Article
How investing in tax credits supports the ‘e’ in ESG initiatives
Jan. 25, 2024 · Authored by Adam DeZego, Madison Poitras
A version of this article was published Sept. 20, 2023, in Bloomberg Tax.
As the global energy transition accelerates, companies with robust environmental, social, and governance (ESG) strategies are more likely to emerge as leaders, supporting their long-term viability and growth in an increasingly competitive market.
A significant component of many ESG strategies is a further commitment to the renewable energy sector to offset carbon emissions as the public's demand for transparency around environmental impacts increases.
Investing in tax credits through the incentives in the Inflation Reduction Act could be an effective strategy to drive shareholder value while supporting the E component in ESG. Explore potential tax credits your business can pursue as well as other ESG considerations below.
How tax credit investing could support ESG initiatives
Companies that adopt sustainable practices often realize cost savings from utilizing renewable energy; these savings become even more pronounced if fossil fuel prices rise.
In addition to reduced operating costs, tax credit investing can help reduce a corporation's effective tax rate while advancing its ESG mission.
Before the passing of the Inflation Reduction Act, however, companies seeking to utilize federal tax credits to support ESG goals were required to enter into tax equity transactions. These transactions are complex, time-consuming to close, and involve complicated accounting considerations, and relatively few corporations were comfortable with tax equity investing.
What the Inflation Reduction Act changed
The transferability provisions of the Inflation Reduction Act simplified the process for taxpayers with clean energy projects to monetize the credits generated. Instead of a complicated structure, taxpayers with eligible projects can now transfer the credits directly to a third-party transferee.
This significantly reduces the barriers to entry and creates a historic investment opportunity in clean energy technology. Thus, more businesses seeking to bolster their support for these clean energy technologies can do so.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.