Corporate reporting standards and obligations are becoming more granular and falling under greater scrutiny across the EU, after new rules came into force at the start of 2024. Argus spoke to net zero adviser Nils Holta at environmental solutions provider Ecohz to review changes to EU legislation and consider their impact on wholesale energy attribute certificates markets. Edited highlights follow:
Let's start by decoding the acronyms and taking stock of changes to reporting standards this year. What do the principles of the CSRD and ESRS look like? How do these align with the EU Taxonomy?
These are all thematically related pieces of legislation, that are not formally linked to each other.
The Corporate Sustainability Reporting Directive (CSRD) and the EU Sustainable Investment Taxonomy are two of the angles of a sustainability transparency triangle completed by the Green Claims Directive (GCD). Through these policy mechanisms, the EU seeks to cover sustainability reporting, sustainability criteria for investments, and marketing information to consumers. Essentially, the EU is trying to add sustainability as a new dimension of the single market, alongside standardised comparisons on quality and price.
The CSRD relates more to the finance side. Through the annex with the European Sustainability Reporting Standards (ESRS), it details how companies should report on their sustainability impact, their sustainability-related risks, and any financial opportunities that arrive as a result of sustainability matters. It has been developed as an addition to European financial disclosure requirements, and in Norway, for instance, it has been transposed through amendments to the "accounting law" (Regnskapsloven). For financial undertakings, the Sustainable Finance Disclosure Regulation (SFDR) plays much the same role, albeit at a higher level of granularity.
On the consumer-facing side, companies will soon be required to adhere to the GCD when promoting their products' environmental profiles to final consumers in what the EU calls "explicit environmental claims". While not quite the same as sustainability reporting, it fits in a market dynamic where the EU expects economic actors to be more transparent about the environmental qualities of their products — like we are used to for price and quality.
Finally, we have the EU Taxonomy for sustainable activities, or just the Taxonomy. The Taxonomy is a list of economic activities with clear criteria on how they can be performed sustainably, and, in some cases, how they can be considered a transitional activity to more sustainable options. The Taxonomy also mandates that large undertakings and financial actors disclose the percentage of their Capex [capital expenditure], Opex [operating expenditure], and turnover that is invested in, finances, or derives from activities that are considered sustainable under the Taxonomy.
Here is the link to the CSRD (ESRS), GCD and SFDR. If you are required to report on the percentage of your investments or turnover that is associated with sustainable activities, you need to know how all the companies you invest in are performing. And through the CSRD they are required to share this information in a transparent and streamlined manner. If, as a company, you want to make a claim about a product's environmental profile, you are now also required to possess and sort the information necessary to found that claim through the same directive.
So here we have the triangle — the Taxonomy and SFDR push investors towards sustainable investments. The GCD provides consumers with a choice to consume sustainably, and the CSRD and ESRS ensure that companies have the information necessary for the other two to work.
So the EU wants you to base Taxonomy reporting or environmental claims on the information published in your CSRD reporting?
Not quite. I should stress at this point that EU law does not require companies to use the same methodologies for their CSRD reporting as for explicit environmental claims under the GCD or for showing criteria alignment with the Taxonomy. The simple reason is that communication to different audiences — shareholders, financial sector institutions, consumers — might require different approaches. It is, however, very simple to base claims under the Taxonomy or GCD on information gathered for CSRD reporting, and I have seen companies rely on CSRD reporting for claims of Taxonomy-alignment in their annual reports.
How are things changing within the CSRD in terms of how industrial and corporate (I&C) companies will need to document energy — power and gas — consumption throughout their supply chains? What does it mean in terms of scope 2 and 3 emissions?
This is a good place to clarify terminology. The CSRD is an EU directive that mandates sustainability reporting, sets out how member states are responsible for making sure companies report, and details which categories of companies need to report. All in all, we are taking about at least 50,000 EU-based companies and maybe another 10,000 non-EU companies with operations in the EU, as a rough assessment. The ESRS are the technical standards, outlining — over some 300 pages — how companies can assess what information they need to report and how this can be reported.
