The Corporate Sustainability Reporting Directive (CSRD), currently in force, extends and solidifies the rules regarding sustainability information that companies should disclose. It places an obligation on companies to use standards to fulfill their legal sustainability reporting obligation. In connection with this, the Commission adopted common standards to ensure harmonised reporting and facilitate access to sustainable finance.
The Corporate Sustainability Reporting Directive (CSRD) introduces legally binding reporting requirements that strengthen the role of market-based reporting and extend the scope of sustainability reporting beyond Scope 1 and 2 to Scope 3 GHG emissions, affecting close to 50 000 companies. Furthermore, the proposed Corporate Sustainability Due Diligence Directive (CSDDD) intends to add a corporate duty for some companies to adopt transition plans to ensure that their business models and strategies are in line with limiting global warming to 1.5 degrees Celsius as per the Paris Agreement. Although the Agreement’s objectives are not meant for corporates but rather for state actors, the CSDDD effectively imposes the obligation on individual companies and puts them on the decarbonisation path.
These companies will need to report according to European Sustainability Reporting Standards (ESRS) that mandate the use of market-based reporting for disclosing the company’s energy mix, where relevant. This can have a bullish impact on the GO market starting from 2024 as the first tranche of affected companies will need to start reporting in 2025 for the previous year.
Companies will have to start reporting under ESRS according to the following timeline:
While the CSRD requires companies that have transition plans in place, to make them publicly available, the CSDDD obliges companies to have them from the outset. The ESRS elaborate on what’s to be included in them.
Companies will need to ensure that their plans are compatible with limiting global warming to 1.5. degrees Celsius. This implies the use of voluntary guidelines provided by the Science Based Targets Initiative (SBTi) to set decarbonisation goals as these are the only GHG emissions reduction standards for industries that are in line with the Paris Agreement. The target-setting guidelines have been already identified for some sectors, while for others the work is still underway.
Other information to disclose in the transition plans includes an explanation and quantification of the company’s investments and funding supporting the implementation of its transition plan, inter alia.
When reporting Scope 2 emissions under the disclosure requirement E1-4 Gross scopes 1,2,3 and Total GHG emissions, companies are to use dual reporting i.e., both market- and location-based.
The ESRS reference the Greenhouse Gas Protocol Scope 2 Guidance which prescribes reporting of Scope 2 GHG emissions using both market- and location-based approaches for companies who are part of the climate initiative and operate in markets providing product or supplier-specific data in the form of contractual instruments, such as in the EEA. However, the issue is that some companies use selective reporting, as they report their emissions using just one reporting method, not both. The preferred method is often location-based in countries with high installed RES-E capacity, while the market-based approach is favoured where the grid carbon intensity is relatively high.
Now that the ESRS mandate obligatory dual reporting, companies will no longer be able to do selective reporting, yet this does not guarantee the use of market-based instruments. Here’s why.
If companies extract the location advantage and rely on location-based Scope 2 emissions i.e., what’s generating on the grid, for reporting, then for market-based reporting, companies are left with the “dirty” residual mix by purposefully not choosing to source RES-E via GOs. Consequently, their Scope 2 market-based emissions will be higher than location-based. While placing a requirement on companies to report emissions using both methods, this measure alone does not oblige undertaking to purchase GOs. But in conjunction with the energy disclosure requirement, GOs are carved out a greater role to play, as discussed below.
Nevertheless, when setting GHG emission reduction targets covering Scope 2, companies have a choice to opt for either location-based or market-based targets.
This leads to method discrepancy in Scope 2 reporting; in countries where carbon intensity of the grids is already quite low (as defined by the RFNBO Delegated Act) such as in the Nordics and where it is set to become lower due to the greening of the grids as per updated National Energy and Climate Plans, companies may favour location-based method for Scope 2 target-setting. This would come at no extra cost and reflects the current practice of selective reporting (location-based as opposed to dual reporting) carried out by some companies.
