ESG: The “E” of taxation and net-zero strategy

Devin Hall, David Strong, Victor Sturgis
| 9/7/2023
ESG: The 'E' of taxation and net-zero strategy
In summary
  • Tax is an important area that should inform a company’s environmental, social, and governance (ESG) policies.
  • Tax can play an important part of the environmental element of ESG through available credits and incentives.
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Within the realm of corporate sustainability, businesses increasingly are recognizing the pivotal role that tax departments can play in shaping their ESG strategies. Tax departments are in a unique position to help organizations access tax credits and incentives to reduce the cost of environmentally responsible initiatives as a part of an organization’s net-zero strategy.

The intersection of tax and environmental strategy

Traditionally, tax departments have focused primarily on compliance and financial reporting. However, forward-thinking organizations acknowledge that tax professionals possess the expertise to provide financial mechanisms to help drive sustainability practices. Tax leaders who emphasize aligning their organization’s tax strategy to its sustainability strategy can position their businesses for long-term success by reducing costs, fostering innovation, mitigating risks, and attracting and retaining talented employees. By integrating tax considerations into their net-zero strategy, companies can effectively align their financial objectives with their commitment to environmental stewardship.

The power of tax credits and incentives

To bolster sustainable practices organizations are already undertaking, and to incentivize further investment in such practices, governments and regulatory bodies have enacted environmentally focused tax credits and incentives. These credits and incentives offer financial benefits to organizations that adopt environmentally friendly practices, making such practices more attainable and rewarding. By taking advantage of these tax benefits, organizations not only enhance their sustainability practices, but they also unlock potential cost savings.

In the U.S., more than $200 billion in tax credits and other incentives for clean energy were enacted by the Inflation Reduction Act of 2022 (IRA). The IRA also made many of these credits much more valuable by allowing them to be monetized through direct pay and transfer elections. The direct pay election benefits organizations that don’t pay tax and otherwise might not be able to take advantage of the credits. The transfer election provides a mechanism for certain tax credits to be sold to third parties. The IRA offers enhanced credits and incentives for activities focused in low-income communities and that meet certain wage requirements, which could be consistent with an organization’s social policies.

The following are examples of environmentally friendly tax credits and incentives:

  • The tax deduction under Section 179D for construction of energy-efficient buildings and renovations to enhance energy efficiency. Eligible activities include qualifying property that enables the installation of more efficient heating, ventilation, and air conditioning systems.
  • Tax credits for renewable energy projects, such as solar, wind, or geothermal; energy storage; carbon capture and sequestration; and energy conservation.
  • Tax credits for clean energy vehicles including credits for organizations that incorporate electric vehicles (EVs) into their fleets or that build EV charging stations.
  • Tax credits for costs related to research and development for environmentally friendly technologies or processes.
  • Other federal incentives, including the alternative vehicle refueling property credit, the enhanced oil recovery credit, and the biofuel producer credit.

Crowe observation

In addition to federal tax credits and incentives, states also have enacted environmental tax benefits, which can be relevant when selecting a site for relocation or expansion, making expenditures on sustainability initiatives and related training, and understanding utility infrastructure development and rate reductions.

Collaboration between departments

Collaboration between tax and other departments within an organization, including departments focused on sustainability, is essential to effectively identify and take advantage of environmentally friendly tax credits and incentives. By aligning their efforts, these teams can identify eligible tax credits and incentives, analyze tax implications of sustainability initiatives, and ensure compliance with relevant laws when claiming tax benefits. For instance, it might be necessary to coordinate with an organization’s human resource department or project contractor to appropriately meet rules for increased tax credits related to meeting prevailing wage and apprenticeship requirements. This collaboration enables organizations to maximize the financial benefits of their environmental initiatives while ensuring tax efficiency.

One area particularly ripe for such collaboration is the development and implementation of a net-zero strategy. Net-zero strategies entail comprehensive plans encompassing a range of policies and initiatives tailored to significantly reduce an organization’s greenhouse gas emissions. These multifaceted approaches are designed to create a balance between the volume of emissions released into the atmosphere and the equivalent volume of emissions that either are diminished or offset through various means. Executing net-zero strategies often necessitates substantial financial investment by the implementing organization. However, a tax department’s active participation in this process often can result in reducing the ultimate financial investment by effectively planning to be in the best position to claim available tax credits and incentives.

Looking ahead

In the era of corporate sustainability and ESG, businesses must recognize the critical role that tax departments play in shaping sustainability practices, including a net-zero strategy. By integrating tax considerations into their sustainability practices and capitalizing on environmentally friendly tax credits and incentives, organizations can align their financial goals with their commitment to environmental responsibility. The collaboration between tax and other departments, including those focused on sustainability, and a comprehensive understanding of tax law requirements are key to harnessing the potential of environmentally friendly tax credits and incentives and driving meaningful change for a greener future.

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Devin Hall
Devin Hall
Managing Partner, Energy
David Strong
David Strong
Partner, Washington National Tax
Victor Sturgis
Victor Sturgis
Partner, Tax