The ESRS go into detail regarding how questions about energy consumption and climate transition plans or supply chains are asked and framed.
Thank you for the clarification, and now back to the market-based vs location-based reporting?
In general, the ESRS move towards market-based reporting. Emissions are to be reported by scope — 1, 2 and 3 — separately and using both market-based and location-based methodologies for Scope 2. They are also to be reported against total turnover, so investors can see the greenhouse gas intensity of their investments' turnover.
At the same time, the ESRS clearly state that energy consumption must be reported using the market-based methodology in the case of Scope 2, and that it "can" be market-based in Scope 1, which for most companies would primarily relate to gas. The latter is highly technical and is tied to the EU emissions trading system monitoring and reporting requirements.
Disclosing companies must report Scope 3 as it was reported to them. There is no option to not report on Scope 3 emissions outside of Europe, which means that these 60,000 or so companies will push their own reporting requirements through their entire value chain. It also means that oil and gas companies will finally need to include emissions from combustion of their own products in their sustainability reporting.
Considering that changes to the CSRD will lead to greater focus on Scope 3 emissions, how is this likely to impact the energy attribute certificates (EAC) markets? Are you already seeing changing approaches to EAC procurement? How do biomethane and hydrogen fit into the picture, and is there a role for carbon offsets?
What we are seeing is a greater corporate interest in understanding their own value chain and getting their suppliers to cover Scope 2 consumption with EACs. They can even use the divergence between location and market-based reporting to stress how much they actually achieve by sourcing renewable energy. The result is quite literally the difference between the two numbers.
The ESRS do not open for carbon offsets as a way of reducing total emissions. Any offsets must be reported separately.
Biomethane and hydrogen would both serve to decarbonise your gas combustion, so mainly Scope 1. However, the requirements for credible claims to consumption are tied to a bundled model, so we expect less focus on certificate trade and more focus on efficient value chains to deliver the product as a whole. There are a lot of open questions here tied to member state transposition of the Renewable Energy Directive (RED) III — and in some cases RED II — and to the coming Union Database for renewable fuels.
How will the GCD impact consumer disclosure requirements and how does it tangentially relate to the Taxonomy? Do you expect this to also drive more granular purchases in EAC markets? When procuring EACs, will additional specifications such as eco labels become more prominent in the market?
There is no specific link between the GCD and the Taxonomy, but Taxonomy-alignment would definitely be one of the things that can be communicated and substantiated in a way that is aligned with the GCD.
Using an eco-label is a way to distinguish your product among several who all use renewable electricity. However, it is difficult to assess exactly how companies and consumers will react to this information in the long term. In the near future, we expect the GCD to lead to a reduction in environmental performance claims overall, at least until companies have a decent understanding of what and how they should communicate. The fine is up to 10pc of total turnover.
There are often questions around how nuclear power is viewed in the EU Taxonomy — can you clarify that? And how do you see nuclear power — through scope 2/3 — playing a role in I&C companies documenting carbon neutrality through disclosure mechanisms? There has been a growing trend of energy suppliers offering carbon-neutral tariffs as opposed to renewable owing to the greater cost of documenting renewables through EACs, on top of already higher outright power and gas prices. Do you see I&C customers taking a similar route?
Under the Taxonomy, nuclear is not considered renewable. It is, however, acknowledged as carbon-neutral, and we see several EU initiatives targeted at promoting "low-carbon" rather than renewable solutions. There is also an addendum to the Taxonomy, where nuclear and gas-fired power plants can be considered Taxonomy-aligned under certain circumstances. For gas, this relates to replacing coal and being time-limited in nature; while for nuclear, it is tied to a series of environmental and waste-treatment requirements. As long as the market recognises a qualitative difference between renewable and nuclear, EACs for each will be priced differently.
