Why Sustainability Due Diligence matters

As published in PV Magazine April 2025 edition

Despite debates in some parts of the world, we can expect environmental, social, and corporate governance (ESG) regulation to continue making headlines in 2025. Everoze Partner Ragna Schmidt-Haupt demystifies the key sustainability risks and opportunities for solar and battery energy storage system (BESS) projects.

The renewable energy industry has long avoided elements of ESG scrutiny thanks to its decarbonization benefits. However, it has become clear that not everything is a healthy green. Local and international regulations have tightened and frameworks for sustainable finance are emerging at an ever-faster pace, exceeding voluntary corporate social responsibility (CSR) practices, which now need to prove that they are more than a marketing tool. With this, systemic risks such as modern slavery in the PV industry, lack of supply chain transparency for battery cells, or project impacts from a changing climate have entered boardrooms. They’ve been followed by calls from alarmed shareholders asking for thorough reviews and mitigation of a broader range of ESG risks.

Regulatory risks

Addressing environmental and social risks is fundamental when developing solar and BESS projects in regulated countries. As a result, developers have managed to adapt their operations to tightening requirements. Normally, a project would only be permitted after stakeholder engagement had been carried out. The project would still be commercially viable and the path forward clear. Now, companies must grapple with a pace of change to sustainability requirements that has accelerated drastically.

Take PV module supply chains. Following increased awareness of potential issues related to this topic, which evolved as part of an industry-wide effort to shed light on labour conditions all along the supply chain, regulations such as the Supply Chain Act entered into force in 2023 in Germany. Those laws also covered modern slavery, to the surprise of investors and developers, who were prompted to react quickly.

The impact does not stop at European borders. The 2023 EU Carbon Border Adjustment Mechanism aims to put a price on carbon-intensive goods entering the European Union, and looming circular-economy legislation aims to ensure more sustainable technology, manufacturing, and design. Both legislative acts increase the risk for renewable energy companies by raising equipment costs and causing potential supply chain bottlenecks due to insufficiently low-carbon manufacturing.

There is good news. In the United Kingdom, solar projects can expect potential revenue upsides from provisions in the UK Environment Act. The legislation sets a biodiversity net gain requirement for the creation and improvement of habitats associated with a new development. It also allows for the trading of biodiversity credits if a project exceeds the net gain target of 10% above the baseline. Solar projects can easily achieve that, if planned well.

Companies will want to ensure compliance with existing sustainability-related legislation and anticipate future changes to avoid costs and reputational risk. As an upside, they will also want to ensure a proper biodiversity monitoring plan is in place from the outset to secure future revenue. The scope of neither standard legal nor technical due diligence pick up on those new topics, so it is not always clear who is responsible for assessing and raising risks and opportunities.

Green finance

Most international lenders require alignment with the Equator Principles environmental and social risk management framework used by financial institutions before financing renewables projects. That bare minimum requirement is changing via an emerging sustainable finance landscape. In the European Union, solar and

BESS projects can now be classified environmentally due to a tranche of regulations: the EU’s Taxonomy (introduced in 2020), Sustainable Finance Disclosure (2021), Corporate Sustainability Reporting (2023), and Due Diligence of Sustainability Practices (2024).

Historically, renewables companies have shown relatively good awareness of environmental risk. That is by no means a light topic and, going forward, a leap is required to ensure the necessary depth of assessment and reporting.

Climate risk and vulnerability assessments are an obvious example of the importance of sustainable finance requirements for shareholder value. Both are required by the EU Taxonomy. These reveal risks that don’t get flagged during traditional due diligence. Depending on the project’s characteristics, future climate risks that could lead to increased operational and capital expenditure, or even reduced revenues and lifetime, could pose a significant threat to the business case over the asset’s lifetime. To mention just a few, increased hail risk combined with thin modules or inappropriate structures, increased flood risk combined with poor drainage, sea level rise, unpredictable typhoons, wildfires, equipment struggling with heat, rising temperatures or unpredictable rain impacting repair and maintenance may appear. These could manifest as individual project or even as combined portfolio risks, potentially even making some investments uninsurable.

On the other side, heated debate in 2024 around Scope 3 carbon emission assessments show frameworks need to evolve further for the industry to properly align with the requirement.

When it comes to social requirements, surprisingly, industry players seemed rather unprepared. However, they quickly understood that stakeholder management beyond the development process matters. Financiers and investors can’t afford ESG-related incidences and controversies in their asset portfolio that could negatively impact their reputation or lead to fines. Recent legislation has focused on assessing and mitigating new risks, such as those related to labor and human rights. Many solar players have taken a first step by implementing a supplier code of conduct and ethical charter. These can demonstrate basic grievance approaches, potentially offer a whistleblowing mechanism or even start addressing diversity-equity-inclusion topics.

Solar and BESS players are least prepared in terms of governance risks, which are addressed by putting time and effort into bringing together the existing organization’s puzzle pieces and into creating a compliant ESG management system. The level of scrutiny with regards to transparency, accountability, independence, expertise or diversity reaches even senior executives and boards and it all comes at a cost. Not only initial ESG baseline assessments and increased reporting has a price, but also the changing responsibilities, processes or contracting frameworks to align with the evolving sustainable finance requirements.

Our recent experience shows that, to address this lack of clarity, financiers are interpreting the regulations adapted to each use-case and have developed their own set of requirements, but no one-size-fits-all yet.

CSR resilience

While solar and BESS players will be playing catch-up to comply with laws and sustainable finance requirements, voluntary CSR is not dead. Walking the walk can put companies ahead of competitors. It allows them to attract dedicated and experienced personnel to fulfil the company’s mission and it creates a strong corporate culture. This is especially useful given labour scarcity has been an industry bottleneck for some time. Creating businesses that are more resilient to price volatility and geopolitical risks also protects shareholder value in the long term.

All things considered, to understand sustainability factors impacting the company’s business model in negative and positive ways, a holistic technical, commercial and sustainability-focused mindset is required. This is best undertaken by experts in renewable energy who can interpret sustainability risks and opportunities into relevant and actionable recommendations for the transaction, helping to remove any guesswork and saving time and money. Ultimately, integrating sustainability due diligence into financing and investment processes from the outset lowers investment risk and increases investment returns.