contingencies are adequate. We have not received a proposed assessment for the unresolved key transfer pricing issues and do not expect a final resolution of these issues in the next 12 months. Based on the information currently available, we do not anticipate a significant increase or decrease to our tax contingencies for these issues within the next 12 months.

We are subject to income tax in many jurisdictions outside the U.S. Our operations in certain jurisdictions remain subject to examination for tax years 1996 to 2020, some of which are currently under audit by local tax authorities. The resolution of each of these audits is not expected to be material to our consolidated financial statements.

NON-GAAP FINANCIAL MEASURES

Adjusted net income and adjusted diluted EPS are non-GAAP financial measures which exclude the tax benefits related to the India Supreme Court decision on withholding taxes in fiscal year 2021. We believe these non-GAAP measures aid investors by providing additional insight into our operational performance and help clarify trends affecting our business. For comparability of reporting, management considers non-GAAP measures in conjunction with GAAP financial results in evaluating business performance. These non-GAAP financial measures presented should not be considered a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP.

The following table reconciles our financial results reported in accordance with GAAP to non-GAAP financial results:

Not meaningful.

FINANCIAL CONDITION

Cash, Cash Equivalents, and Investments

Cash, cash equivalents, and short-term investments totaled $130.3 billion and $136.5 billion as of June 30, 2021 and 2020. Equity investments were $6.0 billion and $3.0 billion as of June 30, 2021 and 2020, respectively. Our short-term investments are primarily intended to facilitate liquidity and capital preservation. They consist predominantly of highly liquid investment-grade fixed-income securities, diversified among industries and individual issuers. The investments are predominantly U.S. dollar-denominated securities, but also include foreign currency-denominated securities to diversify risk. Our fixed-income investments are exposed to interest rate risk and credit risk. The credit risk and average maturity of our fixed-income portfolio are managed to achieve economic returns that correlate to certain fixed-income indices. The settlement risk related to these investments is insignificant given that the short-term investments held are primarily highly liquid investment-grade fixed-income securities.

In general, and where applicable, we use quoted prices in active markets for identical assets or liabilities to determine the fair value of our financial instruments. This pricing methodology applies to our Level 1 investments, such as U.S. government securities, common and preferred stock, and mutual funds. If quoted prices in active markets for identical assets or liabilities are not available to determine fair value, then we use quoted prices for similar assets and liabilities or inputs other than the quoted prices that are observable either directly or indirectly. This pricing methodology applies to our Level 2 investments, such as commercial paper, certificates of deposit, U.S. agency securities, foreign government bonds, mortgage- and asset-backed securities, corporate notes and bonds, and municipal securities. Level 3 investments are valued using internally-developed models with unobservable inputs. Assets and liabilities measured at fair value on a recurring basis using unobservable inputs are an immaterial portion of our portfolio.

A majority of our investments are priced by pricing vendors and are generally Level 1 or Level 2 investments as these vendors either provide a quoted market price in an active market or use observable inputs for their pricing without applying significant adjustments. Broker pricing is used mainly when a quoted price is not available, the investment is not priced by our pricing vendors, or when a broker price is more reflective of fair values in the market in which the investment trades. Our broker-priced investments are generally classified as Level 2 investments because the broker prices these investments based on similar assets without applying significant adjustments. In addition, all our broker-priced investments have a sufficient level of trading volume to demonstrate that the fair values used are appropriate for these investments. Our fair value processes include controls that are designed to ensure appropriate fair values are recorded. These controls include model validation, review of key model inputs, analysis of period-over-period fluctuations, and independent recalculation of prices where appropriate.

Cash from operations increased $16.1 billion to $76.7 billion for fiscal year 2021, mainly due to an increase in cash received from customers, offset in part by an increase in cash paid to suppliers and employees. Cash used in financing increased $2.5 billion to $48.5 billion for fiscal year 2021, mainly due to a $4.4 billion increase in common stock repurchases and a $1.4 billion increase in dividends paid, offset in part by a $1.8 billion decrease in repayments of debt and a $1.7 billion decrease in cash premium paid on debt exchange. Cash used in investing increased $15.4 billion to $27.6 billion for fiscal year 2021, mainly due to a $6.4 billion increase in cash used for acquisitions of companies, net of cash acquired, and purchases of intangible and other assets, a $5.2 billion increase in additions to property and equipment, and a $4.1 billion decrease in cash from net investment purchases, sales, and maturities.

We issue debt to take advantage of favorable pricing and liquidity in the debt markets, reflecting our credit rating and the low interest rate environment. The proceeds of these issuances were or will be used for general corporate purposes, which may include, among other things, funding for working capital, capital expenditures, repurchases of capital stock, acquisitions, and repayment of existing debt. In March 2021 and June 2020, we exchanged a portion of our existing debt at a premium for cash and new debt with longer maturities to take advantage of favorable financing rates in the debt markets, reflecting our credit rating and the low interest rate environment. Refer to Note 11 – Debt of the Notes to Financial Statements for further discussion.

Unearned Revenue

Unearned revenue comprises mainly unearned revenue related to volume licensing programs, which may include Software Assurance (“SA”) and cloud services. Unearned revenue is generally invoiced annually at the beginning of each contract period for multi-year agreements and recognized ratably over the coverage period. Unearned revenue also includes payments for other offerings for which we have been paid in advance and earn the revenue when we transfer control of the product or service. Refer to Note 1 – Accounting Policies of the Notes to Financial Statements for further discussion.

The following table outlines the expected future recognition of unearned revenue as of June 30, 2021:

If our customers choose to license cloud-based versions of our products and services rather than licensing transaction-based products and services, the associated revenue will shift from being recognized at the time of the transaction to being recognized over the subscription period or upon consumption, as applicable.

During fiscal years 2021 and 2020, we repurchased 101 million shares and 126 million shares of our common stock for $23.0 billion and $19.7 billion, respectively, through our share repurchase programs. All repurchases were made using cash resources. Refer to Note 16 – Stockholders’ Equity of the Notes to Financial Statements for further discussion.

Refer to Note 16 – Stockholders’ Equity of the Notes to Financial Statements for further discussion.

Off-Balance Sheet Arrangements

We provide indemnifications of varying scope and size to certain customers against claims of intellectual property infringement made by third parties arising from the use of our products and certain other matters. Additionally, we have agreed to cover damages resulting from breaches of certain security and privacy commitments in our cloud business. In evaluating estimated losses on these obligations, we consider factors such as the degree of probability of an unfavorable outcome and our ability to make a reasonable estimate of the amount of loss. These obligations did not have a material impact in our consolidated financial statements during the periods presented.

Contractual Obligations

The following table summarizes the payments due by fiscal year for our outstanding contractual obligations as of June 30, 2021:

Refer to Note 11 – Debt of the Notes to Financial Statements.
Refer to Note 7 – Property and Equipment of the Notes to Financial Statements.
Refer to Note 14 – Leases of the Notes to Financial Statements.
Refer to Note 12 – Income Taxes of the Notes to Financial Statements.
Amounts represent purchase commitments, including open purchase orders and take-or-pay contracts that are not presented as construction commitments above.
We have excluded long-term tax contingencies, other tax liabilities, and deferred income taxes of $14.6 billion from the amounts presented as the timing of these obligations is uncertain. We have also excluded unearned revenue and non-cash items.

Other Planned Uses of Capital

On April 11, 2021, we entered into a definitive agreement to acquire Nuance Communications, Inc. (“Nuance”) for $56.00 per share in an all-cash transaction valued at $19.7 billion, inclusive of Nuance’s net debt. The acquisition has been approved by Nuance’s shareholders, and we expect it to close by the end of calendar year 2021, subject to the satisfaction of certain regulatory approvals and other customary closing conditions.

We will continue to invest in sales, marketing, product support infrastructure, and existing and advanced areas of technology, as well as continue making acquisitions that align with our business strategy. Additions to property and equipment will continue, including new facilities, datacenters, and computer systems for research and development, sales and marketing, support, and administrative staff. We expect capital expenditures to increase in coming years to support growth in our cloud offerings. We have operating and finance leases for datacenters, corporate offices, research and development facilities, Microsoft Experience Centers, and certain equipment. We have not engaged in any related party transactions or arrangements with unconsolidated entities or other persons that are reasonably likely to materially affect liquidity or the availability of capital resources.

As a result of the TCJA, we are required to pay a one-time transition tax on deferred foreign income not previously subject to U.S. income tax. Under the TCJA, the transition tax is payable in interest-free installments over eight years, with 8% due in each of the first five years, 15% in year six, 20% in year seven, and 25% in year eight. We have paid transition tax of $4.7 billion, which included $1.5 billion for fiscal year 2021. The remaining transition tax of $13.6 billion is payable over the next five years with a final payment in fiscal year 2026.

We expect existing cash, cash equivalents, short-term investments, cash flows from operations, and access to capital markets to continue to be sufficient to fund our operating activities and cash commitments for investing and financing activities, such as dividends, share repurchases, debt maturities, material capital expenditures, and the transition tax related to the TCJA, for at least the next 12 months and thereafter for the foreseeable future.

RECENT ACCOUNTING GUIDANCE

Refer to Note 1 – Accounting Policies of the Notes to Financial Statements for further discussion.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements and accompanying notes are prepared in accordance with GAAP. Preparing consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s application of accounting policies, as well as uncertainty in the current economic environment due to COVID-19. Critical accounting policies for us include revenue recognition, impairment of investment securities, goodwill, research and development costs, contingencies, income taxes, and inventories.

Revenue Recognition

Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. When a cloud-based service includes both on-premises software licenses and cloud services, judgment is required to determine whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the cloud service and recognized over time. Certain cloud services, primarily Office 365, depend on a significant level of integration, interdependency, and interrelation between the desktop applications and cloud services, and are accounted for together as one performance obligation. Revenue from Office 365 is recognized ratably over the period in which the cloud services are provided.

Judgment is required to determine the stand-alone selling price (“SSP”) for each distinct performance obligation. We use a single amount to estimate SSP for items that are not sold separately, including on-premises licenses sold with SA or software updates provided at no additional charge. We use a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount to be allocated based on the relative SSP of the various products and services.

In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions and other observable inputs. We typically have more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, we may use information such as the size of the customer and geographic region in determining the SSP.

Due to the various benefits from and the nature of our SA program, judgment is required to assess the pattern of delivery, including the exercise pattern of certain benefits across our portfolio of customers.

Our products are generally sold with a right of return, we may provide other credits or incentives, and in certain instances we estimate customer usage of our products and services, which are accounted for as variable consideration when determining the amount of revenue to recognize. Returns and credits are estimated at contract inception and updated at the end of each reporting period if additional information becomes available. Changes to our estimated variable consideration were not material for the periods presented.

Impairment of Investment Securities

We review debt investments quarterly for credit losses and impairment. If the cost of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, credit quality of debt instrument issuers, and the extent to which the fair value is less than cost. This determination requires significant judgment. In making this judgment, we employ a systematic methodology that considers available quantitative and qualitative evidence in evaluating potential impairment of our investments. In addition, we consider specific adverse conditions related to the financial health of, and business outlook for, the investee. If we have plans to sell the security or it is more likely than not that we will be required to sell the security before recovery, then a decline in fair value below cost is recorded as an impairment charge in other income (expense), net and a new cost basis in the investment is established. If market, industry, and/or investee conditions deteriorate, we may incur future impairments.

Equity investments without readily determinable fair values are written down to fair value if a qualitative assessment indicates that the investment is impaired and the fair value of the investment is less than carrying value. We perform a qualitative assessment on a periodic basis. We are required to estimate the fair value of the investment to determine the amount of the impairment loss. Once an investment is determined to be impaired, an impairment charge is recorded in other income (expense), net.

We allocate goodwill to reporting units based on the reporting unit expected to benefit from the business combination. We evaluate our reporting units on an annual basis and, if necessary, reassign goodwill using a relative fair value allocation approach. Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (May 1 for us) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit.

Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. The fair value of each reporting unit is estimated primarily through the use of a discounted cash flow methodology. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital.

The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results, market conditions, and other factors. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for each reporting unit.

Research and Development Costs

Costs incurred internally in researching and developing a computer software product are charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, software costs are capitalized until the product is available for general release to customers. Judgment is required in determining when technological feasibility of a product is established. We have determined that technological feasibility for our software products is reached after all high-risk development issues have been resolved through coding and testing. Generally, this occurs shortly before the products are released to production. The amortization of these costs is included in cost of revenue over the estimated life of the products.

Legal and Other Contingencies

The outcomes of legal proceedings and claims brought against us are subject to significant uncertainty. An estimated loss from a loss contingency such as a legal proceeding or claim is accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. In determining whether a loss should be accrued we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our consolidated financial statements.

Income Taxes

The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year, and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Accounting literature also provides guidance on derecognition of income tax assets and liabilities, classification of deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures. Judgment is required in assessing the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our consolidated financial statements.

The TCJA significantly changes existing U.S. tax law and includes numerous provisions that affect our business. Refer to Note 12 – Income Taxes of the Notes to Financial Statements for further discussion.

Inventories

Inventories are stated at average cost, subject to the lower of cost or net realizable value. Cost includes materials, labor, and manufacturing overhead related to the purchase and production of inventories. Net realizable value is the estimated selling price less estimated costs of completion, disposal, and transportation. We regularly review inventory quantities on hand, future purchase commitments with our suppliers, and the estimated utility of our inventory. These reviews include analysis of demand forecasts, product life cycle status, product development plans, current sales levels, pricing strategy, and component cost trends. If our review indicates a reduction in utility below carrying value, we reduce our inventory to a new cost basis through a charge to cost of revenue.

STATEMENT OF MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS

Management is responsible for the preparation of the consolidated financial statements and related information that are presented in this report. The consolidated financial statements, which include amounts based on management’s estimates and judgments, have been prepared in conformity with accounting principles generally accepted in the United States of America.

The Company designs and maintains accounting and internal control systems to provide reasonable assurance at reasonable cost that assets are safeguarded against loss from unauthorized use or disposition, and that the financial records are reliable for preparing consolidated financial statements and maintaining accountability for assets. These systems are augmented by written policies, an organizational structure providing division of responsibilities, careful selection and training of qualified personnel, and a program of internal audits.

The Company engaged Deloitte & Touche LLP, an independent registered public accounting firm, to audit and render an opinion on the consolidated financial statements and internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States).

The Board of Directors, through its Audit Committee, consisting solely of independent directors of the Company, meets periodically with management, internal auditors, and our independent registered public accounting firm to ensure that each is meeting its responsibilities and to discuss matters concerning internal controls and financial reporting. Deloitte & Touche LLP and the internal auditors each have full and free access to the Audit Committee.

Satya Nadella Chief Executive Officer

Amy E. Hood Executive Vice President and Chief Financial Officer

Alice L. Jolla Corporate Vice President and Chief Accounting Officer

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to economic risk from foreign exchange rates, interest rates, credit risk, and equity prices. We use derivatives instruments to manage these risks, however, they may still impact our consolidated financial statements.

Foreign Currencies

Certain forecasted transactions, assets, and liabilities are exposed to foreign currency risk. We monitor our foreign currency exposures daily to maximize the economic effectiveness of our foreign currency positions, including hedges. Principal currency exposures include the Euro, Japanese yen, British pound, Canadian dollar, and Australian dollar.

Interest Rate

Securities held in our fixed-income portfolio are subject to different interest rate risks based on their maturities. We manage the average maturity of the fixed-income portfolio to achieve economic returns that correlate to certain global fixed-income indices.

Our fixed-income portfolio is diversified and consists primarily of investment-grade securities. We manage credit exposures relative to broad-based indices and to facilitate portfolio diversification.

Securities held in our equity investments portfolio are subject to price risk.

SENSITIVITY ANALYSIS

The following table sets forth the potential loss in future earnings or fair values, including associated derivatives, resulting from hypothetical changes in relevant market rates or prices:

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Income statements.

Refer to accompanying notes.

COMPREHENSIVE INCOME STATEMENTS

Balance sheets, cash flows statements, stockholders’ equity statements, note 1 — accounting policies.

Accounting Principles

Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

We have recast certain prior period amounts to conform to the current period presentation. The recast of these prior period amounts had no impact on our consolidated balance sheets, consolidated income statements, or consolidated cash flows statements.

Principles of Consolidation

The consolidated financial statements include the accounts of Microsoft Corporation and its subsidiaries. Intercompany transactions and balances have been eliminated.

Estimates and Assumptions

Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Examples of estimates and assumptions include: for revenue recognition, determining the nature and timing of satisfaction of performance obligations, and determining the standalone selling price (“SSP”) of performance obligations, variable consideration, and other obligations such as product returns and refunds; loss contingencies; product warranties; the fair value of and/or potential impairment of goodwill and intangible assets for our reporting units; product life cycles; useful lives of our tangible and intangible assets; allowances for doubtful accounts; the market value of, and demand for, our inventory; stock-based compensation forfeiture rates; when technological feasibility is achieved for our products; the potential outcome of uncertain tax positions that have been recognized in our consolidated financial statements or tax returns; and determining the timing and amount of impairments for investments. Actual results and outcomes may differ from management’s estimates and assumptions due to risks and uncertainties, including uncertainty in the current economic environment due to COVID-19.

Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing during the year. Translation adjustments resulting from this process are recorded to other comprehensive income.

Product Revenue and Service and Other Revenue

Product revenue includes sales from operating systems, cross-device productivity applications, server applications, business solution applications, desktop and server management tools, software development tools, video games, and hardware such as PCs, tablets, gaming and entertainment consoles, other intelligent devices, and related accessories.

Service and other revenue includes sales from cloud-based solutions that provide customers with software, services, platforms, and content such as Office 365, Azure, Dynamics 365, and Xbox; solution support; and consulting services. Service and other revenue also includes sales from online advertising and LinkedIn.

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.

Nature of Products and Services

Licenses for on-premises software provide the customer with a right to use the software as it exists when made available to the customer. Customers may purchase perpetual licenses or subscribe to licenses, which provide customers with the same functionality and differ mainly in the duration over which the customer benefits from the software. Revenue from distinct on-premises licenses is recognized upfront at the point in time when the software is made available to the customer. In cases where we allocate revenue to software updates, primarily because the updates are provided at no additional charge, revenue is recognized as the updates are provided, which is generally ratably over the estimated life of the related device or license.

Certain volume licensing programs, including Enterprise Agreements, include on-premises licenses combined with Software Assurance (“SA”). SA conveys rights to new software and upgrades released over the contract period and provides support, tools, and training to help customers deploy and use products more efficiently. On-premises licenses are considered distinct performance obligations when sold with SA. Revenue allocated to SA is generally recognized ratably over the contract period as customers simultaneously consume and receive benefits, given that SA comprises distinct performance obligations that are satisfied over time.

Cloud services, which allow customers to use hosted software over the contract period without taking possession of the software, are provided on either a subscription or consumption basis. Revenue related to cloud services provided on a subscription basis is recognized ratably over the contract period. Revenue related to cloud services provided on a consumption basis, such as the amount of storage used in a period, is recognized based on the customer utilization of such resources. When cloud services require a significant level of integration and interdependency with software and the individual components are not considered distinct, all revenue is recognized over the period in which the cloud services are provided.

Revenue from search advertising is recognized when the advertisement appears in the search results or when the action necessary to earn the revenue has been completed. Revenue from consulting services is recognized as services are provided.

Our hardware is generally highly dependent on, and interrelated with, the underlying operating system and cannot function without the operating system. In these cases, the hardware and software license are accounted for as a single performance obligation and revenue is recognized at the point in time when ownership is transferred to resellers or directly to end customers through retail stores and online marketplaces.

Refer to Note 19 – Segment Information and Geographic Data for further information, including revenue by significant product and service offering.

Significant Judgments

Judgment is required to determine the SSP for each distinct performance obligation. We use a single amount to estimate SSP for items that are not sold separately, including on-premises licenses sold with SA or software updates provided at no additional charge. We use a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount to be allocated based on the relative SSP of the various products and services.

Contract Balances and Other Receivables

Timing of revenue recognition may differ from the timing of invoicing to customers. We record a receivable when revenue is recognized prior to invoicing, or unearned revenue when revenue is recognized subsequent to invoicing. For multi-year agreements, we generally invoice customers annually at the beginning of each annual coverage period. We record a receivable related to revenue recognized for multi-year on-premises licenses as we have an unconditional right to invoice and receive payment in the future related to those licenses.

Unearned revenue comprises mainly unearned revenue related to volume licensing programs, which may include SA and cloud services. Unearned revenue is generally invoiced annually at the beginning of each contract period for multi-year agreements and recognized ratably over the coverage period. Unearned revenue also includes payments for consulting services to be performed in the future, LinkedIn subscriptions, Office 365 subscriptions, Xbox subscriptions, Windows 10 post-delivery support, Dynamics business solutions, and other offerings for which we have been paid in advance and earn the revenue when we transfer control of the product or service.

Refer to Note 13 – Unearned Revenue for further information, including unearned revenue by segment and changes in unearned revenue during the period.

Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing from our customers or to provide customers with financing. Examples include invoicing at the beginning of a subscription term with revenue recognized ratably over the contract period, and multi-year on-premises licenses that are invoiced annually with revenue recognized upfront.

As of June 30, 2021 and 2020, other receivables due from suppliers were $965 million and $442 million, respectively, and are included in accounts receivable, net in our consolidated balance sheets.

As of June 30, 2021 and 2020, long-term accounts receivable, net of allowance for doubtful accounts, was $3.4 billion and $2.7 billion, respectively, and is included in other long-term assets in our consolidated balance sheets.

The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence.

Activity in the allowance for doubtful accounts was as follows:

We record financing receivables when we offer certain of our customers the option to acquire our software products and services offerings through a financing program in a limited number of countries. As of June 30, 2021 and 2020, our financing receivables, net were $4.4 billion and $5.2 billion, respectively, for short-term and long-term financing receivables, which are included in other current assets and other long-term assets in our consolidated balance sheets. We record an allowance to cover expected losses based on troubled accounts, historical experience, and other currently available evidence.

Assets Recognized from Costs to Obtain a Contract with a Customer

We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain sales incentive programs meet the requirements to be capitalized. Total capitalized costs to obtain a contract were immaterial during the periods presented and are included in other current and long-term assets in our consolidated balance sheets.

We apply a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. These costs include our internal sales force compensation program and certain partner sales incentive programs as we have determined annual compensation is commensurate with annual sales activities.

Cost of Revenue

Cost of revenue includes: manufacturing and distribution costs for products sold and programs licensed; operating costs related to product support service centers and product distribution centers; costs incurred to include software on PCs sold by original equipment manufacturers (“OEM”), to drive traffic to our websites, and to acquire online advertising space; costs incurred to support and maintain online products and services, including datacenter costs and royalties; warranty costs; inventory valuation adjustments; costs associated with the delivery of consulting services; and the amortization of capitalized software development costs. Capitalized software development costs are amortized over the estimated lives of the products.

Product Warranty

We provide for the estimated costs of fulfilling our obligations under hardware and software warranties at the time the related revenue is recognized. For hardware warranties, we estimate the costs based on historical and projected product failure rates, historical and projected repair costs, and knowledge of specific product failures (if any). The specific hardware warranty terms and conditions vary depending upon the product sold and the country in which we do business, but generally include parts and labor over a period generally ranging from 90 days to three years. For software warranties, we estimate the costs to provide bug fixes, such as security patches, over the estimated life of the software. We regularly reevaluate our estimates to assess the adequacy of the recorded warranty liabilities and adjust the amounts as necessary.

Research and development expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs, localization costs incurred to translate software for international markets, and the amortization of purchased software code and services content. Such costs related to software development are included in research and development expense until the point that technological feasibility is reached, which for our software products, is generally shortly before the products are released to production. Once technological feasibility is reached, such costs are capitalized and amortized to cost of revenue over the estimated lives of the products.

Sales and marketing expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with sales and marketing personnel, and the costs of advertising, promotions, trade shows, seminars, and other programs. Advertising costs are expensed as incurred. Advertising expense was $1.5 billion, $1.6 billion, and $1.6 billion in fiscal years 2021, 2020, and 2019, respectively.

Stock-Based Compensation

Compensation cost for stock awards, which include restricted stock units (“RSUs”) and performance stock units (“PSUs”), is measured at the fair value on the grant date and recognized as expense, net of estimated forfeitures, over the related service or performance period. The fair value of stock awards is based on the quoted price of our common stock on the grant date less the present value of expected dividends not received during the vesting period. We measure the fair value of PSUs using a Monte Carlo valuation model. Compensation cost for RSUs is recognized using the straight-line method and for PSUs is recognized using the accelerated method.

Compensation expense for the employee stock purchase plan (“ESPP”) is measured as the discount the employee is entitled to upon purchase and is recognized in the period of purchase.

Income tax expense includes U.S. and international income taxes, and interest and penalties on uncertain tax positions. Certain income and expenses are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes. Deferred tax assets are reported net of a valuation allowance when it is more likely than not that a tax benefit will not be realized. All deferred income taxes are classified as long-term in our consolidated balance sheets.

Financial Instruments

Investments

We consider all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. The fair values of these investments approximate their carrying values. In general, investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations.

Debt investments are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in fair value, excluding credit losses and impairments, are recorded in other comprehensive income. Fair value is calculated based on publicly available market information or other estimates determined by management. If the cost of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, credit quality of debt instrument issuers, and the extent to which the fair value is less than cost. To determine credit losses, we employ a systematic methodology that considers available quantitative and qualitative evidence. In addition, we consider specific adverse conditions related to the financial health of, and business outlook for, the investee. If we have plans to sell the security or it is more likely than not that we will be required to sell the security before recovery, then a decline in fair value below cost is recorded as an impairment charge in other income (expense), net and a new cost basis in the investment is established. If market, industry, and/or investee conditions deteriorate, we may incur future impairments.

Equity investments with readily determinable fair values are measured at fair value. Equity investments without readily determinable fair values are measured using the equity method or measured at cost with adjustments for observable changes in price or impairments (referred to as the measurement alternative). We perform a qualitative assessment on a periodic basis and recognize an impairment if there are sufficient indicators that the fair value of the investment is less than carrying value. Changes in value are recorded in other income (expense), net.

Derivatives

Derivative instruments are recognized as either assets or liabilities and measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation.

For derivative instruments designated as fair value hedges, gains and losses are recognized in other income (expense), net with offsetting gains and losses on the hedged items. Gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in other income (expense), net.

For derivative instruments designated as cash flow hedges, gains and losses are initially reported as a component of other comprehensive income and subsequently recognized in earnings with the corresponding hedged item. Gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in earnings.

For derivative instruments that are not designated as hedges, gains and losses from changes in fair values are primarily recognized in other income (expense), net.

Fair Value Measurements

We account for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

Level 1 – inputs are based upon unadjusted quoted prices for identical instruments in active markets. Our Level 1 investments include U.S. government securities, common and preferred stock, and mutual funds. Our Level 1 derivative assets and liabilities include those actively traded on exchanges.
Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques (e.g. the Black-Scholes model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit spreads, foreign exchange rates, and forward and spot prices for currencies. Our Level 2 investments include commercial paper, certificates of deposit, U.S. agency securities, foreign government bonds, mortgage- and asset-backed securities, corporate notes and bonds, and municipal securities. Our Level 2 derivative assets and liabilities primarily include certain over-the-counter option and swap contracts.
Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. Our Level 3 assets and liabilities include investments in corporate notes and bonds, municipal securities, and goodwill and intangible assets, when they are recorded at fair value due to an impairment charge. Unobservable inputs used in the models are significant to the fair values of the assets and liabilities.

We measure equity investments without readily determinable fair values on a nonrecurring basis. The fair values of these investments are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections.

Our other current financial assets and current financial liabilities have fair values that approximate their carrying values.

Inventories are stated at average cost, subject to the lower of cost or net realizable value. Cost includes materials, labor, and manufacturing overhead related to the purchase and production of inventories. Net realizable value is the estimated selling price less estimated costs of completion, disposal, and transportation. We regularly review inventory quantities on hand, future purchase commitments with our suppliers, and the estimated utility of our inventory. If our review indicates a reduction in utility below carrying value, we reduce our inventory to a new cost basis through a charge to cost of revenue.

Property and Equipment

Property and equipment is stated at cost less accumulated depreciation, and depreciated using the straight-line method over the shorter of the estimated useful life of the asset or the lease term. The estimated useful lives of our property and equipment are generally as follows: computer software developed or acquired for internal use, three to seven years; computer equipment, two to four years; buildings and improvements, five to 15 years; leasehold improvements, three to 20 years; and furniture and equipment, one to 10 years. Land is not depreciated.

We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities in our consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities in our consolidated balance sheets.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

We have lease agreements with lease and non-lease components, which are generally accounted for separately. For certain equipment leases, such as vehicles, we account for the lease and non-lease components as a single lease component. Additionally, for certain equipment leases, we apply a portfolio approach to effectively account for the operating lease ROU assets and liabilities.

Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (May 1 for us) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.

Intangible Assets

Our intangible assets are subject to amortization and are amortized using the straight-line method over their estimated period of benefit, ranging from one to 20 years. We evaluate the recoverability of intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired.

Recent Accounting Guidance

Recently Adopted Accounting Guidance

Financial Instruments – Credit Losses

In June 2016, the FASB issued a new standard to replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. We adopted the standard effective July 1, 2020. We use a forward-looking expected credit loss model for accounts receivable, loans, and other financial instruments. Credit losses relating to available-for-sale debt securities are recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. We applied a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date to align our credit loss methodology with the new standard. The adoption of the standard did not have a material impact on our consolidated financial statements.

Recent Accounting Guidance Not Yet Adopted

Accounting for Income Taxes

In December 2019, the FASB issued a new standard to simplify the accounting for income taxes. The guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The guidance also simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard will be effective for us beginning July 1, 2021. We have completed our assessment and concluded that adoption of the new standard will not have a material impact on our consolidated financial statements.

NOTE 2 — EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and stock awards.

The components of basic and diluted EPS were as follows:

Anti-dilutive stock-based awards excluded from the calculations of diluted EPS were immaterial during the periods presented.

NOTE 3 — OTHER INCOME (EXPENSE), NET

Net Recognized Gains (Losses) on Investments

Net recognized gains (losses) on debt investments were as follows:

Net recognized gains (losses) on equity investments were as follows:

NOTE 4 — INVESTMENTS

Investment Components

The components of investments were as follows:

Refer to Note 5 – Derivatives for further information on the fair value of our derivative instruments.

Equity investments presented as “Other” in the tables above include investments without readily determinable fair values measured using the equity method or measured at cost with adjustments for observable changes in price or impairments, and investments measured at fair value using net asset value as a practical expedient which are not categorized in the fair value hierarchy. As of June 30, 2021 and 2020, equity investments without readily determinable fair values measured at cost with adjustments for observable changes in price or impairments were $3.3 billion and $1.4 billion, respectively.

Unrealized Losses on Debt Investments

Debt investments with continuous unrealized losses for less than 12 months and 12 months or greater and their related fair values were as follows:

Unrealized losses from fixed-income securities are primarily attributable to changes in interest rates. Management does not believe any remaining unrealized losses represent impairments based on our evaluation of available evidence.

Debt Investment Maturities

NOTE 5 — DERIVATIVES

We use derivative instruments to manage risks related to foreign currencies, interest rates, equity prices, and credit; to enhance investment returns; and to facilitate portfolio diversification. Our objectives for holding derivatives include reducing, eliminating, and efficiently managing the economic impact of these exposures as effectively as possible. Our derivative programs include strategies that both qualify and do not qualify for hedge accounting treatment.

Foreign currency risks related to certain non-U.S. dollar-denominated investments are hedged using foreign exchange forward contracts that are designated as fair value hedging instruments. Foreign currency risks related to certain Euro-denominated debt are hedged using foreign exchange forward contracts that are designated as cash flow hedging instruments.

In the past, option and forward contracts were used to hedge a portion of forecasted international revenue and were designated as cash flow hedging instruments. Principal currencies hedged included the Euro, Japanese yen, British pound, Canadian dollar, and Australian dollar.

Certain options and forwards not designated as hedging instruments are also used to manage the variability in foreign exchange rates on certain balance sheet amounts and to manage other foreign currency exposures.

Interest rate risks related to certain fixed-rate debt are hedged using interest rate swaps that are designated as fair value hedging instruments to effectively convert the fixed interest rates to floating interest rates.

Securities held in our fixed-income portfolio are subject to different interest rate risks based on their maturities. We manage the average maturity of our fixed-income portfolio to achieve economic returns that correlate to certain broad-based fixed-income indices using exchange-traded option and futures contracts and over-the-counter swap and option contracts. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.

Securities held in our equity investments portfolio are subject to market price risk. At times, we may hold options, futures, and swap contracts. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.

Our fixed-income portfolio is diversified and consists primarily of investment-grade securities. We use credit default swap contracts to manage credit exposures relative to broad-based indices and to facilitate portfolio diversification. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.

Credit-Risk-Related Contingent Features

Certain of our counterparty agreements for derivative instruments contain provisions that require our issued and outstanding long-term unsecured debt to maintain an investment grade credit rating and require us to maintain minimum liquidity of $1.0 billion. To the extent we fail to meet these requirements, we will be required to post collateral, similar to the standard convention related to over-the-counter derivatives. As of June 30, 2021, our long-term unsecured debt rating was AAA, and cash investments were in excess of $1.0 billion. As a result, no collateral was required to be posted.

The following table presents the notional amounts of our outstanding derivative instruments measured in U.S. dollar equivalents:

Fair Values of Derivative Instruments

The following table presents our derivative instruments:

Gross derivative assets and liabilities subject to legally enforceable master netting agreements for which we have elected to offset were $395 million and $335 million, respectively, as of June 30, 2021, and $399 million and $399 million, respectively, as of June 30, 2020.

The following table presents the fair value of our derivatives instruments on a gross basis:

Gains (losses) on derivative instruments recognized in our consolidated income statements were as follows:

Gains (losses), net of tax, on derivative instruments recognized in our consolidated comprehensive income statements were as follows:

NOTE 6 — INVENTORIES

The components of inventories were as follows:

NOTE 7 — PROPERTY AND EQUIPMENT

The components of property and equipment were as follows:

During fiscal years 2021, 2020, and 2019, depreciation expense was $9.3 billion, $10.7 billion, and $9.7 billion, respectively. Depreciation expense declined in fiscal year 2021 due to the change in estimated useful lives of our server and network equipment. We have committed $9.5 billion for the construction of new buildings, building improvements, and leasehold improvements as of June 30, 2021.

During fiscal year 2020, we recorded an impairment charge of $186 million to Property and Equipment, primarily to leasehold improvements, due to the closing of our Microsoft Store physical locations.

NOTE 8 — BUSINESS COMBINATIONS

ZeniMax Media Inc.

On March 9, 2021, we completed our acquisition of ZeniMax Media Inc. (“ZeniMax”), the parent company of Bethesda Softworks LLC (“Bethesda”), for a total purchase price of $8.1 billion, consisting primarily of cash. The purchase price included $768 million of cash and cash equivalents acquired. Bethesda is one of the largest, privately held game developers and publishers in the world, and brings a broad portfolio of games, technology, and talent to Xbox. The financial results of ZeniMax have been included in our consolidated financial statements since the date of the acquisition. ZeniMax is reported as part of our More Personal Computing segment.

The purchase price allocation as of the date of acquisition was based on a preliminary valuation and is subject to revision as more detailed analyses are completed and additional information about the fair value of assets acquired and liabilities assumed becomes available.

The major classes of assets and liabilities to which we have preliminarily allocated the purchase price were as follows:

Goodwill was assigned to our More Personal Computing segment. The goodwill was primarily attributed to increased synergies that are expected to be achieved from the integration of ZeniMax. None of the goodwill is expected to be deductible for income tax purposes.

Following are details of the purchase price allocated to the intangible assets acquired:

GitHub, Inc.

On October 25, 2018, we acquired GitHub, Inc. (“GitHub”), a software development platform, in a $7.5 billion stock transaction (inclusive of total cash payments of $1.3 billion in respect of vested GitHub equity awards and an indemnity escrow). The acquisition is expected to empower developers to achieve more at every stage of the development lifecycle, accelerate enterprise use of GitHub, and bring Microsoft’s developer tools and services to new audiences. The financial results of GitHub have been included in our consolidated financial statements since the date of the acquisition. GitHub is reported as part of our Intelligent Cloud segment.

The allocation of the purchase price to goodwill was completed as of June 30, 2019. The major classes of assets and liabilities to which we allocated the purchase price were as follows:

The goodwill recognized in connection with the acquisition is primarily attributable to anticipated synergies from future growth and is not expected to be deductible for tax purposes. We assigned the goodwill to our Intelligent Cloud segment.

Following are the details of the purchase price allocated to the intangible assets acquired:

Transactions recognized separately from the purchase price allocation were approximately $600 million, primarily related to equity awards recognized as expense over the related service period.

Nuance Communications, Inc.

On April 11, 2021, we entered into a definitive agreement to acquire Nuance Communications, Inc. (“Nuance”) for $56.00 per share in an all-cash transaction valued at $19.7 billion, inclusive of Nuance’s net debt. Nuance is a cloud and artificial intelligence (“AI”) software provider with healthcare and enterprise AI experience, and the acquisition will build on our industry-specific cloud offerings. The acquisition has been approved by Nuance’s shareholders, and we expect it to close by the end of calendar year 2021, subject to the satisfaction of certain regulatory approvals and other customary closing conditions.

NOTE 9 — GOODWILL

Changes in the carrying amount of goodwill were as follows:

Includes goodwill of $5.5 billion related to ZeniMax. See Note 8 – Business Combinations for further information.

The measurement periods for the valuation of assets acquired and liabilities assumed end as soon as information on the facts and circumstances that existed as of the acquisition dates becomes available, but do not exceed 12 months. Adjustments in purchase price allocations may require a change in the amounts allocated to goodwill during the periods in which the adjustments are determined.

Any change in the goodwill amounts resulting from foreign currency translations and purchase accounting adjustments are presented as “Other” in the table above. Also included in “Other” are business dispositions and transfers between segments due to reorganizations, as applicable.

Goodwill Impairment

We test goodwill for impairment annually on May 1 at the reporting unit level, primarily using a discounted cash flow methodology with a peer-based, risk-adjusted weighted average cost of capital. We believe use of a discounted cash flow approach is the most reliable indicator of the fair values of the businesses.

No instances of impairment were identified in our May 1, 2021, May 1, 2020, or May 1, 2019 tests. As of June 30, 2021 and 2020, accumulated goodwill impairment was $11.3 billion.

NOTE 10 — INTANGIBLE ASSETS

The components of intangible assets, all of which are finite-lived, were as follows:

Includes intangible assets of $2.0 billion related to ZeniMax. See Note 8 – Business Combinations for further information.

No material impairments of intangible assets were identified during fiscal years 2021, 2020, or 2019. We estimate that we have no significant residual value related to our intangible assets.

The components of intangible assets acquired during the periods presented were as follows:

Intangible assets amortization expense was $1.6 billion, $1.6 billion, and $1.9 billion for fiscal years 2021, 2020, and 2019, respectively.

The following table outlines the estimated future amortization expense related to intangible assets held as of June 30, 2021:

NOTE 11 — DEBT

The components of debt were as follows:

In March 2021 and June 2020, we exchanged a portion of our existing debt at a premium for cash and new debt with longer maturities. The premiums are amortized over the terms of the new debt.
Refer to Note 5 – Derivatives for further information on the interest rate swaps related to fixed-rate debt.

As of June 30, 2021 and 2020, the estimated fair value of long-term debt, including the current portion, was $70.0 billion and $77.1 billion, respectively. The estimated fair values are based on Level 2 inputs.

Debt in the table above is comprised of senior unsecured obligations and ranks equally with our other outstanding obligations. Interest is paid semi-annually, except for the Euro-denominated debt, which is paid annually. Cash paid for interest on our debt for fiscal years 2021, 2020, and 2019 was $2.0 billion, $2.4 billion, and $2.4 billion, respectively.

The following table outlines maturities of our long-term debt, including the current portion, as of June 30, 2021:

NOTE 12 — INCOME TAXES

Tax Cuts and Jobs Act

On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted into law, which significantly changed existing U.S. tax law and included numerous provisions that affect our business. We recorded a provisional net charge of $13.7 billion related to the enactment of the TCJA in fiscal year 2018 and adjusted the provisional net charge by recording additional tax expense of $157 million in fiscal year 2019 pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 118.

In fiscal year 2019, in response to the TCJA and recently issued regulations, we transferred certain intangible properties held by our foreign subsidiaries to the U.S. and Ireland. The transfers of intangible properties resulted in a $2.6 billion net income tax benefit recorded in the fourth quarter of fiscal year 2019, as the value of future tax deductions exceeded the current tax liability from foreign jurisdictions and U.S. global intangible low-taxed income (“GILTI”) tax.

Provision for Income Taxes

The components of the provision for income taxes were as follows:

U.S. and foreign components of income before income taxes were as follows:

The items accounting for the difference between income taxes computed at the U.S. federal statutory rate and our effective rate were as follows:

We have historically paid India withholding taxes on software sales through distributor withholding and tax audit assessments in India. In March 2021, the India Supreme Court ruled favorably in the case of Engineering Analysis Centre of Excellence Private Limited vs The Commissioner of Income Tax for companies in 86 separate appeals, some dating back to 2012, holding that software sales are not subject to India withholding taxes. Although we were not a party to the appeals, our software sales in India were determined to be not subject to withholding taxes. Therefore, we recorded a net income tax benefit of $620 million in the third quarter of fiscal year 2021 to reflect the results of the India Supreme Court decision impacting fiscal year 1996 through fiscal year 2016.

The decrease from the federal statutory rate in fiscal year 2021 is primarily due to earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland and Puerto Rico, tax benefits relating to stock-based compensation, and tax benefits from the India Supreme Court decision on withholding taxes. The decrease from the federal statutory rate in fiscal year 2020 is primarily due to earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland and Puerto Rico, and tax benefits relating to stock-based compensation. The decrease from the federal statutory rate in fiscal year 2019 is primarily due to a $2.6 billion net income tax benefit related to intangible property transfers, and earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland, Singapore, and Puerto Rico. In fiscal year 2021 and 2020, our foreign regional operating centers in Ireland and Puerto Rico, which are taxed at rates lower than the U.S. rate, generated 82% and 86% of our foreign income before tax. In fiscal years 2019, our foreign regional operating centers in Ireland, Singapore, and Puerto Rico, which are taxed at rates lower than the U.S. rate, generated 82% of our foreign income before tax, respectively. Other reconciling items, net consists primarily of tax credits and GILTI tax, and in fiscal year 2021, includes tax benefits from the India Supreme Court decision on withholding taxes. In fiscal years 2021, 2020, and 2019, there were no individually significant other reconciling items.

The decrease in our effective tax rate for fiscal year 2021 compared to fiscal year 2020 was primarily due to tax benefits from the India Supreme Court decision on withholding taxes, an agreement between the U.S. and India tax authorities related to transfer pricing, final TCJA regulations, and an increase in tax benefits relating to stock-based compensation. The increase in our effective tax rate for fiscal year 2020 compared to fiscal year 2019 was primarily due to a $2.6 billion net income tax benefit in the fourth quarter of fiscal year 2019 related to intangible property transfers.

The components of the deferred income tax assets and liabilities were as follows:

Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when the taxes are paid or recovered.

As of June 30, 2021, we had federal, state, and foreign net operating loss carryforwards of $304 million, $1.3 billion, and $2.0 billion, respectively. The federal and state net operating loss carryforwards will expire in various years from fiscal 2022 through 2041, if not utilized. The majority of our foreign net operating loss carryforwards do not expire. Certain acquired net operating loss carryforwards are subject to an annual limitation but are expected to be realized with the exception of those which have a valuation allowance.

The valuation allowance disclosed in the table above relates to the foreign net operating loss carryforwards and other net deferred tax assets that may not be realized. In fiscal year 2020, we removed $2.0 billion of foreign net operating losses and corresponding valuation allowances as a result of the liquidation of a foreign subsidiary. There was no impact to our consolidated financial statements.

Income taxes paid, net of refunds, were $13.4 billion, $12.5 billion, and $8.4 billion in fiscal years 2021, 2020, and 2019, respectively.

