Questions & Answers
(1) Shall a matter included in the financial statements of the undertaking that is outside of its value chain be reported in the undertaking’s financial materiality assessment?
(2) There is uncertainty as to whether a PPA (Power Purchase Agreement) would enter the scope of the value chain of the undertaking, and more specifically, (i) in the case of a VPPA and (ii) in the case of a DPPA.
- Value chain
- financial materiality
- power purchase agreements
Background
As part of the question, the submitter also stated: ‘While Section 3.5 Financial materiality does not mention that the matter shall be part of the undertaking’s value chain, the related notions of risks and opportunities are used in the rest of the document as “in the undertaking’s value chain”.’
ESRS 1 paragraph 49 states: ‘A sustainability matter is material from a financial perspective if it triggers or could reasonably be expected to trigger material financial effects on the undertaking. This is the case when a sustainability matter generates risks or opportunities that have a material influence or could reasonably be expected to have a material influence, on the undertaking’s development, financial position, financial performance, cash flows, access to finance or cost of capital over the short-, medium- or long-term. Risks and opportunities may derive from past events or future events. The financial materiality of a sustainability matter is not constrained to matters that are within the control of the undertaking but includes information on material risks and opportunities attributable to business relationships beyond the scope of consolidation used in the preparation of financial statements.’
ESRS 1 paragraph 63 states: ‘The information about the reporting undertaking provided in the sustainability statement shall be extended to include information on the material impacts, risks and opportunities connected with the undertaking through its direct and indirect business relationships in the upstream and/or downstream value chain (“value chain information”).’
A power purchase agreement (PPA), or electricity power agreement, is a long-term contract between an electricity generator and a customer, usually a utility, government or company. The PPA defines the conditions of the agreement such as the amount of electricity to be supplied, negotiated prices, accounting and penalties for non-compliance. Since it is a bilateral agreement, a PPA can take many forms and is usually tailored to specific applications. The power generated might be renewable. Under a PPA, the customer is strictly speaking paying a provider for the energy received. Therefore, in the case of renewable energy the undertaking will not necessarily get the ancillary benefits of owning the renewable energy asset, such as the ability to get tax rebates or sell renewable energy credits.
PPAs might be in the form of a physical-PPA (where the customer receives a fixed amount of energy at a fixed price) or a virtual-PPA (where the customer receives/pays cash for a fixed amount of energy based on the difference between a fixed and a variable price per unit).
Often those contracts result in parties involved receiving renewable energy certificates (‘RECs’).
Answer
(1) Shall a matter included in the financial statements of the undertaking that is outside of its value chain be reported in the undertaking's financial materiality assessment?
A transaction or contract included in the financial statements and the sustainability matter related to it cannot be considered outside the value chain. Therefore, a PPA, be it physical or virtual, is considered as being in own operations (noting that value chain comprises upstream and downstream value chain as well as own operations; see Annex II Acronyms and Glossary of Terms).
Financial materiality in the sustainability statement includes items that arise from the undertaking’s own operations and items that arise in its value chain.
A matter is material for inclusion in the sustainability statement from a financial materiality perspective when it generates risks or opportunities that have a material influence or could reasonably be expected to have a material influence on the undertaking’s development, financial position, financial performance, cash flows, access to finance or cost of capital over the short-, medium- or long-term (see ESRS 1 paragraph 49).
(2) There is uncertainty as to whether a PPA (Power Purchase Agreement) would enter the scope of the value chain of the undertaking, and more specifically, 1) in the case of a VPPA and (2) in the case of a DPPA.
A counterparty to the power purchase agreement is connected with the undertaking’s activities (see ESRS 1 paragraph 63).
A physical-PPA results in the delivery of energy, and as it relates to indirect emissions from the perspective of the purchaser of energy, falling under Scope 2 emissions under the GHG Protocol.
