In its own portfolio Encavis operates a total of 1.3 GW of PV and wind projects. Though not directly impacted by new EU rules on sustainability-related disclosures, as a publicly listed company it is already seeing the effects.
At depth, a wave may look flat. As it approaches the beach it gathers itself up, curls into a break, and then comes the crash and spray across the shoreline. EU Regulation 2019/2088, part of the sustainable finance process, is likely to play out in a similar way. Its title may appear innocuous: “Sustainability-related disclosure requirements in the financial services sector.” Yet, this sustainability wave will likely end up touching everyone who operates a major solar installation and, later, those who build them as well. On March 10, the wave reached the point where it started to curl. Since that date, merely boasting about sustainability goals no longer cuts it; now the boasts have to be backed up with action.
Environmental, social and corporate governance (ESG) criteria are by no means driven solely by the EU’s mandatory disclosure requirements. Encavis operates more than 160 PV plants in its own portfolio with a total capacity of 1.3 GW. It is a publicly traded company and finances its PV and wind power plants through the stock market. BlackRock holds 10% of its shares, for instance. As an independent producer of electricity, Encavis is not affected by the new disclosure requirements for players in financial markets. Nevertheless, the ESG issue has already reached the company. Some of its investors have, as is customary, commissioned ESG rating agencies to scrutinize it with regard to these criteria.
“It’s not just a matter of using the ESG rating to get better financing terms,” says CFO Christoph Husmann. “ESG rating is going to be a must, otherwise you won’t be able to get financing at all.” We are not there yet, he says, but Husmann expects the relevance of the rating to increase over the next three to five years. “I’d predict that the ESG rating will become at least as relevant as the previous rating.”
Three years ago, the topic began to gain relevance, Husmann continues, but today every investor is asking where investments stand in terms of sustainability. Companies then have to produce evidence, and there is increasing demand for investments in the fossil fuel industry not to exceed a certain share of a portfolio’s total.
The Norwegian state fund Norges, for instance, is withdrawing from all companies that continue to extract, distribute, or burn fossil fuels. Larry Fink, chairman of BlackRock, again explained the ESG orientation of his investment policy in detail this year. Allianz also wants to gradually restructure €800 billion of investments from its own insurance business in such a way as to reduce greenhouse gas emissions 25% by 2025.
Italian utility Enel builds solar power plants around the world, and employs about 20 ESG rating agencies each year. The ratings are primarily useful to institutional investors and asset managers, giving them sound insights into how certain ESG criteria can affect financial performance, a company spokesperson told pv magazine. In addition, Enel said, potential partners look at ESG criteria as part of the due diligence process they conduct on the company. Among them are investors with whom they develop joint ventures to build and operate power plants. Some industrial customers are also starting to pay attention to the criteria, the spokesperson said.
Ratings are an early indicator and an investment precondition for more and more investors, says Husmann. In the rating scheme of the ISS ESG rating agency, Encavis now achieves the Prime label and is rated with a “B”. “Among the companies rated by ISS ESG that also operate PV and wind power plants, only two are better,” Husmann says.
But why doesn’t a PV asset manager have the top score? “That’s a good question,” says the CFO. It’s not just a question of having a positive carbon footprint. “If you drive a Maserati to the construction site, that’s simply not good, even if you generate low-carbon electricity.” ESG rating agencies use extensive catalogs of criteria for evaluating companies. These topics are broadly divided into the three dimensions of sustainability: environmental, social, and governance. A good ESG rating means that a company has done well in all three dimensions of sustainability. “You look at sustainability across the entire value chain,” says Husmann. It shows up in cleaning supplies, travel costs, the gender breakdown of the workforce, and even the question of what the company’s vehicle fleet looks like, he says.
The topic has not yet really reached the level of project developers. “But that will come, too,” says Husmann. Encavis has always attached importance to a strict set of requirements that projects must meet, such as module quality and performance. Increasingly, the carbon footprint of the entire supply chain will come into play, because ultimately how the components are manufactured and how the plant is built will have the greatest impact. The rating agencies give high marks for a positive carbon footprint.
Thilo Tern agrees that the ESG wave will also reach project developers. Tern is managing partner of the Silvester Group and advises Husmann on the ESG process. “It’s eating its way through the chain,” he says. His company specializes in sustainability consulting and management and also has its origins in financial communications. Nowadays, ESG communication sometimes takes longer than annual financial reporting, he says.
The challenge, says Tern, is that the EU’s new sustainable finance guidelines have not yet defined specific ESG criteria for the renewable energy industry. In the case of solar power plants, for instance, it stands to reason that environmentally sustainable management of green spaces would have a positive impact on the ESG rating. The specific indicators and standards, such as the carbon footprint or protection of species and human health, which will be evaluated on a graduated scale, have yet to be clarified. In this respect, it is unfortunately not yet clear exactly what will be in store for the installers and operators of solar power plants. “We are trying to work with the various players in the photovoltaics, supplier and financial markets to develop uniform, real-world standards and procedures,” Tern says.