Gross unrecognized tax benefits related to uncertain tax positions as of June 30, 2021, 2020, and 2019, were $14.6 billion, $13.8 billion, and $13.1 billion, respectively, which were primarily included in long-term income taxes in our consolidated balance sheets. If recognized, the resulting tax benefit would affect our effective tax rates for fiscal years 2021, 2020, and 2019 by $12.5 billion, $12.1 billion, and $12.0 billion, respectively.

As of June 30, 2021, 2020, and 2019, we had accrued interest expense related to uncertain tax positions of $4.3 billion, $4.0 billion, and $3.4 billion, respectively, net of income tax benefits. The provision for income taxes for fiscal years 2021, 2020, and 2019 included interest expense related to uncertain tax positions of $274 million, $579 million, and $515 million, respectively, net of income tax benefits.

The aggregate changes in the gross unrecognized tax benefits related to uncertain tax positions were as follows:

NOTE 13 — UNEARNED REVENUE

Unearned revenue by segment was as follows:

Changes in unearned revenue were as follows:

Revenue allocated to remaining performance obligations, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods, was $146 billion as of June 30, 2021, of which $141 billion is related to the commercial portion of revenue. We expect to recognize approximately 50% of this revenue over the next 12 months and the remainder thereafter.

NOTE 14 — LEASES

We have operating and finance leases for datacenters, corporate offices, research and development facilities, Microsoft Experience Centers, and certain equipment. Our leases have remaining lease terms of 1 year to 15 years, some of which include options to extend the leases for up to 5 years, and some of which include options to terminate the leases within 1 year.

The components of lease expense were as follows:

Supplemental cash flow information related to leases was as follows:

Supplemental balance sheet information related to leases was as follows:

The following table outlines maturities of our lease liabilities as of June 30, 2021:

As of June 30, 2021, we have additional operating and finance leases, primarily for datacenters, that have not yet commenced of $5.4 billion and $7.3 billion, respectively. These operating and finance leases will commence between fiscal year 2022 and fiscal year 2026 with lease terms of 1 year to 15 years.

During fiscal year 2020, we recorded an impairment charge of $161 million to operating lease right-of-use assets due to the closing of our Microsoft Store physical locations.

NOTE 15 — CONTINGENCIES

Patent and Intellectual Property Claims

There were 63 patent infringement cases pending against Microsoft as of June 30, 2021, none of which are material individually or in aggregate.

Antitrust, Unfair Competition, and Overcharge Class Actions

Antitrust and unfair competition class action lawsuits were filed against us in British Columbia, Ontario, and Quebec, Canada. All three have been certified on behalf of Canadian indirect purchasers who acquired licenses for Microsoft operating system software and/or productivity application software between 1998 and 2010.

The trial of the British Columbia action commenced in May 2016. Following a mediation, the parties agreed to a global settlement of all three Canadian actions and submitted the proposed settlement agreement to the courts in all three jurisdictions for approval. The final settlement and form of notice have been approved by the courts in British Columbia, Ontario, and Quebec. The ten-month claims period commenced on November 23, 2020 and will close on September 23, 2021.

Other Antitrust Litigation and Claims

China State Administration for Market Regulation Investigation

In 2014, Microsoft was informed that China’s State Agency for Market Regulation (“SAMR”) (formerly State Administration for Industry and Commerce) had begun a formal investigation relating to China’s Anti-Monopoly Law, and the SAMR conducted onsite inspections of Microsoft offices in Beijing, Shanghai, Guangzhou, and Chengdu. In 2019, the SAMR presented preliminary views as to certain possible violations of China’s Anti-Monopoly Law.

Product-Related Litigation

U.S. Cell Phone Litigation

Microsoft Mobile Oy, a subsidiary of Microsoft, along with other handset manufacturers and network operators, is a defendant in 46 lawsuits, including 45 lawsuits filed in the Superior Court for the District of Columbia by individual plaintiffs who allege that radio emissions from cellular handsets caused their brain tumors and other adverse health effects. We assumed responsibility for these claims in our agreement to acquire Nokia’s Devices and Services business and have been substituted for the Nokia defendants. Nine of these cases were filed in 2002 and are consolidated for certain pre-trial proceedings; the remaining cases are stayed. In a separate 2009 decision, the Court of Appeals for the District of Columbia held that adverse health effect claims arising from the use of cellular handsets that operate within the U.S. Federal Communications Commission radio frequency emission guidelines (“FCC Guidelines”) are pre-empted by federal law. The plaintiffs allege that their handsets either operated outside the FCC Guidelines or were manufactured before the FCC Guidelines went into effect. The lawsuits also allege an industry-wide conspiracy to manipulate the science and testing around emission guidelines.

In 2013, the defendants in the consolidated cases moved to exclude the plaintiffs’ expert evidence of general causation on the basis of flawed scientific methodologies. In 2014, the trial court granted in part and denied in part the defendants’ motion to exclude the plaintiffs’ general causation experts. The defendants filed an interlocutory appeal to the District of Columbia Court of Appeals challenging the standard for evaluating expert scientific evidence. In October 2016, the Court of Appeals issued its decision adopting the standard advocated by the defendants and remanding the cases to the trial court for further proceedings under that standard. The plaintiffs have filed supplemental expert evidence, portions of which the defendants have moved to strike. In August 2018, the trial court issued an order striking portions of the plaintiffs’ expert reports. A hearing on general causation is scheduled for January and February of 2022.

Other Contingencies

We also are subject to a variety of other claims and suits that arise from time to time in the ordinary course of our business. Although management currently believes that resolving claims against us, individually or in aggregate, will not have a material adverse impact in our consolidated financial statements, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future.

As of June 30, 2021, we accrued aggregate legal liabilities of $339 million. While we intend to defend these matters vigorously, adverse outcomes that we estimate could reach approximately $500 million in aggregate beyond recorded amounts are reasonably possible. Were unfavorable final outcomes to occur, there exists the possibility of a material adverse impact in our consolidated financial statements for the period in which the effects become reasonably estimable.

NOTE 16 — STOCKHOLDERS’ EQUITY

Shares Outstanding

Shares of common stock outstanding were as follows:

NOTE 17 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table summarizes the changes in accumulated other comprehensive income (loss) by component:

NOTE 18 — EMPLOYEE STOCK AND SAVINGS PLANS

We grant stock-based compensation to employees and directors. As of June 30, 2021, an aggregate of 251 million shares were authorized for future grant under our stock plans. Awards that expire or are canceled without delivery of shares generally become available for issuance under the plans. We issue new shares of Microsoft common stock to satisfy vesting of awards granted under our stock plans. We also have an ESPP for all eligible employees.

Stock-based compensation expense and related income tax benefits were as follows:

Stock Plans

Stock awards entitle the holder to receive shares of Microsoft common stock as the award vests. Stock awards generally vest over a service period of four years or five years.

Executive Incentive Plan

Under the Executive Incentive Plan, the Compensation Committee approves stock awards to executive officers and certain senior executives. RSUs generally vest ratably over a service period of four years. PSUs generally vest over a performance period of three years. The number of shares the PSU holder receives is based on the extent to which the corresponding performance goals have been achieved.

Activity for All Stock Plans

The fair value of stock awards was estimated on the date of grant using the following assumptions:

During fiscal year 2021, the following activity occurred under our stock plans:

Includes 2 million of PSUs granted at target and performance adjustments above target levels for fiscal years 2021, 2020, and 2019.

As of June 30, 2021, there was approximately $12.0 billion of total unrecognized compensation costs related to stock awards. These costs are expected to be recognized over a weighted average period of three years. The weighted average grant-date fair value of stock awards granted was $221.13, $140.49, and $107.02 for fiscal years 2021, 2020, and 2019, respectively. The fair value of stock awards vested was $13.4 billion, $10.1 billion, and $8.7 billion, for fiscal years 2021, 2020, and 2019, respectively.

Employee Stock Purchase Plan

We have an ESPP for all eligible employees. Shares of our common stock may be purchased by employees at three-month intervals at 90% of the fair market value on the last trading day of each three-month period. Employees may purchase shares having a value not exceeding 15% of their gross compensation during an offering period. Under the terms of the ESPP that were approved in 2012, the plan will terminate on December 31, 2022. We intend to request shareholder approval for a successor ESPP with a January 1, 2022 effective date and ten-year expiration of December 31, 2031 at our 2021 Annual Shareholders Meeting. No additional shares will be requested at this meeting. Employees purchased the following shares during the periods presented:

As of June 30, 2021, 88 million shares of our common stock were reserved for future issuance through the ESPP.

Savings Plan

We have savings plans in the U.S. that qualify under Section 401(k) of the Internal Revenue Code, and a number of savings plans in international locations. Eligible U.S. employees may contribute a portion of their salary into the savings plans, subject to certain limitations. We contribute fifty cents for each dollar a participant contributes into the plans, with a maximum employer contribution of 50% of the IRS contribution limit for the calendar year. Employer-funded retirement benefits for all plans were $1.2 billion, $1.0 billion, and $877 million in fiscal years 2021, 2020, and 2019, respectively, and were expensed as contributed.

NOTE 19 — SEGMENT INFORMATION AND GEOGRAPHIC DATA

In its operation of the business, management, including our chief operating decision maker, who is also our Chief Executive Officer, reviews certain financial information, including segmented internal profit and loss statements prepared on a basis not consistent with GAAP. During the periods presented, we reported our financial performance based on the following segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.

Windows, including Windows OEM licensing and other non-volume licensing of the Windows operating system; Windows Commercial, comprising volume licensing of the Windows operating system, Windows cloud services, and other Windows commercial offerings; patent licensing; Windows Internet of Things; and MSN advertising.

Revenue and costs are generally directly attributed to our segments. However, due to the integrated structure of our business, certain revenue recognized and costs incurred by one segment may benefit other segments. Revenue from certain contracts is allocated among the segments based on the relative value of the underlying products and services, which can include allocation based on actual prices charged, prices when sold separately, or estimated costs plus a profit margin. Cost of revenue is allocated in certain cases based on a relative revenue methodology. Operating expenses that are allocated primarily include those relating to marketing of products and services from which multiple segments benefit and are generally allocated based on relative gross margin.

In addition, certain costs incurred at a corporate level that are identifiable and that benefit our segments are allocated to them. These allocated costs include legal, including settlements and fines, information technology, human resources, finance, excise taxes, field selling, shared facilities services, and customer service and support. Each allocation is measured differently based on the specific facts and circumstances of the costs being allocated. Certain corporate-level activity is not allocated to our segments.

Segment revenue and operating income were as follows during the periods presented:

No sales to an individual customer or country other than the United States accounted for more than 10% of revenue for fiscal years 2021, 2020, or 2019. Revenue, classified by the major geographic areas in which our customers were located, was as follows:

Includes billings to OEMs and certain multinational organizations because of the nature of these businesses and the impracticability of determining the geographic source of the revenue.

Revenue from external customers, classified by significant product and service offerings, was as follows:

Our commercial cloud revenue, which includes Azure, Office 365 Commercial, the commercial portion of LinkedIn, Dynamics 365, and other commercial cloud properties, was $69.1 billion, $51.7 billion and $38.1 billion in fiscal years 2021, 2020, and 2019, respectively. These amounts are primarily included in Server products and cloud services, Office products and cloud services, and LinkedIn in the table above.

Assets are not allocated to segments for internal reporting presentations. A portion of amortization and depreciation is included with various other costs in an overhead allocation to each segment. It is impracticable for us to separately identify the amount of amortization and depreciation by segment that is included in the measure of segment profit or loss.

Long-lived assets, excluding financial instruments and tax assets, classified by the location of the controlling statutory company and with countries over 10% of the total shown separately, were as follows:

Auditor's Report

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Microsoft Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Microsoft Corporation and subsidiaries (the “Company”) as of June 30, 2021 and 2020, the related consolidated statements of income, comprehensive income, cash flows, and stockholders’ equity, for each of the three years in the period ended June 30, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2021, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of June 30, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated July 29, 2021, expressed an unqualified opinion on the Company’s internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Revenue Recognition — Refer to Note 1 to the financial statements

Critical Audit Matter Description

The Company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company offers customers the ability to acquire multiple licenses of software products and services, including cloud-based services, in its customer agreements through its volume licensing programs.

Significant judgment is exercised by the Company in determining revenue recognition for these customer agreements, and includes the following:

Determination of whether products and services are considered distinct performance obligations that should be accounted for separately versus together, such as software licenses and related services that are sold with cloud-based services.
The pattern of delivery (i.e., timing of when revenue is recognized) for each distinct performance obligation.
Identification and treatment of contract terms that may impact the timing and amount of revenue recognized (e.g., variable consideration, optional purchases, and free services).
Determination of stand-alone selling prices for each distinct performance obligation and for products and services that are not sold separately.

Given these factors and due to the volume of transactions, the related audit effort in evaluating management’s judgments in determining revenue recognition for these customer agreements was extensive and required a high degree of auditor judgment.

How the Critical Audit Matter Was Addressed in the Audit

Our principal audit procedures related to the Company’s revenue recognition for these customer agreements included the following:

We tested the effectiveness of controls related to the identification of distinct performance obligations, the determination of the timing of revenue recognition, and the estimation of variable consideration.
We evaluated management’s significant accounting policies related to these customer agreements for reasonableness.
We selected a sample of customer agreements and performed the following procedures:
Obtained and read contract source documents for each selection, including master agreements, and other documents that were part of the agreement.
Tested management’s identification and treatment of contract terms.
Assessed the terms in the customer agreement and evaluated the appropriateness of management’s application of their accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions.
We evaluated the reasonableness of management’s estimate of stand-alone selling prices for products and services that are not sold separately.
We tested the mathematical accuracy of management’s calculations of revenue and the associated timing of revenue recognized in the financial statements.

Income Taxes — Uncertain Tax Positions — Refer to Note 12 to the financial statements

The Company’s long-term income taxes liability includes uncertain tax positions related to transfer pricing issues that remain unresolved with the Internal Revenue Service (“IRS”). The Company remains under IRS audit, or subject to IRS audit, for tax years subsequent to 2003. While the Company has settled a portion of the IRS audits, resolution of the remaining matters could have a material impact on the Company’s financial statements.

Conclusions on recognizing and measuring uncertain tax positions involve significant estimates and management judgment and include complex considerations of the Internal Revenue Code, related regulations, tax case laws, and prior-year audit settlements. Given the complexity and the subjective nature of the transfer pricing issues that remain unresolved with the IRS, evaluating management’s estimates relating to their determination of uncertain tax positions required extensive audit effort and a high degree of auditor judgment, including involvement of our tax specialists.

Our principal audit procedures to evaluate management’s estimates of uncertain tax positions related to unresolved transfer pricing issues included the following:

We evaluated the appropriateness and consistency of management’s methods and assumptions used in the identification, recognition, measurement, and disclosure of uncertain tax positions, which included testing the effectiveness of the related internal controls.
We read and evaluated management’s documentation, including relevant accounting policies and information obtained by management from outside tax specialists, that detailed the basis of the uncertain tax positions.
We tested the reasonableness of management’s judgments regarding the future resolution of the uncertain tax positions, including an evaluation of the technical merits of the uncertain tax positions.
For those uncertain tax positions that had not been effectively settled, we evaluated whether management had appropriately considered new information that could significantly change the recognition, measurement or disclosure of the uncertain tax positions.
We evaluated the reasonableness of management’s estimates by considering how tax law, including statutes, regulations and case law, impacted management’s judgments.

/s/ DELOITTE & TOUCHE LLP Seattle, Washington July 29, 2021

We have served as the Company’s auditor since 1983.

Controls & Procedures

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.

REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our consolidated financial statements; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use, or disposition of company assets that could have a material effect on our consolidated financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our consolidated financial statements would be prevented or detected.

Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of June 30, 2021. There were no changes in our internal control over financial reporting during the quarter ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Deloitte & Touche LLP has audited our internal control over financial reporting as of June 30, 2021; their report follows.

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of Microsoft Corporation and subsidiaries (the “Company”) as of June 30, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2021, based on the criteria established in Internal Control – Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements and the related notes (collectively referred to as the “financial statements”) as of and for the year ended June 30, 2021, of the Company and our report dated July 29, 2021, expressed an unqualified opinion on those financial statements.

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Directors & Officers

DIRECTORS AND EXECUTIVE OFFICERS OF MICROSOFT CORPORATION

Satya Nadella Chairman and Chief Executive Officer, Microsoft Corporation

Sandra E. Peterson 2,3 Operating Partner, Clayton, Dubilier & Rice

John W. Thompson 3,4 Lead Independent Director, Microsoft Corporation

Reid G. Hoffman General Partner, Greylock Partners

Penny S. Pritzker 4 Founder and Chairman, PSP Partners

Emma N. Walmsley 2,4 Chief Executive Officer, GlaxoSmithKline

Hugh F. Johnston 1 Vice Chairman and Executive Vice President and Chief Financial Officer, PepsiCo

Charles W. Scharf 2,3 Chief Executive Officer and President, Wells Fargo & Company

Padmasree Warrior 2 Founder, Chief Executive Officer and President, Fable Group Inc.

Teri L. List 1,3 Former Executive Vice President and Chief Financial Officer, Gap, Inc.

John W. Stanton 1,4 Founder and Chairman, Trilogy Partnerships

Board Committees

Audit Committee
Compensation Committee
Governance and Nominating Committee
Regulatory and Public Policy Committee

Executive Officers

Satya Nadella Chairman and Chief Executive Officer

Amy E. Hood Executive Vice President, Chief Financial Officer

Judson Althoff Executive Vice President, Chief Commercial Officer

Bradford L. Smith President and Vice Chair

Christopher C. Capossela Executive Vice President, Marketing and Consumer Business, and Chief Marketing Officer

Christopher D. Young Executive Vice President, Business Development, Strategy, and Ventures

Kathleen T. Hogan Executive Vice President, Human Resources

Investor Relations

You can contact Microsoft Investor Relations at any time to order financial documents such as annual reports and Form 10-Ks free of charge.

Call us toll-free at (800) 285-7772 or outside the United States, call (425) 706-4400. We can be contacted between the hours of 9:00 a.m. to 5:00 p.m. Pacific Time to answer investment oriented questions about Microsoft.

For access to additional financial information, visit the Investor Relations website online at: www.microsoft.com/investor

Our e-mail is [email protected]

Our mailing address is:

Investor Relations Microsoft Corporation One Microsoft Way Redmond, Washington 98052-6399

Attending the Annual Meeting

The 2021 Annual Shareholders Meeting will be held as a virtual-only meeting. Any shareholder can join the Annual Meeting, while shareholders of record as of September 30, 2021, will be able to vote and submit questions during the meeting.

Date: Tuesday, November 30, 2021 Time: 8:30 a.m. Pacific Time Virtual Shareholder Meeting: www.virtualshareholdermeeting.com/MSFT21

Submit Your Question

We invite you to submit any questions via the proxy voting site at www.proxyvote.com . We will include as many of your questions as possible during the Q&A session of the meeting and will provide answers to questions on the Microsoft Investor Relations website under the Annual Meeting page.

Registered Shareholder Services

Computershare, our transfer agent, can help you with a variety of shareholder related services including:

Change of address
Lost stock certificates
Transfer of stock to another person
Additional administrative services

Computershare also administers a direct stock purchase plan and a dividend reinvestment program for the company.

Contact Computershare directly to find out more about these services and programs at 800-285-7772, option 1, or visit online at: https://www.computershare.com/Microsoft

You can e-mail the transfer agent at: [email protected]

You can also send mail to the transfer agent at:

Computershare P.O. Box 505000 Louisville, KY 40233-5000

Shareholders can sign up for electronic alerts to access the annual report and proxy statement online. The service gets you the information you need faster and also gives you the power and convenience of online proxy voting. To sign up for this free service, visit the Annual Report site on the Investor Relations website at: http://www.microsoft.com/investor/AnnualReports/default.aspx

Environmental, Social, Governance (ESG)/Corporate Social Responsibility (CSR)

Many of our shareholders are increasingly focused on the importance of the effective engagement and action on ESG topics. To meet the expectations of our stakeholders and to and maintain their trust, we are committed to conducting our business in ways that are principled, transparent, and accountable and we have made a broad range of environmental and social commitments. From our CEO and Senior Leadership Team and throughout our organization, people at Microsoft are working to conduct our business in principled ways that make a significant positive impact on important global issues. Microsoft’s Board of Directors provides insight, feedback, and oversight across a broad range of environmental and social matters. In particular, among the responsibilities of the Board’s Regulatory and Public Policy Committee is to review and provide guidance to the Board and management about the Company’s policies and programs that relate to CSR.

For more about Microsoft’s CSR commitments and performance, please visit: www.microsoft.com/transparency .

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Results, reporting and presentations

Annual report

Performing while transforming.

Countries of operation

Million barrels of oil equivalent upstream production, retail sites , our strategy.

Our three-pillar strategy is unchanged – it is focused on investing in our transition growth engines and, at the same time, investing in today’s energy system. And integration connects it all.

Since we set out our strategy in 2020, our track record of delivery has given us increased confidence as we invest in bp's transition and the energy transition.

Resilient hydrocarbons

Convenience and mobility, low carbon energy, case studies.

In order to advance our purpose and ambition, we have identified three strategic focus areas, and we’ve set targets and aims against these out to 2025 and 2030. These provide the basis for a common set of enduring objectives for bp as we transform the organization consistent with the long-term energy transition . Here are some examples of how we performed in 2022.

Our focus remains on safely delivering value, maximizing returns and cash flow and reducing emissions. Having grown production in 2022, we plan to grow underlying production to 2025, and hold broadly flat to 2030, relative to 2022.

An image of a customer at an EV charging point

By bringing our capabilities and reach in convenience together with EV charging, we can provide customer-focused, lower carbon transport solutions over time.

Image of an offshore wind farm being developed in Scotland

We plan to create integrated regional hubs, enabled by two of our transition growth engines in high-growth sectors: hydrogen and renewables & power.

Energy Outlook

Energy Outlook 2023 considers the recent disruption to global energy supplies and associated impacts on global prices, and explores how this could affect the energy transition out to 2050

Key downloads

Our key reports include information about our financial and operating performance, sustainability performance and also global energy trends and projections.

Paper copies

To obtain a hard printed copy of bp’s complete audited financial statements, free of charge, UK based investors should contact bp distribution services by clicking the link above or calling +44 (0)870 241 3269 or by emailing [email protected]. If based in the US or Canada investors should contact Issuer Direct by calling +1 888 301 2505 or by emailing [email protected].

The bp Annual Report and Form 20-F 2022 available for download on this webpage constitutes the Annual Report and Accounts in accordance with UK requirements and the Annual Report on Form 20-F in accordance with the US Securities Exchange Act of 1934, for BP p.l.c. for the year ended 31 December 2022. A cross reference to Form 20-F requirements is included on page 402 of the bp Annual Report and Form 20-F 2022.

The bp Annual Report and Form 20-F 2022 contains the Strategic report on the inside front cover and pages 1-76 and the Directors’ report on pages 77-111, 112 (in part only), 148-150, 263-290 and 351-400. The Strategic report and the Directors’ report together include the management report required by DTR 4.1 of the UK Financial Conduct Authority’s Disclosure Guidance and Transparency Rules. The Directors’ remuneration report is on pages 112-147. The consolidated financial statements of the group are on pages 152-262 and the corresponding reports of the auditor are on pages 152-172. The parent company financial statements of BP p.l.c. are on pages 291-349.

The Directors’ statements (comprising the Statement of directors’ responsibilities; Risk management and internal control; Longer-term viability; Going concern; and Fair, balanced and understandable), the independent auditor’s report on the annual report and accounts to the members of BP p.l.c., the parent company financial statements of BP p.l.c. and corresponding auditor’s report do not form part of bp’s Annual Report on Form 20-F as filed with the SEC.

To obtain a hard printed copy of BP p.l.c.'s complete audited financial statements, free of charge, UK based investors should contact bp Distribution Services by clicking the link above or calling +44 (0)870 241 3269 or by emailing [email protected]. If based in the US or Canada investors should contact Issuer Direct by calling +1 888 301 2505 or by emailing [email protected].

BP p.l.c. is the parent company of the bp group of companies. The company was incorporated in 1909 in England and Wales and changed its name to BP p.l.c. in 2001. Where we refer to the company, we mean BP p.l.c. The company and each of its subsidiaries are separate legal entities. Unless otherwise stated or the context otherwise requires, the term “BP” or "bp" and terms such as “we”, “us” and “our” are used for convenience to refer to one or more of the members of the bp group instead of identifying a particular entity or entities. Information in the bp Annual Report and Form 20-F 2022 reflects 100% of the assets and operations of the company and its subsidiaries that were consolidated at the date or for the periods indicated, including non-controlling interests.

The company’s primary share listing is the London Stock Exchange. In the US, the company’s securities are traded on the New York Stock Exchange (NYSE) in the form of ADSs (see page 380 of the bp Annual Report and Form 20-F 2022 for more details) and in Germany in the form of a global depositary certificate representing bp ordinary shares traded on the Frankfurt, Hamburg and Dusseldorf Stock Exchanges.

The term ‘shareholder’ in the bp Annual Report and Form 20-F 2022 means, unless the context otherwise requires, investors in the equity capital of BP p.l.c., both direct and indirect. As the company's shares, in the form of ADSs, are listed on the NYSE, an Annual Report on Form 20-F is filed with the SEC. Ordinary shares are ordinary fully paid shares in BP p.l.c. of 25 cents each. Preference shares are cumulative first preference shares and cumulative second preference shares in BP p.l.c. of £1 each.

The Material may contain certain forward-looking statements, forecasts or projections with respect to the financial condition, results of operations and businesses of bp and certain of the plans and objectives of bp with respect to these items. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that will or may occur in the future and are outside the control of bp. Actual results may differ materially from those expressed in such statements depending on a variety of factors, including the risk factors discussed under “Risk factors” on pages 73 to 75 of the bp Annual Report and Form 20-F 2022.

Please refer to the Cautionary statement on page 377 of the full bp Annual Report and Form 20-F 2022 for further information on forward-looking statements.

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Generic Drugs

Office of Generic Drugs 2021 Annual Report

Ensuring High-Quality, Affordable Generic Drugs are Available to the American Public

2021 Generic Drug Program At-A-Glance
Success Highlights
GDUFA Science and Research in OGD
Consistently and Efficiently Evaluating Generic Drugs and Monitoring Generic Drug Safety
Advancing Bioequivalence and Generic Drug Assessments
Policies that Support the Efficient Development of Safe, Effective, High-Quality, and more Affordable Generic Drugs
Thank You to Our Collaborators

Office of Generic Drugs 2021 Annual Report Cover

Office of Generic Drugs 2021 Annual Report (PDF - 6 MB)

Director’s Message

Welcome to the seventh Annual Report from the Office of Generic Drugs (OGD) in the Center for Drug Evaluation and Research (CDER) of the U.S. Food and Drug Administration (FDA).

Ensuring that patients who need safe and effective medicines have greater access to them is a public health priority for the FDA. As you will read in this Report, the priority of access to more affordable medicines fits hand-in-hand with OGD’s mission to ensure high-quality, affordable generic drugs are made available to the American public. In this Report, I am pleased to share with you a snapshot of our successes.

Currently 90 percent—9 out of 10—of all prescriptions dispensed in the United States are for generic drugs. To make that possible, the generic drug program approves safe, effective, high-quality drugs and monitors those drugs once they are on the market.

How Did We Do in 2021?

This past year, the generic drug program approved hundreds of abbreviated new drug applications (ANDAs) and thousands of application supplements. Our office prioritized the assessment of generic drug submissions for potential treatments and supportive therapies for patients with COVID-19, approving more than 75 original ANDAs, some in record time,1 and since the beginning of the pandemic, more than 1,200 supplements. We funded approximately $20 million in generic drug science and research programs. We issued 149 product-specific guidances for generic drug development, including 54 for harder-to-develop complex drugs, to relay the agency’s thinking on the most appropriate methodology and evidence needed to support the development of specific generic drugs.

Innovation Helped Ensure the Public’s Access to More Affordable Medicines

In 2021, OGD scientific and programmatic innovations supported our generic drug assessment work. For instance, we established the scientific foundation to support alternative bioequivalence (BE) approaches for several generic drug products. One such example included a novel in vitro BE approach that directly resulted in the development, assessment, and approval of the first generic difluprednate ophthalmic emulsion (generic Durezol) used to treat eye swelling and pain after eye surgery.

Another innovation came with this year’s approval of the first generic paliperidone palmitate extended-release injectable suspension (generic Invega Sustenna), a long-acting injectable product indicated for the acute and maintenance treatment of schizophrenia in adults. The FDA developed modeling and simulation approaches for pharmacokinetic study designs and BE evaluations, which the applicant used. In yet another example, we approved the first complex generic for ferumoxytol injection (generic Feraheme), a parenteral (non-oral) iron product that treats iron deficiency anemia. Our scientific investment in the characterization of the product and advanced BE study designs was essential to this approval. Another successfully deployed programmatic innovation was an increase in the frequency of certain updates from month-ly to semi-monthly in the FDA’s electronic Orange Book. This change in update frequency is providing even more timely information about listed drug products, including their market status.

Scientific and Regulatory Collaboration Moved the Needle

Sally Choe, Ph.D. Director, Office of Generic Drugs

Scientific and regulatory collaborations helped us create new approaches to support assessment of generic drug products in 2021.

FDA’s partnership with the University of Maryland and the University of Michigan (the Center for Research on Complex Generics) reached thousands of stakeholders worldwide with workshops that stimulated innovative dialogue and generated new knowledge about science and research crucial for the development of complex generic medicines.

Additionally, continued implementation of the congressionally established Competitive Generic Therapy (CGT) pathway helped us reach a milestone in 2021—approving 100 ANDAs designated as CGTs. The CGT pathway for generic drugs helps incentivize the entry of drugs with “inadequate generic competition” to the market. This milestone is a sign the CGT program is achieving its goal – the development and market availability of safe, effective generic drugs in areas of the market that previously had little to no competition.

Globally, 2021 marked the launch of a joint FDA and European Medicines Agency pilot program to provide parallel scientific advice to developers of complex generic drug products. The pilot allows assessors from the two agencies to concurrently communicate their views on scientific issues, in real time, to manufacturers working to develop complex generic drugs. This collaboration can help shorten the time it takes for these important products to obtain regulatory approval. The FDA also launched the Global Generic Drug Cluster, the first forum established for leading regulatory agencies to increase scientific alignment around topics relevant to the development of generic drugs.

In 2021, even with the unique challenges caused by the ongoing pandemic, OGD continued to innovate and conduct scientific research to keep the generic drug program moving forward. Today, the generic drug program is stronger than ever and continues to take timely actions to improve access to generic drug products. As always, this is good news for the American public.

Sally Choe, Ph.D. Director, Office of Generic Drugs

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2021 Annual Report

Introduction, program activities.

Safeguarding Union Assets
Protecting Union Democracy
Labor Union and Labor-Management Transparency
Employee Protections
Regulatory Initiatives
Compliance Assistance

January 2022

From the founding of the United States through today, labor unions have performed an essential function in the American economy by providing a voice for workers in their workplace. They do this by negotiating and enforcing agreements with employers to promote employee safety, equitable policies, and fair pay. Labor unions advance the economic aspirations of their members, those in the middle class and those aspiring to reach the middle class. They raise wages and improve working conditions, and they do so with an even hand. They create equity among diverse communities by closing wage gaps that divide the nation by race, gender, and ethnicity. They were and remain in the forefront of the movement for social justice, promoting benefits for their members – the forty-hour week and overtime pay, retirement security and health insurance, to name just a few – long before these benefits were embodied in national and state law.

The mission of the Office of Labor-Management Standards (OLMS) has the effect of strengthening unions. OLMS is tasked with protecting unions and their members by administering the Labor-Management Reporting and Disclosure Act (LMRDA) and related laws. OLMS protects labor organizations and their membership by promoting financial integrity through its compliance audit and criminal enforcement programs. Furthermore, OLMS promotes transparency by reviewing union, employer, and persuader reports for accuracy and making them available to the public. Finally, OLMS conducts investigations of complaints filed by members concerning regularly scheduled union officer elections and trusteeships to protect the democratic process in the election of labor movement leaders by their membership. Unions are strong when they operate democratically, are free from corruption, and are transparent in their operations. OLMS is successful in its mission when strong, democratic, and transparent unions have the full confidence of workers, employers, and policy makers.

By taking regulatory and policy actions, discussing the benefits that labor unions offer, enforcing reporting of anti-union employer conduct, sponsoring far-reaching research projects, contextualizing labor union enforcement data with employer enforcement data, and modernizing its website, the OLMS mission inherently strengthens unions, enabling the labor movement to contribute to the hard work of creating greater equity and economic security. While this report for fiscal year 2021 (October 1, 2020 through September 30, 2021), by its very nature, highlights the instances when unions and their officers or employees fail to live up to the standards set for them, these are the exceptions which prove the rule: the vast and overwhelming majority of unions and their officers and employees do their work exactly as the American people expect them to do.

When the LMRDA was enacted in 1959, Congress reiterated what it had found in 1935 when it enacted the National Labor Relations Act, stating that “in the public interest, it continues to be the responsibility of the Federal Government to protect employees’ rights to organize, choose their own representatives, bargain collectively, and otherwise engage in concerted activities for their mutual aid or protection.” To help achieve that end, Congress declared that “it is essential that labor organizations, employers and their officials adhere to the highest standards of responsibility and ethical conduct in administering the affairs of their organizations, particularly as they affect labor-management relations.” The LMRDA primarily promotes union democracy and financial integrity in private sector labor unions through standards for union officer elections and union trusteeships and safeguards for union assets. Additionally, the LMRDA promotes transparency through reporting and disclosure requirements for labor unions and their officials, employers, labor relations consultants, and surety companies. OLMS continues today to protect union members and their right “to organize, choose their own representatives, bargain collectively, and otherwise engage in concerted activities for their mutual aid or protection” by pursuing this important mission through criminal and civil enforcement of the LMRDA.

The major provisions of the LMRDA are, by title:

Title I: Bill of Rights for union members;
Title II: Requirements for reporting and disclosure by labor unions, union officers and employees, employers, labor relations consultants and surety companies;
Title III: Rules for establishing and maintaining trusteeships;
Title IV: Standards for conducting fair elections of union officers; and
Title V: Safeguards for protecting union funds and assets

Unions representing U.S. Postal Service employees became subject to the LMRDA with the passage of the Postal Reorganization Act of 1970.

OLMS also administers provisions of the Civil Service Reform Act of 1978 and the Foreign Service Act of 1980, which extend comparable protections to federal labor unions. In addition, OLMS administers the Department’s responsibilities under the Federal Transit Act by ensuring that fair and equitable arrangements protecting mass transit employees are in place before the release of federal transit grant funds.

OLMS is the front line agency responsible for safeguarding union assets, promoting democracy by enforcing the LMRDA through its criminal and civil investigations, and creating transparency about employer efforts to persuade workers on how to exercise their rights protected by federal labor laws. Criminal investigations include embezzlement, deprivation of rights by violence, extortionate picketing, willful failure to file reports, destruction of records, filing false reports, prohibition of convicted persons from holding union office or employment, and fraud related to union elections. Civil investigations include violations of the LMRDA involving union election procedures, financial disclosure requirements, and trusteeship standards. OLMS also conducts audits of union finances.

Compliance assistance also plays a major role in OLMS enforcement strategy. OLMS has an active compliance assistance program to promote voluntary compliance with the LMRDA by informing union officers and employees as well as employers and employer-consultants of their responsibilities and informing members of their legal rights.

This report consists of seven sections, with related tables and charts.

Section 1 presents key fiscal year (FY) 2021 criminal enforcement and performance results pursuant to LMRDA Title V (financial safeguards for labor organizations) together with noteworthy criminal enforcement actions. A complete listing of the calendar year (CY) 2021 criminal actions is located on the OLMS website along with those of prior calendar years . It bears noting in this Summary that of the more than 200,000 union officers and employees, fewer than 0.025% were convicted for having broken their trust with the members they represent. OLMS’ 2021 experience is similar to its experience over the last 5 years.
Section 2 presents key FY 2021 civil enforcement and performance results pursuant to LMRDA Title III (trusteeships) and Title IV (union officer elections) together with noteworthy union officer election case summaries for 2021. A listing of all 2021 voluntary agreements for OLMS-supervised union officer elections is located on the OLMS website along with those of prior calendar years . FY 2021 court actions for election investigations are located on the OLMS website along with those of prior calendar years . Final decision letters in election and trusteeship cases are located on the OLMS website in the FOIA reading room . As with OLMS’ criminal enforcement activities, it bears noting that of the more than 7,000 union officer elections estimated to have taken place in 2021, members filed viable complaints in only 78 elections and OLMS found a basis for proceeding in only 22 of those. And as regards trusteeships, reports were filed reflecting 47 subordinate bodies (local or intermediate unions) having been placed in trusteeship and OLMS had a basis for opening only 17 investigations predicated on complaints or other factors. These 2021 results for elections and trusteeships are also consistent with OLMS’ experience over the last 5 years.
Section 3 presents reporting and disclosure data and related program activity pursuant to LMRDA Title II (reporting requirements). Section 3 also presents key 2021 reporting, enforcement and performance results. Reports are available for public disclosure on the OLMS Online Public Disclosure Room .
Section 4 summarizes grant certification activity pursuant to the section 13(c) program, which ensures fair and equitable arrangements protecting mass transit employees, as required by the Federal Transit Act.
Section 5 provides an overview of the OLMS regulatory initiatives in FY 2021.
Section 6 briefly describes compliance assistance activities conducted in FY 2021.
Section 7 discusses OLMS outreach efforts undertaken in FY 2021.

OLMS Annual Reports for 2004–2020 are located on the OLMS website.

1. Safeguarding Union Assets

As part of the effort to protect and safeguard the union funds and assets belonging to hard-working union members, OLMS investigates possible embezzlement from unions and other violations of criminal laws. Union officers, employees, and representatives have a duty to manage the funds and property of the union solely for the benefit of the union in accordance with its constitution. While the vast majority of union officers and employees do their work diligently and without incident, unfortunately criminal violations do sometimes occur and, when they do, the union is the victim. When a union officer or employee violates their position of trust by embezzling or misappropriating union funds or assets, they commit a federal crime punishable by imprisonment or fine, or both. OLMS is responsible for investigating these crimes.

Further, section 504 of the LMRDA prohibits individuals convicted of certain crimes from holding union office or employment or serving in other specified capacities. The bar continues for 13 years after conviction or after the end of imprisonment, whichever is later. OLMS is also responsible for investigating violations of section 504 in addition to other violations including embezzlements of union funds and the willful failure to file complete and accurate financial and other reports with OLMS or to maintain records. These investigations may result in criminal prosecutions.

OLMS monitors activities involving union funds to help safeguard such funds from criminal conduct. There are over 20,000 unions that file LM reports with OLMS and, among those unions, upwards of 200,000 elected officers and employees. During the past five years OLMS has opened annually on average around 217 criminal investigations. Those investigations have led to between 60 and 79 criminal convictions annually over the last five years. While many of those convicted were union officers or employees, others were not. For example, out of the 48 criminal convictions reported for 2021, four were convictions of employers, vendors or others whose criminal conduct affected union funds.

OLMS also conducts audits of labor unions both to detect embezzlements and promote compliance with the LMRDA. This effort extends to every level of labor organizations, from local unions to intermediate bodies, national and international unions. Compliance audit closing letters are located on the OLMS website. Because it is not feasible for OLMS to audit every union, OLMS developed a methodology to direct its auditing resources to unions whose metrics suggest the possibility that there may have been criminal activity, diverting resources from audits of organizations with less potential of criminal activity to other programs. The effectiveness of this methodology is measured by the percent of audits resulting in the opening of a “fallout” criminal case. A higher or lower than expected fallout rate measures only the “efficiency” of OLMS’ targeting strategies and says nothing (either positively or negatively) about the amount of criminal activity involving union funds.

In 2021, OLMS fell short of its performance goal in this area, achieving a fallout rate of 15.25 percent with a target of 16.75 percent. Despite the disruption caused by the COVID-19 pandemic, travel restrictions, and diminished staff training, OLMS met its goal in planned criminal investigations with strong results in other financial integrity areas.

Below are summaries of notable cases resulting from OLMS investigations during FY 2021.

Former Union Officer Sentenced to Home Confinement for Wire Fraud and Forged Securities

In October 2020, Rocky Gannon, former President of American Federation of Government Employees Local 2302, located in Fort Knox, Kentucky, was sentenced to 15 months of home confinement, four years of probation, and 250 hours of community service. He was also ordered to pay $116,353 in restitution and a $1,200 assessment. In June 2020, Gannon pleaded guilty to three counts of wire fraud and nine counts of forged securities. The OLMS investigation found that Gannon converted union funds by making electronic payments to the union credit card company for personal charges, forging checks, and creating false invoices.

Former Union Employee Sentenced to Prison for Embezzlement

In October 2020, Rick E. Drain, former business manager for Laborers Local 1085, located in Parkersburg, West Virginia, was sentenced to one year and one day in prison and one year of supervised release. He was also ordered to pay $59,181 in restitution and a $100 special assessment. In July 2020, Drain pleaded guilty to one count of embezzling union funds. The OLMS investigation discovered that Drain diverted funds from initiation fees and direct dues, withheld cash from bank deposits, and received unauthorized union checks.

Former Union Officer Sentenced to Home Confinement Following $119,000 Embezzlement

In November 2020, Angel Luis Garcia, former Financial Secretary of Amalgamated Transit Union Local 1614, located in Dover, New Jersey, was sentenced to 12 months of home confinement with electronic monitoring and three years of supervised release. Garcia was ordered to pay $119,021 in restitution and a $100 special assessment. In June 2020, Garcia pleaded guilty to one count of embezzling union funds. The OLMS investigation disclosed that Garcia used union funds to pay for his personal telephone bills, home mortgage payments, personal loans, and to purchase personal goods at Home Depot, Amazon, and BestBuy. He also issued himself duplicate salary payments.

Five Former UAW Officials and Fiat Chrysler Sentenced for Union-Auto Industry Corruption

In 2021, the ongoing investigation of union and auto industry corruption involving the United Auto Workers International Union (UAW) in Detroit, Michigan, and the UAW Region 5 and Midwest Community Action Program (CAP) Council, both in St. Louis, Missouri, and Fiat Chrysler Automobiles US LLC resulted in six additional convictions in the United States District Court for the Eastern District of Michigan. The joint investigations conducted with the Department of Labor’s Office of Inspector General, the Federal Bureau of Investigation, and the Internal Revenue Service focused on criminal conspiracies in which UAW officials committed fraud and embezzlement, took bribes and kickbacks, and laundered money.

Between November 2020 and July 2021, five more individuals were sentenced for crimes involving the UAW. Dennis Williams and Gary Jones, former UAW Presidents; Vance Pearson, former UAW Region 5 Director; and Edward “Nick” Robinson, former UAW Midwest CAP Council President, all were sentenced to prison following guilty pleas for conspiracy to embezzle union funds. Jones and Pearson also pleaded guilty to conspiracy to use a facility of interstate commerce to aid a racketeering enterprise, and Jones and Robinson pleaded guilty to conspiracy to defraud the United States. Joseph Ashton, former UAW Vice President in the General Motors (GM) Department and Director of the UAW-GM Center for Human Resources, was also sentenced to prison after he pleaded guilty to conspiracy to commit honest services wire fraud and one count of conspiracy to commit money laundering. Additionally, in August 2021, Fiat Chrysler Automobiles US LLC, located in Detroit, Michigan, was sentenced after the company pleaded guilty to conspiracy to violate the Labor Management Relations Act.

A total of 14 UAW defendants and Fiat Chrysler have been sentenced and ordered to pay $2,385,056 in restitution, $30,090,500 in fines, and $1,912,757 in forfeiture stemming from the investigations and prosecutions to date.

Former Union Officer Sentenced to Prison for Embezzlement

In January 2021, Edward C. Davis, Jr., former Secretary-Treasurer of Brotherhood of Locomotive Engineers and Trainmen Division 620, located in Fort Worth, Texas, was sentenced to six months of prison and three years of supervised release. He was also ordered to pay $61,386 in restitution. In September 2020, Davis pleaded guilty to embezzlement of union funds. The OLMS investigation found that Davis wrote himself 86 unauthorized checks for additional salary and the purchase of a personal laptop.

