Environmental, Social and Governance (ESG) Principles and the Inflation Reduction Act

Electric car using charging station, solar panels and wind farm

The rising influence of the Green Energy revolution is creating new opportunities and compliance challenges for both private and public companies of all sizes. This blog delves into the intersection of Environmental, Social and Corporate Governance (ESG) principles, the 2022 Inflation Reduction Act (IRA) and the evolving role of tax credits and incentives in driving sustainable business practices.

Understanding ESG and the Inflation Reduction Act

Environmental, social and governance (ESG) represents a framework for evaluating a company's impact on the environment, its social practices, and its governance structure. From adopting renewable energy sources to promoting diversity in the workforce and enhancing transparency in governance, ESG principles guide businesses toward sustainable practices.

It's not just about being responsible corporate citizens; ESG is increasingly linked to a company's performance and reputation. As customers, investors, and regulators demand more accountability, businesses are recognizing the importance of incorporating ESG factors into their strategic planning.

  • Nearly 3 in 5 (57%) executives report having implemented a cross-functional ESG working group tasked with driving strategic attention to ESG and another 42% are taking steps to do the same. A similar profile of survey respondents in 2021 indicated that only 21% had implemented a cross-functional ESG working group.
  • With over $370 billion allocated over the next 10 years for spending provisions and tax incentives related to climate change, the IRA creates multiple opportunities for economic growth.

Bolstering these efforts, the Inflation Reduction Act (IRA) of 2022 is a significant piece of legislation that includes provisions aimed at addressing environmental and sustainable governance issues. This Act encourages businesses to invest in renewable energy sources and reduce carbon emissions, aligning with the global push for greener and more sustainable practices. The IRA offers incentives and tax benefits to companies that actively engage in initiatives supporting a cleaner environment, making it a crucial financial opportunity for businesses while contributing to broader environmental goals.

The IRA extends and improves various existing energy-related tax credits and incentives, covering areas such as:

  • renewable electricity
  • energy storage
  • carbon capture
  • clean hydrogen production
  • sustainable aviation
  • electric vehicles
  • domestic manufacturing
  • greenhouse gas reductions.

The Act also aligns with social policies by linking credit amounts to:

  • prevailing wage and apprenticeship requirements
  • incentivizing investment in low-income and energy communities (those that historically relied on fossil fuel-related industries)
  • promoting job creation in the U.S.

The importance of ESG and the IRA for businesses cannot be overstated. Beyond the moral obligation of contributing to a better world, these principles are now firmly integrated into the economic landscape.

  • Embracing ESG factors can enhance a company's reputation, attract conscientious investors, and drive sustainable growth.
  • IRA provides tangible financial benefits for businesses that prioritize environmental and sustainable governance practices, ensuring compliance with evolving regulations and aligning with market demands.

In an era where sustainability is not just a buzzword but a strategic imperative, ESG and the IRA serve as catalysts for companies to thrive and contribute to a more sustainable future.

The connection between ESG and the Inflation Reduction Act

ESG and the IRA share a common goal of fostering sustainable practices. The IRA complements ESG principles by providing tangible financial benefits to businesses prioritizing environmental and sustainable governance practices. This alignment ensures compliance with evolving regulations and meets market demands for responsible business conduct. Beyond moral obligations, ESG and the IRA are now integral to the economic landscape. Embracing ESG enhances a company's reputation, attracts conscientious investors, and drives sustainable growth.

Importance of tax in ESG strategy

A company's tax posture and function are crucial components of an ESG strategy, influencing profit allocation, net-zero transformation, and deal valuations. The expanding tax footprint plays a pivotal role in sustainable finance, requiring alignment between the tax suite and the C-suite.

Game-changing ESG tax incentives

The IRA introduces game-changing ESG tax incentives applicable to all industries that expands existing tax credits and creates new ones to encourage lower-carbon investments while possibly achieving additional sustainability goals.

The new ESG marketplace

The IRA's tax credit transferability creates a "new," flexible marketplace, allowing companies to monetize credits effectively. This dynamic landscape unlocks new financing structures, supporting investments in sustainability.

  • Beyond "E" in ESG: While historically, companies focused on renewable energy incentives in ESG, the IRA's ESG tax incentives extend beyond simple "energy" incentives. Tax considerations are integral to the "S" (Social) and "G" (Governance) elements, influencing where and how businesses operate.
  • Changing direction for tax transparency: With increased focus on "S" and "G" elements, tax reporting gains prominence in ESG transparency. Initiatives like GRI 207, the first global reporting standard that supports public disclosure of a company's business activities and tax payments on a country-by-country basis, and Total Tax Contributions (TTC) demand greater disclosure of tax-related information.
  • Connecting tax to ESG strategy: Tax is no longer an optional consideration but a critical element from the beginning of business planning. Your tax department must align with a broader ESG strategy, connecting with business leaders to plan investments that advance ESG goals.

Next steps to go green

Environmental, social and governance (ESG); the Inflation Reduction Act; and tax are intertwined in the evolving narrative of sustainable business. Learn more about how ADP's expertise in this area can help you thrive in a market where sustainability is a strategic imperative.

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