A virtual-PPA is a financial instrument resulting in the exchange of cash often combined with certificates received by the reporting undertaking to affect the energy mix of the undertaking. As this is part of the undertaking’s activities (to manage its energy costs or to obtain Guarantees of Origin (or Energy Attribute Certificates (EAC)), this is part of its own operations and not its value chain. The purchased Guarantees of Origin may ultimately affect the categorisation of Scope 2 disclosures under ESRS E1, whether surrendered or not. Please note that aforementioned does relate only to the virtual PPA relationship and not to the one between the undertaking and the party delivering physical energy, which often exists in the three-party relationship involving virtual-PPAs.
As the substance of the contracts differ between physical and virtual PPAs, the undertaking’s material impacts on people and environment and the material effects of sustainability matters on the undertaking’s development, performance and condition might also differ.
See also Implementation Guidance EFRAG IG 2 Value Chain FAQ 2: Are financial assets (loans, equity and debt investments) considered business relationships that trigger VC information? states: ‘Business relationships and value chain as defined in Annex II Acronyms and Glossary of Terms do not exclude any types of activities and business relationships.’
Relations
Paragraph | Content |
|---|---|
3.5 Financial materiality | |
3.5 Financial materiality | |
3.5 Financial materiality | |
The information about the reporting undertaking provided in the sustainability statement shall be extended to include information on the material impacts, risks and opportunities connected with the undertaking through its direct and indirect business relationships in the upstream and/or downstream value chain (“value chain information”). In extending the information about the reporting undertaking, the undertaking shall include material impacts, risks and opportunities connected with its upstream and downstream value chain: | |
A sustainability matter is material from a financial perspective if it triggers or could reasonably be expected to trigger material financial effects on the undertaking. This is the case when a sustainability matter generates risks or opportunities that have a material influence, or could reasonably be expected to have a material influence, on the undertaking’s development, financial position, financial performance, cash flows, access to finance or cost of capital over the short-, medium- or long-term. Risks and opportunities may derive from past events or future events. The financial materiality of a sustainability matter is not constrained to matters that are within the control of the undertaking but includes information on material risks and opportunities attributable to business relationships beyond the scope of consolidation used in the preparation of financial statements. | |
The information about the reporting undertaking provided in the sustainability statement shall be extended to include information on the material impacts, risks and opportunities connected with the undertaking through its direct and indirect business relationships in the upstream and/or downstream value chain (“value chain information”). In extending the information about the reporting undertaking, the undertaking shall include material impacts, risks and opportunities connected with its upstream and downstream value chain: | |
A sustainability matter is material from a financial perspective if it triggers or could reasonably be expected to trigger material financial effects on the undertaking. This is the case when a sustainability matter generates risks or opportunities that have a material influence, or could reasonably be expected to have a material influence, on the undertaking’s development, financial position, financial performance, cash flows, access to finance or cost of capital over the short-, medium- or long-term. Risks and opportunities may derive from past events or future events. The financial materiality of a sustainability matter is not constrained to matters that are within the control of the undertaking but includes information on material risks and opportunities attributable to business relationships beyond the scope of consolidation used in the preparation of financial statements. | |
The information about the reporting undertaking provided in the sustainability statement shall be extended to include information on the material impacts, risks and opportunities connected with the undertaking through its direct and indirect business relationships in the upstream and/or downstream value chain (“value chain information”). In extending the information about the reporting undertaking, the undertaking shall include material impacts, risks and opportunities connected with its upstream and downstream value chain: | |
A sustainability matter is material from a financial perspective if it triggers or could reasonably be expected to trigger material financial effects on the undertaking. This is the case when a sustainability matter generates risks or opportunities that have a material influence, or could reasonably be expected to have a material influence, on the undertaking’s development, financial position, financial performance, cash flows, access to finance or cost of capital over the short-, medium- or long-term. Risks and opportunities may derive from past events or future events. The financial materiality of a sustainability matter is not constrained to matters that are within the control of the undertaking but includes information on material risks and opportunities attributable to business relationships beyond the scope of consolidation used in the preparation of financial statements. |