Former Union Officer Sentenced for Taking Money within Special Maritime and Territorial Jurisdiction of the United States

In February 2021, Jeffrey Phillips, former Secretary-Treasurer of International Association of Machinists and Aerospace Workers Local Lodge 836, located at the Portsmouth Naval Shipyard in Kittery, Maine, was sentenced to two years of probation. He was also ordered to pay $57,611 in restitution, a $2,400 fine, and a $100 special assessment. In February 2020, Phillips pleaded guilty to taking and carrying away personal property within the special territorial jurisdiction of the United States.

The OLMS investigation uncovered that Phillips stole union funds by making two to three cash withdrawals of $500 at a bank drive-through window each week for nearly five years.

Former Union Officer Sentenced for Embezzling Over $101,000 through Bank Fraud

In March 2021, Kenneth Morris, former Treasurer of American Federation of Teachers Local 2240, located in Kentfield, California, was sentenced to time served and three years of supervised release. He was also ordered to pay $101,583 in restitution and a $100 special assessment. In November 2019, Morris pleaded guilty to one count of bank fraud. Morris, a teacher at a Catholic school, embezzled the money by depositing dues deduction checks from the Archdiocese of San Francisco and the Diocese of San Jose into his personal account. He also wrote unauthorized checks to himself from the union bank account and deposited them into his personal bank account.

Former Union Officer Sentenced to Prison for Wire Fraud for Embezzling $185,000

In July 2021, Aja Jasmin, former President of United Food and Commercial Workers Local 350-C, located in Rancho Cucamonga, California, was sentenced to 28 months of imprisonment and three years of supervised release. She was ordered to pay $185,000 in restitution and a $25 special assessment. In February 2021, Jasmin pleaded guilty to one count of wire fraud. The investigation found that throughout a multi-year scheme, Jasmin took sole custody of the union’s checkbook, forged the signatures of the other account signatories on hundreds of checks, and wired funds from the local’s bank account to her personal credit cards for personal expenses. Jasmin prolonged the embezzlement scheme by submitting falsified bank statements to the international union, failing to provide relevant records for attempted audits, preventing new officers from reviewing the union’s financial records, and announcing fabricated account balances at membership meetings. The investigation was conducted jointly with the Department of Labor’s Office of Inspector General.

Former Union Employee Sentenced for Embezzling Over $112,000

In August 2021, Karen Pierce, former office manager for Plumbers Local 142, located in San Antonio, Texas, was sentenced to five years of probation and ordered to pay $112,759 in restitution. In July 2020, Pierce pleaded guilty to one count of theft of union funds. The OLMS investigation found that Pierce embezzled money through stolen checks and used signature stamps to forge the officers’ signatures on most of the checks. She also falsified records in an attempt to conceal these thefts.

Former Union Officer Sentenced to Prison for Embezzling Over $140,000

In September 2021, Hasan Zahdeh, former President of Michigan Union of Healthcare Workers, located in Muskegon, Michigan, was sentenced to 14 months of imprisonment followed by three years of supervised release. He was also ordered to pay $140,498 in restitution and a $100 special assessment. In April 2021, Zahdeh pleaded guilty to one count of embezzlement of union funds. The OLMS investigation discovered that Zahdeh used the embezzled funds to pay for hundreds of personal and unauthorized expenses, such as international travel including several trips to Turkey, utility bills, home repairs and maintenance, furniture, and various communications bills. In addition, he wrote four checks to the union’s attorney, forged the attorney’s signature on the back of the checks, and deposited the checks into his personal bank accounts. Zahdeh also stole dues payments from members by depositing dues checks into his personal bank account as well as by directing members to deposit their individual dues payments into a newly opened personal bank account, which he misrepresented to members as a union bank account.

Former Union Officer Sentenced to Prison Following Union Book Selling Scheme

In June 2019, Salvatore Tagliaferro, former President of Carpenters Local 926, located in Brooklyn, New York, and a New York City District Council of Carpenters Representative, and John DeFalco, former Vice President of Carpenters Local 157, located in New York, New York, were indicted on multiple charges for a scheme to sell union “books” or membership cards (union property) in exchange for cash bribes. In October 2020, DeFalco pleaded guilty to embezzlement/conversion of union assets and aiding and abetting, conspiracy, honest services wire fraud, as well as other crimes including witness tampering. DeFalco continues to await sentencing. In April 2021, Tagliaferro was found guilty following a jury trial of all charges he faced: conversion of union assets, honest services wire fraud, aiding and abetting, and conspiracy. In September 2021, Tagliaferro was sentenced to five years in prison and ordered to pay $145,065 in restitution and $296,400 in forfeiture. The investigation was conducted jointly with the United States Attorney’s Office for the Southern District of New York - Public Corruption Unit, the Department of Labor’s Office of Inspector General, and the New York City Department of Investigation.

Former Union Officer Sentenced to Prison for Embezzling Over $184,000

In September 2021, Yvette Luster, former Treasurer of Postal Mail Handlers Local 314, located in Hazelwood, Missouri, was sentenced to 18 months of prison and three years of probation. Luster was also ordered to pay $184,138 in restitution and a $100 special assessment. In June 2021, Luster pleaded guilty to one count of embezzlement of labor union assets. The OLMS investigation found that Luster embezzled by making over $80,000 in ATM cash withdrawals and by using the union’s debit card for numerous personal and unauthorized disbursements. She also embezzled by submitting numerous claims for lost work time paid by the United States Postal Service and by paying herself duplicate unauthorized salary payments. Luster used the embezzled funds to pay for personal expenses.

2. Protecting Union Democracy

Title IV of the LMRDA establishes democratic standards for conducting union officer elections, such as the frequency and method of election, the right of members in good standing to be candidates, rights of candidates, and member voting rights. While the majority of union officer elections are held without protest, OLMS investigates properly-filed complaints protesting union officer elections. Before filing a complaint with OLMS, union members must avail themselves of the union’s internal protest procedures. If OLMS’ investigation reveals a violation of Title IV of the LMRDA that may have affected the outcome of the election, OLMS seeks a voluntary compliance agreement with the union to allow OLMS to supervise a new election. If the union does not voluntarily agree to remedy the violation, OLMS takes legal action seeking to void the challenged election and conduct a new election supervised by OLMS. Under Title III of the LMRDA, the agency also conducts investigations to determine the validity of the imposition or continuation of trusteeships imposed by national unions on subordinate bodies. Trusteeship investigations are conducted upon receipt of a complaint from a member or subordinate body.

OLMS seeks to improve the timely resolution of union officer election complaints, which is measured by the average number of elapsed days between the receipt of a complaint and its resolution. As seen in the chart below, in 2021 OLMS achieved its elapsed time performance goal of 67 days by reducing the average number of elapsed days to resolve union officer election complaints to 66.9 days. OLMS tracks the number of election investigations and supervised elections, both of which are dependent upon the number of election complaints OLMS receives. The 2021 planning projections in those categories were based on historical averages only. OLMS does not project or estimate the number of lawsuits filed or voluntary compliance agreements obtained in a year, given that these actions are dependent upon the facts of each case.

The 78 election complaints OLMS received in 2021 represent 1.1% of the 7,000 elections that OLMS estimates unions held in 2021, and the 27 supervised rerun elections (i.e., elections in cases in which the union acknowledged, or a court found, that there were violations) represents 34.6% of the complaints filed and 0.39% of all union officer elections conducted.

The following highlights significant OLMS election cases during FY 2021.

Department Files Suit Against AFGE Local 96

In June 2021, the Department filed suit against American Federation of Government Employees (AFGE) Local 96, located in St. Louis, Missouri. The complaint alleged that the local failed to elect the winning candidate by a majority of votes cast, as required by the AFGE Constitution. During the union’s 2020 election, Local 96 failed to hold a runoff between the two remaining candidates after a third candidate was declared ineligible, and no candidate received a majority of the votes cast. The lawsuit followed an election conducted under the supervision of the Department pursuant to a voluntary compliance agreement with Local 96. Local 96 failed to complete the supervised election process after an investigation found that one candidate’s campaign materials were created with support from a local employer. The litigation is pending.

New York Professional Nurses Union Agrees to Hold New Election Under OLMS Supervision

In March 2021, OLMS entered into a voluntary compliance agreement with the New York Professional Nurses Union, located in New York, New York, concerning its regular election of officers in October 2020. The union agreed to hold a new election for the offices of the vice president and seven executive board members under the supervision of OLMS. The investigation concluded that the union failed to mail notice of the election to the last known home address of all members at least 15 days prior to the election, denied new members the right to vote despite their having met the requirements for membership, and failed to provide adequate safeguards to ensure a fair election when it did not provide any advance notice of a change in its eligibility rules with respect to members who were in arrears after a leave of absence. The supervised election will take place by polling site and absentee ballot in January 2022.

Communications Workers Local 6222 Agreed to Hold New Election Under OLMS Supervision

In April 2021, OLMS entered into a voluntary compliance agreement with Communications Workers of America Local 6222, located in Houston, Texas, to conduct a new election and installation for the offices of president, vice presidents II and III, and secretary-treasurer, along with executive board positions for AT&T Mobility (Call Center) and ASI, on or before June 2021, under OLMS supervision. The investigation established that the local failed to provide adequate safeguards when it used a ballot drop box that was left unattended and unsecured at the union hall during the election period and by failing to properly count ballots, which resulted in an incorrect candidate being advanced to the runoff election for secretary-treasurer. Additionally, campaign literature was posted on AT&T company vehicles. The June 2021 supervised election and August 2021 run-off election were both held by mail ballot.

Settlement Agreement Ends Litigation Involving Auto Workers Local 2209 Election

In April 2021, the Department filed suit against United Automobile, Aerospace and Agricultural Implement Workers of America Local 2209, located in Roanoke, Indiana. The complaint alleged that the union applied one or more candidate qualifications that were unreasonable because they were not specifically contained in the UAW constitution and bylaws, were not uniformly applied, and denied a member in good standing the right to be a candidate. In June 2021, the union entered into a settlement agreement with OLMS directing that the agency would supervise a new election for the office of Unit I Chairperson. The election concluded with in-person polling at three locations over the course of a 24-hour period in July 2021.

Union of Patriots Plaza Agreed to Hold New Election under OLMS Supervision

In April 2021, OLMS entered into a voluntary compliance agreement with Union of Patriots Plaza, located in Pikesville, Maryland. The union agreed to conduct nominations, election, and installation for the offices of president, vice president, secretary-treasurer and recording secretary under OLMS supervision. The investigation concluded that the union has been in existence since at least September 2016 and had failed to conduct an election of officers in violation of the LMRDA and the union’s constitution and bylaws. The supervised election, conducted by polling site with an absentee ballot provision, was concluded in July 2021.

Settlement Agreement Ends Litigation Involving AFGE District 4 Election

In April 2021, the Department filed suit against the American Federation of Government Employees (AFGE), located in Washington, D.C. The suit sought to nullify AFGE’s election for the office of National Vice President for District 4, one of the positions in the October 2020 AFGE District 4 caucus election. The complaint alleged that AFGE violated Title IV of the LMRDA by failing to follow its constitution and bylaws and failing to provide adequate safeguards to ensure a fair election when one local union cast the incorrect number of votes in the election. The complaint further alleged that AFGE failed to follow its constitution and bylaws when it improperly allocated a local union’s votes to two delegates, after that local improperly denied a third, duly elected delegate’s request to attend the 2020 District 4 caucus. A July 2021 stipulated settlement states that a new election for District 4 national vice president will be conducted under OLMS supervision. The District 4 Caucus concluded in December 2021 via a polling site election with local delegates from District 4.

Letter Carriers Branch 142 Agreed to Hold New Election Under OLMS Supervision

In June 2021, OLMS entered into a voluntary compliance agreement with National Association of Letter Carriers Branch 142, located in Washington, D.C. The union agreed to conduct a new election and installation for the office of president under OLMS supervision. The investigation concluded that a union list was used by one of the candidates to send campaign text messages, and that the list was not provided to the other candidates. The supervised election, conducted by mail ballot, concluded in August 2021.

AFGE Agreed to Hold Rerun Election for District 7 National Vice President

In June 2021, OLMS entered into a voluntary compliance agreement with the American Federation of Government Employees (AFGE), located in Washington, D.C., concerning AFGE District 7’s October 2020 election of union officers. AFGE agreed to hold a new election for the office of District 7 National Vice President. The OLMS investigation concluded that the District 7 Caucus Credentials Committee seated some delegates with incomplete credentials and seated other delegates from locals that had failed to provide proper notice of the delegate election to their members, which resulted in ineligible delegates being permitted to vote. The investigation also determined that one candidate used a union cell phone to send text messages and make phone calls to campaign. In addition, the investigation found that District 7 failed to elect its officers by secret ballot as required by the AFGE Constitution when it utilized an internet voting system that made it possible to connect some delegates with their votes by analyzing local voting strength and number of delegates.

Department Files Suit Against Teamsters Local 688

In July 2021, the Department filed suit against International Brotherhood of Teamsters Local 688, located in St. Louis, Missouri. The lawsuit sought to nullify the union’s November 2020 officer election and order Local 688 to conduct a new election with new nominations under OLMS supervision. The complaint alleged that Local 688 failed to provide adequate safeguards and ensure ballot secrecy during the election when the union failed to provide physical partitions, failed to instruct members to vote in secret, and allowed for multiple members to vote while seated at the same table. The lawsuit is still pending.

Department Files Lawsuit against Electrical Workers Local 108

In August 2021, the Department filed suit against International Brotherhood of Electrical Workers Local 108, located in Tampa, Florida. The lawsuit sought to nullify the local’s September 2020 election for the offices of business manager/financial secretary, president, and convention delegate. The complaint alleged that the local failed to provide absentee ballots to all the members who requested one. The OLMS investigation revealed that the United States Postal Service assigned the local a post office box that was rented to and accessed by a different customer throughout the election period. Since the local used that post office box as the address for all absentee ballot requests, such requests were returned to members as undeliverable, denying members the right to vote. The investigation also established that the union’s failure to provide absentee ballots may have affected the outcome of the election. A December 2021 stipulated settlement provided for new nominations and a new election to be conducted for the offices of president, business manager/financial secretary, and three convention delegates under OLMS supervision.

3. Labor Union and Labor-Management Transparency

The LMRDA is predicated on the principle that union members, officers, and the general public benefit by having access to information about labor unions, their officers and employees, employers, labor relations consultants, and surety companies. To this end, OLMS administers a comprehensive reporting and disclosure program. OLMS also offers compliance assistance sessions for union members and officials on the financial reporting obligations under the LMRDA.

Title II of the LMRDA requires that unions file annual financial reports, known as Labor-Management (LM) Reports (Forms LM-2, LM-3, LM-4, or simplified filings), with OLMS. Unions must also file trusteeship reports (Forms LM-15, LM-16) when they establish supervision or control over a subordinate body. Other entities, such as employers (Form LM-10), labor relations consultants (Forms LM-20, LM-21), union officers and employees (Form LM-30), and surety companies (Form S-1), are also required to file reports under certain circumstances. Reports are available for public disclosure on the OLMS Online Public Disclosure Room website, www.unionreports.gov . OLMS also collects and maintains collective bargaining agreements (CBAs) filed by CBA signatories on a voluntary basis. These CBAs also are located on the OLMS website .

During FY 2021, OLMS established an initiative to improve disclosure of arrangements made between employers and labor consultants, as required under the LMRDA. OLMS planned to process a combined 600 Form LM-10 employer reports and Form LM-20 consultant reports to disclose employer-consultant agreements or arrangements to persuade employees to exercise or not to exercise their rights to organize and engage in collective bargaining. While improving the transparency of these arrangements over the previous year, OLMS fell short of its plan and only processed a total of 480 employer and consultant reports during FY 2021.

OLMS received, processed, and made the following reports publicly available in FY 2021.

OLMS utilizes a web-based Electronic Forms System (EFS) for completing and submitting LM reports. Implementation of EFS is being conducted in phases. Currently, Form LM-1, LM-2, LM-3, and LM-4 Labor Organization reports, Form LM-10 Employer Report, Form LM-20 and LM-21 labor relations consultant reports, and Form LM-30 Labor Organization Officer and Employee reports can be filed via EFS. EFS allows any of these filers with a web-enabled computer to complete and electronically submit an LM report without any special software or a digital signature. EFS performs calculations for the LM report and completes a form error check prior to submission to OLMS. EFS also allows unions that maintain electronic accounting records to import financial data from their accounting programs directly into their LM form. When labor organization annual reports are not filed in a timely manner or the reports filed are deficient, OLMS opens an investigation to obtain compliance. Additionally, when reports due from employers, labor relations consultants, and union officers and employees are not timely or properly filed, OLMS pursues delinquent and deficient reports from these entities, known as “Special Reports” cases.

During FY 2021, 100 percent of LM-2, LM-3, and LM-4 filers submitted their annual reports via EFS, which has increased timely and accurate filing. Additionally, nearly 42 percent of LM-30 reports were filed electronically while 93 percent of LM-10 reports were filed using EFS, both representing increases in electronic filing in these areas over last year. In 2021, OLMS exceeded its performance goal by increasing the percent of all LM reports filed electronically to 97.4 percent. OLMS tracks the numbers of delinquent and deficient reports and special reports cases completed. The 2021 planning projections in those categories are largely based on historical averages.

4. Employee Protections

OLMS also administers responsibilities under federal transit law by ensuring that fair and equitable arrangements protecting mass transit employees are in place before the release of federal transit assistance. When federal funds are used to acquire, improve, or operate a transit system, federal law requires that arrangements must be made to protect the rights of affected mass transit employees. These arrangements must be approved by OLMS before the U.S. Department of Transportation’s Federal Transit Administration (FTA) can release funds to mass transit employers.

In FY 2021, OLMS certified employee protections for 1,985 federal transit grants. With the exception of one grant application, OLMS certified 100 percent of grants within a 45-day timeframe, well under the 60 days permitted by guidelines (29 CFR §215). Pursuant to 29 CFR §215.7, OLMS notified unions and the public of 330 rural grants, to which the FTA applied the Special Warranty Arrangement. More information about employee protections under federal transit law can be found on the OLMS website .

5. Regulatory Initiatives

OLMS published, on March 6, 2020, a final rule establishing a Form T-1 Trust Annual Report that requires annual reporting by Form LM-2 filing labor organizations on financial information pertinent to “trusts in which a labor organization is interested” (“section 3(l) trusts”). The rule required a labor organization with total annual receipts of $250,000 or more to file a Form T-1, under certain circumstances, for each section 3(l) trust, as defined by 29 U.S.C. § 402(l) of the LMRDA. Under this rule, the Form T-1 reporting requirements were triggered if a labor organization, either alone or in combination with other labor organizations, (1) selected or appointed the majority of the members of the trust’s governing board, or (2) contributed more than 50 percent of the trust’s receipts.

Subsequently, on March 29, 2021, OLMS announced that, in the spring 2021 Semi-Annual Regulatory Agenda, it would publish notice of an intended rulemaking to propose rescission of the Form T-1. Additionally, OLMS announced that it would not seek to enforce the filing of a Form T-1 for one year from the date a labor organization’s first Form T-1 is due. See: https://www.dol.gov/agencies/olms/about/newsletter/2021/1 .

Later, on May 27, 2021, OLMS published a notice of proposed rulemaking (NPRM) to rescind the Form T-1. Upon further review of the 2020 Form T-1 rule, including the pertinent facts and legally relevant policy considerations surrounding that rulemaking, OLMS proposed to withdraw the rule implementing the Form T-1 because it believed that the trust reporting required under the rule is overly broad and is not necessary to prevent the circumvention and evasion of the LMRDA Title II reporting requirements. Moreover, upon further consideration, the Department expressed concern that the 2020 rulemaking record was insufficient to justify the separate trust reporting requirements as set forth in the 2020 Form T-1 rule. The NPRM had a 60-day comment period that closed on July 26, 2021. Please see the OLMS Form T-1 filing advisory .

6. Compliance Assistance

In FY 2021, OLMS undertook the following initiatives as part of a comprehensive compliance assistance program to educate unions, union officials, employers, and consultants about the LMRDA:

OLMS continued its program of structured, nationwide compliance assistance seminars, but sought to reduce the number of sessions while increasing attendance through enhanced recruitment. The goal of this program is to provide an opportunity each year for the officers of every labor organization to attend a compliance assistance seminar. The content of the compliance assistance seminar is similar throughout the country so that every officer in attendance benefits from the same material. In 2021, OLMS conducted more virtual compliance assistance seminars than normal due to COVID-19 in an effort to increase participation. For example, OLMS sponsored national compliance assistance seminars, presented in both English and Spanish, providing guidance on holding union officer elections during the pandemic. In total, OLMS provided formal compliance assistance seminars to 3,730 participants and recorded 8,252 contact hours (i.e., the number of participants multiplied by the number of hours of instruction).
OLMS continued to be responsive to all specific requests for compliance assistance seminars. OLMS also received and responded to hundreds of requests for information and interpretations.
OLMS continued to work with the nation’s most prominent international and national unions in the Voluntary Compliance Partnership (VCP) initiative, leveraging their resources to improve the compliance performance of over 16,000 affiliates in 2021. During FY 2021, the VCP program expanded to 47 partner national/international unions. VCP continued to solidify its platform as a national compliance assistance effort focused on improving timely reporting, bonding coverage, accurate and complete reporting including the submission of union constitutions and bylaws, and the implementation of financial safeguards to prevent unions from becoming victims of financial fraud. VCP is a strategic leadership effort that requires executive level involvement from OLMS and officer level involvement from the union, which helps to drive compliance through the labor-management community by providing tools, information, and assistance. The overall late-filing rate for unions under the VCP initiative is significantly lower than for non-VCP unions, and the late filing rate decreased significantly after increasing during FY 2020, as the COVID-19 pandemic began. VCP continues to assist labor organizations with OLMS procedures regarding mergers and terminations, regional and national training conferences, and other organizational development activities. OLMS leadership met directly with the presidents and secretary-treasurers of 23 VCP member unions in 2021. The initiative generated 77 compliance assistance contact hours and distributed comprehensive annual VCP informational reports, specifically tailored for each of 30 different VCP international and national unions.
OLMS reinstituted its Persuader Reporting Orientation Program (PROP), a compliance assistance initiative to inform employers and their representatives about potential reporting obligations under the LMRDA . The PROP initiative was in effect previously from 2011 to 2016. PROP enables OLMS to contact employers involved in representation elections – and any other parties that have notified the National Labor Relations Board of their status as representatives for such employers – to inform them of potential LMRDA reporting requirements. OLMS provides information on where to locate reporting forms and instructions and how to contact OLMS to ask questions or receive additional information. OLMS also provides a fact sheet on employer-consultant agreements.
OLMS managed a public email address, enabling it to respond to nearly 2,400 inquiries and requests in the year.
OLMS continued its Labor Organization Orientation Program, which distributed 99 information letters to newly registered labor organizations.

7. Outreach

In 2021, OLMS embarked on a project to educate workers, unions, policy makers and the public more broadly about OLMS’ work and the important role labor unions play in the modern American economy. These efforts include:

A redesigned website to better describe the results of OLMS’ enforcement activities in the broader context of the labor movement and the enforcement activities of other Department of Labor worker protection agencies.
A series of blog posts by the OLMS Director under the website headline “From the Director’s Desk” discussing these and other topics in a more narrative form.
Presentations on these topics (in person and virtually) by the Director to the regulated community.
Conducting (in coordination with other DOL agencies) empirical research into topics including the role of “persuaders” in union representation elections, and the leveraging of OLMS and other data to better understand the race, ethnicity and gender wage gap between union and non-union workers and industries.
Participation in work undertaken by the Department in connection with the White House Task Force on Worker Organizing and Empowerment.

Last Updated: 1-31-22

Annual Report 2021

Jump to: Midstream Expansion - 2019 Environmental Performance Highlights - Focus on Flaring - A Year in Review

Despite the challenges of 2020, The Environmental Partnership and our growing coalition of participating companies pressed forward to demonstrate the oil and natural gas industry’s commitment to reduce emissions and deliver improved environmental performance by Taking Action , Learning , and Collaborating . Our companies implemented the program in every major oil and natural gas basin across the country, launched a new Flare Management Program to help companies utilize available practices to avoid flaring and minimize emissions when flaring does occur, and safely implemented two new midstream-focused environmental performance programs. The Environmental Partnership’s scope and implementation continued to grow throughout a very difficult year and we’re proud of the resolve of the industry to continue tackling new challenges.

See our progress in the 2021 Annual Report (4 MB) .

Mike Sommers

President & CEO, API

As global leaders consider climate solutions, the natural gas and oil industry is already there, focused on delivering meaningful energy and environmental progress. I am proud that this initiative has paved the way for additional policies and programs designed to ensure the long-term viability of the U.S. energy sector.

Matthew Todd

Director, The Environmental Partnership

As the country continues to recover from the ongoing impact of the pandemic, we’re hopeful for the future and grateful for the community of dedicated women and men of our industry that steadfastly do their part to keep the nation moving forward.

Vanessa Ryan

Chair, The Environmental Partnership Manager, Carbon and Climate Policy, Chevron

The Environmental Partnership’s scope and implementation continued to grow despite the challenges of the previous year and we’re confident in the resolve of the industry to tackle new challenges as we strive to meet the mission of the program and never stop improving.

2020 Environmental Performance Highlights

Leak Detection and Repair

More than 85,000 sites surveyed
More than 430,000 surveys conducted
More than 235 million component inspections performed
0.04% leak occurrence rate, or less than 1 component leaking in two thousand

Pipeline Blowdown

More than 400 emission reduction methods implemented during pipeline blowdowns

Compressor Program

Rod packings changed on more than 2,000 reciprocating compressors
Approved emission reduction practices on more than 320 compressors

Manual Liquids Unloading

Emissions minimized by monitoring more than 44,000 manual liquids unloading events

Pneumatic Controllers

More than 9,200 additional gas driven controllers replaced or removed from service
More than 970 high-bleed pneumatic controllers replaced, retrofitted, or removed from service
More than 2,700 zero-emission pneumatic controllers installed at new sites
54 participating companies no longer have high-bleed pneumatic controllers in their operations

Flare Management Program

In 2020, The Environmental Partnership launched its latest environmental performance program, which is focused on reducing flaring of associated gas in oilfield operations. The flare management program expands on The Environmental Partnership’s core mission to share information on best practices, advance new and proven technologies, foster collaboration to reduce emissions and collect data to inform efforts to minimize flaring.

Flare Volumes Reduced More than 50% From 2019 to 2020 while oil and natural gas production among participating companies remained flat

*Gas Flare Intensity – Flaring relative to Gas Production in Oil Fields (MCF gas flared / MCF gas produced) **Energy Intensity – Flaring Relative to Oil and Gas Production (BOE gas flared / BOE produced) *** DRE: Destruction and Removal Efficiency

Improvement Through Collaboration

In addition to the Actions that each participating company took to further reduce the industry’s environmental footprint, The Partnership continued to advance the program’s Learning and Collaborating principles. The Environmental Partnership has grown to become an effective tool to coordinate and facilitate communications to companies participating in key oil and natural gas basins across the country. In 2020, The Partnership fostered the collaboration to advance the development and implementation of new methane detection technologies through substantive engagement with Colorado State University, Bridger Photonics, and NASA’s Jet Propulsion Laboratory Methane Source Finder team.

“We welcomed the opportunity to engage The Environmental Partnership and introduce our Gas Mapping LiDAR technology to companies that are participating in the program. It’s a fast-moving field and the industry is really pushing the envelope to better understand and mitigate methane emissions. We’re thrilled to work with them and be a part of the solution.”

CEO, Bridger Photonics

“Our methane research program has conducted numerous aerial remote-sensing surveys across the United States. The Partnership provided a platform to share our data with participating companies in the Permian basin to investigate and take steps to address emissions. The collaboration provided us an opportunity to connect our efforts with the operators on the ground that would not exist otherwise.”

Riley Duren

Research scientist, u. arizona; ceo, carbon mapper; engineering fellow, nasa jet propulsion laboratory.

“Since its inception, The Environmental Partnership has been an active supporter of the efforts at our Methane Emission Technology Evaluation Center (METEC). With the funding they provided, Colorado State University was able to secure a grant from the Department of Energy to advance the development of cutting-edge methane detection technologies. We look forward to continuing this work and our engagement with the participating companies to test these technologies at their facilities in the field this year.”

Dan Zimmerle

Director of the methane emissions technology evaluation center at colorado state university’s energy institute.

Annual Report

Report of the secretary-general, on the work of the organization.

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Introduction

The past year has been one of deep and interlocking crises that are growing in scale and severity. The coronavirus disease (COVID-19) pandemic persists and, with less than 20 per cent of people in low-income countries vaccinated, recovery is uneven. The war in Ukraine has caused distress for millions of people in and far beyond the country and has amplified the effects of the climate crisis and long-standing inequalities around the world. All these challenges transcend borders and can be solved only with forceful collective action.

Priority 1: Sustainable Development

Priority 2: Peace & Security

Priority 3: Development in Africa

Priority 4: Human Rights

Priority 5: Humanitarian Assistance

Priority 6: Justice & International Law

Priority 7: Disarmament

Priority 8: Drugs, Crime & Terrorism

In these turbulent times, the work of the United Nations is more necessary than ever to reduce suffering, prevent crises, manage risks and build a sustainable future for all.

António Guterres, Secretary-General

United Nations Secretariat staff...

…working in, countries..., …delivering results across, priority areas..., …with the support of, to build a safer, more equal and sustainable world....

A wide view of a classroom. Rows of children sit by wooden desks and turn to look at the camera.

Development in Africa

We helped 54 countries to leapfrog development challenges and catalyse a sustainable and equitable recovery from COVID-19

Human Rights

We helped 46,000+ victims of torture to receive rehabilitation support and facilitated assistance for 13,000+ victims of contemporary forms of slavery

A man and an aid worker stand facing each other. The aid worker is writing in a notebook. Behind them are ruined buildings and rubble.

Humanitarian Assistance

We helped to mobilize $20.3B to assist 174M people across 60 countries and territories

Justice & International Law

As of 2021, 639 multilateral treaties addressing matters of worldwide interest had been deposited with the Secretary-General

Disarmament

We channeled funds to 104 arms-control-related projects benefiting 145 countries

Drugs, Crime & Terrorism

We consolidated 14,000+ real-time data points on individual drug seizures from 125+ countries on an open multi-source drug-monitoring platform

A person sits with his back towards the camera in a booth with a large window overlooking a conference room. The person is seated by a desk with two laptops and microphones.

Effective Functioning

With over 35,000 staff in 465 duty stations, the UN’s work is underpinned by effective management of finance, human resources, supply chains, and communication

We published our Q1 2023 results

Investor Relations

Q1 2023 results

Ahold Delhaize will publish its first quarter 2023 results on May 10, 2023

Annual Report 2022

Ahold Delhaize published its 2022 Annual Report on March 1, 2023

Local heroes

One year, a dozen ways to care

Mega Image’s “12 Acts of Kindness’’ program offers different opportunities each month for associates to engage in their communities and help causes that matter to them and their customers

Leading through our values

Every year, Ahold Delhaize recognizes leaders from across the local brands and businesses for their leadership qualities and how they live our values and serve communities.

Albert Heijn fights food waste with "yesterday's bread"

The team at Albert Heijn has found a way to help keep one popular product from going to waste.

Working together to keep shelves stocked

Teams from our brands in Greece, Serbia and Romania worked across their organizations, with inspiration from other Ahold Delhaize brands, to develop a single new automated system to replenish stocks in their stores.

The network behind U.S. omnichannel growth

The future of retail is omnichannel – and the right supply chain is essential.

Hannaford leads the way to zero food waste

In 2021, Hannaford became the first large-scale supermarket chain in the northeast United States to achieve zero food waste to landfills.

Giving diverse associates a path to growth

Region Director Steve Harfield and Talent Acquisition Manager Kelsey Sloan had big dreams and much success in launching The GIANT Company’s first “Diversity Cohort.”

In its second year, the brand’s community of #Megavolunteers grew each month. As the pandemic persisted, associates felt an even stronger need to give back to society. Over 300 #Megavolunteers supported a total of 20 causes during the year, in partnership with 14 NGOs. Their work benefited 700 people directly and over 5,000 people indirectly through projects that included donating gifts to victims of domestic violence; raising funds and donating school supplies to underprivileged children; supporting the construction of the first hospital in Romania for children with cancer, trauma and other severe diseases; and taking part in a workshop on reducing food waste.

"12 Acts of Kindness reminds us how lucky we are. You can prove to yourself through every action that you can be a better person and that nothing in this world is random.”

Elisabeta Popescu, Customer Advisor

Perhaps the most prestigious award we give out is Store Manager of the Year – chosen from more than 7,000 peers. This year, the award went to Samir Hamadache from Delhaize in Belgium.

Samir is truly passionate about building strong teams and working in service of the customer. An outstanding people manager and coach, his listening, empathy and communication skills strengthen his teams and help them to deliver.

Samir epitomizes our values of care and teamwork – and it shows in his history-making results. For 20 years, the same Delhaize store had the best end-of-year sales, but, in 2020, Samir and his team took the crown, achieving the best end-of year sales despite the impact of COVID-19 and increased competition around the store.

"Samir is a big source of inspiration for me. He has a strong eye on the whole customer journey. Truly a good leader, he can motivate the team to be stronger than ever together!”

Benoit Leclercq, Assistant Store Manager

Through the “Yesterday’s bread” initiative, bread not sold on the same day it’s delivered fresh to the store will be sold the next morning for an extra low price: 25 cents for a half loaf or 50 cents for a whole loaf or bag of buns. Customers in all Albert Heijn stores are now able to save and prevent food waste with every sandwich they eat!

The brand estimates that around 1% of products are wasted before making it to customers’ plates. While that may seem like a small percentage, for Albert Heijn it’s too much. It represents not only a waste of food but of the time and energy invested in its production. “Yesterday’s bread” could save 1.4 million kilograms of food waste annually.

"Our challenge is to reduce food waste while at the same time offering customers a wide assortment; we’ve been working for years on innovative ways to do this and ‘yesterdays’ bread’ will help!”

Anita Scholte Op Reimer, responsible for Quality and Sustainability at Albert Heijn

Store managers in these brands used to do the stock taking and ordering themselves – wasting valuable time and leading to errors and inefficiencies. So, they set out to build a system to replenish stocks using algorithms that forecast what the store needs, based on sales, sending orders directly to the distribution centers. In line with our vision to create the leading local shopping experience, the project was implemented by a team of representatives from each brand IT and other experts from the regional organization. This enabled us to combine a deep understanding of local requirements with IT expertise and the knowledge-sharing power of the entire company.

In 2021, the team finished rolling out the system to 1,700 stores, covering about 70% of the assortment. Next up are the distribution centers and the remaining 30% of the assortment, fully enabling the data-based creation of orders to suppliers.

"Less time needed to order means more time to serve our customers. In the end that is what matters most!”

Fotis Koutras, Forecasting & Replenishment Director Alfa Beta

To meet customers’ individual needs online, in-store and everywhere in between, Ahold Delhaize USA businesses are creating a more durable omnichannel supply chain.

Now at the mid-point of a three-year transformation, the U.S. businesses are bringing new facilities into their self-managed network in key areas to support the retail brands. They are deploying innovative technology, using artificial intelligence to more precisely predict demand for fresher products with less waste, automation to enhance efficiency, wearable robotics to reduce fatigue and injuries, and even virtual reality training to make distribution centers a safer place to work.

And they’re doing it with care for communities and the planet, investing in associate development, increasing energy efficiency and leveraging technology to operate more sustainably. Despite the COVID-19 pandemic and unprecedented supply chain challenges, the team continues to deliver on schedule.

"The transformation of the U.S. supply chain is a strategic investment at the core of accelerating omnichannel growth. We’re excited for what the future holds.”

Roger Wheeler, President of Retail Business Services

They start by avoiding food waste through great ordering and food handling processes that keep products fresh. Then, they donate or divert any food waste that does occur in one of three ways. First, to fight food insecurity. As a Feeding America partner, Hannaford donates as much safe and nutritious food as possible to community pantries, soup kitchens, and food banks.

Second, when food isn't suitable for human consumption, Hannaford stores donate it to local livestock farmers who can use it as animal feed. And for the rest, they work with Agri- Cycle, a recycling company that collects food waste from across the northeast U.S. and uses farm-based anaerobic digesters to turn it into renewable energy. In this way, Hannaford generates enough energy to power 2500 homes annually!

"Our planet’s health and well-being are a top priority for Hannaford; our role in the food supply chain comes with great responsibility.”

Mike Vail, Brand President

It is aimed at providing one-of-a-kind development, training, and mentorship opportunities for diverse team members.

First, they challenged store managers in Steve’s region to identify one diverse associate with the potential to lead. Then they developed a four-month training program to help the associates achieve their aspirations while ensuring GIANT has diverse internal candidates to fill future leadership positions.

And it’s having an impact, not just for the participants, who say they better understand their career opportunities after the program. – but for the region, which has shown engagement scores that beat the brand average.

Now other GIANT region directors have been inspired to adopt the program, with similar success.

"I finally see what others see in me. I was never sure if I wanted to move up or not, but now I know for certain I do.”

Jonathan Houston, program participant and Meat Team Member

"During the past two years, our values and purpose have become strong drivers, motivating people across our businesses."

Our brands and performance

Associates worldwide

Customers served every week, both in stores and online

Great local consumer-facing brands1

Stores serving our local communities in Europe and the United States2

Including our joint venture brands.
Excluding our joint venture brands' stores.
Group performance
The United States

GROUP PERFORMANCE

Net sales for the financial year ending on January 2, 2022, were €75,601 million, an increase of €865 million, or 1.2%, compared to net sales of €74,736 million for the financial year ending on January 3, 2021. At constant exchange rates, net sales were up by €2,382 million or 3.3%.

Gasoline sales increased by 35.1% in 2021 to €901 million. At constant exchange rates, gasoline sales increased by 39.6%, driven by a reduction in pandemic measures during the year leading to an increase in gasoline volumes. In addition, gasoline prices increased considerably worldwide in 2021.

Net sales excluding gasoline increased in 2021 by €631 million, or 0.9%, compared to 2020. At constant exchanges rates, net sales excluding gasoline increased in 2021 by €2,127 million, or 2.9%, compared to 2020. Sales growth continued to be elevated by demand related to COVID-19, yet was also fuelled by improvements in our brands’ business models, including online, and the acquisition of FreshDirect, 71 stores from Southeastern Grocers at Food Lion and 38 stores from DEEN in the Netherlands.

We continued to see strong sales growth in our online businesses, which contributed €7,704 million to net sales in 2021 (2020: €5,547 million). Net consumer online sales amounted to €10,401 million and increased in 2021 by 38.2% at constant exchange rates.

With the launch of online shopping at Albert in the Czech Republic, all our brands now have online operations. The continued increase in online sales was driven by the impact of COVID-19 and consumers shifting to online shopping, as we also saw in 2020. We saw continued positive trends across all the brands with online acceleration in the U.S. supported by more click-and-collect points, third-party delivery and the acquisition of FreshDirect in 2021, and growth in Europe that was mainly driven by the bol.com and ah.nl online brands.

During 2021, we further increased the sale of healthy own-brand products as a proportion of total own-brand food sales to 53.6%. This increase resulted from the introduction of Nutri-Score in our European brands and the U.S. brands’ continuous effort to reformulate own-brand products. Our performance was also supported by the brands’ increased focus on driving healthy own-brand sales

In addition, we have seen that the fresh product category is the fastest growing segment at Food Lion and Delhaize keeps benefiting from its SuperPlus loyalty program, which gives higher discounts on products with a Nutri-Score of A or B.

Operating income in 2021 went up by €1,129 million, or 51.5%, to €3,320 million compared to €2,191 million in 2020. The increase of €1,129 million is mainly explained by the changes in gross profit and operating expenses, which are explained above. At constant rates, operating income was up €1,274 million, or 62.2%.

Underlying operating income was €3,331 million in 2021, down €263 million, or 7.3%, versus €3,594 million in 2020. Underlying operating income margin in 2021 was 4.4%, compared to 4.8% in 2020. At constant exchange rates, underlying operating income was down by €157 million, or 4.5%, compared to 2020. Our 2021 results were mainly impacted by higher logistics and distribution costs, operational expenses, advertising costs and depreciation and rent, driven by supply chain challenges in the U.S. and incremental omnichannel investments accelerating our online business.

Tight cost management remains a core objective of our business model. Our Save for Our Customers program delivered €967 million this year, positively impacting our gross profit and operating expenses. Through this program, we drive efforts to provide our businesses with optimized store processes and improved sourcing conditions, enabling us to continue to invest in our customer proposition.

For more information, see the Performance review section of the Annual Report 2021.

UNITED STATES

In 2021, net sales were €45,455 million, down by €15 million or 0.0% compared to 2020. At constant exchange rates, net sales were up by 3.6%. Sales growth was positively impacted the acquisitions of FreshDirect and 71 stores from Southeastern Grocers, COVID-19 and inflation, and negatively affected by one fewer week of sales in 2021 compared to 2020. The additional week of sales in 2020 amounted to $967 million.

Online sales were €3,228 million, up by 68.9% compared to the prior year at constant exchange rates. The increase versus last year was primarily driven by the pandemic, as consumers’ intent to shop online continued to increase. The launch of 270 additional click-and-collect points helped the brands’ capture sales from this channel, along with a further strengthening of partnerships with third-party delivery services, the acquisition of the FreshDirect online grocery delivery service and the expansion of e-commerce offerings across the U.S. brands.

In 2021, underlying operating income was €2,150 million, down by €316 million or 12.8% compared to last year. At constant rates, underlying operating income decreased by (8.8)%.

The United States’ underlying operating income margin in 2021 was 4.7%, down 0.7 percentage points compared to 2020. The 2021 sales were positively affected by COVID-19, while supply chain costs were impacted negatively by supply chain challenges in the U.S.. Operating income was further affected by inflationary pressure, lower labor productivity and higher facility transition costs from C&S to our integrated supply chain network.

Net sales in 2021 were €30,147 million, up by €881 million or 3.0% compared to 2020. At constant exchange rates, net sales were up by 2.8%. Sales growth was driven by the increased demand related to COVID-19, the acquisition of 38 DEEN stores in the Netherlands and by strong execution of our distribution and store operations. In Europe, the pandemic has had a more mixed impact on the different brands compared to our brands in the United States, and the effect of COVID-19 has been more balanced, with additional sales matching the related costs.

Online sales were €4,477, up by 25.1% compared to last year, mainly driven by the strong performance of our online brands, bol.com and ah.nl. Bol.com experienced strong net consumer online sales growth of 26.6% in 2021. This growth comes on top of the very high growth of 56.8% in 2020. The brand’s business in Belgium and its third-party platform – which currently offers a marketplace to more than 48,500 merchant partners in the Netherlands and Belgium – remain important growth drivers. Other brands also saw a rapid growth in online sales, partially driven by higher demand due to COVID-19, complementing the total online sales growth.

In 2021, underlying operating income in Europe was €1,306 million, down by €19 million, or 1.4%, compared to 2020. Underlying operating margin in Europe was 4.3% in 2021, down 0.2% compared to 2020. In Europe, some of our brands, including those in Romania and our brands’ convenience formats (To Go and Shop & Go), were negatively impacted by COVID-19 to a greater extent, suffering from decreased traffic, the absence of tourists and the trend of people moving from the city to the countryside during lockdown periods. Margins were mainly impacted by higher underlying operating expenses, particularly driven by higher labor, operational and administrative expenses related to COVID-19. To a lesser extent, margins were negatively impacted by the floods in Belgium. This was partly offset by better gross margins driven by lower cost of product and savings from our Save for Our Customers program.

Our net sales in Europe consist of sales to consumers and to franchise stores. Franchise stores operate under the same format as Ahold Delhaize-operated stores. Franchisees purchase merchandise primarily from Ahold Delhaize, pay a franchise fee and receive support services.

Our growth drivers

Our Leading Together strategy has served us well for the past three years. Even through the challenges of COVID-19, it has helped us to stay resilient and continue to achieve strong results.

Drive omnichannel growth

Elevate healthy and sustainable

Cultivate best talent

Strengthen operational excellence

Create seamless digitally-enabled experiences with a compelling value proposition across all shopping and meal occasions.

