Tax Equity and ESG: Leveraging Tax Credits for Sustainable Investments

Due to the risks posed by unsustainable practices, Environmental, Social, and Governance (ESG) analysis has gained increasing importance in the corporate world. This approach considers key stakeholders outside of shareholders during investment analysis, which helps investors protect against risks, capitalize on green opportunities, and attract ESG-conscious investors. By doing so, ESG analysis promotes stakeholder capitalism. 

In recent years, ESG-aligned investments have accelerated and outperformed the market. Environmental and social factors are among the top risks identified by the World Economic Forum, and double materiality makes ESG-aligned corporations best positioned for a low-carbon future. Governments can incentivize private investment in green industries through taxes and tax credits, which are an increasingly popular option as part of ESG strategies. Tax credit investments provide a market and revenue stream for renewable energy producing organizations, enabling them to align themselves with a sustainable, low-carbon economy and reduce their transition and liability risks and cost of capital while enhancing their ESG-credentials. 

Currently, ESG measurement and reporting space lacks a universal framework and consistency in terminology, data, and practices. The Taskforce on Climate-related Financial Disclosures (TCFD) framework and the EU Action Plan on Sustainable Finance aim to provide clarity and guidance on ESG and its incorporation into investment decisions, while the US Securities and Exchange Commission’s proposed disclosure rule will mandate public companies to report on their ESG impacts and seek assurance on that data from a third party. Companies that report and progress on ESG impacts and progress towards ESG goals are viewed as remaining competitive, while financial markets predict long-term benefits for returns. 

ESG-related disclosures are important as they provide stakeholders with the necessary data to analyze the material impacts of an organization. This enables companies to make smarter tax credit investment decisions and report the investments afterwards, meeting stakeholder expectations and enhancing their leadership credentials. Companies can use ESG ratings to figure out where they currently stand, how they compare to others, and where they can go next. Tax credit investments offer a clear opportunity to grow and strengthen one’s business and align with the green transition, especially in a time of economic and stock market uncertainty. 

Analysis of ESG and tax credit investments are crucial to achieving ESG goals, including mitigating climate change and transitioning to a net-zero economy. Companies that prioritize ESG and take advantage of tax credit investments can reduce risks, capitalize on opportunities, and strengthen their business while contributing to a sustainable future. While challenges remain around ESG measurement, reporting, and incorporation, governments, investors, and companies can work together to address these challenges and promote ESG-aligned investments for a better tomorrow. 

For an in-depth analysis of how tax credit investments can help companies reduce risks, take advantage of opportunities, and strengthen their business while contributing to a sustainable future through ESG-aligned investments, read our full Whitepaper, Capitalizing on the Green Transition: Tax Credits & Corporate Leadership.