The European Commission (EC) endorsed Guarantees of Origin (GOs) as a primary method for proving renewable energy consumption in line with the EU Taxonomy by requiring companies to report on “contractual arrangements” for energy consumption under the newly adopted European Sustainability Reporting Standards (ESRS).
The move could drive demand for documented renewables. Simultaneously, the reporting standards could increase the cost of capital for companies that do not prove clean energy consumption using GOs.
The ESRS are delegated acts under the Corporate Sustainability Reporting Directive (CSRD), which introduces new disclosure obligations related to environmental, governance, and social issues for close to 50 000 companies in the EU. As part of energy-related reporting, the ESRS instruct entities covered by the Directive to disclose both location-based and market-based emissions from purchased electricity, heating, and cooling, known as Scope 2.
Importantly, the ESRS establishes the market-based method as the only mandatory method for disclosing energy consumption. Entities within the scope of the CSRD shall prove the use of renewables through contractual instruments such as GOs.
Under Annex 1, page 87, the standards specify that undertakings shall only consider energy consumption “as deriving from renewable sources if the origin of the purchased energy is clearly defined in the contractual arrangements with its suppliers”.
The ESRS will provide essential information on business sustainability performance to financial entities as a basis for allocating investments. The European Investment Bank (EIB), for example, recently adopted guidelines for evaluating investment projects against their EU Taxonomy alignment.
“The ESRS are a significant sign that the European Commission supports Guarantees of Origin (GOs), the most mature energy tracking system in the world. Purchasing GOs will make companies’ energy consumption Taxonomy-aligned, increasing their attractiveness to investors. Failing to comply will result in higher costs of capital. In other words, not purchasing documented renewable energy will become increasingly expensive and unprofitable. We expect the new reporting criteria to increase corporate demand for GOs,” says Tom Lindberg, CEO of Ecohz.
The ESRS were adopted by the European Commission on 31 July 2023.