Customers interact with our brands at many touchpoints throughout their busy lives – we call this the customer journey. Through our omnichannel offering, our brands are working to provide a seamless experience in all phases of the journey – one that is relevant for local customers and enables them to shop on their terms: when and how they want. It’s part of how our brands help customers navigate the choices they encounter, from planning to shopping to enjoying their meals, and fulfil our purpose of helping people eat well, save time and live better.

Our Omnichannel Customer Value Proposition outlines the seven areas our brands focus on that impact this customer journey. Among these are three where our brands really excel and differentiate themselves: fresh and healthy, local and trusted and personalization.

Provide inspiring, healthy and affordable food options for all and achieve our sustainability commitments.

We believe that what’s healthy and sustainable should be accessible and available to all. We are working towards this through our “Grounded in Goodness” strategy, that focuses on healthier people and a healthier planet. Grounded in Goodness, officially launched in 2021, is based on the idea that the world’s health crisis and climate crisis are intrinsically linked. We believe that if we get it right for ourselves, we usually also get it right for the planet. And acting responsibly today is imperative to securing a better tomorrow for generations to come.

Our approach ensures the decisions we make are grounded in doing the right thing for people and planet. We collaborate closely with our partners and our brands to empower customers to join this journey with us.

Our brands’ marketing, reward programs and store designs ensure that what’s healthy and sustainable is affordable, accessible and inclusive for all. Teams across the brands innovate to make products even healthier, more interesting and more varied. The brands source locally, help farmers get a fair deal and work with suppliers to improve the food supply chain. Through it all, we are transparent in highlighting our progress and making better choices clear.

All of this helps us to make healthy and sustainable choices into easy choices, for everyone.

Attract, develop and retain the best talent with an engaging associate experience that drives high performance, inclusion and growth.

Everything we do to create the leading local food shopping experience is enabled by our people. The 413 thousand associates working in our brands’ stores and support offices create relationships with customers and communities – the trust our business is built on.

We are passionate about creating healthy, engaged and inclusive workplaces. We strive to reflect the markets we serve and make sure associates’ voices are heard and valued. We want everyone who works for our brands and support offices to find purpose in what they do, have equitable access to opportunities and be able to grow and contribute to their fullest.

We aspire to a workforce that is 100% gender balanced, 100% reflective of our markets and 100% inclusive.

Save for our customers, leverage scale, and use technology and data to build the future.

Powered by our continuously turning business wheel, Ahold Delhaize and its great local brands create value through a relentless focus on saving for our customers, driving same-store sales and investing to fund growth. Our operational excellence growth driver is focused on making this wheel turn faster and better all the time.

Our great local brands are outstanding operators, with many decades of experience in running retail businesses and the ability to maintain a steady performance even in the midst of challenging circumstances. They work to continuously improve how they operate stores, distribution centers and home delivery and pick-up operations.

This work is underpinned by our strong operating model: our network of leading local brands supported by service companies that operate at scale and leverage their best capabilities regionally and globally. This is an important part of our competitive advantage, and the key to how we bring our omnichannel customer value proposition to life.

Our operating model enables us to transform quickly and use our scale in a way that balances with the brands’ need to consistently meet the unique demands of customers across our local markets. Through it, we believe that we have developed a repeatable formula for growth in the U.S., Europe and Indonesia.

Our business model

Across Ahold Delhaize, each of our great local brands works hard to save for customers, drive same-store sales and fund growth. Our impact goes beyond what happens in stores and distribution centers: from farming to consumption, our brands work with suppliers and partners to make the value chain more sustainable and provide customers with more of the meals they enjoy each day, and healthier choices to help them live better. We have recently committed to reaching net-zero carbon emissions across our own operations by 2040 and to becoming a net-zero business across our entire supply chain, products and services by 2050.

Many of our brands’ products originate from farms around the world. While Ahold Delhaize does not own or operate farms, our brands have long-standing strategic partnerships with farmers and local producers. The raw materials for own-brand products are sourced from and processed by selected partners to ensure the highest quality.

Our brands work with farmers and suppliers to drive down carbon emissions across the value chain and to protect, restore and sustain forests and other ecosystems.

Our brands’ products are made from raw materials and packaged for sale. The brands’ assortments include own-brand ranges that offer great value across different price points and the most relevant local assortment. Our brands develop them in-house, including branding and marketing, and actively work to reduce plastic and increase the use of recyclable materials in packaging.

They are re-formulating many own-brand product recipes to reduce sugar, salt, colorants and additives, and achieved 54% of own-brand sales from healthy products in 2021. All own-brand products adhere to high standards that support Ahold Delhaize’s ESG ambitions.

Various suppliers manufacture branded products that are delivered to our brands’ distribution centers. Our brands give small consumer packaged goods companies the chance to sell their product innovations in their stores and reach a wider audience. Suppliers can benefit from the unique customer insights resulting from our brands’ strong local presence and over a century of experience in grocery retail. We share our expertise and scale with other food retailers as part of the Coopernic European Buying Alliance and through our partnership with AMS. This enables our brands to improve product quality and buy more efficiently.

Products are delivered to our brands’ warehouses and prepared for transport to stores, pick-up points and customers’ homes. We are continuously adapting our supply chain to serve customers better. Our brands’ automated warehouses and fulfilment centers enable faster distribution to stores and delivery to customers’ homes.

Customers can shop with our brands in stores and online. Ahold Delhaize is known for our great local brands, that serve 55 million customers each week.

Our brands create the leading local food shopping experience in more than 7,000 local grocery, small-format and specialty stores and through online shopping. And our brands sell more than just food – they include the top online retailer in the Benelux, bol.com.

While the majority of our revenue is generated by selling products to customers, growing complementary revenue streams allows us to save and reinvest across the value chain. Complementary revenue streams are driven by digital and in-store media, retail media services and data insights.

Environmental, Social & Governance

ESG performance is an important part of how we measure success at Ahold Delhaize. We have a long history of reporting on our ESG performance and we are pleased to see our stakeholders’ interest in this area continuing to increase.

Environmental

Environment

As the pace of climate change accelerates, there is less than a decade left to ensuring a healthy future. As part of our strategy to support a healthier planet, we measure and manage our company’s environmental impacts relating to carbon emissions, food waste and plastic waste as well as the impact of climate change on our company.

For more information, see the ESG section of the Annual Report 2021.

In addition to building a healthier planet, we focus on healthier people as part of our Grounded in Goodness strategy. Our commitment to healthier people begins with empowering customers and associates to make better choices when shopping with us, in stores and online. We also support resilient communities, everywhere the brands operate. And finally, we work with farmers and suppliers to ensure that they demonstrate a high standard of business ethics and regard for human rights, and that our products are safe, high quality, and produced in clean, safe and efficient facilities with good working conditions. Our social impact goes beyond our Grounded in Goodness strategy and includes topics such as health and well-being; fair labor practices in the supply chain; associate safety, health and well-being; and customer health and safety. We take responsibility for driving positive impact, for example by helping customers and associates make healthy and sustainable choices, by keeping people safe and well during a pandemic and by safeguarding human rights in our brands’ own operations and across supply chains.

Governance

As in every other area of our business, having the right governance in place to ensure we take a structured and effective approach to our ESG ambitions is critical to our success.

We have bold ambitions to become a more diverse and inclusive company, across all our brands and businesses.

Leading Together

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FY 2021 Adult Education and Literacy Annual Report

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NCAA's Power Five conferences are cash cows. Here's how much schools made in fiscal 2022.

The five biggest conferences in college athletics reported a combined $3.3 billion in revenue for the 2022 fiscal year, the highest total ever..

Clarification: The article was updated to reflect the future financial distributions and conference television revenue for Big 12 schools following the upcoming departures of Oklahoma and Texas .

The Power Five conferences combined for more than $3.3 billion in revenue during their 2022 fiscal years, their new federal tax records show. That represents an expected recovery from a pandemic-related decrease in 2021, but it also leaves the conferences short of where they would have been had their revenues kept increasing at an average annual rate that they had established before the COVID-19 pandemic.

In addition, the Pac-12 Conference reported on its new filing that it “anticipates” filing an amended return for 2022 because of “a possible restatement” of its audited financial statements. This is connected to overpayments totaling more than $50 million that Comcast made over a period of at least five years to the conference-owned Pac-12 Networks, according to a conference spokesman, a previous statement from the conference and a wrongful-termination suit filed by two former Pac-12 executives who were fired in January after the overpayments were discovered.

In fiscal 2017, 2018 and 2019, the Power Five conferences’ combined revenues increased by an annual average of about 8.4%. Had they maintained that for 2020, 2021 and 2022, the fiscal 2022 figure projected to be just over $3.7 billion.

The conferences other than the SEC provided their new returns this week in response to requests from USA TODAY Sports. The SEC made its return public in February .

Overall, among the Power Five:

▶ The Big Ten had the greatest revenue total at $845.6 million and the greatest per-school distribution at about $58.8 million for each school other than Nebraska, Maryland and Rutgers. Those schools each received several million less, the conference said, because of distribution of revenue from the Big Ten Network that was earned before they became entitled to full shares.

In February, the SEC reported what ended up being the second-highest total and distributions -- $802 million, which was lower than its total in 2021, and about $49.9 million per school.

▶ Because of changes in commissioners, and IRS rules about the reporting of compensation to highly paid former employees, the conferences reported pay for eight current or former commissioners that combined for a net total of $26.3 million for the 2021 calendar year. (The IRS requires non-profit organizations to report their revenues and expenses based their fiscal years and their employee compensation based on the calendar year completed during the fiscal year.

Former Pac-12 commissioner Larry Scott had the largest single-year net total: nearly $4.1 million, although he departed his job by mutual agreement with the schools’ presidents on June 30, 2021 – a year before his contract had been set to expire. His amount included $875,000 in bonus pay, as well as a $1.5 million severance payment. He also continued to have the benefit of a nearly $1.9 million loan.

Conference spokesman Andrew Walker said Scott received further compensation in 2022 and the loan is due to be repaid by June 30, 2024.

Scott, who became the conference’s commissioner in July 2009, had totaled $48.7 million in compensation over 12½ years through December 2021.

Other conference-by-conference facts, figures and details from the documents obtained this week, along with additional comments from the conferences:

Revenue: $617 million, third among Power Five.

The total increased by $38.7 million from fiscal 2021 (6.7%), when the ACC joined the SEC as the only Power Five conferences to have a year-over-year revenue increase, as they were the most aggressive in their approaches to staging football games during the 2020 football season amid a period of considerable caution about the pandemic. The increase in fiscal 2022 was driven by the ACC Network reaching full distribution in December 2021, the conference said in a statement.

Per-school payouts: $37.9 million to $41.3 million, fourth among Power Five, with Notre Dame receiving $17.4 million while playing football as an independent.

The payouts vary because of reimbursements for bowl travel and participation in ACC championship events, a conference spokesperson said. They increased from fiscal 2021, in part because Notre Dame received a full share of nearly $35 million after playing the 2020 football season as an ACC school.

Commissioners’ pay: John Swofford retired as commissioner on June 30, 2021, but remained on the payroll through December 2022, the spokesperson said. His total pay for the 2021 calendar year was nearly $3.4 million, with more than $3.2 million in base salary. The conference declined to provide information about Swofford’s pay rate after his retirement date. In 2019, his last full year of pay not affected by a pandemic-related reduction, Swofford was reported with nearly $3.9 million in base salary.

Current commissioner Jim Phillips moved onto the payroll on Feb. 1, 2021, and had total pay of just over $2.5 million, including $2.4 million in base salary.

Revenue: $480.6 million, fifth among Power Five.

The total increased by just over $124 million after decreasing by $53 million in fiscal 2021. Compared to fiscal 2019, which was pre-pandemic, the increase for 2022 is just under $42 million.

Per-school payouts: $42 million to $44.9 million, third among Power Five.

The question going forward is what these will look like for the conference’s eight continuing schools as Brigham Young, Central Florida, Cincinnati and Houston join on July 1, and Oklahoma and Texas depart for the SEC as of July 1, 2024, which is one year earlier than originally planned.

It is possible the payouts, at least for the 2023 fiscal year, will be greater than those for 2022. Oklahoma and Texas have agreed to forgo a combined total of $100 million in what the Big 12 has termed “distributable revenues.” That money will go to the eight continuing schools. Based on the 2022 distributions, at least some of that amount will have to occur in 2023.

Meanwhile, conference spokesman Bob Burda said, the four incoming schools will have multi-year ramp-ups to full revenue distributions. Burda declined to provide additional details, but that also will mitigate the impact on the eight continuing schools.

Commissioner’s pay: In his final full calendar year as commissioner, Bob Bowlsby was credited with $4.05 million in total pay for the 2021 calendar year. His base salary of $2.25 million reflects the last part of a pandemic-related decrease he took to April 2021. But after receiving no bonus money in 2020 amid the pandemic, Bowlsby received $1.25 million in bonus pay in 2021. That’s double the amounts he received in both 2018 and 2019, so he ended up being made whole in that portion of his compensation.

Brett Yormark became commissioner on Aug. 1, 2022.

Revenue and per-school payouts: See above.

The conference said in a statement that under its existing TV deals, revenue has been designed to increase by 2% to 3% each year, so it seems safe to anticipate that its revenue for fiscal 2023 will be at least $870 million and that per-school payouts will be at least $60 million.

But new television agreements with Fox, NBC and CBS begin July 1. Southern California and UCLA are set to join the conference for the 2024-25 school year. While the SEC’s revenue also likely will take off with Texas and Oklahoma joining that year, figure the Big Ten’s to do the same.

Commissioners’ pay: Kevin Warren, who recently departed for the Chicago Bears , was credited with just over $3.6 million in total compensation for the 2021 calendar year. His total increased by about $140,000 over the amount reported for him for 2020. Nearly all of the increase was in deferred pay. He received no bonus money in 2020 or 2021. He has been succeeded by Tony Petitti.

Jim Delany, who retired from the Big Ten in the middle of 2020, was credited with a net total of just over $3 million in pay that represented the fourth year’s worth of money from the more than $20 million in future bonuses for which he became eligible in July 2015 and the conference said he will be receiving over a 10-year span, running through the 2027 calendar year. In addition, during the 2021-22 fiscal year, Delany Advisory Inc., received $400,000 for what the new tax record described as consulting services.

Revenue: $580.9 million, fourth among the Power Five, pending the anticipated restatement of revenue.

The Pac-12 had $190 million decrease in revenue in fiscal 2021 and a $237 million increase in 2022. The future appears challenging, with Southern California and UCLA leaving after the upcoming season, no new TV deal announced yet and the Comcast overpayment issues.

Per-school payouts: About $37 million, fifth among the Power Five.

Commissioners’ pay: George Kliavkoff, who took over after Scott’s departure, was credited with a total of just more than $1.8 million for a period beginning July 1, 2021, including $1.75 million in base salary. Annualized, that’s a little over $3.6 million. Kliavkoff received no bonus pay in 2021.

Eight other Pac-12 or Pac-12 Networks executives were credited with more than $435,000 in total pay in 2021, including four who made more than $550,000. Among those was then-Pac-12 Networks president Mark Shuken, who was credited with more than $1.1 million. He and then-Pac-12 treasurer Brent Willman (just over $650,000) were fired in connection with the Comcast overpayments and are now suing the conference.

Revenue: $802 million, second among the Power Five.

Per-school payouts: About $49.9 million, second among the Power Five.

Commissioner's pay: Greg Sankey was credited with just over $3.7 million in total pay in the 2021 calendar year, nearly all in base salary.

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Presale: Supplement Business Report 2023

One of NBJ’s most looked forward to times of the year is the release of our annual Supplement Business Report and the launch for the 2023 update is no different. Commentary across the industry has been consistent with observations supporting that the market is normalizing post covid. The decline in some categories is expected, what’s unexpected is the increase across channels not predicted to have the level of growth we're seeing.

The 2023 Supplement Business Report is packed full with a total of 160 charts , a top 50 company list , and data backed commentary that’ll give you an understanding of how the industry has developed in the past year and forecasting where it's heading through 2026 .

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Pick up where the Supplement Market Economy Update Report left off with the 2023 Supplement Business Report . The report will launch on June 6th, 2023 but is available now for preorder . Purchase the Supplement Business Report now and receive an additional 9 bonus data charts for free !

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‘Go to hell, Shell’: Climate protesters try to storm stage at oil giant’s annual shareholders meeting

In this article

LONDON — Shell Chief Executive Wael Sawan and the firm's board of directors on Tuesday were shielded by security staff as climate protesters unsuccessfully tried to storm the stage at the British oil giant's annual shareholders meeting.

The acrimonious meeting, which was held at the ExCeL London exhibition center, was repeatedly disrupted by protesters before they were removed by security staff.

Proceedings were scheduled to get underway at 10 a.m. London time (5 a.m. ET) but waves of disruption delayed the meeting for well over an hour.

Protesters could be heard singing to the tune of "Hit the Road Jack," "Go to hell, Shell, and don't you come back no more" as Sawan, Chairman Andrew Mackenzie and other directors looked on.

It comes as climate-focused investors seek to ramp up pressure on the energy major after an extraordinary run of record profits.

Follow This, a small Dutch activist investor and campaign group with stakes in several Big Oil companies, tabled a resolution at Shell's shareholders meeting.

Climate Resolution 26 calls on Shell to align its climate targets with the landmark Paris Agreement and commit to absolute carbon emissions cuts by 2030. These cuts, Follow This says, should include emissions generated by customers' use of their oil and gas, known as Scope 3 emissions.

It echoes a 2021 ruling by a Dutch court that Shell should reduce its global carbon emissions by 45% by the end of the decade, which the company has appealed.

For the first time, Dutch pension managers MN and PGGM — both Shell shareholders — have endorsed the resolution. The institutional investors lead engagement with Shell on behalf of the world's largest climate-focused investor group Climate Action 100+, which represents $68 trillion in assets.

It comes as investors increasingly see a warming planet as a growing risk to their portfolios. The burning of fossil fuels, such as oil, gas and coal, is the chief driver of the climate crisis.

Meanwhile, the Church of England Pensions Board, Britain's Local Authority Pension Fund Forum, the U.K.'s National Employment Savings Trust, and shareholder advisor PIRC have said they will either vote against or recommend a vote against the reappointment of Shell's Mackenzie.

Adam Matthews, chief responsible investment officer at the Church of England Pensions Board, reportedly said earlier this month that it had "lost confidence in the direction of the company."

Shell, which is aiming to become a net-zero emissions business by 2050, has recommended shareholders vote against the motion tabled by Follow This. The company described Climate Resolution 26 as "unclear, generic and would create confusion as to Board and shareholder accountabilities."

"We strongly disagree with the Follow This resolution and with those organisations which have recommended supporting it, or voting against Board members. There must be an emphasis on changing the use of energy as much as its supply, and this is reflected in our approach," a spokesperson for Shell said in a statement.

"We will continue to invest in producing the energy the world needs today and for the foreseeable future. All of our investments have to provide a rate of return that our investors demand," they added.

Proxy advisors Glass Lewis and Institutional Shareholder Services have both recommended that their clients vote against Resolution 26.

It’s a huge year for Shell — and a huge year to look back on, CEO says

Follow This said it represents nearly 10,000 Shell shareholders, although the majority hold only a couple of shares.

It is unlikely that those planning to vote in favor of the resolution will trigger a broader shareholder revolt or succeed in ousting board members, but Follow This says it hopes investors take the opportunity to compel the company to align their 2030 emissions reduction targets with the Paris accord.

At BP 's annual general meeting last month , support for a Follow This resolution calling for tougher emission reduction targets by the end of the decade came in at 17%, although this was up from 15% last year.

Bumper profits

Big Oil posted bumper profits last year, bolstered by soaring fossil fuel prices and robust demand following Russia's full-scale invasion of Ukraine .

For its part, Shell reported its highest-ever annual profit of nearly $40 billion for 2022. That comfortably surpassed the $28.4 billion in 2008 which Shell said was its previous annual record and was more than double the firm's full-year 2021 profit of $19.29 billion.

Earlier this month, Shell posted adjusted earnings of $9.6 billion for the first three months of 2023.

The record profits were seen from within the industry as something of a vindication. Oil and gas giants came under immense pressure from shareholders and activists to invest in clean energy as oil demand cratered in the peak of 2020 Covid lockdowns.

The push toward green reform lost momentum last year, however, alarming investors and campaigners as the world's leading climate scientists warned of "a brief and rapidly closing window to secure a livable future."

After ultimately failing with several climate resolutions in 2022, Follow This' Mark van Baal told CNBC earlier this year that it was clear from discussions with oil majors that they were determined to fend off activist and shareholder pressure and continue with their core oil and gas businesses.

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The year at a glance

2022 was a turning point for the ECB’s monetary policy. The inflation outlook changed abruptly as two types of shock hit the economy at the same time. First, the euro area underwent an unprecedented series of negative supply shocks caused by pandemic-induced supply chain disruptions, Russia’s unjustifiable invasion of Ukraine and the ensuing energy crisis. This significantly increased input costs for all sectors of the economy. Second, there was a positive demand shock triggered by the reopening of the economy after the pandemic. That allowed firms to pass their rising costs through to prices much faster and more strongly than in the past.

We had already announced, at the end of 2021, that we would gradually reduce net asset purchases under our asset purchase programme (APP) and would end them under the pandemic emergency purchase programme (PEPP) at the end of March 2022. But our overall policy stance was still highly accommodative, having been tailored to the environment of very low inflation in the past decade and the deflationary risks early in the pandemic. So we took a series of steps to normalise that stance and respond rapidly to the emerging inflation challenge.

In March we speeded up the reduction of net purchases under the APP and in April said we expected to discontinue them in the third quarter. In July we then raised the key ECB interest rates for the first time in 11 years, hiking them again in a series of large steps at the policy meetings that followed. The pace of this adjustment was an important signal to the public of our determination to bring down inflation. That helped anchor inflation expectations even as inflation accelerated.

In parallel, we acted to ensure that – as monetary policy was normalised – our policy stance would continue to be transmitted smoothly via financial markets throughout the euro area. This was achieved via two key measures. First, we decided to apply flexibility in reinvesting maturing securities in the PEPP portfolio to counter risks to the monetary policy transmission mechanism related to the pandemic. Second, we launched a new Transmission Protection Instrument.

But as the inflation outlook evolved it became clear that achieving a broadly neutral monetary policy stance would not in itself suffice. Inflation was projected to be too far above our 2% medium-term target for too long, and we saw signs that it was becoming more persistent, with price pressures broadening and underlying inflation strengthening. In this setting, we needed to bring interest rates into restrictive territory and dampen demand.

So in December, following our last policy meeting of the year, we announced that interest rates would still have to rise significantly at a steady pace to reach levels that were sufficiently restrictive to ensure a timely return of inflation to our target. At the same time, we said that, while the key ECB interest rates were our primary tool for setting the policy stance, we would begin reducing the APP securities portfolio from March 2023 at a measured and predictable pace. This also followed a decision in October to recalibrate the terms and conditions of the third series of our targeted longer-term refinancing operations, removing a deterrent to voluntary early repayment of outstanding funds. Monetary policy assets on our balance sheet declined by around €830 billion between end-June (when net asset purchases ended) and end-December, contributing to the normalisation of our balance sheet.

In addition to our measures to combat high inflation, we continued to examine and address wider threats to our mandate stemming from a changing climate. In 2022 we took further steps to incorporate climate change considerations into our monetary policy operations. This included conducting a first climate stress test of several of the financial exposures on our balance sheet and making progress in better capturing the impact of climate change in our macroeconomic modelling. As of October, we started to decarbonise the corporate bond holdings in our monetary policy portfolios by tilting them towards issuers with a better climate performance. We also decided to limit the share of assets issued by non-financial corporations with a high carbon footprint that counterparties can pledge as collateral when borrowing from the Eurosystem.

In 2022 we continued our efforts to remain at the forefront of technological developments in payment systems and market infrastructures. This involved preparations for the transition from TARGET2 to a new, modernised real-time gross settlement system, as well as several measures to ensure pan-European reachability of payment service providers in the TARGET Instant Payment Settlement (TIPS) system. Instant payment transactions via TIPS increased 17-fold in 2022 compared with 2021.

The year also marked the 20th anniversary of the introduction of euro banknotes and coins, a milestone in European history and a tangible symbol of European integration. To date, cash remains the most frequently used means of payment among Europeans, accounting for almost 60% of payments, and there is no doubt that it will continue to play an important role in people’s lives. But as the economy becomes increasingly digital, we need to ensure that Europeans also have access to safe, efficient and convenient digital payment methods. This is why the Eurosystem is exploring the possibility of issuing a digital euro. As part of the ongoing investigation phase, the Eurosystem agreed in 2022 on the main use cases and several key design decisions for a digital euro.

As the year came to a close, the euro area expanded again, with Croatia becoming its newest member on 1 January 2023 – demonstrating that the euro remains an attractive currency that brings stability to its members.

None of the above would have been possible without the dedicated efforts of ECB staff and their collective determination to serve the people of Europe.

Frankfurt am Main, May 2023

Christine Lagarde

The year in figures

1 High inflation amid growing uncertainty and slowing economic growth

Global growth decelerated in 2022. Russia’s invasion of Ukraine, high inflation and tighter financial conditions weighed on both advanced and emerging market economies. Global inflation pressures rose significantly, fuelled by high and volatile commodity prices, global supply bottlenecks and tight labour markets. The euro weakened against the US dollar but appreciated against many other currencies, and was thus more stable in nominal effective terms.

In the euro area inflation increased to 8.4% in 2022 from 2.6% in 2021. The rise mainly reflected a surge in energy and food prices, triggered by the war in Ukraine. Past supply bottlenecks and some pent-up demand from the coronavirus (COVID-19) pandemic, together with high input costs in production due to the rise in energy prices, increased price pressures across many sectors of the economy. After a strong first half of the year, when particularly the services sector benefited from the lifting of pandemic-related restrictions, growth slowed in the euro area, largely owing to the effects of the war in Ukraine.

1.1 Slowing economic activity across advanced and emerging market economies

Russia’s war in Ukraine weighed on global economic growth, by increasing uncertainty and inflation

Global economic growth dropped to 3.4% in 2022 from 6.4% in 2021, as Russia’s war in Ukraine and other geopolitical factors created uncertainty, inflation rose and financial conditions tightened. The slowdown was broad-based across advanced and emerging market economies (Chart 1.1, panel a). It followed a strong recovery in 2021, mainly due to the easing of pandemic-related restrictions and a subsequent rise in global demand. In early 2022 the war in Ukraine inflicted another major shock on the world economy. It led to a surge and very high volatility in commodity prices, and undermined food security, especially for emerging market economies. Rising energy and food prices amplified inflationary pressures globally, reducing households’ real disposable incomes and leading central banks to swiftly tighten monetary policy. In an environment of rising interest rates, falling stock market valuations and heightened risk aversion, global financial conditions tightened significantly.

Global GDP and trade developments

(annual percentage changes)

Sources: Haver Analytics, national sources and ECB calculations. Notes: Panel a): the aggregates are computed using GDP adjusted with purchasing power parity weights. The solid bars indicate data. The dashed lines indicate the long-term averages (between 1999 and 2022). The latest observations are for 2022 as updated on 18 April 2023. Panel b): global trade growth is defined as growth in global imports including the euro area. The solid bars indicate data. The dashed lines indicate the long-term averages (between 1999 and 2022). The latest observations are for 2022 as updated on 18 April 2023.

Global trade growth decelerated in 2022

Global trade growth fell in 2022, although it remained above the historical average (Chart 1.1, panel b). The drop was mainly due to weak manufacturing activity. In the first half of the year global trade was still relatively resilient since the effects of Russia’s war in Ukraine and lingering global supply bottlenecks were partially compensated by the recovery in travel and transportation services as pandemic-related restrictions were relaxed. In the second half of the year, however, trade slowed significantly, reflecting in particular lower imports from emerging market economies. While global value chain integration has stagnated since the global financial crisis, the pandemic and geopolitical developments have increased incentives for firms to return to domestic production and diversify their suppliers, which could in future lead to a fragmentation of global value chains.

Global headline inflation and inflation excluding energy and food both rose significantly

Global inflationary pressures – as reflected both in headline inflation measures and in measures of inflation excluding energy and food – increased significantly in 2022 (Chart 1.2). Inflationary pressures were fuelled by high and volatile commodity prices, global supply bottlenecks, prolonged reopening effects from the pandemic, and tight labour markets. In the countries belonging to the Organisation for Economic Co-operation and Development (OECD), headline inflation peaked in aggregate at 10.7% in October, then started to decline. Inflation excluding energy and food peaked in the same month, at 7.8%. In most countries the surge in inflation over the first half of the year mainly reflected higher commodity prices. The increase in inflation excluding energy and food later in the year indicated that inflationary pressures had become increasingly broad-based, both in advanced and in emerging market economies. Underlying inflationary pressures were also fuelled by increasing wage pressures, as labour markets across key advanced economies remained tight despite the slowdown in global economic activity.

OECD inflation rates

(annual percentage changes, monthly data)

Source: OECD. Note: The latest observations are for December 2022 as updated on 18 April 2023.

Energy prices rose after Russia’s invasion of Ukraine but eased to some extent as energy demand fell and LNG imports increased

Energy prices increased sharply during 2022 but eased to some extent towards the end of the year. Oil prices increased by 6%, driven by supply disruptions, mainly due to Russia’s invasion of Ukraine which caused a spike in oil prices in spring. Supply disruptions were partly counterbalanced by lower demand amid the global economic slowdown and lockdowns in China. The invasion of Ukraine and reduced gas supplies to Europe also led to unprecedented spikes in European gas prices, which increased by more than 240% in the immediate aftermath of the Russian invasion relative to the beginning of the year. The surge in gas prices left a significant mark on European energy prices in general as it also led to an increase in wholesale electricity prices. Gas prices moderated in the last quarter, as increased imports of liquified natural gas (LNG) and measures to save gas meant the EU had high gas storage levels at the start of the heating season, leaving gas prices largely similar to pre-invasion levels at the end of 2022 but still 14% higher than at the beginning of the year.

The euro fell against the US dollar but was more stable in nominal effective terms

The euro depreciated by 6% against the US dollar in 2022 but was more stable in nominal effective terms (+0.8%), albeit with considerable within-year variation. The dollar strengthened against most other currencies, as the US Federal Reserve System tightened monetary policy and global risk sentiment was subdued. The euro also came under pressure from high energy prices and the deteriorating economic outlook for the euro area. However, it appreciated against other major currencies, such as the pound sterling, the Japanese yen and Chinese renminbi.

The major risks to the outlook for global economic growth at the end of 2022, amid high uncertainty, included greater repercussions from the war in Ukraine, spillovers from a more significant slowdown of the Chinese economy and tighter financial conditions due to a swifter withdrawal of monetary policy stimulus in key advanced economies. The latter was seen as potentially triggering more significant capital outflows from emerging market economies and disrupting financial markets. In addition, global commodity markets remained sensitive to supply risks. Higher commodity prices and a stronger transmission to consumer price inflation would erode purchasing power more significantly and could weigh on global demand. Renewed pressures in global supply chains and an increasing fragmentation of the global trading system could also hamper growth and fuel inflation.

1.2 Growth in the euro area weakened substantially in the course of 2022

Euro area real GDP grew by 3.5% in 2022, after growing 5.3% in 2021 as the economy recovered from the pandemic-related recession (Chart 1.3). Growth in 2022 mainly reflected a robust contribution from domestic demand. By the end of the year output in the euro area was 2.4% above its pre-pandemic level, i.e. compared with the final quarter of 2019. However, the growth performance varied markedly across countries, reflecting the different economic structures and the extent to which individual countries benefited from the reopening of the services sector and were affected by Russia’s invasion of Ukraine. As the strong rebound in demand for contact-intensive services in the first half of the year lost steam, soaring energy prices started to dampen spending and production throughout the economy. The euro area also felt the impact of the weakening in global demand and tighter monetary policy in many major economies amid high economic uncertainty and falling confidence for businesses as well as households.

Euro area real GDP

(annual percentage changes; percentage point contributions )

Source: Eurostat. Note: The latest observations are for 2022.

Monetary policy support was withdrawn while fiscal policy offered protection against energy price rises

In 2022 monetary policy support was withdrawn while fiscal policies focused on protection against energy price rises. While the normalisation of the monetary policy stance started in December 2021, monetary policy remained accommodative overall, particularly in the first half of the year. In the second half of the year, however, monetary policy support was rapidly withdrawn in unprecedentedly large steps (see Section 2.1). Euro area governments introduced fiscal policy measures to attenuate the impact of high energy prices. The measures were largely non-targeted, rather than primarily aimed at protecting the most vulnerable households and firms. About half of the measures had an impact on the marginal cost of energy consumption rather than being tailored to preserving incentives to consume less energy. At the same time, structural policies continued to be pursued to increase the euro area’s growth potential. The ongoing implementation of countries’ investment and structural reform plans under the Next Generation EU (NGEU) programme made an important contribution to these objectives.

Private consumption was affected by several shocks but was resilient overall

Private consumption growth was resilient in 2022 as labour income remained firm and savings supported pent-up demand (Chart 1.4). The positive dynamics were underpinned mainly by consumption of services, which rose sharply as the pandemic-related restrictions were lifted. Nevertheless, private consumption growth slowed down in the course of the year, owing to weak spending on non-durable goods amid declining real disposable income growth and lingering uncertainty. Overall, household spending increased by 4.3% in 2022. With strong growth in employment and the gradual acceleration in wages, labour income, which is typically used for consumption more than other sources of income, was the main contributor to disposable income growth in 2022. However, rising inflation increasingly dampened real disposable income towards the end of the year, outweighing the favourable effects of the resilient labour market and fiscal support.

Euro area real private consumption

(annual percentage changes; percentage point contributions)

Sources: Eurostat and ECB calculations. Note: The latest observations are for the fourth quarter of 2022.

Investment faced rising energy and financing costs amid high uncertainty

Non-construction investment growth – a proxy for private non-housing investment – fluctuated strongly in 2022 (Chart 1.5). [ 1 ] Excluding the particularly volatile Irish intangible investment component, [ 2 ] non-construction investment growth slowed throughout the year. It started the year on a strong note, spurred by high demand, robust corporate profits and favourable financing conditions, as pandemic-related restrictions were lifted. However, Russia’s war in Ukraine and the ensuing energy crisis, together with the reduction of monetary policy stimulus, meant rising energy and financing costs for firms. Alongside slowing domestic and global demand in an environment of high uncertainty, this reduced their incentives to invest. In level terms, non-construction investment was by the end of 2022 well below its level in the fourth quarter of 2019, which had been boosted by a considerable rise in intangible investment. Excluding Irish intangibles, it had already recovered by the end of 2020. Overall, non-construction investment grew by 5.2% in 2022.

Euro area real investment

(quarterly percentage changes; percentage point contributions)

Housing investment grew at a strong pace in the first quarter of 2022, as housing demand was sustained by favourable financing conditions, the accumulation of a large stock of savings and income support measures. It recoiled in the following quarters, however, as demand weakened on the back of rising mortgage rates and uncertainty related to the war in Ukraine, while supply suffered from soaring costs stemming from shortages of materials and labour. At the end of 2022 housing investment was around 3% above its pre-pandemic level, having grown by 1.1% in 2022 as a whole.

Trade was affected by higher energy costs, supply chain bottlenecks and weakening global demand

The euro area goods trade balance shifted into deficit in 2022, largely owing to the higher cost of energy imports and a subdued export performance. On the imports side, robust growth driven by energy stockpiling and increasing intermediate goods imports was accompanied by strongly rising prices, especially for energy imports. Goods exports were hampered by a re-intensification of supply chain bottlenecks in the first half of 2022. They subsequently remained subdued as global demand weakened while supply chain issues improved only gradually. In contrast, services exports, particularly tourism services, benefited from the easing and gradual elimination of pandemic-related restrictions. Overall, the contribution from trade to euro area GDP growth was broadly neutral in 2022.

Labour markets

The labour market remained resilient overall in 2022

The labour market continued its marked recovery from the pandemic alongside the rebound in euro area economic activity. By the fourth quarter of 2022 total employment and total hours worked had surpassed their levels in the fourth quarter of 2019 by 2.3% and 0.6% respectively (Chart 1.6). The labour force participation rate in the age group 15-74 years increased to a level of 65.2% in the fourth quarter of 2022, 0.5 percentage points above its level in the fourth quarter of 2019. In line with employment growth, the unemployment rate declined further, from an already historically low level of 6.9% in January 2022 to 6.7% at the end of 2022 (Chart 1.7). There was a drop in recourse to job retention schemes, which had limited job lay-offs during the crisis, and workers under such schemes largely resumed their normal hours.

Employment, hours worked and the labour force participation rate

(left-hand scale: index, Q4 2019 = 100; right-hand scale: percentages of the working-age population)

Unemployment and the labour force

(left-hand scale: quarter-on-quarter percentage changes, percentage point contributions; right-hand scale: percentages of the labour force)

The euro area labour market remained resilient overall in 2022 despite Russia’s war in Ukraine, as also indicated by continued high levels of job vacancies towards the end of the year. Still, labour market developments and survey indicators of labour demand moderated in the second half of the year. Box 1 compares the labour market developments in the United States and the euro area with a view to better understanding the differences and similarities in the drivers of the recovery from the pandemic and prospects for developments in employment and wages.

1.3 Fiscal policy measures to address a cost-of-living crisis

The euro area general government deficit ratio decreased in 2022 as pandemic-related measures expired and were only partly offset by new support measures

In 2022 euro area governments were confronted, for the third year in a row, with new challenges that required reactive fiscal policies. The euro area’s general government deficit ratio decreased to 3.5% of GDP in 2022 from 5.1% in 2021 (Chart 1.8) as support measures related to the pandemic expired and were only partly offset by new support measures. The latter were aimed at countering rising energy prices and their consequences, namely an increased cost of living for households and higher costs for companies. To a smaller extent, they also financed spending related to Russia’s war in Ukraine. The same developments are reflected in the fiscal stance, which tightened moderately in 2022 for the second year in a row. [ 3 ] As can be seen in the chart below, however, only slightly over a third of the loosening in 2020 has so far been reversed.

Euro area general government balance and fiscal stance

(percentages of GDP)

Sources: Eurosystem staff macroeconomic projections for the euro area, December 2022 and ECB calculations. Note: The measure of the fiscal stance takes into account expenditures funded by the NGEU Recovery and Resilience Facility and other EU structural funds.

But measures related to inflation and Russia’s war in Ukraine were sizeable and broad in scope

When energy prices started to increase more strongly at the end of 2021, euro area governments put in place support measures amounting to around 0.2% of GDP. These comprised subsidies, indirect tax cuts and transfers to households and companies. In 2022, with Russia’s invasion of Ukraine, governments swiftly expanded such measures to around 1.9% of GDP (Chart 1.9), which also included capital transfers to energy-producing firms. In addition they increased government support by 0.2% of GDP owing to, inter alia, refugee-related and military spending. The energy and inflation support measures were compensated only to a small extent by new financing measures such as higher direct taxation of energy producers making large windfall profits. This implied that their net budgetary effect remained sizeable, at around 1.7% of GDP. In sum, the gross discretionary support (energy and inflation support plus refugee-related and military spending) was thus 2.1% of euro area GDP and, net of new financing, 1.9% of GDP (Chart 1.10).

Euro area budget support related to high energy prices and inflation

(percentages of GDP, levels per year)

Sources: Eurosystem staff macroeconomic projections for the euro area, December 2022 and ECB calculations. Notes: Positive numbers denote fiscal support. The bars and totals denote gross fiscal support. The net impact shows the gross support less the discretionary financing measures for the purposes indicated, as identified by Eurosystem staff.

Euro area budget support related to high energy prices, inflation and Russia’s war in Ukraine

(percentages of 2022 GDP, levels per year)

Targeting of government support measures was limited

Support measures should be temporary, targeted to the most vulnerable households and companies, as well as tailored to preserving incentives to consume less energy. Fiscal measures falling short of these principles are likely to exacerbate inflationary pressures, which would necessitate a stronger monetary policy response, and to weigh on public finances. Given that only a small share of these measures was targeted (12% according to the December 2022 Eurosystem staff projections [ 4 ] ), it is important that governments adjust these measures accordingly.

Consecutive shocks to public finances increase the need for prudent fiscal policies over the medium term

The pandemic, Russia’s war in Ukraine and fiscal expenditures to compensate for high inflation rates represent consecutive major shocks to public finances. These occurred against a background of already elevated government debt-to-GDP ratios. While the pandemic led to high costs for public finances and the war in Ukraine has intensified risks to economic growth prospects, the net impact of the inflationary shock on debt levels is less clear-cut. While higher tax receipts will have some downward effect on the debt ratio, high inflation has prompted a normalisation of monetary policy and thus rising financing costs. Moreover, government expenditures tend to eventually catch up with receipts, while inflation negatively affects output growth.

Pressures on public finances are likely to increase

Pressures on public finances are likely to increase. These will arise from, among other factors, the need to step up the energy transition and to increase investment in a greener and more digital economy, on top of rising fiscal costs due to an ageing population. It is therefore important that the increased vulnerability of euro area public finances is addressed through both growth-enhancing reforms and a gradual reduction in high debt ratios. This will require a swift implementation of the investment and structural reform plans under the Next Generation EU programme and prudent fiscal policies for years to come.

1.4 A sharp increase in euro area inflation

Headline inflation in the euro area as measured by the Harmonised Index of Consumer Prices (HICP) was 8.4% on average in 2022, sharply up from an average of 2.6% in 2021. Inflation surged throughout the year and led to high rates of around 10% year-on-year in the later months. Energy prices were the most important component behind the increase in headline inflation, and food prices also rose increasingly strongly, particularly after Russia’s invasion of Ukraine in February. In addition, persistent supply bottlenecks for industrial goods, recovering demand following the easing of pandemic-related restrictions, especially in the services sector, and the depreciation of the euro added to inflationary pressures (Chart 1.11). Overall, price pressures spread across an increasing number of sectors, in part owing to the indirect impact of high energy costs across the whole economy. The divergence of inflation rates across euro area countries also increased significantly, reflecting primarily different degrees of exposure to the commodity and energy price shocks. Most measures of underlying inflation recorded a sizeable rise over the year. At the end of 2022, the factors behind the inflation surge were expected to unwind and inflation was expected to ease over the course of 2023.

Headline inflation and its main components

Sources: Eurostat and ECB calculations. Note: The latest observations are for December 2022.

Energy and food prices drove inflation

Developments in the energy prices component accounted directly for almost half of the increase in headline inflation over the course of 2022. Energy inflation was already high at the start of the year, then rose sharply further after Russia’s invasion of Ukraine owing to concerns that the supply of energy could be disrupted. In October, energy inflation stood at 41.5%, with large contributions from gas and electricity prices, for which the underlying wholesale prices had decoupled from oil prices. Governments adopted sizeable fiscal measures that helped to dampen the short-term impact of rising energy prices somewhat (see Section 1.3). The varying intensity of these measures contributed to the differences in energy inflation among euro area countries, with the Baltic States recording the highest numbers. The surge in energy costs also placed substantial upward pressure on food prices, affecting them with various lags. The war in Ukraine had also a more direct impact on food prices, as both Russia and Ukraine are important exporters of grain and the minerals used in the production of fertilisers. [ 5 ] The contribution of total food inflation to headline HICP inflation reached 2.9 percentage points in December 2022, substantially above the level in 2021, reflecting a rise in both the unprocessed and processed components.

Underlying inflation rose strongly, with some signs of levelling off at the end of the year

Indicators of underlying inflation picked up substantially over the course of 2022, although with some signs of flattening towards the end of the year. HICP inflation excluding energy and food was, at 2.3%, already above the ECB’s inflation target at the beginning of the year and increased to 5.2% in December. On average, non-energy industrial goods inflation rose to 4.6% in 2022, while services inflation reached 3.5%. Price pressure resulted largely from the same factors: very strong input cost rises, related in part to the increase in energy commodity prices, and pandemic-related factors such as global supply bottlenecks and reopening effects. The depreciation of the euro over most of the year also contributed to inflationary pressures. As supply chain disruptions gradually eased over the second half of 2022 and commodity prices came down, pressures at the early stages of the pricing chain moderated after the summer. Yet lagged pass-through effects kept inflation high. Pent-up demand after the lifting of pandemic-related restrictions contributed to a favourable pricing environment for firms, in particular for contact-intensive services. Overall, price pressures became increasingly persistent and broad-based. This led all indicators of underlying inflation to increase.