Disclosure requirement E1-5 Energy consumption mix obliges companies to provide information on the share of renewable energy in their overall energy mix, inter alia. It reads:
Obligatory market-based reporting is thus applicable to report Scope 2 GHG emissions to prove RES-E consumption in case the said renewable electricity is purchased from a supplier. In the EU, green electricity tariffs come with GOs as required by the Renewable Energy Directive and the Internal Electricity Market Directive, and PPAs are meant to be concluded with bundled GOs to claim RES-E properties. If companies opt for PPAs, the market will see the corresponding issuance of untradeable GOs, which despite the increased supply, will have no effect on GO prices.
If the companies’ procurement strategies entail GOs, we expect the demand-side of the GO market to receive an influx of new consumers. Considering that disclosure of the electricity consumption mix is to be included in the company’s sustainability reports on an annual basis, lasting GO demand could be expected.
The ESRS delegated act adopted by the Commission will be formally transmitted in the second half of August to the European Parliament and to the Council for scrutiny. The scrutiny period runs for two months and can be extended by a further two months. The European Parliament or the Council may accept or reject the delegated act, but they cannot amend it due to the type of the legislative procedure. This means that the ESRS may be adopted and formally enter into force before the year’s end.
By mandating the use of dual reporting for gross GHG emissions, the ESRS strengthen the case of market-based reporting thereby preventing selective usage of location-based approach.
Where the grid carbon intensity is already low and historically corporates have shown reluctance to source RES-E using GOs such as the case in Iceland and Norway, the ESRS’ dual reporting requirement could incentivise the use of market instruments as opposed to merely reporting the residual mix. Now that dual reporting would be made mandatory, the perception of these corporate as “green” could be compromised on the back of low location-based vs high market-based Scope 2 emissions (residual mix). Greenwashing would be further prevented by the Green Claims Directive as it promotes the use of GOs for managing GHG emissions from the electricity use. This could push previously hesitant to market based approach companies to rethink their strategies to rely less on the “dirty” residual mix.
Depending on the corporate objectives (GHG management + RES-E procurement or GHG management), we could see those with vested interest in the latter option go for GOs with low life-cycle emissions, including cheap nuclear GOs, currently trading below 1 EUR/MWh.
As the Commission also directs companies to supplement RES-E consumption reporting in the energy mix disclosure with PPAs and/or EACs, this requirement can have the most pronounced impact on the GO market. This move will also help improve the corporates’ gross scope 2 indicators under the market-based approach.
At the same time, the choice to select market- or location-based method when setting decarbonisation targets does not necessarily strengthen the case for EAC procurement. The reasoning is based on a sample of current sustainability reports provided to CDP, whereby selected companies chose to provide location-based Scope 2 targets and rely on residual mix to cover market-based Scope 2 emissions.
Nonetheless, elsewhere in Europe, environmentally conscious corporates such as in Germany and France, and who are also members of the SBTi, are already choosing to set decarbonisation targets using market-based method and report on their current Scope 2 emissions using market instruments.
We foresee that these regional patterns to persist going forward and Nordics-based companies to gradually change their Scope 2 preferences in favour of GOs and PPAs.
We therefore expect demand from market-based solutions to fulfill disclosure requirements “targets related to climate change mitigation” and “gross scopes 1,2,3 and total GHG emissions” and “energy consumption mix”.
The regulation also requires the companies to provide information on their Scope 3 GHG emissions, which in turn means that along the supply chain, there will be greater pressure on smaller market players to decrease their emissions, including through their scope 2 emissions. This could lead to a trickle-down effect on GO demand.
The Commission estimates that the sustainability reporting obligation under the CSRD and the standards will affect 49 000 companies compared to 11 600 under the current regime. The wave of ESRS-spurred demand for GOs is expected to hit the market first in 2024 (large listed companies) with additional demand coming in 2026 (large companies) and with comparably lower demand entering the market in 2029 (listed SMEs).
At this stage, it is hard to quantify the impact; however, Veyt is working on updating its long-term GO fundamental model to reflect corporate demand taking into account the aforementioned policy changes.
Veyt specialises in data, analysis, and insights for all significant low-carbon markets and renewable energy.
