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3 ways corporate tax teams are integral for ESG strategy

Corporate tax teams can help companies seize incentive-fueled investment opportunities and credits meant to fund a transition to clean energy.

Woman analyzing numbers on a piece of paper.

Image via Shutterstock/Natee Meepian

Given the momentum behind clean energy and climate tech tax credits, carbon pricing and shareholder engagements on tax transparency, it’s particularly important that corporate tax teams be involved in ESG and sustainability strategy development. 

That’s because tax specialists can help companies navigate which incentives make the best sense for their unique financial circumstances; they are also well versed in managing complex data systems to meet the needs of shareholders and regulators. 

With that in mind, here are three ways in which the input of corporate tax specialists can be invaluable for sustainability professionals.

1. Navigating investment incentives

Renewable energy projects have long benefited from government funding such as production tax credits for a range of renewable electricity sources, energy efficiency tax deductions or investment tax credits for installing climate technologies ranging from fuel cells to combined heat and power systems. (The link offers a solid list of many current U.S. programs.) The Inflation Reduction Act passed in August 2022 increased federal support for all manner of investment in industries and technologies essential for the clean energy transition — ranging from manufacturing facilities to carbon removal investments to solar and wind development. 

One of the bill’s provisions provides for a 10 percent domestic content bonus for offshore wind projects that use 100 percent domestically made iron and steel for structural components.

Those incentives were highlighted for bringing a $250 million dollar investment to New Jersey to develop a facility for manufacturing monopiles, a common type of foundation for offshore wind turbines. 

Tax teams can also be instrumental in navigating one big challenge associated with many of these tax credits — that companies must report taxable earnings to cash in on the credit. That requirement can pose a challenge for projects such as offshore wind installations, which require significant investments upfront that are then paid back over decades.

The transferability provision of the IRA can help — and tax specialists can help devise strategies to take advantage of this. This mechanism allows a developer of clean energy projects to sell its tax credits to another organization that reports taxable earnings, enabling it to benefit from the tax credits.  

Bank of America is leading the way in taking advantage of this provision with a first-of-its-kind $580 million deal to purchase tax credits from renewable energy project developer IRG Acquisition Holdings. The bank’s work as a broker of tax credits could help free up capital for renewable energy project developers that they can use to fund development of new clean energy projects. 

2. Interpreting national carbon taxes or policies

Tax teams can also help ESG strategists understand the impact of carbon taxes, such as the European Union’s carbon border adjustment mechanism, an import tariff applied to the carbon footprint of certain carbon-intensive products.

In order to comply with regional carbon taxes, companies will need access to carbon emissions data for their value chains. That data, in turn, will need to be incorporated into their supply chain management and corporate reporting systems. 

In the United States, a carbon border tax could be on the horizon with a bill referred to as the Prove It Act, which would ​​have the Department of Energy study the emissions intensity of certain products produced domestically versus those that are imported. That data-gathering exercise is a key step on the path to a potential U.S. carbon tax introduced with bipartisan support in June. (A caveat: The idea of a carbon tax has been floated many times in the past.) 

As companies prepare for more governments to introduce carbon taxes, it is increasingly important for them to incorporate a price of carbon into financial projections. Some businesses already use an internal carbon price, a predetermined dollar value applied to the emissions generated by business units in the organization to help managers convert emissions metrics into dollar values that can inform decision making. 

3. Engaging shareholders on corporate taxes 

Shareholders have a growing interest in corporate tax strategies — including where a company is paying taxes, and where it isn’t. This pressure has grown as stakeholders have questioned many companies’ social license to operate in places where they don’t pay taxes. 

The Global Reporting Initiative (GRI) has released guidance that suggests how companies should report on tax policies (GRI 207: 2019), which went into effect in 2021 and provides a standard for organizations to communicate their tax practices publicly. 

This interest is real. In the recent past, shareholders have filed resolutions at Amazon, Microsoft, Brookfield and Cisco requesting that management provide country by country reporting in line with the GRI standard. 

Amazon was the first to face this type of shareholder resolution. The resolution on the 2022 proxy ballot at Amazon was filed by Missionary Oblates of Mary Immaculate and Greater Manchester Pension Fund, both asset owners with responsible investing guidelines. 

The resolution was supported by prominent asset owners such as the New York City Comptroller, Norges Bank Investment Management and Legal & General Investment Management. 

Corporate tax teams can help management meet these shareholder disclosure requests since large multinational enterprises are required to report country by country tax payments to the Internal Revenue Service. This could be an opportunity for progressive companies to start highlighting how they are developing a tax strategy that will help achieve both financial and sustainability goals.

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