Wage pressures rose towards year-end, amid strong labour markets and some compensation for high inflation

Domestic cost pressures in the euro area, as measured by the growth in the GDP deflator, increased on average by 4.7% in 2022, continuing the path started in 2021 (Chart 1.12). Pressures from wage developments remained moderate in the first half of the year but became more pronounced towards the year-end. Annual growth in compensation per employee rose in 2022, reaching 4.5% on average after 3.9% in 2021 and an average of 1.7% in the pre-pandemic period (between 2015 and 2019). The rise compared with the previous year was partly due to an increase in average hours worked as the impact of job retention schemes faded. Negotiated wages, which were affected to a lesser extent by the impact of government measures, rose by an average annual rate of 2.8% in 2022, slightly below actual wage growth, reflecting the intensification of wage pressures towards the end of the year. Inflation compensation became an increasingly important aspect in wage negotiations during 2022, especially since labour markets remained strong. Increased labour costs were to some extent offset by an increase in labour productivity. Unit profits across sectors contributed positively to the GDP deflator over the year, indicating that firms were able to pass input cost increases through to selling prices.

Breakdown of the GDP deflator

Longer-term inflation expectations rose further but remained broadly anchored at the ECB’s target

Longer-term inflation expectations of professional forecasters, which had stood at 1.9% in late 2021, edged up during the year, reaching 2.2% in the fourth quarter of 2022 (Chart 1.13). Other survey data, such as from the ECB Survey of Monetary Analysts and from Consensus Economics, also suggested longer-term inflation expectations were anchored at or just above 2%, despite higher expectations for the shorter term. Market-based measures of longer-term inflation compensation, particularly the five-year inflation-linked swap rate five years ahead, declined at the beginning of the year in anticipation of a tightening of monetary policy but, following the outbreak of Russia’s war in Ukraine, gradually picked up, standing at 2.38% in late December. Importantly, however, market-based measures of inflation compensation are not a straightforward measure of market participants’ actual inflation expectations, since they incorporate risk premia to compensate for inflation uncertainty.

Survey and market-based indicators of inflation expectations

Sources: Eurostat, Refinitiv, Consensus Economics, ECB Survey of Professional Forecasters (SPF) and ECB calculations. Notes: The market-based indicators of inflation compensation series is based on the one-year spot inflation-linked swap rate, the one-year forward rate one year ahead, the one-year forward rate two years ahead, the one-year forward rate three years ahead and the one-year forward rate four years ahead. The latest observation for market-based indicators of inflation compensation are for 30 December 2022. The SPF for the fourth quarter of 2022 was conducted between 30 September and 6 October 2022. The cut-off date for the Consensus Economics long-term forecasts was October 2022, while the SPF cut-off date for 2022 and 2023 was December 2022. The latest observation for the HICP is for December 2022.

1.5 Tighter credit and financing conditions as monetary policy normalises

Monetary policy normalisation led to higher bond yields, amid considerable volatility

With inflationary pressures rising throughout the economy (see Section 1.4), the ECB took decisive action in 2022 to normalise monetary policy and prevent longer-term inflation expectations from becoming unanchored above its 2% target (see Section 2.1). Risk-free long-term interest rates were more volatile than in 2021, partly because of very high uncertainty about inflation and the reaction of monetary authorities around the world, including the euro area. Long-term yields increased overall. The euro area ten-year GDP-weighted average of government bond yields closely followed developments in the risk-free rate (Chart 1.14). At the country level, despite some differences, movements in sovereign spreads were contained overall, in part owing to the Governing Council’s announcement in June that it would apply flexibility in reinvesting redemptions coming due in the pandemic emergency purchase programme portfolio and the approval in July of the Transmission Protection Instrument (see Section 2.1). The euro area GDP-weighted average of ten-year nominal government bond yields stood at 3.26% on 31 December 2022, almost 300 basis points higher than at the end of 2021.

Long-term interest rates, and the cost of borrowing for firms and for households for house purchase

(percentages per annum)

Sources: Bloomberg, Refinitiv and ECB calculations. Notes: The data refer to the GDP-weighted average of ten-year government bond yields (daily), the ten-year overnight index swap (OIS) rate (daily), the cost of borrowing for non-financial corporations (monthly) and the cost of borrowing for households for house purchase (monthly).The indicators for the cost of borrowing are calculated by aggregating short-term and long-term bank lending rates using a 24-month moving average of new business volumes. The latest observations are for 31 December 2022 for daily data and for December 2022 for monthly data.

Financing conditions tightened in bond and equity markets

Expectations of higher interest rates and of lower long-term earnings growth put downward pressure on stock prices. Overall, euro area equity prices were very volatile and declined in 2022. The broad indices of euro area non-financial corporation and bank equity prices (Chart 1.15) stood at around 16% and 4.4% below their respective end-2021 levels on 31 December 2022. Since corporate bond yields also increased sizeably, in both the investment grade and high-yield categories, euro area financing conditions tightened considerably.

Equity market indices in the euro area and the United States

(index: 1 January 2021 = 100)

Sources: Bloomberg, Refinitiv and ECB calculations. Notes: The Refinitiv market index for non-financial corporations and the EURO STOXX banks index are shown for the euro area; the Refinitiv market index for non-financial corporations and the S&P banks index are shown for the United States. The latest observations are for 31 December 2022.

Against the background of monetary policy normalisation and general market developments, bank funding costs and bank lending rates increased steeply in 2022. The overall upward trend in bank bond yields, the gradual increase in the remuneration of customer deposits, and a change in the terms and conditions of the third series of targeted longer-term refinancing operations (TLTRO III) towards the end of the year all contributed to an increase in bank funding costs. As a result, nominal bank lending rates increased during 2022 to levels last seen in 2014. The euro area bank lending survey also indicated that banks’ credit standards (i.e. internal guidelines or loan approval criteria) for loans to households and firms tightened substantially. The composite bank lending rate for loans to households for house purchase stood at 2.94% at the end of 2022, up by a cumulative 163 basis points since the end of 2021, and the equivalent rate for non-financial corporations stood at 3.41%, up 205 basis points (Chart 1.14). Viewed in relation to the changes in the key ECB interest rates, such developments were broadly in line with past periods of monetary policy tightening, and the differences in lending rates across countries remained contained. This suggested that changes in the ECB’s monetary policy were transmitting smoothly across the euro area.

Credit growth increased in the first half of 2022, but then moderated for both households and firms

Credit growth increased in the first half of 2022, but new lending moderated after the summer on the back of tighter credit conditions (Chart 1.16). The annual growth rate of bank loans to households weakened to 3.8% for the year, reflecting rising interest rates, tighter credit standards and lower consumer confidence. The annual growth rate of bank loans to firms still increased in 2022, to 6.3%, although this concealed differing developments in the course of the year. Nominal growth was robust for most of the year, reflecting firms’ need to finance working capital and inventories in view of continued supply bottlenecks and elevated costs. In the last months of the year, however, bank lending to firms declined sharply, reflecting the impact of tighter financing conditions on supply and demand factors. Net issuance of debt securities, which had become more expensive for firms, also decreased during the year. In total, the net flows of external financing to non-financial corporations declined in 2022, mainly on account of a reduction in inter-company loans as a form of financing (Chart 1.17). The survey on the access to finance of enterprises indicated, moreover, that firms were increasingly pessimistic about the future availability of most sources of external financing.

M3 growth and the growth of credit to non-financial corporations and households

Source: ECB. Notes: The second line depicts growth of credit to the private sector. Defined as non-monetary financial institutions excluding the general government sector, the private sector comprises essentially non-financial corporations and households. The latest observations are for December 2022.

Net flows of external financing to non-financial corporations

(annual flows in EUR billions)

Sources: ECB and Eurostat. Notes: MFI: monetary financial institution. In “loans from non-MFIs and the rest of the world”, non-monetary financial institutions consist of other financial intermediaries, pension funds and insurance corporations. “MFI loans” and “loans from non-MFIs and the rest of the world” are corrected for loan sales and securitisation. “Other” is the difference between the total and the instruments included in the chart and consists mostly of inter-company loans and trade credit. The annual flow for a year is computed as a four-quarter sum of flows. The latest observations are for the fourth quarter of 2022.

Broad money growth moderated as Eurosystem net asset purchases ended and credit creation declined

The pace of deposit accumulation moderated from the high levels recorded during the pandemic, owing primarily to increased expenditure on the back of rising prices and to higher returns on alternative forms of saving in line with the normalisation of monetary policy. The annual growth of broad money (M3) moderated further to 4.1% in 2022 (Chart 1.16), reflecting the end of net asset purchases by the Eurosystem in July, lower credit creation in the last quarter of 2022, and net monetary outflows to the rest of the world linked to the euro area’s higher energy bill.

Box 1 Labour market developments in the euro area and the United States in 2022

In a context of high uncertainty in 2022, labour market analyses were an essential element in assessing the state of the economy and its degree of slack. This box examines the similarities and differences between the euro area and the US labour market as regards their recovery from the pandemic.

Developments in total hours worked

In 2022 total hours worked recovered to pre-pandemic levels in both the euro area and the United States, but the recovery reflected different paths of the labour supply and demand components. While unemployment rates were in 2022 back to levels seen before the crisis in the United States and even lower than that in the euro area, the degree of labour market tightness, measured by the ratio of vacancies to unemployment, appeared to be stronger in the United States. [ 6 ] These developments can be attributed both to diverging policy responses to the pandemic and to structural differences in labour supply and demand between the two economies.

Developments in labour demand

In 2022 the two economies were at different stages of the business cycle. Cyclical demand for labour was stronger in the United States and therefore partly responsible for the greater labour market tightness. In the euro area economic activity recovered later from its trough during the pandemic than in the United States. Real GDP in the euro area returned to its pre-crisis level in the last quarter of 2021, while in the United States the pre-crisis level had been reached in the first quarter of 2021. To some extent, this reflected more restrictive and widespread lockdown measures in many euro area countries in the second wave of the pandemic than in the United States as well as differences in the speed of vaccination. However, a more important factor was the differing magnitude and focus of the fiscal measures. The fiscal support in the euro area was concentrated on cushioning employment losses by supporting firms, and letting automatic stabilisers operate. The US fiscal support was larger and focused more directly on supporting household income and thus consumption, via pay cheques and enhanced unemployment benefits. Accordingly, private consumption in the euro area returned even later to its pre-crisis level than overall economic activity, i.e. only in the second quarter of 2022.

In addition, from a more structural perspective, the US labour market tends to react to the business cycle more strongly than the euro area labour market. Measures of “churning” show that the US labour market is structurally more dynamic. The term “labour churn” refers to the rate at which employees leave and are replaced within a company or organisation within a certain period of time. A crude measure of churning indicates that on average since the early 2000s around 4% of all US workers changed jobs per month. Indicators of churning are not available for the euro area, and the most comparable statistics refer to recent job leavers and job starters (although these also cover people moving from inactivity/unemployment into employment and vice versa). These point to an increase in the number of job starters in 2022 particularly, but a less pronounced rise than that seen in the United States. These dynamics are also visible in the level of vacancies in the two economic regions: this was higher in 2022 in the United States than it was in the euro area (with considerable variation across euro area countries [ 7 ] ), where the focus had mainly been on bringing retained staff back to normal working time (Chart A).

In sum, stronger structural dynamism of the US labour market added pressure to already more robust labour demand.

Labour market tightness in the euro area and the United States

(ratio of vacancies to unemployment)

Sources: Eurostat, Haver Analytics, US Bureau of Labor Statistics and ECB calculations. Notes: The gap refers to the figure for the United States minus the figure for the euro area. In France, vacancies are reported only for firms with ten or more employees. Employment losses during the pandemic crisis were cushioned in the euro area by extensive usage of job retention schemes, which had declined to very low levels by mid-2022. The latest observations are for the fourth quarter of 2022.

Developments in labour supply

During the pandemic crisis, labour supply declined more and recovered more slowly from its trough in the second quarter of 2020 in the United States than in the euro area. The difference in the pace of the recovery of labour supply was in part linked to the differences in the implemented policies. First, the recovery of the labour force participation rate was more sluggish in the United States. This reflects in part the fact that higher lay-offs in the United States led some workers to leave the labour force, while the relatively generous income support allowed people to remain outside the labour force for longer or even increase the wage at which they would be prepared to re-enter employment. Throughout 2022 the labour force participation rate in the United States continued to be below its pre-pandemic level, in stark contrast to the euro area, where the participation rate exceeded its pre-pandemic level. Second, the recent developments in labour force participation are also partly shaped by long-term trends. Over time, the share of older workers in the labour force, who usually participate less in labour markets than younger workers, has increased in both areas. In Europe, this shift coincided with a positive trend in participation rates due to greater participation by women and was boosted by pension reforms. The trend continued during the pandemic, and older workers supported the increase in the labour force participation rate over 2022. In the United States, however, demographic developments weighed on the labour force participation rate in 2022. Finally, while the net inflow of migrant workers was negatively affected by the pandemic in both regions, in the United States it had started to moderate earlier, following the tightening of immigration policies between 2017 and 2020. Recently, however, the net inflow of migrant workers has rebounded strongly in both regions.

Wage developments

The gap in wage growth between the United States and the euro area has increased in recent years, and this was particularly visible in 2022. To a large extent this can be explained by the different developments in labour supply and demand as explained above. From the second quarter of 2020, US nominal wage growth increased substantially, to 5.5% in the second quarter of 2022, as measured by the employment cost index (private industry). It has moderated since then, but remained high. The rise in euro area wage growth in this period was more gradual and limited, with negotiated wage growth (which is much less affected by job retention schemes than compensation per employee or hour) standing at 2.9% in the fourth quarter of 2022 (Chart B). The structurally more dynamic labour market in the United States may also strengthen the reaction of wages to labour market tightness, as reflected in the higher wage growth of those switching jobs.

Measures of wage growth in the euro area and the United States

Sources: Eurostat, Haver Analytics and ECB staff calculations. Note: The latest observations are for the fourth quarter of 2022 for both euro area negotiated wages and the US employment cost index (private industry).

2 Monetary policy on a normalisation path

The ECB continued to normalise its monetary policy in 2022 to combat exceptionally high inflation, amid Russia’s invasion of Ukraine and lasting effects from the pandemic. In the first phase of normalisation the Governing Council ended net asset purchases under the pandemic emergency purchase programme (PEPP) at the end of March and under the asset purchase programme (APP) at the beginning of July. In the second phase the key ECB rates were raised for the first time in more than a decade, and the deposit facility rate left negative territory for the first time since 2014. Policy rates increased by a cumulative 250 basis points over the last four meetings of the year, which included the largest individual rate hikes on record (Chart 2.1). The Governing Council also approved the Transmission Protection Instrument to ensure an orderly transmission of monetary policy across the euro area. In addition, the flexibility available for reinvestments under the PEPP served as a first line of defence to counter pandemic-related risks to transmission. In December, the Governing Council decided to decrease the monetary policy securities portfolio acquired by the Eurosystem under the APP, at a measured and predictable pace, from March 2023 onwards. The Eurosystem’s balance sheet reached a historical high in June 2022 at €8.8 trillion, before declining to €8.0 trillion by the year’s end. The reduction stemmed mainly from maturing operations and early repayments under the third series of targeted longer-term refinancing operations (TLTRO III). Early repayments were supported by the Governing Council’s decision in October to change the terms and conditions for TLTRO III operations. In line with the normalisation of monetary policy, the ECB also began phasing out collateral easing measures introduced in response to the pandemic, thus gradually restoring pre-pandemic risk tolerance levels in the Eurosystem’s credit operations.

2.1 Withdrawing monetary policy accommodation

A first phase of policy normalisation: a slower pace of asset purchases and the preconditions for rate hikes.

In early 2022 the pandemic was still hampering economic growth, and inflation was higher than projected

In early 2022 the euro area economy continued to recover from the pandemic and the labour market improved further, not least as a result of the support provided by public policies. However, the near-term outlook for economic growth remained subdued amid surging new coronavirus infections due to the spread of the Omicron variant. Shortages of materials, equipment and labour continued to hold back output in some industries, and high energy costs were already hurting real incomes. Inflation in the Harmonised Index of Consumer Prices (HICP) had risen sharply in the preceding months and was again higher than projected in January. This was primarily driven by higher energy costs, which were pushing up prices across many sectors, as well as by higher food prices. On the basis of data at the beginning of the year, the Governing Council assessed in February that inflation was likely to remain elevated for longer than previously expected but to decline over the course of the year.

In February the Governing Council continued the normalisation of monetary policy which had started in December 2021

The Governing Council therefore confirmed the decision taken at its monetary policy meeting in December 2021 to continue reducing the pace of asset purchases step by step over the following quarters. It had decided to discontinue net asset purchases under the PEPP at the end of March 2022, and to reinvest the principal payments from maturing securities purchased under the PEPP until at least the end of 2024. The Governing Council emphasised that, in the event of renewed market fragmentation related to the pandemic, PEPP reinvestments could be adjusted flexibly across time, asset classes and jurisdictions whenever threats to monetary policy transmission jeopardised the attainment of price stability. This could include purchasing bonds issued by the Hellenic Republic over and above rollovers of redemptions in order to avoid an interruption of purchases in that jurisdiction, which could impair the transmission of monetary policy to the Greek economy while it was still recovering from the fallout of the pandemic.

The invasion of Ukraine dramatically increased economic uncertainty and price pressures

Russia’s invasion of Ukraine in February was a watershed for Europe. The unjustified war had a material impact on economic activity and inflation in 2022, including in the euro area, through higher energy and commodity prices, the disruption of international trade and weaker confidence. In March the Governing Council assessed that the extent of these effects would depend on how the war evolved, on the impact of sanctions and on possible further measures. In recognition of the highly uncertain environment, the Governing Council considered a range of scenarios in addition to the usual ECB staff macroeconomic projections for the euro area. The impact of the war was assessed in the context of incoming data that indicated still solid underlying conditions for the euro area economy, helped by considerable policy support. The ongoing recovery of the economy was boosted by the fading impact of the Omicron coronavirus variant. Supply bottlenecks were showing some signs of easing and the labour market was improving further. Still, in the baseline of the March staff projections, which incorporated a first assessment of the implications of the war, GDP growth was revised downwards for the near term. Prior to the Governing Council’s March monetary policy meeting, inflation had continued to be higher than projected mainly because of unexpectedly high energy costs. Price rises had also become more broad-based across sectors. Compared with the December 2021 Eurosystem staff projections, the baseline for HICP inflation in the March projections was revised significantly upwards, while longer-term inflation expectations across a range of measures were in line with the ECB’s 2% medium-term inflation target.

The Governing Council revised the APP purchase schedule in March

On the basis of this updated assessment and taking into account the uncertain environment, the Governing Council revised the purchase schedule for the APP at its March monetary policy meeting, with monthly net purchases to be €40 billion in April, €30 billion in May and €20 billion in June. The calibration of net purchases for the third quarter was to depend on incoming data. The Governing Council also confirmed its prior decision that any adjustments to the key ECB interest rates would take place some time after the end of net purchases under the APP. The path for the key ECB interest rates was still determined by the Governing Council’s forward guidance, reflecting its strategic commitment to stabilise inflation at 2% over the medium term.

The June staff projections made another upward revision to the inflation path

Inflation again rose significantly in May, mainly due to the impact of the war and a continued surge in energy and food prices. At the same time, inflation pressures had broadened and intensified, with prices for many goods and services increasing strongly. Against this backdrop and the June baseline Eurosystem staff projections, which saw inflation above the 2% target at the end of the projection horizon, the Governing Council decided on 9 June to take further steps in normalising monetary policy, guided by the principles of optionality, data-dependence, gradualism and flexibility.

The Governing Council said it would end APP net asset purchases and start raising rates...

First, the Governing Council decided to end net asset purchases under the APP as of 1 July 2022. It said that it intended to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it started raising the key ECB interest rates and, in any case, for as long as necessary to maintain ample liquidity conditions and an appropriate monetary policy stance.

Second, the Governing Council concluded in June that the conditions under its forward guidance for starting to raise the key ECB interest rates had been satisfied. Accordingly, and in line with the previously signalled policy sequencing, it said that it intended to raise the key ECB interest rates by 25 basis points at the July monetary policy meeting, with another increase expected in September.

Third, based on the assessment in June, the Governing Council anticipated that, beyond September, a gradual but sustained path of further increases in interest rates would be appropriate, depending on the incoming data and the assessment of inflation developments over the medium term.

…and addressed concerns about the transmission of monetary policy

The decisions taken on 9 June reflected significant steps towards a normalisation of the monetary policy stance. At an ad hoc meeting on 15 June, the Governing Council assessed the financial market situation and potential fragmentation risks, and underscored its determination to preserve an orderly transmission of the monetary policy stance throughout the euro area. In particular, the Governing Council assessed that the pandemic had left lasting vulnerabilities in the euro area economy, which were contributing to an uneven transmission of the normalisation of the ECB’s monetary policy across jurisdictions.

On the basis of this assessment, the Governing Council decided to apply flexibility in reinvesting redemptions coming due in the PEPP portfolio, with a view to preserving the functioning of the monetary policy transmission mechanism. In addition, it mandated the relevant Eurosystem committees together with the ECB services to accelerate the completion of the design of a new anti-fragmentation instrument.

A second phase of policy normalisation: the Transmission Protection Instrument and policy rate hikes

In July the Governing Council approved the Transmission Protection Instrument…

The new Transmission Protection Instrument (TPI) was approved by the Governing Council at its meeting on 21 July. The Governing Council considered the establishment of the new instrument necessary to support the effective transmission of monetary policy, in particular over the course of policy normalisation. The TPI would ensure that the monetary policy stance is transmitted smoothly across all euro area countries. The TPI constitutes an addition to the ECB’s toolkit and can be activated to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across the euro area. Subject to established criteria being met, the Eurosystem can make secondary market purchases of securities issued in jurisdictions experiencing a deterioration in financing conditions not warranted by country-specific fundamentals, to counter risks to the transmission mechanism to the extent necessary. The scale of TPI purchases, if activated, would depend on the severity of the risks facing monetary policy transmission; purchases would not be restricted ex ante. The Governing Council further emphasised in July that, in any event, the flexibility in reinvestments of redemptions coming due in the PEPP portfolio remained the first line of defence to counter risks to the transmission mechanism related to the pandemic. The Governing Council also highlighted in July that it retained discretion to conduct Outright Monetary Transactions for countries that fulfilled the requisite criteria. While the TPI’s objective is to safeguard the smooth transmission of monetary policy across all euro area countries, Outright Monetary Transactions can be activated in the event of severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro.

The Governing Council also decided in July on the first policy rate hike since 2011, raising the three key ECB interest rates by 50 basis points. It judged that it was appropriate to take a larger first step on its policy rate normalisation path than had been signalled at its previous meeting. This decision was based on the Governing Council’s updated assessment of inflation risks and the reinforced support provided by the TPI for the effective transmission of monetary policy. The Governing Council also signalled that further normalisation of interest rates would be appropriate in the following months.

…and ended its forward guidance on policy rates

The frontloading of the exit from negative interest rates in July allowed the Governing Council to make a transition from forward guidance on interest rates to a meeting-by-meeting approach to its interest rate decisions. This transition appeared warranted in view of the exceptional uncertainty surrounding the outlook for inflation and the economy.

With inflation over 9% in August and expected to be above target in the medium run, the Governing Council raised rates by another 75 basis points in September

In September the Governing Council decided to raise the key ECB interest rates by another 75 basis points, the largest single increase in these rates on record up to then. It took this decision because inflation remained far too high and incoming data indicated that it would stay above target for an extended period. Soaring energy and food prices, demand pressures in some sectors owing to the reopening of the economy, and supply bottlenecks were still driving up inflation, which had risen to 9.1% in August. As in previous months, price pressures were continuing to strengthen and broaden across the economy. ECB staff had significantly revised up their inflation projections in September in comparison with the June projections, with HICP inflation declining over the projection horizon but still above the 2% target in the final year. Furthermore, incoming data pointed to a substantial slowdown in euro area economic growth, and the economy was expected to stagnate later in the year and in the first quarter of 2023. Very high energy prices continued to reduce the purchasing power of people’s incomes and supply bottlenecks were still constraining economic activity. In addition, the geopolitical situation, especially Russia’s war in Ukraine, weighed on the confidence of businesses and consumers. Against this backdrop, the September staff projections for economic growth were revised down markedly for the remainder of 2022 and throughout 2023.

Positive policy rates made the two-tier system for excess reserve remuneration obsolete

The increase in the key ECB interest rates by 75 basis points in September frontloaded the transition from a highly accommodative level of policy rates towards levels that would ensure the timely return of inflation to the ECB’s 2% medium-term target. The Governing Council said that, based on its assessment, it expected to raise interest rates further over the coming meetings to dampen demand and guard against the risk of a persistent upward shift in inflation expectations. Furthermore, since the deposit facility rate had been raised to above zero, the two-tier system for the remuneration of excess reserves was no longer necessary. The Governing Council therefore decided to suspend the two-tier system by setting the multiplier to zero. In addition, to preserve the effectiveness of monetary policy transmission and safeguard orderly market functioning, the Governing Council decided to temporarily remove the 0% interest rate ceiling for the remuneration of government deposits. The ceiling was temporarily set at the lower of either the deposit facility rate or the euro short-term rate (€STR), including under a positive deposit facility rate. The measure was intended to remain in effect until 30 April 2023 and was designed to prevent an abrupt outflow of deposits into the market, at a time when some segments of the euro area repo markets were showing signs of collateral scarcity, and to allow an in-depth assessment of how money markets were adjusting to the return to positive interest rates.

A third phase of policy normalisation: further rate hikes and balance sheet reduction

With inflation likely to stay high for an extended period, the Governing Council raised rates again by 75 basis points in October…

Inflation rose to 9.9% in September and 10.6% in October, the highest reading in the history of the single currency. Soaring energy and food prices, supply bottlenecks and the post-pandemic recovery in demand had led to a further broadening of price pressures and an increase in inflation over summer. Against this background, the Governing Council decided in October to raise the three key ECB interest rates again by 75 basis points, emphasising that with this third major policy rate increase in a row substantial progress had been made in withdrawing monetary policy accommodation.

…and aligned the TLTRO III terms and conditions with the broader policy normalisation

The Governing Council also decided in October to change the terms and conditions of TLTRO III. It adjusted the interest rates on the operations from 23 November, by indexing the interest rate paid to the average applicable key ECB interest rates, and offered banks three additional voluntary early repayment dates. During the acute phase of the pandemic, this instrument played a key role in countering downside risks to price stability. In view of the unexpected and extraordinary rise in inflation, however, it needed to be recalibrated to ensure consistency with the broader monetary policy normalisation process and to reinforce the transmission of policy rate increases to bank lending conditions. The Governing Council expected the recalibration of the TLTRO III terms and conditions to contribute to the normalisation of bank funding costs. The ensuing normalisation of financing conditions would, in turn, exert downward pressure on inflation, helping to restore price stability over the medium term. The recalibration also removed deterrents to voluntary early repayment of outstanding TLTRO III funds. Voluntary early repayments would reduce the Eurosystem balance sheet and thus contribute to the overall monetary policy normalisation. The recalibration of TLTRO III and the subsequent repayments led to a substantial decline in excess liquidity.

Finally, in order to align the remuneration of minimum reserves held by credit institutions with the Eurosystem more closely with money market conditions, the Governing Council decided to set the remuneration of minimum reserves at the deposit facility rate.

December saw the fourth rate hike in a row amid double-digit inflation and increasing recession risks

In December the Governing Council raised interest rates for the fourth time in a row, this time by 50 basis points, because inflation remained far too high and was projected to stay above the ECB’s target for too long. The Governing Council also said that interest rates would still have to rise significantly at a steady pace to reach levels that were sufficiently restrictive to ensure a timely return of inflation to the target. Keeping interest rates at restrictive levels would over time reduce inflation by dampening demand and also guard against the risk of a persistent upward shift in inflation expectations. Inflation was 10.1% in November, slightly lower than the 10.6% recorded in October. The decline resulted mainly from lower energy price inflation. Food price inflation and underlying price pressures across the economy had strengthened and were expected to persist for some time. Amid exceptional uncertainty, Eurosystem staff had significantly revised up their inflation projections in December, and saw average inflation reaching 8.4% in 2022 before decreasing to 6.3% in 2023, with inflation projected to decline markedly over the course of that year. Inflation was then seen falling further to an average of 3.4% in 2024 and 2.3% in 2025. The projections indicated that the euro area economy might contract around the turn of 2022/2023, owing to the energy crisis, high uncertainty, weakening global economic activity and tighter financing conditions. However, they saw a possible recession as likely to be relatively short-lived and shallow, while the growth outlook for 2023 had still been revised down significantly compared with the previous projections.

The Governing Council laid out the principles for normalising the balance sheet

In December the Governing Council also discussed principles for reducing the APP securities holdings. It decided that from the beginning of March 2023 onwards the APP portfolio would decline at a measured and predictable pace, as the Eurosystem would not reinvest all of the principal payments from maturing securities. The decline would amount to €15 billion per month on average until the end of the second quarter of 2023 and its subsequent pace would be determined over time. The Governing Council also highlighted that by the end of 2023 the ECB would review its operational framework for steering short-term interest rates, which would provide information regarding the endpoint of the balance sheet normalisation process.

Changes in the key ECB policy rates

(percentage points)

Source: ECB.

2.2 Eurosystem balance sheet developments as monetary policy normalises

In the first half of 2022 the growth of the Eurosystem balance sheet slowed as net purchases under the APP and the PEPP were phased out. In the second half the ongoing normalisation of monetary policy contributed to a gradual reduction of the balance sheet. The balance sheet reached its historical high in June at €8.8 trillion before net asset purchases under the APP were concluded as of 1 July (Chart 2.2). By the end of the year it had declined to €8.0 trillion, mainly on account of TLTRO III operations maturing as well as sizeable early repayments, especially after the TLTRO III terms and conditions were changed to align them with the broader monetary policy normalisation process.

At the end of 2022 monetary policy-related assets on the Eurosystem balance sheet amounted to €6.3 trillion, a decline of €0.7 trillion compared with the end of 2021. Loans to euro area credit institutions accounted for 17% of total assets (down from 26% at the end of 2021) and assets purchased for monetary policy purposes represented 62% of total assets (up from 55% at the end of 2021). Other financial assets on the balance sheet consisted mainly of foreign currency and gold held by the Eurosystem and euro-denominated non-monetary policy portfolios.

On the liabilities side, the overall amount of credit institutions’ reserve holdings and recourse to the deposit facility decreased to €4.0 trillion at the end of 2022 (from €4.3 trillion at the end of 2021) and represented 50% of total liabilities (in line with the percentage at the end of 2021). Banknotes in circulation grew to €1.6 trillion (from €1.5 trillion at the end of 2021) and accounted for 20% of total liabilities (up from 18%).

Evolution of the Eurosystem’s consolidated balance sheet

(EUR billions)

Source: ECB. Notes: Positive figures refer to assets and negative figures to liabilities. The line for excess liquidity is presented as a positive figure, although it refers to the sum of the following liability items: current account holdings in excess of reserve requirements and recourse to the deposit facility.

APP and PEPP portfolio distribution across asset classes and jurisdictions

The APP comprises four asset purchase programmes: the third covered bond purchase programme (CBPP3), the asset-backed securities purchase programme (ABSPP), the public sector purchase programme (PSPP) and the corporate sector purchase programme (CSPP). The PEPP was introduced in 2020 in response to the pandemic. All asset categories that are eligible under the APP are also eligible under the PEPP; a waiver of the eligibility requirements has been granted for securities issued by the Hellenic Republic. The Eurosystem completed net purchases under the PEPP at the end of March 2022 and under the APP as of 1 July 2022, while it continued reinvesting the principal payments from maturing securities under both programmes in full. Purchases continued to be conducted in a smooth manner and in line with the respective prevailing market conditions.

APP holdings were €3.3 trillion at the end of 2022

At the end of 2022 APP holdings amounted to €3.3 trillion (at amortised cost). The PSPP accounted for the bulk of these holdings, with €2.6 trillion or 79% of total APP holdings at the end of the year. Under the PSPP, the allocation of purchases to euro area jurisdictions was guided by the ECB’s capital key on a stock basis. In addition, some national central banks purchased securities issued by EU supranational institutions. The weighted average maturity of the PSPP holdings stood at 7.2 years at the end of 2022, with some variation across jurisdictions. The ABSPP accounted for less than 1% (€23 billion) of total APP holdings at year-end, the CBPP3 for 9% (€302 billion) and the CSPP for 11% (€344 billion). Of the private sector purchase programmes, the CSPP contributed the most to the growth in APP holdings in 2022, with €34 billion of net purchases. Corporate and covered bond purchases are guided by benchmarks which reflect the market capitalisation of all eligible outstanding corporate and covered bonds respectively. As of October 2022 climate change considerations were incorporated into the corporate sector benchmark – more details can be found in Section 11.5. [ 8 ]

PEPP holdings were €1.7 trillion at the end of 2022

At the end of 2022 PEPP holdings amounted to €1.7 trillion (at amortised cost). Covered bond holdings accounted for less than 1% (€6 billion) of the total, corporate sector holdings for 3% (€46 billion) and public sector holdings for 97% (€1,629 billion).

For the purchases of public sector securities under the PEPP, the benchmark allocation across jurisdictions is the ECB’s capital key on a stock basis. At the same time, purchases were conducted in a flexible manner, which led to fluctuations in the distribution of purchase flows over time, across asset classes and among jurisdictions. The weighted average maturity of the PEPP public sector securities holdings stood at 7.6 years at the end of 2022, with some differences across jurisdictions.

The Eurosystem reinvested the principal payments from maturing securities held in the APP and PEPP portfolios. Redemptions of private sector securities amounted to €77 billion in 2022, while redemptions of public sector securities under the PSPP and PEPP amounted to €446 billion. The assets purchased under the PSPP, CSPP, CBPP3 and PEPP continued to be made available for securities lending to support bond and repo market liquidity. Owing to the increase in demand for securities amid collateral scarcity in repo markets, the Governing Council decided in November 2022 to increase the Eurosystem limit for securities lending against cash collateral to €250 billion.

Developments in Eurosystem refinancing operations

At the end of 2022 the outstanding amount of Eurosystem refinancing operations was €1.3 trillion, representing a decline of €878 billion compared with the end of 2021. This change mainly reflects voluntary early repayments (€826 billion) and the maturing of operations (€54 billion) under the TLTRO III series. Of the early repayments, €744 billion occurred following the change in the TLTRO III terms and conditions which took effect on 23 November 2022. Additionally, the pandemic emergency longer-term refinancing operations (PELTROs) had mostly matured by the end of 2022, with only €1 billion outstanding, compared with €3.4 billion at the end of 2021. The weighted average maturity of outstanding Eurosystem refinancing operations decreased from around 1.7 years at the end of 2021 to 0.9 years at the end of 2022.

Gradual phasing-out of pandemic collateral easing measures

In March 2022 the ECB announced the gradual phasing-out of pandemic-related collateral easing measures . These measures were a core element of the ECB’s monetary policy response to the pandemic, making it easier for banks to access Eurosystem credit operations and increasing the volume of eligible collateral. According to ECB staff estimates, roughly 10% of the total collateral mobilised at the end of February 2022 was attributable to the easing measures. [ 9 ] This contribution was predominantly driven by the temporary reduction in valuation haircuts across all asset classes by a fixed factor of 20% and the extensions to the additional credit claim (ACC) frameworks of some national central banks.

In the first step of the gradual phase-out, which started in July 2022, the temporary reduction in valuation haircuts was decreased from 20% to 10%. In addition, several measures with a more limited impact and scope were phased out. This included no longer maintaining the eligibility of certain downgraded marketable assets and issuers of these assets that had met the credit quality requirements on 7 April 2020 and restoring the 2.5% limit on unsecured debt instruments, in a credit institution’s collateral pool, issued by any single other banking group.

Two further steps in the phase-out will be implemented in June 2023 and March 2024. As part of the second step, a revision of the valuation haircut schedule will take effect from 29 June 2023 and will include the complete phase-out of the temporary reduction in valuation haircuts; the revision of the schedule is described in greater detail in Section 2.3. The remaining pandemic collateral easing measures will, in principle, be phased out in the third step in March 2024, following a comprehensive review of the ACC frameworks. The waiver of the minimum rating requirement for marketable debt securities issued by the Hellenic Republic will continue to apply for at least as long as reinvestments in Greek government bonds under the PEPP continue.

Developments in eligible marketable assets and mobilised collateral

The amount of eligible marketable assets increased by €759 billion in 2022, reaching a level of €17.1 trillion at the end of the year (Chart 2.3). Central government securities continued to be the largest asset class (€9.3 trillion). Other asset classes included corporate bonds (€1.9 trillion), covered bank bonds (€1.7 trillion) and unsecured bank bonds (€1.7 trillion). Regional government securities (€595 billion), asset-backed securities (€562 billion) and other marketable assets (€1.3 trillion) each accounted for a comparatively small fraction of the eligible assets universe.

Developments in eligible marketable assets

Source: ECB. Notes: Asset values are nominal amounts. The chart shows averages of end-of-month data for each period.

Mobilised collateral decreased by €314 billion to €2.5 trillion at the end of 2022 (Chart 2.4). Credit claims (including ACCs), for which mobilised amounts stood at €881 billion, continued to represent the most important asset class used as collateral. Covered bank bonds (€640 billion), asset-backed securities (€392 billion) and central government securities (€330 billion) were also mobilised to a considerable extent. Unsecured bank bonds, regional government securities and corporate bonds were used to a lesser extent, accounting for €113 billion, €62 billion and €55 billion respectively.

Developments in mobilised collateral

Source: ECB. Notes: Since the first quarter of 2013 “non-marketable assets” has been split into “credit claims” and “fixed-term and cash deposits”. For collateral, the averages of end-of-month data for each period are shown, and values are after valuation and haircuts. For outstanding credit, daily data are used.

2.3 Financial risks in times of monetary policy normalisation

Risk efficiency is a key principle of the Eurosystem’s risk management function

All monetary policy instruments involve financial risks, which the Eurosystem manages through specific risk management frameworks when pursuing its monetary policy objectives. When there are several ways to implement policy, the Eurosystem’s risk management function endeavours to attain risk efficiency: achieving the policy objectives with the lowest possible amount of risk for the Eurosystem. [ 10 ]

In 2022, in view of the gradual normalisation of monetary policy and in line with the climate change action plan set out by the Governing Council, the Eurosystem made changes to its risk management frameworks. The Governing Council decided to gradually phase out the collateral easing measures it had introduced in response to the pandemic and to restore pre-pandemic risk tolerance levels in the Eurosystem’s credit operations. It also introduced climate change considerations in the framework for purchases of corporate sector securities. Rising interest rates will reduce the Eurosystem’s profitability in the foreseeable future.

Regular review of the risk control framework for credit operations

The updated haircut schedule will be implemented in mid-2023

In 2022 the ECB carried out its regular review of the risk control framework for monetary policy credit operations, resulting in an updated haircut schedule. The outcome of the review will be implemented in June 2023 with the second step of the gradual phase-out of the collateral easing measures. The phase-out process is explained in Section 2.2. This approach will gradually restore the Eurosystem’s pre-pandemic risk tolerance levels for credit operations, while at the same time avoiding cliff effects as regards collateral availability.

The main changes in the haircut schedule can be summarised as follows: (i) EU bonds (debt instruments issued by the European Union) will be moved to haircut category I from haircut category II and thus treated in the same way as debt instruments issued by central governments; (ii) all legislative covered bonds and multi-cédulas will be in haircut category II, thus removing the distinction between jumbo and other covered bonds; (iii) haircuts will be the same for marketable debt instruments with both variable and fixed coupons; (iv) the longest residual maturity category (over ten years) will be split into three to better cover the risks of long-dated bonds; (v) the flat 5% theoretical valuation markdown will be replaced with a markdown that varies by maturity and its application will be extended to all theoretically valued marketable assets except those in haircut category I.

Overall, the complete phase-out of the temporary reduction in valuation haircuts, based on an updated haircut schedule, will ensure an adequate level of risk protection, improve the consistency of the framework and enhance the risk equivalence of assets, while ensuring collateral availability.

Managing risks of the asset purchases in the APP and the PEPP

In 2022 asset purchases continued to be conducted for monetary policy purposes under the APP and PEPP, for which specific financial risk control frameworks are in place. These take into account the policy objectives of the programmes as well as the features and risk profiles of the different asset types purchased. The frameworks consist of eligibility criteria, credit risk assessments and due diligence procedures, pricing frameworks, benchmarks and limits. They apply to net asset purchases, the reinvestment of principal payments from maturing holdings, and the holdings for as long as they remain on the Eurosystem’s balance sheet. Table 2.1 summarises the current key elements of these frameworks, reflecting changes introduced in 2022.

Future purchases of commercial paper are expected to be limited

As part of the policy response to the pandemic, the Eurosystem made substantial purchases of commercial paper under the PEPP. In view of the discontinuation of net asset purchases under the PEPP and the APP, future commercial paper purchases are generally expected to be limited. Any future commercial paper purchases will be focused on the APP and be conducted at backstop pricing levels. [ 11 ]

Corporate sector reinvestments were tilted towards issuers with a better climate performance

From October 2022 onwards the Eurosystem tilted its reinvestments of principal payments from maturing corporate sector securities towards issuers with a better climate performance. This measure is further explained in Section 11.5. [ 12 ]

Key elements of the risk control frameworks for the APP and the PEPP

Source: ECB. Notes: ABS: asset-backed security; CAC: collective action clause; CQS: credit quality step as per the Eurosystem’s harmonised rating scale ( see the “ Eurosystem credit assessment framework ” page on the ECB’s website). 1) ABSs rated below credit quality step 2 have to satisfy additional requirements, which include: (i) no non-performing loans backing the ABS at issuance or added during the life of the ABS; (ii) the cash-flow-generating assets backing the ABS must not be structured, syndicated or leveraged; and (iii) servicing continuity provisions must be in place. 2) See the “ Implementation aspects of the public sector purchase programme (PSPP) ” page on the ECB’s website.

Rising interest rates can affect Eurosystem profits

As interest rates rise, central bank interest expenses initially increase faster than income

The ECB increased its key interest rates several times in 2022 in response to the extraordinarily large shocks to the inflation outlook. The higher interest rates in turn affect the profits of the ECB and of the national central banks of the euro area countries and may even result in financial losses. This is due to the fact that, in the short and medium term, the cost of the liabilities on central bank balance sheets is more sensitive to interest rates than the income generated by their assets. Over time, the income earned on the Eurosystem’s assets is also expected to rise, which will improve profitability.

In previous years financial buffers have been built up that can be used to offset potential losses. If these buffers are fully utilised, any remaining losses can be recorded on the balance sheet and can be offset with future profits, without directly affecting the ability of the Eurosystem central banks to operate effectively. [ 13 ]

3 European financial sector: financial stability conditions deteriorate

Financial stability conditions deteriorated in the euro area over the course of 2022 amid high inflation, tighter financial conditions and weaker growth prospects. Key vulnerabilities increased throughout the year. They included: i) debt sustainability concerns as regards some firms, households and sovereigns; ii) financial asset valuations that may not have reflected the more negative outlook for growth, inflation and financial conditions, iii) stretched property market valuations, iv) increased credit risk for banks, and v) credit and liquidity risk exposures among non-bank financial institutions. To address the risks arising from these vulnerabilities, macroprudential authorities gradually tightened capital-based and/or borrower-based policy measures. In addition, work continued on strengthening the regulatory framework for banks and the macroprudential approach as regards non-bank financial institutions to further increase the long-term resilience of the financial system.

3.1 The financial stability environment in 2022

Financial stability risks increased as macro-financial conditions weakened

Financial stability conditions deteriorated in the euro area over the course of 2022, reflecting high inflation, tighter financial conditions and weaker growth prospects. Russia’s invasion of Ukraine triggered large rises in commodity and energy prices which, together with global supply chain pressures, fuelled inflationary pressures. This led major central banks to adjust their monetary policy stance, which contributed to tighter global financial conditions, greater financial market volatility and asset price corrections. Large-scale fiscal support at a time of rising government bond yields resulted in increased debt servicing costs, particularly for more indebted countries, while high inflation weighed on households’ real incomes and firms’ costs. As a result, while euro area banks benefited from higher interest rates, concerns rose over the quality of their assets. Non-bank financial institutions continued to face elevated credit and liquidity risk, although they took steps to reduce portfolio risk levels to some extent.

High inflation, recession risks and tighter financial conditions posed challenges for indebted sovereigns, firms and households

High inflation and a tightening of financial conditions weighed on the financial situation of sovereigns, firms and households in 2022. With already high debt levels stemming from the pandemic, euro area governments provided renewed sizeable fiscal support to attenuate the impact of higher energy prices and inflation. At the same time, government bond yields increased sharply, which revived concerns about fragmentation in euro area sovereign debt markets. These were mitigated to some extent by policy action such as the announcement of the ECB’s Transmission Protection Instrument. In the corporate sector, higher energy and commodity prices posed challenges for, particularly, those energy-intensive sectors that were less able to pass on higher costs to customers, such as some utility and construction firms. Small and medium-sized enterprises benefited less than larger firms from the post-pandemic rebound in economic activity and remained particularly vulnerable to a slowdown in economic activity and higher borrowing costs. Households’ ability to service debt was weakened by the erosion of real disposable income and savings by high inflation, combined with higher interest rates, particularly in countries where household debt levels are higher. While property price growth remained strong in the euro area, there were signs that the real estate expansion of recent years could come to an end, as overvaluation estimates were elevated, rates on new mortgages rose and mortgage growth slowed. A turn in the real estate cycle may compound the vulnerabilities in euro area household incomes and financial situations.

Financial markets saw large price corrections as interest rates rose

Euro area financial markets saw large price falls in 2022, mainly reflecting the direct impact of higher interest rates. While these corrections were generally orderly, there was an unusually strong co-movement in prices across a wide range of asset classes, which complicated diversification strategies. However, in the second half of 2022 and especially after September, stock market indices diverged from bond market performance and increased across Europe, supported by rising banking indices. Activity in primary markets – including initial public share offerings and issuance of high-yield corporate bonds – fell significantly compared with the previous year. Despite the market corrections, the prices of some risky assets still appeared stretched and may not have fully reflected the more negative outlook for growth, inflation and financial conditions. In addition, large shifts in commodity prices and related margin requirements posed challenges to liquidity management for some participants in derivative markets.

Higher interest rates supported bank profits, but funding costs rose and asset quality appeared at risk

Euro area bank profitability remained robust in 2022, underpinned by lower operating expenses, still low loan loss provisions and higher operating income thanks to wider margins and higher lending volumes. Despite a significant worsening of the economic outlook, the quality of euro area banks’ assets showed no signs of a broad-based deterioration, with the non-performing loan ratio falling further. However, trends in “underperforming” loans (Stage 2 of the three categories under the IFRS 9 international financial reporting standard) suggested some increase in credit risk. Higher interest rates could increase credit risks stemming from banks’ exposures to vulnerable sectors, which have grown in recent years, notably including residential real estate markets. On the liability side, bond funding costs rose markedly for banks during 2022, driven predominantly by expectations of monetary policy actions. In addition, rising rates on new deposits and maturing funds under the third series of targeted longer-term refinancing operations (TLTRO III) started to translate into higher average funding costs for banks. These growing cyclical headwinds were compounded by longer-term challenges stemming from low cost-efficiency, limited revenue diversification and overcapacity in parts of the euro area banking sector.

Credit risk exposure of the non-bank financial sector remained high

Non-bank financial institutions’ overall exposures to credit risk remained high in 2022, which put them at risk of substantial credit losses in the event of a significant deterioration in corporate sector fundamentals, especially in energy-intensive industries. In addition to liquidity needs stemming from investor redemptions, insurance policy lapses and margin calls, the broad-based fall in financial asset prices was the main driver of a significant decline in the total value of assets in the non-bank financial sector. While the cash holdings of investment funds rose from early 2022, their holdings of liquid assets remained relatively low, making them likely to amplify a market correction via procyclical selling behaviour should an adverse scenario trigger large redemptions. Non-banks’ duration risk remained elevated too, exposing the sector to further bond portfolio revaluation losses. However, particularly the life insurance and pension fund sectors stand to benefit from the transition to a higher interest rate environment because of their structural negative duration gaps. That said, non-banks responded to rising yields and a worsening economic outlook by starting to reduce their holdings of lower-rated corporate and sovereign bonds, thereby lowering risk in their portfolios.

In addition to risks for individual sectors, climate change continued to pose risks to financial stability in the euro area in 2022. Euro area banks, funds and insurers need to manage the implications of the transition to a greener economy, including concentration risks associated with climate-related exposures. Furthermore, increasing cyber risks threatened the euro area financial system, underlining the need for financial institutions to invest continuously in cyber infrastructures and security and for authorities to increase monitoring.

3.2 Macroprudential policy measures to build up financial sector resilience to accumulated vulnerabilities

Macroprudential policies are a key instrument to address financial stability vulnerabilities

The ECB has the task of assessing macroprudential capital measures for banks planned by national authorities in countries participating in the Single Supervisory Mechanism (SSM), the system of banking supervision in Europe. Importantly, the ECB has the power to apply more stringent capital measures if necessary. [ 14 ] This role was particularly important in 2022 owing to the macro-financial vulnerabilities that had built up in recent years, including during the pandemic.

Promoting financial system resilience and identifying priorities for regulatory reform

Although the macroeconomic outlook and financial stability conditions deteriorated in the euro area during 2022, banks under European banking supervision remained in a good position to withstand the unfolding economic challenges. Regulatory advances and an active use of prudential policies had resulted in stronger bank balance sheets and capital positions. At the same time, accumulated vulnerabilities, related in particular to residential real estate developments but also, more broadly, to strong credit growth and increasing indebtedness in the non-financial private sector, posed medium-term risks. Russia’s invasion of Ukraine made the macro-financial situation more challenging, compounding these vulnerabilities and increasing the likelihood of risks materialising in the near term.

To address these medium-term risks, a significant number of the countries participating in European banking supervision decided to tighten capital-based macroprudential measures. By the end of 2022, 11 countries had announced an increase in the countercyclical capital buffer and three countries had introduced a (sectoral) systemic risk buffer or announced an increase. [ 15 ] The ECB exchanged views with the national authorities and assessed the measures. It did not object to the decisions, which were considered consistent with its own assessment of the need to preserve resilience in the banking sector. By the end of 2022 15 countries had also applied borrower-based macroprudential measures.

In November 2022 the Governing Council issued a statement highlighting the role of macroprudential capital buffers in preserving and strengthening banking sector resilience in a challenging macro-financial environment. [ 16 ] Tightening capital buffers, even late in the economic or financial cycle, provided that procyclical effects are avoided, shields against accumulated vulnerabilities and helps make capital available when needed as the buffers can be released if adverse developments materialise. In turn, this boosts the capacity of banks to absorb losses while continuing to provide key financial services to the economy. The statement noted the existing capital headroom above regulatory requirements and highlighted the need to avoid procyclical effects from an excessive tightening of credit conditions, in particular by properly tailoring the macroprudential measures to the specific conditions in each country. It also referred to the importance of addressing financial stability risks in the non-bank financial sector from a systemic risk perspective. In December 2022 the Governing Council announced that it had revised the floor methodology for capital buffers applicable to other systemically important institutions (O-SIIs). The revised methodology will make systemically important banks more resilient and will apply from 1 January 2024.

The ECB continued to communicate its analysis and views on macroprudential policy topics in 2022. It expressed the view that, over the medium term, the resilience of the financial system would be reinforced by creating more macroprudential space through an increase in the amount of releasable buffers, and by enhancing the effectiveness of the existing countercyclical capital buffers. [ 17 ] In addition, the macroprudential policy chapters of the May and November 2022 issues of the ECB’s Financial Stability Review explained why it was important to strengthen banking system resilience in a timely manner, while adjusting the timing and pace of the prudential measures to heightened uncertainty and country-specific conditions. [ 18 ] Last but not least, with the accumulation of vulnerabilities in real estate markets over recent years duly receiving renewed attention, the ECB dedicated the October 2022 issue of its Macroprudential Bulletin to analysing the interplay between real estate markets, financial stability and macroprudential policy.

Cooperation with the European Systemic Risk Board

The ESRB published a significant number of recommendations and warnings in response to systemic risk

In 2022 the ECB continued to provide analytical, statistical, logistical and administrative support to the European Systemic Risk Board (ESRB) Secretariat. [ 19 ] Notably, the ECB co-chaired an ESRB drafting team responding to the European Commission’s call for advice on the review of the EU macroprudential framework. [ 20 ] The ECB also supported the ESRB’s work on: (i) a macroprudential strategy on the risks to financial stability stemming from cyber incidents; [ 21 ] (ii) policy reforms aimed at increasing the resilience of money market funds; [ 22 ] (iii) monitoring vulnerabilities related to non-bank financial intermediation; [ 23 ] (iv) the measurement and modelling of climate-related risks to EU financial stability; [ 24 ] and (v) analysing vulnerabilities in the European Economic Area commercial real estate sector. [ 25 ]

In 2022 the ESRB issued several warnings and recommendations. In January and February it published recommendations on increasing the resilience of money market funds and on establishing a systemic cyber incident coordination framework [ 26 ] as well as five warnings and two recommendations on vulnerabilities in the residential real estate sector. [ 27 ] Amid increasing risks to financial stability, the ESRB published its first general warning in September 2022. [ 28 ] In addition, the ESRB issued a recommendation concerning vulnerabilities in the commercial real estate sector in December 2022. [ 29 ]

More detailed information on the ESRB can be found on its website and in its Annual Reports .

3.3 Microprudential activities to ensure the soundness of individual banks

The euro area banking sector proved resilient to the macroeconomic and financial effects of Russia’s war in Ukraine

Following Russia’s invasion of Ukraine the ECB conducted a vulnerability analysis which confirmed the overall resilience of the euro area banking sector to the macroeconomic and financial consequences of the war. However, as a result of sanctions put in place, some banks left the market. In February the ECB assessed that Sberbank Europe AG and its two subsidiaries in the banking union, Sberbank d.d. in Croatia and Sberbank banka d.d. in Slovenia, were failing or likely to fail owing to a deterioration of their liquidity situation. Moreover, the ECB took decisions related to RCB Bank phasing out its banking operations.

In 2022 the ECB adjusted the focus of its targeted reviews and on-site inspections to the risks most directly affected by the war: energy-related exposures, interest rate risk in the banking book, real estate exposures and counterparty credit risk. These pockets of risk, as well as pronounced uncertainty over the macroeconomic outlook and persistent concerns about banks’ governance and internal risk controls, meant that banks’ overall scores did not improve in the 2022 Supervisory Review and Evaluation Process despite better asset quality and profitability metrics. To account for possible impacts of the war and the normalisation of monetary policy, geopolitical and funding risks were included in the 2023-25 supervisory priorities.

The ECB made decisive progress towards its climate risk agenda with the first dedicated stress test and a thematic review

The ECB also took decisive steps forward on its climate risk agenda. The first supervisory climate risk stress test assessed how prepared banks were to anticipate and manage financial and economic shocks stemming from climate risk. The results, published in July, showed that banks did not yet sufficiently incorporate climate risk into their stress-testing frameworks and internal models, despite some progress made since 2020. Moreover, in November the ECB published the results of the 2022 thematic review on climate-related and environmental risks , which concluded that most banks still needed to improve their risk practices to meet the supervisory expectations set out in the ECB Guide on climate-related and environmental risks . Two reports compiling good practices observed in the review and in the stress test were published in November and December.

As part of its continued effort to enhance transparency and accountability, on 28 September 2022 the ECB launched a public consultation on its draft Guide on qualifying holding procedures . The ECB also clarified its policies for exercising options and discretions when supervising banks, following a public consultation which ended on 30 August 2021. In June 2022 the ECB issued a statement on the methodology that would be used for exercising supervisory discretion regarding cross-border intra-banking union exposures in the assessment framework for global systemically important banks (G-SIBs).

Three banks were sanctioned by the ECB in 2022. [ 30 ]

Finally, the ECB published two supervisory Memoranda of Understanding (with the Single Resolution Board and Commissione Nazionale per le Società e la Borsa respectively) which were reviewed in 2022. ECB Banking Supervision also pursued its desk-mapping review of the international banks that had decided to relocate business from London, following Brexit, to subsidiaries in the countries participating in European banking supervision, to ensure that all entities supervised by the SSM have prudentially sound risk management arrangements and a local presence which enables effective supervision and is commensurate with the risks they originate.

More detailed information on ECB Banking Supervision can be found on its website and in the 2022 ECB Annual Report on supervisory activities .

3.4 The ECB’s contribution to European financial sector policy initiatives

Significant progress was made on improving the regulatory framework

Significant progress was made on the regulatory framework for the financial sector in 2022. At the same time, further work remains to be done on implementing the final Basel III reforms, completing the banking union, improving the macroprudential framework and tackling climate risk, as well as on regulating crypto-assets, capital markets and non-bank financial institutions.

Improving the regulatory framework for banks

Work on banking regulation in the EU focused on Basel III, crisis management, the macroprudential framework and climate risks

The European Commission published its proposals for implementing the Basel III reforms in the EU on 27 October 2021. Since then, the ECB has actively supported the legislative process. In 2022 it published opinions on the proposed revisions to the Capital Requirements Regulation and the Capital Requirements Directive. [ 31 ] It also communicated its views on the banking package on several occasions. [ 32 ]

The discussions on completing the banking union continued in 2022, with the active involvement of the ECB. As agreed by the Eurogroup in June, work will now focus on strengthening the crisis management framework for banks, and in July the ECB published a contribution to the European Commission’s targeted consultation on the evaluation of State aid rules for banks in difficulty .

The review of the macroprudential framework in the EU, aimed at ensuring that the relevant authorities can address systemic risks in a timely, consistent and comprehensive manner across jurisdictions, was another important workstream for the ECB in 2022. In its response to the European Commission’s call for advice , the ECB identified a number of priority areas where legislative action was needed to increase the efficiency and effectiveness of the EU macroprudential toolkit.

As part of its overall climate agenda , the ECB continuously monitored climate-related financial risks and contributed to European and international policy discussions. It published a report, jointly with the ESRB, that showed how climate shocks can affect the financial system . The report assessed the scope for macroprudential policies as part of a broader policy response, to complement microprudential efforts to address the financial impact of climate change. On the microprudential side, the ECB conducted an assessment of banks’ disclosures and a thematic review of climate-related and environmental risks, as well as a climate stress test (see Section 3.3). Furthermore, the ECB participated in the work of the Basel Committee on Banking Supervision (BCBS) Task Force on Climate-related Financial Risks, which published frequently asked questions clarifying how climate-related financial risks may be addressed through existing regulatory standards, as well as principles for the effective management and supervision of climate-related financial risks. At the EU level, the ECB contributed to the European Banking Authority’s analysis on the role of environmental risks in the prudential framework.

Strengthening regulation of capital markets and non-bank financial institutions and developing a regulatory framework for crypto-assets

For the non-bank financial sector, regulatory efforts focused on capital markets union, structural vulnerabilities and crypto-assets

In 2022 the ECB continued to highlight the importance of advancing the capital markets union. [ 33 ] It published several opinions on legislative proposals, including on i) enhancing market transparency , ii) the establishment and functioning of the European Single Access Point , iii) central securities depositories and iv) the Alternative Investment Fund Managers Directive . The ECB also reiterated the need to implement the European Commission’s 2020 capital markets union action plan in full and without delay, welcoming the legislative proposals published in December 2022. These proposals address structural impediments to EU capital market integration, such as national differences in insolvency rules. The proposals will also make it less burdensome for companies to list securities and raise capital on public exchanges and will strengthen the EU central clearing system. The ECB called for further progress on investor protection and harmonisation of taxation, for cross-border supervision of capital markets to be strengthened and for venture capital frameworks to be harmonised across the euro area to support equity and risk capital markets and make it easier to finance innovation.

The ECB continued to highlight the importance of addressing structural vulnerabilities in the non-bank financial sector and improving the relevant policy framework from a macroprudential perspective. Policy proposals to address liquidity mismatch in the money market fund sector were reviewed in the ECB’s Macroprudential Bulletin and the ECB also contributed to the economic rationale supporting the ESRB recommendation on reforming money market funds , published in January 2022. [ 34 ] The ECB has continued to stress that the implementation of such reforms must not be delayed. As regards open-ended investment funds, the ECB contributed to the assessment by the Financial Stability Board (FSB) of the effectiveness of the FSB’s 2017 recommendations on the structural liquidity mismatch in such funds. [ 35 ] The FSB will now revise the recommendations to better address the mismatch. [ 36 ]

The ECB also actively contributed to the discussions on a regulatory framework for crypto-assets in international fora such as the FSB, the BCBS and the Committee on Payments and Market Infrastructures (CPMI). [ 37 ] Important progress was made on ensuring that all crypto-asset activities posing a risk to financial stability will become subject to comprehensive, globally coordinated regulation, supervision and oversight and that there is a globally agreed prudential treatment of banks’ crypto-asset exposures .

Box 2 Strong rules, strong banks – the banking package

In 2022 the ECB published its opinions on the European Commission’s proposed amendments to the Capital Requirements Directive (CRD VI) and the Capital Requirements Regulation (CRR III), which are two main elements in the EU’s latest “banking package”. [ 38 ] These proposals aim to implement the outstanding Basel III rules in the EU, as well as to further strengthen the EU prudential framework, for example by increasing harmonisation and closing regulatory loopholes, and by putting more focus on environmental, social and governance risks. The ECB strongly supports these aims. Stronger rules make stronger banks, and will therefore benefit the resilience of the EU banking system.

Implementing the outstanding Basel III rules

Implementing the outstanding elements of the Basel III standards is the final step in the overhaul of global financial regulation in response to the global financial crisis. These rules have been developed and agreed upon internationally, by central banks and bank supervisors, in response to the lessons from the crisis. They also incorporate proposals and adjustments put forward by European representatives in the Basel Committee.

The ECB has consistently argued for a full, timely and faithful implementation of the Basel III standards in the EU. This will be decisive in keeping the EU’s banking system safe and sound. The legislative proposal put forward by the European Commission in October 2021 includes several deviations from the agreed Basel III rules, about which the ECB raised concerns in its opinions. In particular, the ECB pointed out that the proposal for the Capital Requirements Regulation includes transitional arrangements for exposures to real estate and unrated corporates that deviate from the Basel III standards. These deviations are not justified from a prudential and financial stability perspective and may leave pockets of risk unaddressed. In the ECB’s view all deviations should be removed or, if kept, made limited and strictly temporary. However, during the ongoing legislative process, proposals and calls have been made by co-legislators to deviate even further from the Basel III standards than proposed by the European Commission. Such additional deviations would further weaken the safety net which Basel III provides and widen the gap between EU regulation and these important international minimum standards. They would also make the regulatory system more complex, raise compliance costs for banks and complicate the work of supervisors. In sum, lowering regulatory standards below the international minimum would put the safety and competitiveness of the EU banking sector at risk, and increase its funding costs.

Furthermore, too many significant adjustments versus the Basel III standards could call the EU’s compliance with the Basel III framework into question. Not complying with Basel III could weaken the reputation of the EU, potentially jeopardising its standing in future international negotiations. In addition, not upholding global consistency in the implementation of the standards could initiate a race to the bottom among jurisdictions in financial regulation. This would be unfortunate, as the pandemic has demonstrated that strong banks are a source of resilience. [ 39 ] This increased resilience of the banking sector comes largely from the Basel standards that have already been implemented and should be upheld through faithful implementation of the remaining rules.

Strengthening banking regulation: more harmonisation and closing loopholes

Certain supervisory rules and powers are not yet harmonised in the EU. The banking package suggests further harmonisation, so that rules and powers can be applied consistently to banks regardless of the country in which they are headquartered. Among other changes, the banking package proposes the following measures.

The harmonisation of supervisory rules and powers will make the ECB’s banking supervision more effective and create a more integrated and resilient banking sector.

Focus on environmental, social and governance risks

Environmental, social and governance (ESG) risks matter for the stability of both individual banks and the financial system as a whole, especially in view of climate change. The ECB therefore welcomes the inclusion of the requirement for banks to manage all material risks, including ESG risks, in the proposed banking package.

The banking package includes a new legal requirement for banks to prepare specific plans to monitor and address ESG risks arising in the short, medium and long term. This will ensure that banks thoroughly assess the structural changes that are likely to occur within the industries they are exposed to, according to the transition pathways determined by the EU legal framework. [ 41 ]

Timeline of the legislative process of the banking package

Source: ECB. Note: Trilogue: a process of negotiation between the European Commission, the EU Council and the European Parliament. ECOFIN: Economic and Financial Affairs Council. ECON: the European Parliament Committee on Economic and Monetary Affairs.

4 Smooth functioning of market infrastructure and payments

The Eurosystem plays a central role in developing, operating and overseeing market infrastructure and arrangements that facilitate the safe and efficient flow of payments, securities and collateral across the euro area. It also acts as a catalyst for integration and innovation in the payments and securities market. In 2022 the Eurosystem reviewed and renewed existing market infrastructure, policies and strategies, and explored new technologies and a potential digital euro.

4.1 TARGET Services and innovation and integration of market infrastructure and payments

The Eurosystem’s TARGET Services consist of three settlement services: TARGET2, a real-time gross settlement system (RTGS) for euro payment transactions supporting the Eurosystem’s monetary policy operations, bank-to-bank transfers and commercial payments; TARGET2-Securities (T2S), a single multi-currency platform for securities settlement in Europe; and TARGET Instant Payment Settlement (TIPS), which settles instant payments in central bank money.

For the first time, more than 100 million payments per year were processed by TARGET2

Approximately 1,000 banks use TARGET2 to initiate transactions in euro, either on their own behalf or on behalf of their customers. Taking into account branches and subsidiaries, more than 41,000 banks worldwide can be reached via TARGET2. In 2022 TARGET2 processed on average 399,653 payments per day with an average daily value of €2.219 trillion. This was a 7% increase in the daily volume of payments compared with 2021. For the first time, TARGET2 processed more than 100 million payments per calendar year.

In 2022 TARGET2 achieved 100% technical availability. Furthermore, the Eurosystem largely implemented the action plan to address the TARGET Services incidents that occurred in 2020. [ 42 ]

To verify the high level of cybersecurity of TARGET2, a TIBER-EU [ 43 ] test was performed in 2022. TIBER-EU tests mimic the tactics, techniques and procedures of real-life cyber attackers, based on bespoke threat intelligence. Performing such tests contributes to a deeper understanding of the ability of TARGET2 to withstand cyberattacks.

Following the formal approval of Croatia’s accession to the euro area on 1 January 2023, preparatory testing and the required coordination activities with Hrvatska narodna banka and the Croatian financial community for the migration from the national RTGS system to TARGET2 were conducted throughout 2022.

The launch of T2 was rescheduled

In line with technological developments, new regulatory requirements and changing user demands, the Eurosystem has been working on implementing T2, a new RTGS system and central liquidity management function that optimises liquidity management across all TARGET Services. The launch of T2 , which was planned for November 2022, was rescheduled to March 2023.

The T2S platform connects 19 central securities depositories (CSDs) from 20 European markets, allowing securities settlement in euro and Danish kroner. In 2022 T2S processed an average of 707,879 transactions per day with an average daily value of €716.67 billion. In addition, the Croatian CSD (SKDD), the Bulgarian CSD (CDAD ) and the Bulgarian National Bank Government Securities Settlement System signed the T2S Framework Agreement in 2022 and are assessing suitable migration dates. Testing activities for onboarding new CSDs to T2S will continue in 2023.

Two major enhancements to T2S took place in 2022. First, the penalty mechanism functionality to support the CSDs in complying with their obligations under the Central Securities Depository Regulation (CSDR) settlement discipline regime moved from the dry run phase into production. Second, the deployment of release 6.0 of the T2S platform allowed for the adoption of components that will be shared across the TARGET Services (so-called common components) within T2S.

To support the rollout of instant payments in the euro area, the Eurosystem finalised the implementation of measures to ensure pan-European reachability via TIPS . As more banks and national communities joined TIPS, transaction volumes increased 17.1 times compared with 2021, peaking at 18.7 million transactions in December 2022 (compared with 1.6 million in December 2021). Given the European Commission’s legislative proposal to oblige EU payment service providers that already offer credit transfers in euro to also offer their instant version within a defined period, it is expected that the rollout of instant payments in euro will accelerate further.

The multi-currency design of TIPS has been attracting interest from non-euro area central banks. In May 2022 Sveriges Riksbank successfully completed the first phase of migration to TIPS , paving the way for the instant settlement of payments in Swedish kronor in TIPS. Danmarks Nationalbank will offer settlement in Danish kroner on TARGET Services including TIPS in the second quarter of 2025. Norges Bank has also expressed an interest in potentially joining TIPS with its respective national currency. A possible cross-currency functionality that would allow instant payments between currencies settled on the platform is being explored.

In addition to the three settlement services, the Eurosystem is developing a new TARGET Service, the Eurosystem Collateral Management System (ECMS), which will be a unified system for managing the assets used as collateral in Eurosystem credit operations for all euro area jurisdictions. The launch of ECMS was moved from November 2023 to April 2024 to mitigate the impact of the rescheduled launch of T2.

With regard to the payments domain, the Eurosystem continues to pursue the goals set out in its retail payments strategy . This includes supporting a pan-European retail payment solution at the point of interaction (i.e. at the physical point of sale and in the mobile and e-commerce space, governed by European private sector entities), the full deployment of instant payments, and making improvements to cross-border payments. It also encompasses work on ensuring all Europeans have access to safe, efficient and convenient payments in view of the growing digitalisation of the economy. This work included publication of the report on the stock-take of accessibility to retail payments in the EU . Its key findings indicate that, while growing digitalisation poses particular challenges for vulnerable individuals and groups, it also provides opportunities for improving accessibility through dedicated innovative solutions.

Progress made on open banking promoted by the ERPB, a high-level strategic body chaired by the ECB

In parallel to promoting the Eurosystem retail payments strategy, the ECB supports work on developing innovative payment services, including at the level of the Euro Retail Payments Board ( ERPB ). In particular, the ERPB has been promoting progress in open banking, which enables third-party providers to access payment account-related data with the consent of banks’ customers, and to initiate payments via open application programming interfaces. This in turn allows third-party providers to offer convenient and attractive payment solutions. At the invitation of the ERPB, the European Payments Council (EPC) started work on a future SEPA Payment Account Access (SPAA) scheme setting out rules, practices and standards that will allow the exchange of payment accounts related data and facilitates the initiation of payment transactions of value-added services provided by banks to third-party providers. A first version of a SPAA scheme rulebook was published by the EPC in November 2022.

The Eurosystem explored ways of using DLT or other new technologies to provide central bank money for the settlement of wholesale financial transactions

Digital innovation is not only changing retail payment services but also wholesale financial transactions. Financial market stakeholders have been experimenting with new technologies, for example distributed ledger technologies (DLT), for a couple of years now. In order to better assess these technologies, on 23 March 2023 the EU launched a pilot regime for market infrastructures based on DLT , which will last for three years and is renewable once. This regime allows investment service providers, market undertakings and CSDs to operate a multilateral trading facility, a settlement system or a trading and settlement system based on DLT technology. In the hypothetical scenario that financial markets were to widely adopt DLT or other new technologies for wholesale transactions , the needs of the users of the Eurosystem’s wholesale settlement services, notably TARGET2 and T2S, might also change. To reduce risks to the financial system by ensuring that central bank money would retain its role as the safest settlement asset for wholesale financial transactions, the Eurosystem is exploring ways of using new technology for providing central bank money for the settlement of wholesale financial transactions. Careful analysis by the Eurosystem of the potential implications for governance, settlement efficiency and liquidity management is critical, while not implying any policy direction.

In line with its goal to further European financial market integration, the Eurosystem’s Advisory Group on Market Infrastructures for Securities and Collateral (AMI-SeCo) continued to report on the progress made by national markets towards compliance with the standards agreed under the Single Collateral management Rulebook for Europe (SCoRE) initiative. In the H2 2022 SCoREBoard report , the AMI-SeCo noted that, despite some delays in the progress by stakeholders, ensuring full compliance by the deadline was still feasible. In view of the rescheduling of the go-live of the Eurosystem’s ECMS to April 2024, the AMI-SeCo agreed to move forward the deadline for compliance with the SCoRE standards in order to align on the timing.

Furthermore, the AMI-SeCo continued to monitor and discuss progress and developments in the T2S harmonisation agenda and corporate events compliance , including the industry standards on shareholder identification. In addition, the AMI-SeCo submitted responses to the European Commission and European Securities and Markets Authority public consultations on withholding tax procedures and on the implementation of the Shareholder Rights Directive 2.

4.2 Digital euro investigation phase

The investigation phase of the digital euro project which was launched in October 2021 is on track and expected to finish in the second half of 2023. By that time the Governing Council will have been presented with the findings of the investigation phase and advice on whether or not to move to a preparation phase, as well as a project plan for this subsequent phase. Any potential decision to move to the preparation phase does not in itself pre-empt a decision to issue.

The Eurosystem agreed on the main use cases and key design decisions in the investigation phase of the digital euro project

The Eurosystem regularly reported on the progress of the digital euro investigation phase, publishing two progress reports in September and December . In 2022 the Eurosystem agreed upon the main use cases and many key design decisions for a digital euro , taking into account the aspects of privacy and regulatory requirements, as well as the need to provide online possibilities alongside offline options for payments with a digital euro. These decisions also reflect the important role of intermediaries as distributors of a digital euro and a scheme as the preferred distribution model. The decision was taken to start preparations for a digital euro rulebook, for which a rulebook manager was hired and a call for expressions of interest by market representatives to take part in the drafting was issued. Work on the rulebook itself started in the first quarter of 2023.

As part of this project, the related digital euro prototyping activities with Eurosystem national central banks and private companies progressed according to plan. Findings will be reported on in the first half of 2023 and applied as relevant in a future project phase.

To ensure the development of a digital euro that is attractive for all stakeholders, the project relies on frequent interactions with market participants and future users in different fora and formats. In 2022 this included the dedicated technical sessions of the ERPB, bilateral feedback sessions with major stakeholder groups, meetings of the digital euro Market Advisory Group, focus group exercises and civil society seminars. In parallel, the ECB collaborated closely with the European institutions that will decide on the necessary legal framework for a potential future issuance of a digital euro.

4.3 Oversight and the role of central bank of issue

To ensure the safe and efficient functioning of financial market infrastructures (FMIs) and payments in the euro area, the Eurosystem sets out oversight objectives in regulations, standards, guidelines and recommendations, monitors their implementation, and promotes change where necessary. As central bank of issue for the euro, the Eurosystem is involved in cooperative oversight and supervision, as well as crisis management arrangements for FMIs with meaningful euro-denominated activities.

As regards systemically important payment systems (SIPS), the Eurosystem oversight function directly oversees TARGET2, EURO1, STEP2-T and the Mastercard Clearing Management System. A particular focus during 2022 was the Eurosystem’s T2-T2S consolidation project (see Section 4.1). The Eurosystem conducted a pre-assessment of the consolidated platform focused on major changes to TARGET2 and monitored the project to identify any potential risks for the successful go-live of the platform and its subsequent smooth operation. In addition, the Eurosystem conducted a comprehensive assessment of the Mastercard Clearing Management System against the SIPS Regulation and the Cyber Resilience Oversight Expectations. The evolution and operational resilience of pan-European instant payment systems such as TIPS and RT1 was also closely monitored.

Implementation of the PISA framework started

With respect to payment instruments, work focused on the implementation of the Eurosystem’s oversight framework for electronic payment instruments, schemes and arrangements (PISA framework). Based on the outcome of a harmonised scoring exercise, the governance authorities of identified payment schemes were notified as to whether they will be overseen, monitored or exempted from oversight activities under the PISA framework. For payment arrangements, this process is close to finalisation. Furthermore, comprehensive assessments were launched for a first group of payment schemes.

As central bank of issue for the euro, the Eurosystem continued to be a member of the supervisory colleges for EU central counterparties under the European Market Infrastructure Regulation (EMIR). In this capacity, it assessed various proposals for the extension of services or major changes in risk management procedures and revised recovery plans prepared in line with the EU Regulation on Recovery and Resolution for Central Counterparties. In the context of the preparatory work on the review of EMIR , the Eurosystem provided input to the March 2022 consultation by the European Commission.

The Eurosystem also monitored the impact of increased market volatility on central counterparties. The ECB conducted analytical work on volatility in the energy market to explore the impact of large margin calls on clearing participants. The findings supported the ECB’s contribution to EU and international policy work on reducing the risk and potential impact of sudden large margin calls.

With regard to securities settlement, the Eurosystem contributed as central bank of issue to the regular evaluation of CSDs under the CSDR. The Eurosystem also started preparations for contributing to the application of Regulation (EU) No 2022/858 on a pilot regime for market infrastructures based on distributed ledger technology.

In the field of T2S oversight, the Eurosystem finalised the first assessment of T2S against the Cyber Resilience Oversight Expectations in the first quarter of 2022. The Eurosystem also completed its assessment of the changes implemented in T2S in 2022 (see Section 4.1).

Cyber resilience of FMIs continues to be a key focus in both the operational area of TARGET Services (see Section 4.1) and oversight. In 2022 a review of the Eurosystem/ESCB oversight cyber resilience strategy for financial market infrastructures and some of its tools was launched, another round of the Cyber Resilience Survey concerning FMIs was concluded, while the Euro Cyber Resilience Board worked on information-sharing (particularly in view of the Russian invasion of Ukraine), crisis coordination and third-party risk. Under the TIBER-EU framework, the TIBER-EU Knowledge Centre developed best practices for purple teaming , a collaborative activity which takes place during a certain stage of a TIBER test.

5 Market operations activities and financial services provided to other institutions

Most euro liquidity lines to other central banks established or activated since 2020 remained in place in 2022 and new lines were established with Narodowy Bank Polski and the Andorran Financial Authority. The ECB continued to offer US dollar operations to euro area counterparties, thereby providing a backstop to market-based funding. No ECB interventions took place in the foreign exchange market.

The ECB remained responsible for the administration of various financial operations on behalf of the European Union and played a coordinating role in relation to the Eurosystem reserve management services framework.

The transmission of ECB policy rate changes to euro area money markets (Box 3) was complete and immediate in the short-term unsecured money market segment, while term unsecured rates increased only sluggishly. The pass-through of rate hikes to secured money markets was also largely smooth, although with some heterogeneity in the speed of adjustment across segments.

5.1 Developments in market operations

Euro and foreign currency liquidity lines.

Liquidity lines continued to help the ECB fulfil its price stability objective, prevent euro liquidity shortages and avoid spillover effects

The Eurosystem’s swap and repo lines are monetary policy instruments that are used as stabilising tools in times of stress in global financial markets.

When the Eurosystem provides euro to non-euro area central banks, the liquidity lines address possible euro liquidity needs in non-euro area countries in the event of market dysfunctions. They therefore prevent spillover effects in euro area financial markets and economies via upward pressure on short-term money market rates or fire sales of assets that might adversely impact the smooth transmission of the ECB’s monetary policy. The liquidity lines also prevent euro liquidity shortages from turning into financial stability risks.

When the ECB receives foreign currency from another central bank (for example US dollars from the Federal Reserve System) and provides euro as collateral, the foreign currency liquidity lines ensure the continuous provision of loans in foreign currency. This prevents abrupt deleveraging, extreme price movements and interruptions to the flow of credit resulting from tensions in international funding markets.

Most euro liquidity lines that have been established or activated since 2020 remained in place and were prolonged initially to 15 January 2023 and later to 15 January 2024, with the exception of the swap agreements with Българска народна банка (Bulgarian National Bank) and Hrvatska narodna banka, and the repo line with the National Bank of Serbia, which expired at the end of March 2022. New liquidity lines were established in 2022 with Narodowy Bank Polski and the Andorran Financial Authority. Table 5.1 shows the euro liquidity lines in operation as of 31 December 2022, whereby the Eurosystem could provide euro liquidity to foreign central banks. Drawings on the euro liquidity lines have been limited to quarter-ends.

The reciprocal swap agreement with the People’s Bank of China was extended for another three years to October 2025.

In 2022 the ECB continued to provide US dollar liquidity in coordination with the Federal Reserve System, the Bank of Canada, the Bank of England, the Bank of Japan and the Swiss National Bank, usually at a maturity of seven days. The provision of US dollars in major jurisdictions helped ease pressure in global funding markets and continued to backstop private funding markets.

Overview of operational liquidity lines

Source: ECB website . Note: The table does not include repo lines established with non-euro area central banks under the Eurosystem repo facility for central banks (EUREP), for which the ECB does not disclose its counterparties.

Reporting on foreign exchange interventions

No ECB interventions took place in the foreign exchange market

The ECB did not intervene in the foreign exchange market in 2022. Since the inception of the euro, the ECB has intervened in the foreign exchange market twice – in 2000 and 2011. Data on foreign exchange interventions are published on a quarterly basis with a delay of one quarter on the ECB’s website and in the Statistical Data Warehouse. The information published in the quarterly table is also recapped on an annual basis in the ECB’s Annual Report (Table 5.2). If there were no foreign exchange interventions in the relevant quarter, this is explicitly stated.

ECB foreign exchange interventions

The reporting framework covers foreign exchange interventions carried out by the ECB unilaterally and in coordination with other international authorities, as well as interventions “at the margins” within the exchange rate mechanism (ERM II).

5.2 Administration of EU borrowing and lending operations

The ECB processes payments for various EU loan programmes

The ECB is responsible for the administration of the borrowing and lending operations of the EU under the medium-term financial assistance ( MTFA ) facility [ 44 ] , the European financial stabilisation mechanism ( EFSM ) [ 45 ] , the European instrument for temporary support to mitigate unemployment risks in an Emergency ( SURE ) [ 46 ] and the Next Generation EU ( NGEU ) [ 47 ] programme. In 2022 the ECB also accepted the European Commission’s request to perform paying agent services, thereby extending the ECB’s current fiscal agent services. Preparations are ongoing to become operational in 2023.

In 2022 the ECB processed interest payments in relation to the loans under the MTFA. As at 31 December 2022 the total outstanding nominal amount under this facility was €200 million. In 2022 the ECB also processed various payments and interest payments in relation to the loans under the EFSM. As at 31 December 2022 the total outstanding amount under this mechanism was €46.3 billion. In 2022 the ECB processed disbursements of SURE loans to various EU Member States and related interest payments. As at 31 December 2022 the total outstanding amount under this mechanism was €98.4 billion. Finally, in 2022 the ECB processed the disbursements of NGEU loans and grants to various Member States.

The ECB is also responsible for the administration of payments arising in connection with operations under the European Financial Stability Facility ( EFSF ) [ 48 ] and the European Stability Mechanism ( ESM ) [ 49 ] . In 2022 the ECB processed various interest and fee payments in relation to one loan under the EFSF.

Finally, the ECB is responsible for processing all payments in relation to the loan facility agreement for Greece. [ 50 ] As at 31 December 2022 the total outstanding amount under this agreement was €44.8 billion.

5.3 Eurosystem Reserve Management Services

A number of Eurosystem national central banks provided services under the ERMS framework

In 2022 a comprehensive set of financial services continued to be offered within the Eurosystem reserve management services ( ERMS ) framework established in 2005 for the management of customers’ euro-denominated reserve assets. A number of Eurosystem national central banks provide financial services within this framework ‒ under harmonised terms and conditions and in line with market standards ‒ to central banks, monetary authorities and government agencies located outside the euro area, as well as to international organisations. The ECB performs an overall coordinating role, monitors the smooth functioning of the services, promotes changes to improve the framework and prepares related reports for the ECB’s decision-making bodies.

The number of reported customer accounts in the ERMS stood at 270 at the end of 2022, compared with 265 at the end of 2021. The total aggregated holdings (including cash assets and securities holdings) managed within the ERMS framework decreased by approximately 6% in 2022 compared with 2021.

Box 3 Pass-through of key ECB interest rate changes to euro money market rates

Between July and December 2022 the ECB increased its key interest rates by 250 basis points, bringing the ECB’s deposit facility rate out of negative territory and to a level of 2.0% by year-end. This hiking cycle stands out historically in terms of the magnitude of the rate increases (two 50 basis point rate hikes and two 75 basis point rate hikes), the speed of the policy rate adjustment (over a period of five months) and because it took place in an environment of record high excess liquidity of more than €4 trillion.

This box provides an overview of how the policy rate changes were transmitted to money markets, which represent the first link in the chain of monetary policy transmission. In summary, the transmission was complete and immediate in the short-term unsecured segment, as reflected in the euro short-term rate (€STR), while term unsecured rates reacted more sluggishly. In the secured money market, rates on repurchase agreements (repos) experienced in part a delayed or even impaired transmission, mainly owing to an increase in collateral scarcity in 2022. Moreover, the limited supply of short-term securities and increased demand for such instruments contributed to only a partial pass-through of policy rate increases to government bill rates.

Short-term unsecured money market rates adjusted well to the policy rate hikes, while term unsecured rates increased only sluggishly.

The €STR increased by 249 basis points between July and December 2022 and therefore adjusted almost one-to-one to the 250 basis point policy rate increase (Chart A). The distribution of money market transaction rates supporting the €STR, collected under the ECB Money Market Statistical Regulation, also remained stable, as reflected in the unchanged spread between the 25th and 75th percentile of interest rates underlying the €STR. Unsecured short-term trading volumes picked up substantially, especially after interest rates returned to positive territory. In particular, the average trading volume backing the €STR increased by 20% between September and December 2022 compared with the average trading volume up to September 2022. However, unsecured term rates, reflected in the euro interbank offered rate (EURIBOR) reacted sluggishly to the rate hikes for short-term maturities (Chart B). The delayed adjustment in term rates was largely driven by increased demand for short-term money market investments in an environment of high uncertainty about the future level of policy rates and by a premium charged by the banks accepting term deposits.

The transmission of rate hikes to secured money markets was also largely completed eventually, although with some heterogeneity in the speed of adjustment across segments.

Repos essentially function as short-term secured loans where cash is exchanged for a security under the agreement that the transaction is reversed (typically the next day). From the last quarter of 2021 the demand for borrowing securities and secured short-term investments increased significantly, widening the wedge between repo rates and the deposit facility rate of the ECB as the type of collateral backing those trades became scarcer. Looking at the transmission of the three rate hikes in July, October and December 2022, all of them were largely transmitted to the short-term repo rates backed by government bonds of most euro area countries, while the pass-through to the highest-rated government bond collateral, for example German government securities, experienced some delays. For the 75 basis point rate hike in September 2022, which brought the policy rate back into positive territory, the transmission to repo rates was more severely delayed and impaired. In the first days after the implementation of the rate hike, repo rates across all euro area jurisdictions experienced substantial downward pressure, amid concerns of a substantial increase in demand for collateral as investors rushed to invest cash holdings in the repo market with the return to positive interest rate levels. In longer-dated repo and government bill rates, the pass-through was also imperfect, mainly owing to the limited supply of collateral and increased demand for such investments. Collateral availability improved towards the end of 2022, reflected in a narrowing spread between secured money market rates and the ECB policy rates, not least owing to a number of initiatives on behalf of the Eurosystem and national debt management offices to ease collateral scarcity, with the usual end-of-year volatility experienced in late December 2022 (Charts A and B).

Transmission of rate hikes to short-term unsecured and secured money market rates

(percentages, volume-weighted average rate)

Sources: ECB calculations, Bloomberg and BrokerTec/MTS. Notes: There are two types of transaction: non-general collateral (non-GC) repo transactions, which are motivated to exchange a specific security, and cash-motivated repo transactions or so-called general collateral (GC). Repo rates displayed in the chart combine GC and non-GC repo rates and overnight, tomorrow-next, and spot-next maturities. The decline in repo rates at the end of October and December 2022 was due to quarter-end effects, when banks’ balance sheet constraints are particularly binding on regulatory reporting dates.

Transmission of rate hikes to term unsecured and secured money market rates

Sources: ECB calculations and Bloomberg. Note: OIS represents 1-month overnight indexed swap rates, where the floating rate refers to the expected €STR.

6 Cash remains the most frequently used means of payment among European citizens, with a low level of counterfeiting

Euro banknote circulation continued to grow in 2022, by 4.5% in terms of number and 1.8% in terms of value, and was mainly affected by Russia’s war in Ukraine and the rises in the ECB’s key interest rates from July onwards.

The ECB study on payment attitudes of consumers in the euro area revealed that cash was the most frequently used payment method at points-of-sale, accounting for 59% of payments. Moreover, the first survey on the use of cash by companies concluded that 96% of companies serving mostly private customers accepted cash and more than 90% will continue to do so in the future.

Counterfeiting levels remain remarkably low. Development of new security features for banknotes continues with a view to keeping ahead of counterfeiters and further improving the resilience and integrity of the banknotes.

6.1 Circulation of euro banknotes

Euro banknote circulation increased in line with two main developments

At the end of 2022 euro banknote circulation reached 29.5 billion pieces and a total value of €1.57 trillion. This represents positive annual growth rates of 4.5% and 1.8% in terms of the number and value of banknotes respectively. Two main developments affected the circulation of euro banknotes in 2022. First, Russia’s invasion of Ukraine generated higher demand for euro banknotes in February and March 2022, as people wanted to have enough funds in the event of possible disruptions to payment ecosystems. The demand for euro banknotes stabilised from April 2022 onwards. Second, the increase in the ECB’s key interest rates starting on 27 July 2022 made the outstanding euro cash holdings more expensive compared with interest-bearing instruments. As a result, a small part of euro banknotes in circulation returned to the Eurosystem, with a downward effect on euro banknote circulation (Chart 6.1).

Number and value of euro banknotes in circulation

(left-hand scale: EUR billions; right-hand scale: billions)

To maintain the quality of euro banknotes in circulation and trust in them, Eurosystem national central banks processed 24.8 billion euro banknotes. Of this amount, 3.2 billion worn-out banknotes had to be replaced with newly printed banknotes.

The value of euro coin circulation also grew by 4.0% annually to reach €32.5 billion at the end of 2022. This represents a total of 145 billion euro coins in circulation.

The introduction of euro banknotes and coins in physical form as of 2002 was a milestone in European history. It was considered a remarkable event, including at a global level, as it represented – and still does – the world’s largest ever monetary changeover.

6.2 Studies on payment attitudes among consumers and use of cash by companies in the euro area

Study on payment attitudes of consumers in the euro area.

Cash continued to be the most frequently used means of payment at points-of-sale.

Between October 2021 and June 2022 the ECB conducted the study on payment attitudes of consumers in the euro area to assess consumers’ payment behaviour and preferences, as well as their access to various payment instruments. The study showed that cash was the most frequently used payment method at points-of-sale, with 59% of all payments made in cash, although the share of cash payments had declined from 72% in 2019. In terms of value, cards accounted for a higher share of payments (46%) than cash (42%). Cash was accepted in 95% of transactions in physical payment locations throughout the euro area, while it was possible to pay with non-cash instruments in 81% of transactions.

Most euro area consumers were satisfied with their access to cash. The vast majority of consumers (90%) found it fairly easy or very easy to get to an ATM or a bank.

Use of cash by companies in the euro area

96% of companies with private clients accept cash and 90% will continue to do so in the future

In 2022 the ECB published the results of its first survey on the use of cash by companies, shedding light on companies’ strategic views on the current and future use and acceptance of cash. Cash is likely to remain relevant as a payment method, since more than 90% of firms currently accepting cash intend to continue to do so in the future. Security and reliability are the most important criteria for firms when deciding whether to accept a means of payment.

6.3 Low level of counterfeiting and euro banknote development

Remarkably low level of euro banknote counterfeiting.

In 2022 the second lowest level of counterfeits in proportion to banknotes in circulation was observed since the introduction of euro banknotes

In the course of 2022, 376,000 counterfeit euro banknotes were withdrawn from circulation. With 13 counterfeits detected per 1 million genuine banknotes in circulation, this is the second lowest level of counterfeits in proportion to banknotes in circulation since the introduction of euro banknotes (Chart 6.2). There was an increase of 8.4% in the total number of counterfeits withdrawn from circulation compared with 2021. This also reflects the rebound in economic activity in 2022 following the lifting of most pandemic-related restrictions. The quality of the counterfeits continues to be low. Consequently, they can be detected very quickly and easily on applying the “ feel-look-tilt ” test.

Number of counterfeits detected annually per 1 million genuine notes in circulation

Euro banknote development

The development of new security features continued to stay ahead of counterfeiters

In order to ensure the high quality of euro banknotes and their resilience to counterfeiting in the future, the development of new security features continues, also taking into account benefits offered by technological advances. Other important objectives that have been set for future banknotes include the redesign of euro banknotes and reduction of their environmental impact. No decision on the actual production and issuance of new euro banknotes has yet been taken.

7 Statistics

The ECB – assisted by the national central banks (NCBs) – develops, collects, compiles and disseminates a wide range of statistics and data needed to support the ECB’s monetary policy, as well as financial stability-related and other tasks of the European System of Central Banks (ESCB) and the European Systemic Risk Board. These statistics are also used by public authorities, international organisations, financial market participants, the media and the general public, and help the ECB to increase the transparency of its work.

In 2022 the ECB focused on new euro area statistics, namely the enhanced publication of securities statistics, the development of indicators for overnight index swaps (OIS) in the euro money market based on Money Market Statistical Reporting (MMSR) data, information on special purpose entities (SPEs) and bilateral external statistics of euro area countries vis-à-vis Russia. Experimental indicators to support climate change policy were developed and work started on the design phase of the Integrated Reporting Framework (IReF). Furthermore, new data on non-bank financial institutions were included in quarterly financial accounts.

7.1 New and enhanced euro area statistics and other developments

The ECB’s Governing Council adopted a Guideline for the production of new monthly data on securities issues

The ECB’s Governing Council adopted a new Guideline in the field of securities data and securities issues statistics. [ 51 ] The Guideline defines amended requirements for the data quality management of the ESCB’s Centralised Securities Database (CSDB) and new requirements to produce securities issues statistics based on CSDB data.

New statistics on securities issues and holdings were made available at significantly enhanced timeliness

Following the adoption of the Guideline, the ECB started publishing new breakdowns for securities issues statistics by valuation method, maturity and interest rate type for all EU Member States. This is the first ESCB micro-to-macro dataset, whereby CSDB micro data are used to compile official macro statistics in line with international statistical standards. The data are available at a significantly enhanced timeliness. The ECB also significantly extended the publication of securities holdings statistics with new breakdowns by individual euro area country, as well as by holder and issuer sectors. The new data provide a more timely and complete picture of the financial markets, allowing better monitoring of primary and secondary market activities.

New statistics were published on the overnight index swaps in the euro money market

The ECB started publishing new statistics on the OIS in the euro money market based on MMSR data collected from 47 euro area banks. [ 52 ] The data series include information on the OIS spot and forward markets about the total and daily average nominal amount and the weighted average rate. The new statistics complement data on the unsecured and secured money market segments, which have been published regularly since November 2017 and January 2019 respectively. The publication of the new statistics serves to enhance market transparency and therefore improve money market functioning.

The ECB Guideline on external statistics was amended to include special purpose entities

In May 2022 the ECB’s Governing Council adopted the amendment to the Guideline on external statistics to collect statistical information on SPEs. [ 53 ] This will allow a better understanding of their role in the economic and financial system of the euro area. The first transmission of data relating to cross-border transactions and stocks of resident SPEs started in March 2023 based on data for the fourth quarter of 2022, while back data from the first quarter of 2020 will be transmitted by September 2023.

Public release of euro area countries’ external statistics vis-à-vis Russia

In October 2022 the ECB started publishing a subset of bilateral external statistics of euro area’s countries vis-à-vis Russia. [ 54 ] This additional granularity at quarterly frequency provides useful statistical detail for the topical analysis of cross-border transactions and positions between euro area countries and Russia.

7.2 Development of experimental indicators to support climate change policy

New climate change indicators were introduced to support the ECB’s monetary policy strategy

Based on work completed in 2022, on 24 January 2023 the ECB published for the first time three sets of new statistical indicators on sustainable finance, greenhouse gas emissions and physical risk. This work is part of the ECB action plan [ 55 ] to include climate change considerations in its monetary policy strategy. The development of these indicators on climate change was highly complex. The indicators consist of, among other things, matching various cross-country micro-level datasets, developing appropriate imputation mechanisms for missing data, and inspecting data quality considering aspects such as confidentiality, replicability and representativeness. As such, and with differences dependent on the subset of data in question, the datasets remain a “work in progress” with some caveats hampering the use of these indicators.

The following three datasets were released: [ 56 ]

In line with the action plan set out by the ECB’s Governing Council, improvements in these three datasets are being worked on, partially supported by new and better data sources as they emerge, as well as by any future methodological developments both within the ESCB and worldwide.

7.3 Progress on the Integrated Reporting Framework

Reporting burden reduction effort entered a concrete phase

The ECB’s long-standing commitment to reduce the reporting burden of banks and improve the quality and comparability of data took shape in 2022. In December 2021 the design phase of the IReF programme was launched with the aim of integrating the Eurosystem’s statistical requirements for banks into a single standardised framework that will be applicable across the euro area and that might also be adopted by authorities in other EU Member States. [ 57 ]

During the IReF design phase, work focused on the future framework and assessment of cost-benefit

During the design phase, the Eurosystem is identifying the key elements of the new framework (both in terms of content and data processes) and outlining a more efficient organisation of the Eurosystem statistical business process. In shaping the IReF, the Eurosystem builds on the contributions of the relevant stakeholders by means of an ongoing cost-benefit assessment. [ 58 ] As part of the ongoing cost-benefit assessment, three reports were published in September 2022. These were each focused on specific features of the envisaged reporting system, namely content-related topics, technical integration of country-specific requirements, and procedural and implementation aspects. [ 59 ] Furthermore, the ECB organised two workshops with the banking industry in 2022 to discuss the state of play of the cost-benefit assessment.

The IReF is a first step towards a broader initiative for an integrated reporting system for statistical, prudential and resolution data in the EU, as requested by the European banking industry and solicited by the European Parliament and the Council. The European Banking Authority (EBA), ECB, Single Resolution Board (SRB) and the European Commission have started cooperating in an Informal Coordination Group to further such integration. The cooperation among authorities is expected to be formalised through the creation of a Joint Bank Reporting Committee (JBRC) ‒ involving the ESCB, the EBA, Single Supervisory Mechanism (SSM) and non-SSM national competent authorities, the SRB, national resolution authorities and the European Commission, as outlined in the EBA feasibility study published in December 2021. [ 60 ]

Box 4 New statistics on non-bank financial institutions in the quarterly financial accounts

Other financial institutions ‒ the second largest financial sector in the euro area.

The quarterly financial accounts published by the ECB provide a new breakdown of other financial institutions (OFIs). OFIs are, after monetary financial institutions (i.e. banks and money market funds), the second largest financial sector in the euro area (Chart A). Their expanding role was recognised in the ECB’s 2020-21 monetary policy strategy review, and the new breakdown is an important step in facilitating analysis of this development. [ 61 ] Three subsectors are distinguished:

Financial subsectors in the euro area

(outstanding amount of liabilities at the end of the third quarter of 2022 as percentages of financial sector liabilities)

Source: Quarterly sector accounts, ECB.

8 ECB research activities

In 2022 ECB research focused on assessing inflation developments and analysing the potential impacts of monetary policy normalisation. The use of datasets available via the Household Finance and Consumption Network (HFCN) was extended to the analysis of heterogeneities in household finances across the euro area. New projects have been initiated based on the rich information collected via the ECB’s Consumer Expectations Survey (CES). Research on climate change-related issues also intensified. Collaboration with national central banks within the research clusters of the European System of Central Banks (ESCB) continued, with annual workshops organised to discuss the most pressing issues in their respective fields of specialisation. The Price-setting Microdata Analysis (PRISMA) network concluded its work and delivered several policy-relevant findings (see Box 5).

8.1 Update on ECB research initiatives

Research focused on assessing the impact of monetary policy normalisation

In 2022 a main focus of the ECB’s research was to examine the effects of interest rate and balance sheet normalisation, including the transmission channels and trade-offs involved. A wide array of in-house models with macro-financial linkages were used to assess the potential impact of normalisation on financial stability. A key and persistent insight from most of this research is that policy normalisation mitigates the build-up of financial vulnerabilities and lowers tail risks to inflation over the medium term, at the cost of tighter financing conditions and greater downside risks to growth in the short term.

The Household Finance and Consumption Network provided key input for research on heterogeneity

The HFCN has served as a key input for constructing the euro area distributional wealth accounts and is an important source of information for several research projects conducted by the ECB’s Research Taskforce on Heterogeneity.

Research based on HFCN data focused on the difference in wealth and liquid assets between non-immigrant and immigrant households in the euro area, financial distress of households, substantial differences in housing and home ownership rates across euro area countries, and the heterogeneity of the effects of the pandemic on household finances.

New projects were initiated based on datasets of the Consumer Expectations Survey

The ECB’s CES gained increasing visibility over the course of 2022. This was evidenced by the development of new survey modules on consumer finance, housing, labour markets and other central banking-related topics, as well as the expansion of research output and new projects drawing on the rich array of topics covered by the survey. Work based on the CES has featured prominently in the ECB’s economic, monetary and financial analysis, as well as in its official publications. As highlighted on the newly developed CES web page , publications featuring the survey data have led to insights on a variety of topics including inflation expectations, central bank communication, consumption and consumer finance, monetary policy transmission to households, the energy shock, and fiscal support to households. In addition, the aggregate results from the monthly surveys are now reported regularly on the CES web page. A monthly press release initiated in August 2022 summarises consumers’ expectations about inflation, the housing market, access to credit, income, consumption, the labour market, and economic growth.

Policy-relevant conclusions emerged from extensive research on climate change-related issues

Research on climate change intensified in the course of 2022. Researchers focused on various aspects of the interaction between financial stability, financial markets, government policy and the green transition. A number of ECB research papers were published on various aspects of this topic and drew the following policy-relevant conclusions: (i) bank lending responds to climate policy, with visible reallocation of fossil fuel lending across national borders in response to carbon taxes [ 62 ] and a significant decline in lending to greenhouse gas-intensive companies following the Paris Agreement [ 63 ] ; (ii) more equity-based economies decarbonise faster than more debt-based economies [ 64 ] ; (iii) natural-resource scarcity prompts energy-saving technical change [ 65 ] ; and (iv) it is considerably costlier for society to set carbon taxes at lower-than-optimal rather than higher-than-optimal levels [ 66 ] .

Another strand of research studied how climate-related risk and financial stability are connected and considered three main dimensions: 1) data on and measurement of climate-related risks for the financial system, 2) stress test assessments of climate-related risks, and 3) macroprudential policy implications of climate-related risks. The findings were published in a joint ECB/ESRB report in July 2022.

8.2 Update on the work of ESCB research clusters

Collaboration within research clusters continued and the research cluster on climate change was launched

Regular research networks continued coordinating research efforts within the ESCB and maintaining relations with academic researchers. In particular, the ESCB research clusters on “Monetary economics” (Cluster 1), “International macroeconomics, fiscal policy, labour economics, competitiveness and EMU governance” (Cluster 2), “Financial stability, macroprudential regulation and microprudential supervision” (Cluster 3) and “Climate change” (Cluster 4) held workshops on the most pressing issues in their fields.

The annual workshop of Cluster 1 took place in Paris on 10-11 October 2022. Organised by the Banque de France, it focused on the themes of inflation, interest rates, and monetary and fiscal policy interactions. Cluster 2 held its annual workshop at the Bank of Greece on 29-30 September 2022. It focused on the implications of economic sanctions, in particular their effects on trade, employment and production. Members also discussed the interactions between monetary and fiscal policies, as well as the design of EU institutions in the light of the threat of disintegration. The annual workshop of Cluster 3, hosted by the Banco de Portugal, took place in Lisbon on 20-21 October 2022. It covered topics ranging from banking regulation and supervision to housing markets and central bank digital currencies. On 5-6 September 2022 Cluster 4 held its first annual workshop virtually, hosted by the Deutsche Bundesbank. The workshop dealt with theoretical and empirical research on the macroeconomic effects of climate change and climate policy, as well as the implications for various financial markets.

Box 5 Microdata in the spotlight – findings of the Price-setting Microdata Analysis Network

The Price-setting Microdata Analysis ( PRISMA ) research network was set up in 2018 by the European System of Central Banks (ESCB) to deepen understanding of price-setting behaviour and inflation dynamics in the European Union, with a view to gaining new insights on this key element of monetary policy transmission. It officially concluded its work in March 2022.

Under PRISMA, ECB and national central bank staff produced numerous research and policy products on price-setting and inflation dynamics, e-commerce, online prices and household inflation heterogeneity. The research work focused on the period 2010-19 and resulted in the following policy-relevant findings.

The frequency of price changes in the euro area in the period 2010-19 was low but heterogeneous across “core” sectors, implying a slow transmission of nominal shocks. On average, 8.5% of consumer prices changed each month (when sales prices are excluded), which is close to the 10% frequency recorded in the United States. The typical non-sale retail price therefore changed only every 12 months, entailing a slow transmission of nominal impulses. The ex-sales repricing rate was lowest for services (6% over a 17-month duration) and highest for processed food (10% over a 10-month duration).

Price changes are heterogeneous, with both small and large hikes and cuts, and mainly driven by firm-specific shocks. Typical (non-zero) price changes (“reset” prices) were rather large (even excluding sales). In the period from 2010 to 2019 the median increase and decrease stood at around 9% and 12% respectively. However, price hikes and cuts were very heterogeneous: 14% were smaller than ±2% in absolute value, while around 20% were larger than ±14%. Firm-specific cost and demand shocks were thus more relevant than aggregate shocks in determining when and by how much firms reset their prices. Data confirm that producer price changes are more frequent and smaller than consumer price changes, in line with previous findings for the euro area.

The online prices of most goods change more frequently than prices in brick-and-mortar stores, while the respective sizes of both price cuts and hikes do not differ significantly, consistent with lower price-setting frictions online. For both Poland and Germany, where this comparison was possible, the repricing rate for non-energy goods, except for processed food, was higher online than offline (at 16.7% and 11.1% respectively). However, the (absolute) size of online price increases and decreases was lower in Germany, whereas in Poland the opposite tended to be the case. Overall, these findings were consistent with lower price-setting frictions online, at least for goods. They confirmed previous evidence supporting the assumption that, with online trade gaining market share in an ever growing number of sectors, aggregate price flexibility might increase.

Price-setting is mildly dependent on the stage in the economic cycle, implying that in the current environment, more frequent and larger price changes can occur than suggested by historical regularities. Prices that are far from their “target” values are slightly more likely to adjust. This direct evidence of a moderate degree of state dependence can still influence the monetary transmission, especially by eliciting non-linearities in response to variations in trend inflation or large cost shocks. In the current volatile environment, more frequent and larger price changes can occur than suggested by historical regularities.

Inflation variation in the period 2005-2019 was due to fluctuations in the average size of price changes, as the repricing rate moved very little. Despite several possible structural influences, the repricing rate showed little sign of following either a downward or upward trend during the low inflation period under review. Moreover, its limited cyclical variation did not contribute much to fluctuations in aggregate inflation, which instead mainly reflected shifts in the average size of price changes. Specifically, aggregate disturbances affected inflation by shifting the relative share of firms increasing or decreasing their prices, rather than the size of price increases and decreases or the repricing rate. This “linear” behaviour of aggregate inflation could change, however, when aggregate shocks are larger than in the historical experience, because of the non-linearities in firm-level decisions.

According to models calibrated to match the micro price evidence, shifts in trend inflation above 5-6% would materially raise the slope of the euro area Phillips curve. Simulations of models featuring non-linearities in price-setting consistent with the micro price evidence suggest that increases of above 5-6% in trend inflation (and thus in firms’ long-run inflation expectations) would materially raise the repricing rate and the slope of model-based Phillips curves. Evidence for the United States confirms that, in the period of “Great Inflation” from 1978 to 1982, the repricing rate stood at over 15% (compared with 10% in the low inflation period under review).

9 Legal activities and duties

In 2022 the Court of Justice of the European Union (the “Court of Justice”) interpreted for the first time the concept of “other type of credit facility” in the context of the monetary financing prohibition and recognised the financial independence of national central banks (Case C-45/21). The Court of Justice also put an end to almost ten years of litigation relating to the 2013 resolution measures in Cyprus (Cases T-200/18 and T-379/16) and further clarified important aspects of the ECB’s supervisory powers (Case T-275/19). The ECB adopted 14 opinions on proposed Union acts and 32 opinions on draft national legislation falling within its fields of competence. Five cases of non-compliance with the obligation to consult the ECB on draft legislation were recorded in respect of national laws. The ECB’s 2022 monitoring exercise on central banks’ compliance with the prohibitions on monetary financing and privileged access confirmed that Articles 123 and 124 of the Treaty were in general respected.

9.1 Jurisdiction of the Court of Justice of the European Union concerning the ECB

For the first time, the Court of Justice interpreted the concept of “other type of credit facility” in the context of the monetary financing prohibition

In September 2022 the Court of Justice of the European Union, sitting in Grand Chamber, ruled for the first time on the interpretation of the term “other type of credit facility” used in Article 123(1) of the Treaty on the Functioning of the European Union and defined in Article 1(1)(b)(ii) of Council Regulation (EC) No 3603/93 as “any financing of the public sector’s obligations vis-à-vis third parties” (Case C-45/21). According to the Court of Justice, the prohibition of a credit facility within the meaning of any financing of the public sector’s obligation vis-à-vis third parties not only means that the national central banks (NCBs) must not assume pre-existing obligations of other public authorities or bodies vis-à-vis third parties; it also requires that the effective financing of the obligations vis-à-vis third parties by the NCBs must not result directly from the measures adopted by, or from the policy choices made by, other public authorities or bodies. In the same preliminary ruling, the Court of Justice expressly recognised, again for the first time, the financial dimension of the NCBs’ independence and interpreted its implications in the context of an NCB performing national tasks outside the European System of Central Banks (ESCB). According to the Court of Justice, NCBs’ ability to carry out independently a task falling within the scope of the ESCB would be undermined if national tasks falling outside that scope precluded NCBs from building up adequate financial resources in the form of reserves or buffers to offset losses, particularly those resulting from monetary policy operations.

The General Court put an end to almost ten years of litigation relating to the 2013 resolution measures in Cyprus by dismissing the last pending actions for damages against the ECB

In July and November 2022, respectively the General Court dismissed the last pending actions for damages brought against, amongst others, the ECB by some stakeholders in two Cypriot banks which were subject to the 2013 resolution measures (Cases T-200/18 and T-379/16). The orders follow the 2020 judgment of the Court of Justice of the European Union in the joined Chrysostomides and Bourdouvali cases [ 67 ] that concerned similar subject matter. The applicants alleged that the relevant resolution measures were imposed by the ECB and other defendants [ 68 ] through, among other things, their involvement in the Eurogroup meetings, their role in the negotiation and adoption of the Cypriot Memorandum of Understanding, and the ECB Governing Council decisions relating to the emergency liquidity assistance. The General Court found that the ECB and other defendants did not commit any breach of the right to property, the principle of legitimate expectations, the principle of proportionality or the principle of equal treatment. The orders delivered by the General Court put an end to almost ten years of litigation relating to the 2013 resolution measures in Cyprus and in which the ECB has always prevailed by demonstrating that it acted lawfully.

The General Court further clarified the ECB’s investigatory and supervisory powers

In December 2022 the General Court delivered four judgments, dismissing all actions brought by AS PNB Banka against a series of ECB supervisory decisions and further clarifying the ECB’s supervisory powers. From January 2019 to February 2020 the ECB adopted a series of supervisory decisions regarding AS PNB Banka. Reviewing these decisions, the General Court confirmed that the ECB is competent to exercise, with regard to a less significant credit institution, all investigatory powers listed in Articles 10 to 13 of the SSM Regulation , including on-site inspections, and clarified that applicable regulation does not require the inspected entity to be heard before the adoption of the decision to perform an on-site inspection (Case T-275/19). The General Court also confirmed that the ECB enjoys broad discretion to activate the power to take over direct supervision of a less significant institution when necessary to ensure consistent application of high supervisory standards (Case T-301/19). Third, the General Court ruled that the ECB may oppose a proposed acquisition of a qualifying holding if there are reasonable grounds for doing so on the basis of one or more of the criteria referred to in Article 23(1) of Directive 2013/36, without being required to examine the other criteria (Case T-330/19). Lastly, having regard to the withdrawal decision, the General Court clarified some aspects relating to the relations between a proposal by a national competent authority (NCA) and the ECB’s final decision on withdrawal. For example, it ruled that, since it is not bound by the NCA proposal, the ECB shall perform its own assessment, taking into account the elements listed in Article 83(2) of the SSM Framework Regulation. As a result, the ECB may, if appropriate, add in the final withdrawal decision grounds for withdrawal which were not included in the NCA proposal (Case T-230/20).

9.2 ECB opinions and cases of non-compliance

Articles 127(4) and 282(5) of the Treaty on the Functioning of the European Union require that the ECB be consulted on any proposed EU or draft national legislation falling within its fields of competence. All ECB opinions are published on EUR-Lex . ECB opinions on proposed EU legislation are also published in the Official Journal of the European Union. In 2022 the ECB adopted 14 opinions on proposed Union legal acts and 32 opinions on draft national legislation falling within its fields of competence.

Five clear and important cases of non-consultation were recorded

Five cases of non-compliance with the obligation to consult the ECB on draft legislation were recorded in respect of national laws and Union legal acts. The first case concerned a Finnish law on an emergency interbank payment scheme. This case was considered to be clear and important owing to its potential impact on the ESCB’s task of promoting the smooth operation of payment systems and on the tasks of Suomen Pankki. The second case concerned an Italian law on measures prohibiting the financing of companies producing anti-personnel mines and cluster munitions and submunitions, which required the relevant authorities, including Banca d’Italia, to ensure that credit institutions comply with the ban on financing companies that produce anti-personnel mines, cluster munitions and submunitions. This case was considered to be clear and important owing to its potential impact on Banca d’Italia due to the atypical nature of the task for a national central bank. The third case concerned the Irish Land Development Agency Act, which makes provision for the compulsory acquisition of lands owned by relevant public bodies, including the Central Bank of Ireland. This case was considered to be clear and important owing to its potential impact on the Central Bank of Ireland, in particular on its financial independence. The fourth case concerned a Lithuanian law on securitisation and covered bonds amending the Law on Lietuvos bankas that designated Lietuvos bankas as the competent authority responsible for the public supervision of securitisation and covered bonds and conferred on it the related supervisory, investigatory and sanctioning powers. This case was considered to be a clear and important case owing to its impact on the tasks of Lietuvos bankas. The fifth case concerned the Union Directive on measures for a high common level of cybersecurity across the Union. This case was considered to be a clear and important case of failure to consult the ECB because of its potential impact on the ESCB’s tasks, in particular the promotion of the smooth operation of payment systems, the contribution to the smooth conduct of policies pursued by competent authorities relating to the stability of the financial market system and the ECB’s tasks concerning the prudential supervision of credit institutions.

The ECB adopted 14 opinions on proposed EU legislation

The ECB adopted 14 opinions on EU legislative proposals, covering topics such as the introduction of the euro in Croatia and the conversion rate to euro for the Croatian kuna; the introduction of a gas price market correction mechanism; CSDs; prudential requirements for credit institutions and investment firms as regards requirements for credit risks and with respect to resolution ( CRR III ); supervisory powers, sanctions, third-country branches, and environmental, social and governance risk ( CRD VI ); the prevention of the use of the financial system for the purposes of money laundering or terrorist financing ( AMLD 6 ), and the establishment of an Authority for Anti-Money Laundering and Countering the Financing of Terrorism; ensuring a high common level of cybersecurity across the Union ( NIS 2 ); markets in financial instruments ( MiFIR / MiFID II ); alternative investment fund managers; harmonised rules on fair access to and use of data ( Data Act ); the establishment and functioning of a European Single Access Point providing centralised access to publicly available information relevant to financial services, capital markets and sustainability; and the system of national and regional accounts in the European Union.

The ECB adopted 32 opinions on draft national legislation

With regard to national legislation, which often covers more than one subject, the ECB adopted eight opinions concerning currency matters and means of payment; 25 opinions concerning NCBs; two opinions concerning payment and/or securities settlement systems; four opinions concerning statistical matters; five opinions concerning the stability of the financial system; two opinions concerning monetary policy instruments and operations; and seven opinions concerning the prudential supervision of credit institutions.

9.3 Compliance with the prohibition of monetary financing and privileged access

Pursuant to Article 271(d) of the Treaty on the Functioning of the European Union, the ECB is entrusted with the task of monitoring the compliance of the EU NCBs with the prohibitions laid down in Articles 123 and 124 of the Treaty and Council Regulations (EC) Nos 3603/93 and 3604/93. Article 123 prohibits the ECB and the NCBs from providing overdraft facilities or any other type of credit facility to governments and EU institutions or bodies, as well as from purchasing in the primary market debt instruments issued by these institutions. Article 124 prohibits any measure, not based on prudential considerations, which establishes privileged access by governments and EU institutions or bodies to financial institutions. In parallel with the Governing Council of the ECB, the European Commission monitors Member States’ compliance with the above provisions.

The ECB also monitors the EU central banks’ secondary market purchases of debt instruments issued by the domestic public sector, the public sector of other Member States and EU institutions and bodies. According to the recitals of Council Regulation (EC) No 3603/93, the acquisition of public sector debt instruments in the secondary market must not be used to circumvent the objective of Article 123 of the Treaty. Such purchases should not become a form of indirect monetary financing of the public sector.

The prohibitions laid down in Articles 123 and 124 of the Treaty were in general respected

The ECB’s monitoring exercise conducted for 2022 confirmed that Articles 123 and 124 of the Treaty were in general respected.

The ECB will continue monitoring the involvement of the Magyar Nemzeti Bank in the Budapest Stock Exchange as the purchase of the majority ownership of the Budapest Stock Exchange by the Magyar Nemzeti Bank in 2015 may still be seen as giving rise to monetary financing concerns.

The Central Bank of Ireland’s reduction of assets related to the Irish Bank Resolution Corporation during 2022 through sales of long-duration floating rate notes is a step towards the necessary full disposal of these assets and raises the prospect of fully dissolving the Special Portfolio in 2023. Continued sales at an appropriate pace would further mitigate the serious monetary financing concerns that persist.

The financing by NCBs of obligations falling upon the public sector vis-à-vis the International Monetary Fund (IMF) is not considered as monetary financing provided it results in foreign claims that have all characteristics of reserve assets. However, financial donations as provided in 2022 and previous years by a few NCBs via the IMF for debt relief for heavily indebted poor countries did not result in any foreign claims. This form of financial contributions by NCBs to IMF initiatives is therefore not compatible with the prohibition of monetary financing and warrants corrective measures where not yet fully implemented (Nationale Bank van België/Banque Nationale de Belgique, Banque de France, Banca d’Italia, Lietuvos bankas and Sveriges Riksbank).

10 The ECB in an EU and international context

The ECB continued to interact closely with its European and international partners in 2022. The ECB’s relationship with the European Parliament is an essential part of its accountability framework. Throughout the year, the ECB engaged in regular hearings and exchanges of letters with the Committee on Economic and Monetary Affairs of the European Parliament (ECON). It held additional meetings with ECON as part of its ongoing work on a digital euro. At international level, the ECB engaged constructively in a challenging dialogue with G20 finance ministries and central banks. It also contributed to central bank-relevant discussions at the International Monetary Fund (IMF), focusing on policy responses to alleviate the consequences on IMF members of Russia’s war in Ukraine. The ECB also interacted closely with the IMF on the operationalisation of the Resilience and Sustainability Trust to facilitate the voluntary channelling of special drawing rights (SDRs) following the landmark general allocation of SDRs in 2021 in line with the governance framework of Economic and Monetary Union. The ECB, often together with its partners in the European System of Central Banks, also continued its international engagement beyond the G20 and the IMF in other fora, including through central bank cooperation with Ukraine, and with other prospective EU Member States and developing and emerging countries.

10.1 The ECB’s accountability

The ECB discharged its accountability obligations

The ECB was granted independence under the Treaty on the Functioning of the European Union (TFEU), meaning that it is not subject to instructions from Union institutions, any national government or other bodies. This ensures that the ECB can make decisions in pursuit of its objective to maintain price stability without being influenced by political actors. The necessary counterpart to independence is accountability. The ECB is accountable for its actions to the European Parliament as the body composed of the elected representatives of the EU’s citizens. The effective discharge of the ECB’s accountability obligations to the European Parliament is an essential part of its work. The two-way dialogue between the ECB and the European Parliament allows the ECB to explain its actions and policies to the representatives of EU citizens and to listen to their concerns. This dialogue has evolved over time, going beyond the requirements set out in Article 284(3) of the TFEU. Additionally, the actions of the ECB are subject to judicial review by the Court of Justice of the European Union, providing an additional layer of accountability.

Wide-ranging interaction with the European Parliament continued

In 2022 the President of the ECB attended four regular hearings of the ECON Committee and participated in the plenary debate on the ECB’s 2020 Annual Report in February. During the regular hearings, the President of the ECB answered more than 120 questions from Members of the European Parliament covering a wide range of topics. A majority of the questions focused on the ECB’s monetary policy and the economic outlook (75%), but Members also raised issues related to economic governance (9%), climate change (6%) and financial legislation (4%). The ECB Vice-President also presented the ECB’s 2021 Annual Report to the ECON Committee in April 2022. On the same occasion, the ECB published its feedback on the input provided by the European Parliament as part of the latter’s resolution on the 2020 Annual Report. Moreover, in May 2022 a delegation of Members of the ECON Committee participated in the annual visit to the ECB, which took place in person following two years of virtual visits during the pandemic. In addition to these direct interactions, the ECB also replied to 32 written questions from Members of the European Parliament over the course of the year.

Furthermore, the ECB interacted closely with the ECON Committee in the context of its work on a digital euro. [ 69 ] In 2022 Executive Board Member Mr Panetta attended three hearings of the ECON Committee to discuss progress made during the digital euro investigation phase, including the topics of privacy, financial stability and the role of the private sector in a digital euro ecosystem. The ECB also organised staff-level technical seminars with the European Parliament and participated in events organised by Members of the European Parliament to discuss a digital euro.

The Winter 2022-23 Eurobarometer survey conducted in January and February 2023 indicated that 79% of euro area respondents supported the euro. While these results are encouraging, the same survey also showed that a relatively smaller share of 44% tended to trust the ECB. It is essential for the ECB to foster public trust both to anchor inflation expectations and to shield the ECB from political pressures that could undermine its independence. The ECB will therefore continue its efforts to build trust among the public by engaging in constructive dialogue with the European Parliament and euro area citizens to explain its decisions and listen to their concerns.

10.2 International relations

The G20 had to respond to the impact of Russia’s war in Ukraine in addition to structural challenges

Global economic developments during Indonesia’s G20 Presidency in 2022 were dominated by the severe economic and humanitarian impact of Russia’s war in Ukraine, which exacerbated global fragilities and slowed the nascent global recovery. G20 finance ministers and central bank governors had to respond to the direct and indirect impacts of the war, such as food and energy shortages, rising global inflation and increasing debt problems, in particular in vulnerable countries. Moreover, long-term structural challenges, such as mitigating climate change, improving pandemic preparedness, and avoiding protectionism and global fragmentation remained high on the agenda.

The ECB also continued to support G20 initiatives in the area of strengthening financial stability and resilience. This included reducing structural vulnerabilities stemming from non-bank financial intermediation and making progress towards the implementation of a regulatory framework at international and jurisdictional level to contain the risks from crypto-assets ecosystems. The ECB also supported the G20 in developing a framework to ensure just and affordable climate transitions and to accelerate the flow of sustainable investment. With regard to vulnerable countries, the ECB continued to support a predictable, timely and coordinated implementation of the Common Framework for Debt Treatments as well as measures to enhance debt transparency.

Policy issues related to the IMF and the international financial architecture

The IMF introduced measures to support Ukraine and other members in dealing with the impact of Russia’s war in Ukraine

The IMF played a prominent role in supporting Ukraine and other member countries affected by the direct and indirect repercussions of Russia’s war in Ukraine, such as the energy and food crises. It deployed several measures, including a newly created food shock window under its emergency financing instruments and a new Program Monitoring with Board involvement, from which Ukraine and several other countries benefited. An Administered Account was set up to allow donor countries to securely channel financial support – loans or grants – to Ukraine using the IMF’s payment infrastructure. Moreover, the IMF has been closely engaging with Ukrainian authorities to provide technical support for Ukraine’s economic policy measures.

Work continued to alleviate the impact of global challenges, including the pandemic and Russia’s war in Ukraine

In terms of the IMF’s lending toolkit, the new Resilience and Sustainability Trust (RST) – first proposed following the 2021 general allocation of SDRs – was approved and became operational ahead of the 2022 IMF Annual Meetings. The RST will help amplify the positive effects of the general allocation of SDRs in 2021 by facilitating the voluntary channelling of SDRs from members with strong external positions to low-income countries and vulnerable middle-income countries. RST funding can be used to address longer-term structural challenges, including climate change and pandemic preparedness, thereby contributing to prospective balance of payments stability. For contributions from the ESCB, similar to other channelling alternatives via the Poverty Reduction and Growth Trust, it is essential that claims on the RST maintain reserve asset quality. Among other SDR-related issues, in May 2022 the IMF concluded the five-year review of the SDR valuation , according to which the euro remained the second largest currency by size of share after the US dollar.

Amid heightened debt vulnerabilities following the pandemic, which were further exacerbated by Russia’s war in Ukraine, the IMF continued to develop its debt-related work agenda, completing its Review of the Fund’s Policies on Sovereign Arrears and Related Perimeter Issues in Spring 2022. The Review revisited the conditions under which the Fund can lend to a member country in the presence of sovereign arrears, taking into account the evolution in the creditor landscape, including the emergence of new official bilateral and institutional creditors and instruments. This includes a refinement of the claims that are subject to the policy of non-toleration of arrears, the highest level of IMF protection for the claims of international financial institutions and official bilateral creditors. The work on debt transparency under the joint IMF-World Bank Multipronged Approach to Address Debt Vulnerabilities has proceeded further. The IMF also completed the Review of The Institutional View on the Liberalization and Management of Capital Flows in March 2022. This forms part of its surveillance activities, which are increasingly important in the light of the slowing growth momentum, tightening financial conditions, and the impact of the energy and food crises.

11 Promoting good governance, social and environmental sustainability

In 2022 the ECB closely monitored the developments on sustainability reporting at European and international level to continuously increase transparency on its activities in the environmental, social and governance fields. Key work in these areas was carried out throughout the year including the achievement of several milestones set for the ECB’s climate agenda, the launch of awareness-raising campaigns and easy access to advice on ethics and good conduct to address the growing relevance of ethics and compliance issues, the expansion of the ways in which the ECB communicates with the public and the adjustment of human resources policies and practices to the new ways of working that emerged after the pandemic.

11.1 The ECB’s response to sustainability and related impacts and risks

Key work was conducted on environmental, social and governance-related topics

The ECB first started reporting on environmental, social and governance (ESG) matters in a more holistic manner in 2021, based on a materiality assessment which identified key sustainability topics for the organisation. This exercise also guided the ECB’s disclosures for 2022, which were further enriched through an initial analysis of the sustainability topics identified in the European Sustainability Reporting Standards in 2022. [ 70 ]

As a public institution, the ECB strives for the highest level of integrity and good conduct, continuously monitoring and adapting its frameworks to make them fit for purpose in a fast-changing world (see Section 11.2). With regard to its social impacts, the ECB has made further efforts to explain its policies to the public, targeting different audiences and addressing the concerns of citizens, while also creating space for conversations with the public on a regular basis. Section 11.3 sets out the key activities in this domain in 2022. The ECB also updated its human resources policies and practices in line with the new ways of working that arose in response to the COVID-19 pandemic. This included developing a new, flexible teleworking policy, introducing new learning programmes and advancing its diversity and inclusion initiatives, as outlined in Section 11.4. In 2022 the ECB further defined its strategic approach to climate change by developing an ECB climate agenda (see Section 11.5).

In addition to assessing ESG aspects from an impact perspective, the ECB considers sustainability risks under its existing governance framework, as highlighted in the chapter on risk management in the Annual Accounts.

11.2 Strengthening ethics and integrity

The ECB puts ethics and good conduct at the heart of its activities

The ECB actively promotes an organisational culture of ethics and compliance, ensuring that its high-level officials, management and staff members perform their functions in accordance with the highest standards of conduct. The Compliance and Governance Office (CGO) is responsible for establishing the rules on ethics and governance for ECB staff and for monitoring compliance with these. It organises awareness campaigns, training courses and e‑learning programmes, and provides individual advice and guidance on ethical issues. In 2022 efforts were made to enhance awareness about these rules and facilitate access to advice on ethics. Noting the importance of a prompt delivery of quality guidance, the CGO developed an ethics chatbot, which is able to provide general information and replies to straightforward questions in several ethical areas in real time. As a result, the number of queries submitted to the CGO fell by almost 20% from approximately 2,050 in 2021 to 1,690 in 2022, allowing the ethics and compliance experts to focus on more complex issues (Chart 11.1).

Overview of requests received from ECB staff in 2022

The ECB developed a structured approach to managing conduct risk stemming from external contractors

In addition to its regular information and advisory activities, the ECB invested in further strengthening its integrity and good conduct frameworks. In 2022 the ECB adopted a structured approach to managing the risk incurred if contractors working in sensitive areas do not behave according to the ECB’s ethics standards. The new approach complements the ECB’s vendor risk management framework and provides guidance on the monitoring and management of conduct risk during contract implementation.

An independent Ethics Committee provides advice to high-level ECB officials on questions of ethics, mostly concerning private activities and post-mandate gainful employment, and assesses their declarations of interests. In line with the ECB’s commitment to transparency and public trust-building, the opinions of the Ethics Committee on conflicts of interest, post‑mandate gainful employment and private activities, as well as the declarations of interests of high-level officials are published on the ECB website.

The ECB adopted enhanced rules on the private financial transactions of high-level ECB officials

In addition, the Ethics Committee monitors international developments in the field of ethics and good conduct and advises on desirable updates of the ECB’s ethics framework for high-level ECB officials. At the end of 2021 the Ethics Committee proposed a review of the rules governing private financial transactions to further mitigate the risks of misuse of confidential information and possible conflicts of interest. As a result, in November 2022 the Governing Council adopted an enhanced Single Code of Conduct imposing additional restrictions on the investment universe and horizon of private financial transactions, as well as new transparency obligations. [ 71 ]

At Eurosystem level, the Ethics and Compliance Conference, which comprises the Chief Ethics Officers of the ECB, national central banks (NCBs) and national competent authorities (NCAs), supported the ongoing implementation of the Ethics Guidelines adopted in 2021, which promote a consistent interpretation of the provisions across the national institutions. [ 72 ] To reflect the growing importance of ethics and compliance, the Governing Council decided to transform the Conference into an Ethics and Compliance Committee.

The ECB participated in European and international activities and knowledge-sharing on ethical issues

The ECB participates in joint activities and knowledge-sharing with the ethics functions of European institutions and international organisations. To encourage conversations on ethics and integrity, the Ethics and Compliance Committee organised thematic sessions with guest speakers from European and international organisations. In 2022 the ECB participated in interinstitutional discussions on the establishment of an independent ethics body common to all EU institutions, contributed to the Mechanism for the Review of Implementation of the United Nations Convention against Corruption and assumed the role of Vice-Chair of the Ethics Network of Multilateral Organizations.

11.3 Enhancing transparency and fostering understanding of ECB policy

The ECB continued to uphold its commitment to price stability and to make itself better understood by the wider public

In 2022 the surge in inflation, Russia’s invasion of Ukraine and the subsequent energy crisis created a challenging environment, including for the ECB’s communication. During times of exceptional uncertainty, clear, credible and consistent communication is particularly essential to anchor expectations and foster trust among the public in the ECB’s commitment and ability to restore price stability. To that end, the ECB continued its major efforts to foster better understanding of its decisions among both experts and the wider public, using innovative formats and adopting a multilingual approach.

Explaining ECB policy in uncertain times and beyond

The ECB reassured European citizens and provided accessible explanations on its policy decisions

With inflation rising to levels not seen in the history of the euro, and the ECB taking decisive monetary policy action, it was essential to step up communication and provide accessible explanations. First and foremost, this included reassuring European citizens about the ECB’s core commitment to bring inflation back to its 2% target over the medium term and its ability to deliver price stability with the tools at its disposal. At the same time, it was important to acknowledge that high inflation is a strain on everyone in the economy and that the necessary monetary policy tightening will also cause pain.

The ECB undertook major efforts to explain how its policy decisions will affect inflation. The interest rate hike in July 2022 was the first in 11 years. To explain to the wider public what higher interest rates seek to achieve, what they mean concretely for people and their economic choices, the ECB ran an extensive communication campaign. This involved publishing a new explainer (available in all EU languages) and arranging a number of TV and radio appearances by ECB Executive Board members and staff members to explain the various decisions and the reasoning behind them, as well as to address concerns.

In addition, a dedicated ECB Podcast episode explained the basic mechanisms of how higher interest rates can rein in inflation, and a second podcast on why monetary policy tightening needs to continue despite a weakening economy.

Sharing more of the insights and analysis that feed into ECB decisions can also help to foster understanding of the ECB’s policy among the interested public. To that end, 2022 saw the launch of a revamped ECB Blog , which now includes contributions from both Executive Board members and ECB staff.

With a fresh look and a steady flow of interesting and visually attractive posts, the ECB Blog has become an appealing channel for learning about a variety of central banking topics, ranging from differences in how men and women “feel” inflation to the financing of green innovation and the rise and fall of crypto-assets. Since blog posts are, as a rule, concise and written in accessible language, they tend to attract a readership that goes beyond experts and academics.

Novel ways of reaching the wider public

The ECB increased the presence of its Executive Board members on TV and radio

In 2022 the ECB also followed up on its commitment stemming from the ECB’s monetary policy strategy review to expand the reach of its communication and engagement beyond financial markets and experts to focus more on the wider public. Based on the finding from internal research that the majority of Europeans (79%) hear about the ECB via television, with radio and other general interest media also playing a very important role, the ECB focused its efforts on these media in 2022. This was reflected in the significant increase in the presence of ECB Executive Board members on radio and television (Chart 11.2).

Increase in TV and radio appearances by ECB Executive Board members

(percentages of overall media engagements)

Source: ECB. Notes: Media activities include Executive Board members' interviews, blog posts, contributions, op-eds, Q&A on social media and podcasts. Short contributions and video messages are excluded.

As younger people in particular increasingly access news via digital channels, the ECB also strengthened its online presence. It did so by enhancing its websites and by expanding its activity and using new formats on a variety of social media platforms, leading to continued growth in the number of followers.

In view of the outcome of the strategy review, the ECB had also committed to making direct engagement and interaction with the wider public a structural part of its communication – in other words, to expand on its one-way communication to encompass two-way conversation. To that end, the “ECB Listens” concept developed into a new “ ECB & You ” format. “ECB & You” seeks to enable direct dialogue between the ECB’s top representatives and the public. It aims for the widest possible reach, for instance via suitable TV programmes in euro area countries. The first event of this kind on a Dutch TV programme called “College Tour” gave local students an opportunity to interact live with President Lagarde on a variety of topics, including inflation, the digital euro, crypto-assets and career advice.

To reach the wider public effectively, the ECB has to speak to people in their own languages. Taking a multilingual approach to communications is the only way it can do this. To that end, significant parts of the ECB’s websites are available in all 24 official EU languages, including in Irish from 2022.

Providing access to documents is a key part of the ECB’s transparency policy. In 2022 the ECB undertook several initiatives to facilitate the submission and handling of requests for public access to ECB documents. Not least, following up on the policies and practices proposed by the European Ombudsman to give effect to the right of public access to documents, the ECB enhanced the information available on its Access to documents web page by publishing its filing and retention plan, as well as summary information on the requests for public access received in the previous year. With regard to the recommendations on the recording of text and instant messages sent/received by staff members in their professional capacity , the ECB prepared guidance for staff on the strictly limited use and mandatory recording of text and instant messages exchanged for business purposes.

No findings of maladministration were raised by the European Ombudsman regarding the ECB’s handling of public access requests.

To facilitate the handling of requests for public access to ECB documents within the ECB, the Eurosystem and the Single Supervisory Mechanism, the CGO developed a portal on transparency and access to documents, accessible to staff of the ECB, NCBs and NCAs. It provides easy access to the legal framework and procedures to follow, as well as information on past cases. It also raises awareness about transparency developments at the EU and international levels.

In 2022 the ECB responded to around 10,400 enquiries from European citizens, an increase of 7% compared with 2021. Citizens requested information or commented on a wide variety of topics, including inflation, interest rates, Russia’s war in Ukraine, climate change, the euro and exchange rates.

11.4 Empowering our people to excel for Europe

After more than two years of mostly working remotely, in 2022 ECB staff gradually returned to the office and started preparing for a new way of working. To support them during this period, we developed and adapted our people policies and initiatives. We continued to run pulse checks to check in with our employees on their well-being, connectedness and initial experiences with hybrid working. As we shifted to a hybrid working model, we also strengthened our diversity and inclusion efforts to create a workplace where everyone feels safe, valued and respected for who they are.

Gradual return to the office

ECB staff prepared for a new way of working

In May 2022 ECB staff entered a transition phase during which they gradually returned to the office, based on a minimum on-site presence of eight days per month. In parallel, we launched a Hybrid Working Model pilot to collect initial experiences with hybrid working. Roughly 1,400 employees from six business areas took part. The findings from the pilot, together with the feedback shared by ECB staff via different channels, extensive benchmarking and several rounds of consultation with our staff representatives all fed into the ECB’s new teleworking policy. This new policy, effective as of 1 January 2023, stands out in terms of overall flexibility compared with other organisations, allowing ECB staff to telework up to 110 days per year (around 50% of their working time).

The ECB checked in with employees

To gain insight into our employees’ well-being, productivity, connectedness and first experiences with hybrid working, we continued to run pulse checks, with participation rates of around 60%. While our employees’ well-being continued to improve in the first part of the year, it dropped towards the end of the year despite an improved feeling of connectedness after returning to the offices. Our latest pulse check showed that our employees feel well equipped to work in a hybrid way and that 83% of them feel proud to work for the ECB and 72% would recommend the ECB as a great place to work.

Learning and development

Digital people development initiatives were introduced

In 2022 we offered learning initiatives to accelerate digital business transformation, equip our staff for hybrid working and support their professional development. For example, we launched a digital dexterity learning portfolio that included masterclasses and e-learning courses for leaders and all staff and re-introduced a Leadership Growth Programme for our ECB leaders. In parallel to enabling our employees to access learning material from the European Commission and other EU institutions, as well as LinkedIn Learning through the Commission’s learning portal “EU Learn”, we launched EUREKA (“European Expertise & Knowledge Academy”), our new virtual learning platform. EUREKA promotes knowledge-sharing and collaboration. It also gathers learning and mobility opportunities within the ECB in one place. From 2023 it will also cover learning and mobility opportunities across other institutions in the ESCB and SSM.

System-wide collaboration on learning and development was enhanced

We use mobility to foster versatility and to attract talented people with new perspectives. This proved useful during the pandemic when we redeployed ECB staff on mobility to their former business areas in response to urgent business needs. In 2022 staff mobility in the ECB across business areas decreased slightly to 4.3% (compared with 4.5% in 2021). However, mobility within the ESCB and SSM increased thanks to two related initiatives: the relaunched Schuman programme and a new “System-wide Virtual Teams” programme pilot, allowing both ECB staff and staff from other ESCB and SSM institutions to work on interesting projects remotely (Table 11.1).

Mobility projects

Measures taken to support Ukrainian professionals

The ECB took several measures to support Ukrainian nationals after Russia’s invasion of Ukraine. We launched a traineeship for Ukrainian graduates and offered short-term contracts to Ukrainian professionals. In September 2022 we welcomed 15 Ukrainian trainees and two short-term employees. We also ensured that our childcare and accommodation service providers were available for Ukrainian refugees. Furthermore, we have been working on offering opportunities to staff from the National Bank of Ukraine.

Diversity and inclusion

Steps taken to attract diverse talent

Attracting diverse talent is crucial for the ECB to be able to make the best possible decisions for the citizens it serves. To achieve this, in 2022 the ECB participated in several careers fairs, such as the careers fair organised by ADAN ( Afro Deutsches Akademiker Netzwerk) , Europe's largest careers fair for black people and people of colour, and EUROUT, Europe’s leading LGBTQ+ business conference. We also successfully launched a traineeship pilot for applicants on the autism spectrum.

Efforts were strengthened to improve gender balance

We continued monitoring our progress towards our 2020-26 gender targets through improved gender scorecards. In 2022 the ECB met its target to hire and promote women in at least 50% of cases at management level (all management and senior management). However, the targets were missed at the (team) lead, expert and analyst levels by between 10 and 6 percentage points. When it comes to the overall share of women in the relevant salary band groups, the 2022 targets were achieved at management (all management and senior management) and analyst levels. However, the targets were missed at the (team) lead and expert levels by 2 percentage points and 1 percentage point respectively (Table 11.2). We will continue to strengthen our efforts to achieve gender balance.

Targets for intake and share of female staff in 2022

We also implemented further measures focused on the intersection of gender with other aspects of diversity, such as age, ethnicity and disability. One such measure was the launch of our redesigned ECB Scholarship for Women .

The ECB strived to build an inclusive culture

At the ECB, we strive to create a working culture where all employees feel included and respected, and where individual backgrounds, experiences and abilities are welcomed and valued. To enable such a culture and engage with our employees on this topic, in 2022 we continued to roll out our Inclusion Programme. In addition to providing training and e-learning courses, we launched several workshops focusing on inclusive behaviours within teams. Furthermore, President Christine Lagarde and the governors of 28 NCBs and NCAs signed an Equality, diversity and inclusion charter to promote a culture based on respect, dignity and inclusion across the ESCB and SSM.

The ECB workforce in figures

1 As of 31 December 2022. 2 Employees seconded from a national central bank of the European System of Central Banks, European public institutions/agencies or international organisations. 3 Refers only to permanent staff members and staff with fixed-term positions. 4 Refers to any permanent or temporary horizontal move across divisions or business areas. 5 Refers to any permanent or temporary move to a higher salary band, with or without a recruitment campaign. 6 Refers only to permanent staff members and staff with fixed-term convertible positions. 7 The table shows shares of ECB staff and management by nationality, i.e. staff members holding multiple nationalities are counted for each nationality they declare. “All staff” refers to employees, including management, on permanent, fixed-term convertible and fixed-term non-convertible contracts as at 31 December 2022. “Management” refers to salary bands I to M. Totals may exceed 100% due to rounding. The countries are listed using the alphabetical order of the country names in the respective national language.

11.5 Addressing environmental and climate-related challenges

The ECB’s climate-related work is steered by its climate change centre under the guidance of the Executive Board

The ECB is committed to playing its part in the fight against climate change and in addressing climate-related risks, within its mandate. In 2021 the ECB strengthened the governance of its climate-related work by setting up the climate change centre (CCC), which reports directly to the ECB President and regularly updates the Executive Board on progress and priorities.

The CCC designs and steers the ECB’s strategy on climate and advances climate-related work in collaboration with relevant internal and external stakeholders. Regular meetings with ECB senior managers serve as a forum for coordination and information exchange.

The ECB launched its climate agenda to guide its work on climate change across all areas of competence

The ECB climate agenda was launched in 2022 and sets out the strategic objectives, priorities and a roadmap for the ECB’s work in this area. It is guided by three strategic objectives. First, the ECB manages and mitigates the financial risks associated with climate change and assesses its economic impact. Second, it supports an orderly transition to a climate-neutral economy with measures that are within its mandate. Third, it shares expertise with the aim of fostering action beyond the ECB. The ECB’s climate agenda will be regularly updated, with details on the activities supporting the achievement of the strategic objectives grouped under six priority areas as outlined in Figure 11.1.

Figure 11.1

The strategic objectives of the ECB’s climate agenda

Source: ECB. Note: For more information on the ECB’s climate agenda, see the web page “ Climate change and the ECB ”.

Priority areas for climate change-related work

In 2022 the ECB took further steps to incorporate climate change considerations into its activities within its mandate and given the tasks at hand.

The ECB is assessing the macroeconomic impact of climate change and mitigation policies, and improving climate data

Through its analytical work, the ECB continued to assess the macroeconomic impact of climate change and mitigation policies on inflation and the real economy. The December 2022 Eurosystem staff macroeconomic projections for the euro area included an evaluation of the macroeconomic impact of climate change-related fiscal measures, such as energy taxes, on growth and inflation. The main results were published in the Economic Bulletin . Analytical work focused, among other things, on assessing the impact of extreme weather events on inflation. Furthermore, the ECB made progress on integrating climate change considerations into the macroeconomic modelling toolbox.

The Eurosystem developed climate-related statistical indicators , including experimental indicators for sustainable financial instruments and analytical indicators on financial institutions’ exposures to physical risk and the carbon footprint of their portfolios. These indicators will be developed further. In this context, the Eurosystem also aims to improve the availability and quality of climate data, for instance by means of assessing and incorporating public data sources for the analysis of transition and physical risk and through the procurement of commercial data to close existing data gaps.

The ECB is working on enhancing climate change-related financial risk assessment

To enhance the assessment of climate-related financial risks, in 2022 the Eurosystem conducted a first climate stress test of several of the financial exposures on its balance sheet. The main results relating to the corporate bond portfolio were published in the Eurosystem’s climate-related financial disclosures in March 2023. The Eurosystem also developed common minimum standards for incorporating climate change risks into the in-house credit assessment systems of NCBs for Eurosystem collateral, which will enter into force by the end of 2024. ECB analysis also provided further evidence on the systemic nature of climate risks and made the case for adapting existing macroprudential policy instruments to mitigate such risks for the financial system. [ 73 ]

Climate and environmental risks are being further integrated into the ECB’s banking supervision and are identified as a supervisory priority for 2023-25. Information on the key actions taken in 2022 is provided in the ECB Annual Report on supervisory activities .

The ECB is integrating climate change considerations into monetary policy operations and assessing its impact on monetary policy

The Eurosystem took further steps to incorporate climate change into its monetary policy operations. As of October 2022 the Eurosystem began to decarbonise the corporate bond holdings in its monetary policy portfolios by tilting its holdings towards issuers with a better climate performance as measured by past emissions, the ambitiousness of emission reduction plans and the quality of reporting.

Furthermore, in its collateral framework, the Eurosystem decided to limit the share of assets issued by non-financial corporations with a high carbon footprint that counterparties can pledge as collateral when borrowing from the Eurosystem. The limitation will apply by the end of 2024, provided that the necessary technical preconditions are in place. Furthermore, in December 2022 the ECB considered climate risks during its regular reviews of haircuts applied to corporate bonds used as collateral for the first time. The 2022 review of risk control measures did not find evidence that called for changes to the haircut schedule based on climate considerations, as the updated haircut schedule is already sufficiently protective against climate-related financial risks. Other measures in the collateral framework include the introduction of disclosure-related eligibility requirements, expected to apply as of 2026, for entities that are subject to the Corporate Sustainability Reporting Directive, and the above-mentioned enhancement of risk assessment.

The ECB is analysing and contributing to policy discussions to scale up sustainable finance

In the areas of EU and international policy and financial regulation, the ECB actively participated in discussions on sustainable finance in relevant fora, including the G7, G20, Financial Stability Board, Basel Committee on Banking Supervision, Central Banks and Supervisors Network for Greening the Financial System (NGFS), European Banking Authority and EFRAG. Through this, the ECB aims to further advance the regulatory framework to address climate change, improve climate risk analysis and climate scenarios, act as a catalyst to improve reporting from its perspective, fill data gaps and ultimately help scale up private and public sustainable finance. Examples of the ECB’s work in the field of EU sustainable finance and climate legislation include the opinion on the proposed recast of the Energy Performance of Buildings Directive and its contribution to developing the European Sustainability Reporting Standards as observer on the Sustainability Reporting Board of EFRAG. At the international level, the ECB also currently chairs the workstream on Scenario Design and Analysis and the Experts’ Network on Legal Issues of the NGFS.

In its Environmental Statement 2022 the ECB set out how it plans to align its business operations with the objectives of the Paris Agreement. The plan focuses on reducing travel and conference-related environmental impacts and engaging with suppliers via tools offered by sustainable procurement processes to manage impacts along the value chain. Progress was also made in the assessment of the potential environmental impacts of the second series of euro banknotes over the lifecycle. Based on the information available, research activities were launched and policies implemented to minimise the environmental impact of euro banknotes, such as the use of sustainable cotton for banknote paper, the extension of banknotes’ life in circulation and the use of more sustainable methods to dispose of used banknotes.

With regard to increased transparency, in March 2023 the ECB and the Eurosystem published their first climate-related financial disclosures of the euro-denominated non-monetary policy portfolios of the ECB and the Eurosystem NCBs and of the Eurosystem corporate bond portfolio for monetary policy purposes. The ECB’s report on non-monetary policy portfolios explains the ECB’s investment strategy and outlines the progress made on decarbonising its own funds and staff pension fund portfolios.

12 Meet our people

Changing jobs within the ECB or working temporarily at another central bank or partner institution has become an integral part of the professional and personal development of colleagues within the Eurosystem and the European System of Central Banks. Such mobility opportunities are a great tool for staff to broaden their knowledge and skills, while allowing them to contribute their specific expertise to important projects with a European impact.

The following stories give an insight into the rich array of assignments undertaken by colleagues via various forms of mobility.

Elena Bobeica, Lead Economist, Directorate General Economics

After a temporary assignment in Directorate General (DG) Secretariat under the ECB’s internal mobility scheme, I returned in 2022 to DG Economics to undertake a challenging project. I was entrusted the task of co-leading a group of experts from the ECB and national central banks to investigate issues related to forecasting owner-occupied housing costs.

Interestingly, the current inflation measure only partially includes the housing service costs of homeowners associated with owning, maintaining and living in their own home, even though these represent key expenditure items. While the future inclusion of these costs in the Harmonised Index of Consumer Prices is a multi-year project under the remit of the European Statistical System, forecasting inflation and its components is one of the main tasks of a central bank.

Having worked previously on various aspects of inflation forecasting, I was interested in gaining an understanding of the challenges involved in forecasting owner-occupied housing costs and investigating ways to address these. I found interacting with colleagues from the national central banks particularly rewarding. We worked closely on the project and were able to share diverse insights and information on country particularities. This was extremely useful given the heterogeneity of housing markets across the euro area. I felt that we managed to deepen our understanding of the costs associated with owner-occupied housing and the potential impact of including them in the HICP from the forecasting and monitoring perspectives.

Daniel Gybas, Senior Economist, Secretariat of the Network of Central Banks and Supervisors for Greening the Financial System (NGFS Secretariat)

While addressing climate change is a global challenge that requires global action, central banks operate in very different circumstances. Having been involved as a member of the DG Market Operations team in shaping the ECB’s initial thinking on how to integrate climate change into its monetary policy framework, I was curious to understand how other central banks operating in different environments address this challenge. Thanks to a special mobility initiative among the EU’s national central banks (Schuman Programme), I was able to join the NGFS Secretariat (hosted by the Banque de France), where I support the workstream on monetary policy . My focus area is the greening of monetary policy operations, which involves facilitating exchanges between more experienced central banks, including the ECB, and central banks that are exploring the possibility of making climate-related adaptations to their respective operational frameworks.

Thanks to this very rewarding assignment I have been able to learn first-hand about central banks’ actions and initiatives, and facilitate the sharing of knowledge and experience across institutions. On a personal level, while relocating my family from Frankfurt am Main to the Paris area was challenging, it has also created opportunities for personal growth and long-lasting memories.

Stefano Pagnano, Senior Business Analysis Expert, Directorate General Information Systems

I started my career at the ECB in the Governance and Transformation Services Division, where I was involved in IT governance and digital transformation. After a few years, I realised that I would be interested in getting to know the ECB from a different perspective and bringing my experience to a new context. Thanks to an opportunity for internal mobility, in 2022 I joined the Data and Analytics Services Division of DG Information Systems. My new Division works on cutting-edge data platforms and analytical applications that help the ECB meet its goal of becoming a data-driven organisation.

I currently work on a centralised data collection platform called CASPER, which automates the submission of data to the ECB from anywhere in the world in a self-service mode and within a short time frame. More than 3,000 users and 175 different institutions currently use it to fulfil their reporting obligations.

In my new role, I am involved in project management and business analysis. Together with colleagues from DG Statistics, we are constantly looking for ways to improve our services. For example, my new Division has initiated a Common Data Management programme. This is a complex project, which aims to build a new-generation data management and analytics platform for all ESCB and SSM users. There are many transformational challenges ahead, but our team spirit and constructive approach are one of our strengths!

Being on mobility has been enriching, both professionally and personally. It has allowed me to expand my network and work on innovative assignments wearing my two hats: contributing a different perspective thanks to my “newcomer’s eyes” combined with my experience as a seasoned professional.

Meri Sintonen, Economist, Directorate General Monetary Policy

In 2022 I joined the ECB’s Monetary Policy Strategy Division on secondment from Suomen Pankki under a Eurosystem staff mobility initiative called the Schuman Programme. As an economist with expertise in the payments field, I contribute to analysing the monetary policy effects of a digital euro with colleagues from various ECB business areas. While a digital euro could offer a wide range of benefits, it could also have monetary policy and financial stability implications depending on the extent to which it would become a substitute for bank deposits.

I am involved in a project that aims to predict the potential demand for a digital euro depending on its design features. The findings of this research can be used to gauge the impact of introducing a digital euro on households’ bank deposits and cash holdings. Insights from the analysis also shed light on how different design choices affect the demand for a digital euro and the way in which demand varies according to household characteristics and across euro area countries.

This secondment has offered me a unique opportunity to enhance my skills, grow my networks, get to know the ECB better and contribute to an incredibly interesting project. It has been an inspiring experience to see so many talented people working together towards common goals.

Annual Accounts

Consolidated balance sheet of the eurosystem as at 31 december 2022.

Postal address 60640 Frankfurt am Main, Germany Telephone +49 69 1344 0 Website www.ecb.europa.eu

The cut-off date for the data included in this report was 18 April 2023 (exceptions are explicitly indicated).

For specific terminology please refer to the ECB glossary (available in English only).

PDF ISBN 978-92-899-5946-9, ISSN 1725-2865, doi:10.2866/390483, QB-AA-23-001-EN-N HTML ISBN 978-92-899-5961-2, ISSN 1725-2865, doi:10.2866/03321, QB-AA-23-001-EN-Q

Given that official quarterly data on public investment are not available, this alternative approximation is widely used in ECB publications.

The volatility stems from global activities of a limited number of large multinational firms resident in Ireland and reflects tax-optimal international transfers of intangible assets that are essentially unrelated to the business cycle. Such transactions can be sizeable and irregular. They could also be immediate, as intangible investment does not need time to build.

The fiscal stance reflects the direction and size of the stimulus from fiscal policies to the economy beyond the automatic reaction of public finances to the business cycle. For more details on this concept, see the article entitled “ The euro area fiscal stance ”, Economic Bulletin , Issue 4, ECB, 2016.

See the article entitled “ Fiscal policy and high inflation ”, Economic Bulletin , Issue 2, ECB, 2023.

On the impact of the war on food inflation, see the box entitled “ The surge in euro area food inflation and the impact of the Russia-Ukraine war ”, Economic Bulletin , Issue 4, ECB, 2022.

See the box entitled “ Comparing labour market developments in the euro area and the United States and their impact on wages ” in the article entitled “Wage developments and their determinants since the start of the pandemic”, Economic Bulletin , Issue 8, ECB, 2022.

See Antonopoulos, C. et al., “ The Greek labour market before and after the pandemic: Slack, tightness and skills mismatch ”, Economic Bulletin , Issue 56, Bank of Greece, December 2022.

See “ ECB provides details on how it aims to decarbonise its corporate bond holdings ”, press release , ECB, 19 September 2022.

See the box entitled “ Gradual phasing-out of pandemic collateral easing measures ”, Economic Bulletin , Issue 3, ECB, 2022.

See “ The financial risk management of the Eurosystem’s monetary policy operations ”, ECB, July 2015

See “ FAQs on the corporate sector purchase programme and non-financial commercial paper ”, on the ECB’s website, updated on 22 February 2023.

See “ ECB takes further steps to incorporate climate change into its monetary policy operations ”, press release , ECB, 4 July 2022.

See the explainer “ Profits and losses of the ECB and the euro area national central banks: where do they come from? ” ECB, updated on 23 February 2023.

Article 5 of the SSM Regulation assigns an important role and specific powers to the ECB in this area, including the power to apply more stringent capital measures in case of need.

In 2022, 11 countries increased the countercyclical capital buffer (Bulgaria, Germany, Estonia, Ireland, France, Croatia, Cyprus, Lithuania, Netherlands, Slovenia and Slovakia) while Luxembourg maintained a positive buffer rate. As regards systemic risk buffers, two countries (Germany and Slovenia) introduced a sectoral buffer and Lithuania maintained a positive sectoral buffer (Belgium had decided at the end of 2021 to replace its residential real estate risk weight measure with a sectoral systemic risk buffer). Austria increased its broad systemic risk buffer, while Bulgaria and Croatia maintained positive broad systemic risk buffers.

The statement also acknowledged and endorsed the warning on vulnerabilities in the EU financial system issued by the European Systemic Risk Board on 22 September 2022 (see below).

“ Enhancing macroprudential space in the banking union – report from the Drafting Team of the Steering Committee of the Macroprudential Forum ”, Annex 2 of the ECB response to the European Commission’s call for advice on the review of the EU macroprudential framework, ECB, March 2022.

For example, Box 8 in the May issue focuses on the transmission and effectiveness of capital-based macroprudential measures.

The ESRB is responsible for the macroprudential oversight of the EU financial system and the prevention and mitigation of systemic risk. It uses “soft powers”, i.e. issuance of warnings and recommendations, to carry out its mandate.

See “ Review of the EU Macroprudential Framework for the Banking Sector – response to the call for advice ”, ESRB, March 2022, “ Review of the EU Macroprudential Framework for the Banking Sector – a Concept Note ”, ESRB, March 2022, and Wedow, M. et al., “ Making the EU macroprudential framework fit for the next decade ”, VoxEU column , 4 October 2022.

See “ Mitigating systemic cyber risk ”, ESRB, January 2022.

See “ Report on the economic rationale supporting the ESRB Recommendation of 2 December 2021 on money market funds and assessment ”, ESRB, January 2022.

See “ EU Non-bank Financial Intermediation Risk Monitor ”, No 7, ESRB, July 2022.

See ECB/ESRB Project Team on climate risk monitoring, “ The macroprudential challenge of climate change ”, ECB/ESRB, July 2022.

See “ Vulnerabilities in the EEA commercial real estate sector ”, ESRB, January 2023.

Recommendation of the European Systemic Risk Board of 2 December 2021 on reform of money market funds ( ESRB/2021/9 ) (OJ C 129, 22.3.2022, p.1) and Recommendation of the European Systemic Risk Board of 2 December 2021 on a pan-European systemic cyber incident coordination framework for relevant authorities ( ESRB/2021/17 ) (OJ C 134, 25.3.2022, p.1).

See “ ESRB issues new warnings and recommendations on medium-term residential real estate vulnerabilities ”, press release , ESRB, 11 February 2022.

Warning of the European Systemic Risk Board of 22 September 2022 on vulnerabilities in the Union financial system ( ESRB/2022/7 ) (OJ C 423, 7.11.2022, p.1).

Recommendation of the European Systemic Risk Board of 1 December 2022 on vulnerabilities in the commercial real estate sector in the European Economic Area ( ESRB/2022/9 ).

Using its power to impose sanctions on supervised credit institutions, in March 2022 the ECB sanctioned Banque et Caisse d’Epargne de l’Etat, Luxembourg , for misreporting capital needs. On the same day, it sanctioned Bank of Cyprus for transferring liquidity to subsidiaries without approval. In December 2022 the ECB sanctioned ABANCA for failing to report a significant cyber incident within the prescribed deadline.

For more details on the Capital Requirements Regulation and Directive, see Box 2, which also provides links to the ECB opinions on the banking package proposals.

See, for example, Elderson, F., “ Mind the gap, close the gap – the ECB’s views on the banking package reforms ”, The Supervision Blog , ECB, 28 April 2022 and Campa, J.M., (Chairperson of the European Banking Authority), de Guindos, L. and Enria, A., “ Strong rules, strong banks: let’s stick to our commitments ”, The Supervision Blog , ECB, 4 November 2022.

See “ An EU financial system for the future ”, speech by Luis de Guindos, Vice-President of the ECB, at the Joint conference of the ECB and the European Commission on European financial integration, Frankfurt am Main, 6 April 2022.

See “ Mind the liquidity gap: a discussion of money market fund reform proposals ” and “ Assessing the impact of a mandatory public debt quota for private debt money market funds ”, Macroprudential Bulletin , Issue 16, ECB, 21 January 2022.

See “ Assessment of the Effectiveness of the FSB’s 2017 Recommendations on Liquidity Mismatch in Open-Ended Funds ”, FSB, 14 December 2022.

See “ Enhancing the Resilience of Non-Bank Financial Intermediation – Progress report ”, FSB, 10 November 2022.

See CPMI and Board of IOSCO, “ Application of the Principles for Financial Market Infrastructures to stablecoin arrangements ”, Bank for International Settlements and IOSCO, July 2022.

See Opinion of the European Central Bank of 27 April 2022 on the Proposal for a Directive of the European Parliament and of the Council amending Directive 2013/36/EU as regards supervisory powers, sanctions, third-country branches, environmental, social and governance risk ( CON/2022/16 ) (OJ C 248, 30.6.2022, p.87) and Opinion of the European Central Bank of 24 March 2022 on a proposal for amendments to Regulation (EU) No 575/2013 of the European Parliament and of the Council as regards requirements for credit risk, credit valuation adjustment risk, operational risk, market risk and the output floor ( CON/2022/11 ) (OJ C 233, 16.6.2022, p.14). The ECB also published an opinion on the third element of the package, see Opinion of the European Central Bank of 13 January 2022 on a proposal to amend Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms with respect to resolution ( CON/2022/3 ) (OJ C 122, 17.3.2022, p. 33).

See Ikeda, Y. et al., “ Covid-19 and bank resilience: where do we stand? ”, BIS Bulletin , No 44, Bank for International Settlements, 22 July 2021.

A process to ensure that only suitable and experienced managers are appointed to the top positions of a bank.

For example, a bank that finances companies operating in sectors affected by the sustainable transition may face significant risks in terms of both credit losses and business model resilience. The proposed legislative provisions will ensure that such a bank sets up a plan to proactively measure and manage these risks. This may help the bank to identify opportunities to mitigate ESG risks, for instance by supporting the transition and adaptation of its most vulnerable customers.

In total, five major information technology (not cyber) related incidents occurred in 2020, affecting the payment transactions and securities processing of TARGET Services. See “ ECB publishes an independent review of TARGET incidents in 2020 press release ”,, ECB, 28 July 2021.

TIBER-EU is the European framework for threat intelligence-based ethical red-teaming. It serves as an EU-wide guide on how authorities, entities, threat intelligence and red-team providers should work together to test and improve the cyber resilience of entities by carrying out a controlled cyberattack.

In accordance with Article 141(2) of the Treaty on the Functioning of the European Union, Articles 17, 21.2, 43.1 and 46.1 of the Statute of the ESCB, and Article 9 of Council Regulation (EC) No 332/2002 of 18 February 2002.

In accordance with Articles 122(2) and 132(1) of the Treaty on the Functioning of the European Union, Articles 17 and 21 of the Statute of the ESCB, and Article 8 of Council Regulation (EU) No 407/2010 of 11 May 2010.

In accordance with Articles 17 and 21 of the Statute of the ESCB (in conjunction with Article 10 of Council Regulation (EU) No 2020/672 of 19 May 2020 on the establishment of a European instrument for temporary support to mitigate unemployment risks in an emergency (SURE) following the COVID-19 outbreak).

In accordance with Articles 17 and 21 of the Statute of the ESCB (in conjunction with Regulation (EU) No 2021/241 of the European Parliament and of the Council of 12 February 2021 establishing the Recovery and Resilience Facility).

In accordance with Articles 17 and 21 of the Statute of the ESCB (in conjunction with Article 3.5 of the EFSF Framework Agreement).

In accordance with Articles 17 and 21 of the Statute of the ESCB (in conjunction with Article 5.12.1 of the ESM General Terms for Financial Assistance Facility Agreements).

In the context of the loan facility agreement between the Member States whose currency is the euro (other than Germany and Greece) and Kreditanstalt für Wiederaufbau (acting in the public interest, subject to the instructions of and with the benefit of the guarantee of the Federal Republic of Germany) as lenders and the Hellenic Republic as borrower and the Bank of Greece as agent to the borrower, and pursuant to Articles 17 and 21.2 of the Statute of the ESCB and Article 2 of Decision of the European Central Bank of 10 May 2010 concerning the management of pooled bilateral loans for the benefit of the Hellenic Republic and amending Decision ECB/2007/7 ( ECB/2010/4 ) (OJ L 119, 13.5.2010, p. 24).

Guideline (EU) 2022/971 of the European Central Bank of 19 May 2022 on the Centralised Securities Database and the production of securities issues statistics and repealing Guideline 2012/689/EU (ECB/2012/21) and Guideline (EU) 2021/834 (ECB/2021/15) ( ECB/2022/25 ) (OJ L 166, 22.6.2022, p. 147).

Regulation (EU) No 1333/2014 of the European Central Bank of 26 November 2014 concerning statistics on the money markets ( ECB/2014/48 ) (OJ L 359, 16.12.2014, p. 97).

Guideline (EU) 2022/747 of the European Central Bank of 5 May 2022 amending Guideline 2012/120/EU on the statistical reporting requirements of the European Central Bank in the field of external statistics (ECB/2011/23) ( ECB/2022/23 ) (OJ L 137, 16.5.2022, p. 177).

An additional Tab “Focus on Russia” is also available in the dashboard of the Balance of payments and international investment position .

For more information, see “ ECB presents action plan to include climate change considerations in its monetary policy strategy ”, press release , ECB, 8 July 2021.

See “ Climate change-related indicators ”, on the ECB’s website.

See “ ECB moves towards harmonising statistical reporting to ease burden for banks and improve analysis ”, press release , ECB, 17 December 2021.

In line with the Decision on increased transparency in ECB regulations on European Statistics adopted by the Governing Council in October 2016.

For more information, see “ Standardising banks’ data reporting ” (IReF and BIRD) on the ECB’s website.

See “ The ESCB input into the EBA feasibility report under Article 430c of the Capital Requirements Regulation (CRR 2) ”, ECB, September 2020.

For more information on the analysis of OFIs, see “ Non-bank financial intermediation in the euro area: implications for monetary policy transmission and key vulnerabilities ”, Occasional Paper Series , No 270, ECB, revised December 2021.

See Laeven, L. and Popov, A., “ Carbon taxes and the geography of fossil lending ”, Working Paper Series , No 2762, ECB, December 2022.

See Reghezza, A., Altunbas, Y., Marques-Ibanez, D., Rodriguez d’Acri, C. and Spaggiari, M., “ Do banks fuel climate change? ”, Working Paper Series , No 2550, ECB, May 2021.

See De Haas, R. and Popov, A., “ Finance and Green Growth ”, The Economic Journal , Vol. 133, Issue 650, February 2023, pp. 637-668.

See Hassler, J., Krusell, P. and Olovsson, C., “ Finite resources and the world economy ”, Journal of International Economics , Vol. 136, No 103592, May 2022.

See Hassler, J., Krusell, P. and Olovsson, C., “ Presidential Address 2020 Suboptimal Climate Policy ”, Journal of the European Economic Association , Vol. 19, No 6, December 2021, pp. 2895-2928.

Joined Cases C‑597/18 P, C‑598/18 P, C‑603/18 P and C‑604/18 P - ECLI:EU:C:2020:1028.

The Council of the European Union, the European Commission, the Eurogroup and the European Union.

See Letter from Fabio Panetta to Irene Tinagli, Chair of the ECON Committee, on progress reporting on the investigation phase of a digital euro , ECB, 14 June 2022.

The standards developed by the European Financial Reporting Advisory Group (EFRAG) outline requirements for corporate reporting on a broad range of ESG issues.

See “ ECB publishes enhanced rules for private financial transactions of high-level officials ”, press release , ECB, 16 December 2022.

Guideline (EU) 2021/2253 of the European Central Bank of 2 November 2021 laying down the principles of the Eurosystem Ethics Framework ( ECB/2021/49 ) (OJ L 454, 17.12.2021, p. 7) and Guideline (EU) 2021/2256 of the European Central Bank of 2 November 2021 laying down the principles of the Ethics Framework for the Single Supervisory Mechanism ( ECB/2021/50 ) (OJ L 454, 17.12.2021, p. 21).

See “ The macroprudential challenge of climate change ”, joint report by the ECB/ESRB Project Team on climate risk monitoring, July 2022.

The survey of more than 22,000 Gen Zs and millennials across 44 countries examines their shifting relationship with work, how they continue to make lifestyle and career decisions based on their values, and underscores continuing concerns about finances, climate change, and mental health.

Gen Zs and millennials recognize progress, but they are expecting more.

Let’s make this work.

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Employers have made progress since pre-pandemic times, but business is still not meeting expectations

Satisfaction with work/life balance and employer's DEI and societal impact efforts have improved.

While these positive trends show Gen Zs and millennials are slightly more satisfied with their own employers, they are not convinced that business more broadly is having a positive impact. And new setbacks are hampering their ability to plan for their futures.

Progress since 2019

The high cost of living looms large for gen zs and millennials.

Once again, the high cost of living is the top societal concern for both Gen Zs and millennials, ahead of unemployment and climate change.

Half of Gen Zs and millennials say they live paycheck to paycheck. And they are taking on side jobs to make ends meet.

Economic uncertainty is causing them to postpone big life decisions—many say it will become harder or impossible to buy a house, start a family, ask for a promotion, or start a new job if the economy doesn’t improve.

Gen Zs and millennials are facing increased financial concerns year over year

Gen zs and millennials are rethinking the role of work in their lives.

The pandemic prompted a rethinking of the role work plays in their lives. While 49% of Gen Zs and 62% of millennials say work is central to their identity, they place a strong focus on work/life balance—the top trait they admire in their peers, and their top consideration when choosing an employer.

To help them achieve better balance, Gen Zs and millennials want flexibility in where and when they work. Many respondents now work in hybrid or remote work patterns, a benefit they value deeply.

Gen Zs and millennials would also like their employers to offer better career advancement opportunities for part-time employees, more part-time jobs overall, and the option for more flexible hours for full-time employees, for example the ability to work condensed four-day work weeks.

Professionals working on their laptops in breakout area of office

77% of Gen Zs and 75% of millennials who are currently in remote or hybrid roles would consider looking for a new job if their employer asked them to work on-site full-time.

Employers' efforts to improve mental health support are having a positive impact, but stigma remains

Nearly half of Gen Zs and four in 10 millennials say they feel stressed all or most of the time.

The majority of respondents consider mental health support and policies to be very important when considering a potential employer. And many respondents believe that their employers are taking mental health seriously and driving positive change.

But, despite this progress, mental health support and resources are still under-utilized, and many don’t feel they can talk to their employers about mental health.

Those who...

Climate change is a major concern for gen zs and millennials. it’s impacting their lifestyle and career decisions.

Six in 10 Gen Zs and millennials say they have felt anxious about the environment in the past month, and these concerns are impacting their career and lifestyle decisions. About one in six have already changed jobs or industries due to climate concerns, with another quarter planning to do so in the future.

They want to be empowered to drive change within their organizations. And about half of Gen Zs and millennials say they are pressuring businesses to act on climate change, yet few respondents say they feel able to influence their organization’s sustainability efforts.

Gen Zs and millennials want their employers to support and empower them to make more sustainable decisions in their own lives, and to develop the skills needed for the transition to a low-carbon economy.

“My main financial concern will be ensuring I can have a comfortable work/life balance, as at present I am struggling to maintain this due to picking up a lot of overtime to make ends meet.”

“Although it takes up a large amount of our time, life doesn't necessarily have to be all about work. It's because I have a job that I'm able to enjoy my personal life. And it's because I enjoy my personal life that I'm able to work hard at my job. I reckon it's precisely because I have fulfilment in both of these areas that I'm able to be my true self.”

“It is very important for me to work remotely and work flexible hours. It gives me more time to take care of my personal life, my mental health, my home life with my partner and for me to have better quality of life…Flexibility is very important, and I believe it is a trend without return, that all employers should adapt to.”

“I have rejected some jobs because the companies are only interested in your services, rather than paying attention to how their employees are, so that they can perform to their best ability in the workplace. In this case, I’m specifically referring to the issues of mental health, and gender equality.”

“I’ve turned down employers and assignments, because I believe in environmental sustainability, and I refuse to be part of something that does not take the environment into account.”

Young woman practicing rock-climbing on a rock wall indoors

Gen Zs and millennials are facing a unique combination of challenges during a pivotal point in their lives as they progress in their careers and plan for their futures. It is crucial for employers to understand these generations and continue driving progress on the issues that matter most to them. This will not only help boost productivity and retain talent—it will ultimately build trust and value for business in society more broadly.

Employers can—and must—act. As businesses face new headwinds, it will be important to stay focused on maintaining the progress they've made and driving greater momentum.

Download the 2023 Gen Z and Millennial Survey

To learn more about the mental health findings, read the Mental Health Deep Dive

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Environmental, Social, and Governance Strategy

ESG Mission and Strategy Pillars

At American Express, our ESG mission is to back people and businesses to thrive and create equitable, resilient, and sustainable communities globally. We seek to mobilize our business to address pressing global challenges and deliver high impact initiatives to serve our colleagues, customers, and communities.

In 2021, we launched a new roadmap for our global ESG strategy, establishing new long-term goals and objectives across three critical areas for our company, stakeholders, and society: Promote Diversity, Equity, and Inclusion (DE&I); Advance Climate Solutions; and Build Financial Confidence. Throughout 2021 and 2022, we made significant progress toward our goals throughout our 2021-2022 ESG Report .

Group of people promoting diversity, quity, and inclustion.

Promote Diversity, Equity and Inclusion Support a diverse, equitable, and inclusive workforce, marketplace, and society.

Build Financial Confidence Provide responsible, secure, and transparent products and services to help people and businesses build financial resilience.

Advance Climate Solutions Enhance our operations and capabilities to meet customer and community needs in the transition to a low-carbon future.

Awards & Recognition Highlights

Our commitment to be a great place to join, stay and grow a career continues to earn us industry awards and recognition. Here are some of the recognitions that make us proud:

In the News

CORPORATE SUSTAINABILITY

American Express Releases 2021-2022 Environmental, Social and Governance (ESG) Report

August 4, 2022

Neir’s Tavern: One of America’s Oldest Bars in NYC Perseveres as a Testament to Community and Backing from American Express July 18, 2022

American Express Announces New Initiatives to Advance Climate Action and Support Low-Carbon Communities

April 6, 2022

Learn more about our progress on our Environmental, Social, and Governance (ESG) Strategy in our 2021-2022 ESG Report.

Download PDF

Inspiring a New Generation of Learning: 2021-2022 Annual Report

We are thrilled to share DPP’s 2021-2022 Annual Report with you below.

As we reflect on an exciting year of growth, innovation, and successful collaboration, we are deeply grateful for the Denver Preschool Program Community. Our families, our providers, and of course, the students are always at the forefront of our minds as we push forward to continue improving the early childhood education experience for Denver’s youngest learners. In this year’s report, we are proud to share the successes of our core programs and the exciting new pilot programs like Preschool for 3s and the DPP Scholarship. As we look to the future, our focus is on equity and expanding the power of preschool to all families across locations and languages, specifically those in areas of concentrated disadvantage. We have entered an exciting momentum stage for early education, and we hope you will join us on our bold path forward.

Previous Annual Reports

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About American Express
Throughout 2021 and 2022, we made significant progress toward our goals throughout our 2021-2022 ESG Report. Promote Diversity, Equity and Inclusion Support a diverse, equitable, and inclusive workforce, marketplace, and society.
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