Chapter
Impacts on the “S” in ESG
In addition to environmental concerns, the act also elevates social and governance aspects of ESG.
The IRA is one of the more unique pieces of legislation to come out of Congress in recent years partly because it goes beyond the E (or environmental leg) of the ESG equation, with the stated goal of elevating and advancing the social and governance aspects. Many of the credits and incentives now have specific requirements tied to them with the objective of elevating wages, retraining people, developing careers, restoring communities and bringing manufacturing back to the US.
Additionally, the IRA includes provisions designed to “strengthen energy security and drive investment to hard-hit coal communities and underserved communities.” This entails offering renewable energy project developers an additional 10% in tax credits for qualified projects located within an “energy community.” Broadly defined, an energy community can include a brownfield site, an area that has experienced a coal mine or coal-fired power plant closure or a community with an economy that is heavily based on coal, oil or natural gas. The IRA also provides an additional 10% credit for qualified renewable projects that meet certain requirements, such as incorporating steel or iron produced in the US, or that have products that meet the criteria to qualify as having been manufactured in the US.
The IRA represents a major US energy investment that can also help advance corporate ESG initiatives and sustainability goals. More than half of all Fortune 500 companies have stated ESG goals that include a target of net zero greenhouse gas emissions by 2050 or sooner. Qualifying for the IRA’s energy incentives may help power and utility companies reach their ESG and stated net zero target.
Chapter
Reimagining traditional roles to propel a clean energy transition
Aligning the tax department with sustainability goals will help organizations leverage the IRA’s energy provisions.
As more guidance is issued on the IRA’s energy credits, the tax function is gaining additional clarity on how power and utility companies can qualify for and capitalize on the law’s tax credits and incentives. At the same time, organizations are becoming aware of how realizing these incentives may help advance their key enterprise ESG goals. This overlap between tax policy and sustainability goals presents an opportunity for synergies between these two objectives, and the tax department has a key role to play. Efficiency in this area will require close coordination with other departments across the company’s operations and finance functions, as well as engagement with members of the C-suite to answer key questions, including:
- Do we have the right processes in place so that those making capital investment decisions identify and consider all the various federal and state tax incentives that may apply?
- What data will be required for an investment to realize the benefits and how can that data be used to potentially create additional value by advancing ESG objectives?
- Has our organization aligned the right people, processes and technology to realize the full value of these incentives? How will that alignment differ from existing processes?
- Recognizing every department has a role in ESG, do we have a chief sustainability officer (CSO) or someone with lead oversight for key ESG initiatives? If not, should we consider creating that role and a team to support it?
In addition to helping power and utility companies leverage these provisions in the IRA, tax and finance teams need to join forces with other departments to guide and facilitate compliance with an ever-changing legislative and regulatory environment.
Tax and finance leaders will need to expand their responsibilities to work closely with other C-suite executives, especially the CSO (if one exists), to go beyond helping the company realize applicable energy tax incentives to confirming that the incentive aligns with and helps further the organization’s ESG goals. Organizations will also need to take steps to facilitate the tax department’s gathering of data from new areas.
To further collaboration and establish clear lines of responsibility for sustainability issues, power and utility companies should consider implementing a chief sustainability officer role if they haven’t already created one. The need for this role will become even more imperative as policymakers and regulators continue to focus on energy transition and climate-related reporting (such as the SEC’s proposed rules and the EU’s CBAM) .
As ESG and climate-related reporting requirements evolve, the sustainability leader will need to increasingly collaborate with the finance department, which already serves as a critical stakeholder in confirming the accuracy of any carbon-related reporting. The CSO, as the leader responsible for deploying an enterprise-wide sustainability strategy, will need to execute that strategy by working collaboratively with other leaders across the organization.
In 2022, the US accounted for 13% of global renewables capacity, excluding hydro, compared with China and the EU, which held shares of 38% and 21%, respectively. The IRA could more than double the installed capacity of renewables in the US by 2030.¹
Chapter
Powering on through collaboration
Compliance will require tax and finance to collaborate with several functions, including HR, supply chain and information technology.
To fully realize the synergies between capturing the various IRA incentives and achieving overall ESG goals, power and utility companies need to support collaboration across the various stakeholder functions. While tax teams typically focus on securing credits and incentives, other finance-centric teams will be taking on expanded responsibilities ranging from complying with proposed SEC reporting requirements (which include carbon and ESG reporting), once effective, to working with vendors, contractors and even regulators to confirm tax benefits are being realized and properly reflected in the overall capital plans for power and utility companies.
For example, under the IRA, many of the credits have at least two components: a “base” credit representing 20% of the credit and a bonus credit, representing an additional 80%. To receive the bonus credit, the company must typically meet certain criteria, including wage and apprenticeship requirements. Meeting the wage requirement requires the developer to pay a “prevailing wage” in accordance with federal guidelines to any laborers and mechanics employed by the developer in the construction of the facility (including their contractors and subcontractors). Complying with these provisions will require tax, HR, payroll, supply chain procurement, general counsel, information technology and various other departments to collaborate in order to collect and analyze the requisite data.
Finance leaders will also need to work closely with the technology leader (CTO) to make the appropriate technology investments that integrate and align supply chain and procurement with broader sustainability initiatives. HR will need to be involved from the perspective of helping establish a corporate culture that prioritizes sustainability. And to bring it all together, the data leader (CDO) should collaborate with these units to create a data-focused culture with programs to efficiently collect quality data that supports and drives the ESG effort.
Data will also be key to other ESG-related reporting under consideration, such as the SEC’s proposed framework for reporting on different categorizations of greenhouse gas emissions. Reporting of different types of emissions, such as those classified, will be required and must therefore be carefully tracked. To address these requirements, organizations will need to track data on Scope 1 emissions, which are from sources that an organization owns or controls directly – for example, from burning fuel in an electric generation plant. The proposed SEC framework will also require organizations to keep track of Scope 2 emissions, which are indirect greenhouse gas emissions associated with the purchase of electricity, steam or heat.
Given the central role power and utility companies play in the power-generation ecosystem, the accurate collection and reporting of this data, which may include financial, ESG and carbon-specific information, is essential for utilities and for their corporate customers. The chief sustainability and finance officers will need to work together closely on this aspect of reporting. They will also need to team with the chief data officer to provide this information back to the C-suite and Board so they can adjust corporate strategy, if necessary.
To make the process of collecting data more sustainable and efficient, data officers and their organization may need to reconfigure how they gather information and set up new pathways to funnel that data to the finance and, when necessary, the tax team. To further this effort, they should consider
- Establishing holistic investment processes. Capital investments need to consider the IRA, state/local policy, and any relevant incentives throughout the development lifecycle.
- Uncovering new sources of data collection. To satisfy potential reporting uses, power and utility companies should consider collecting more than the minimum required for IRA compliance, evaluating ways to leverage data for other types of external ESG reporting.
Chapter
Conclusion
Making room for tax at the ESG strategy table.
With the US relying heavily on the tax code and an incentives-driven approach to achieving sustainability goals, it is even more critical for tax departments to have a seat at the ESG strategy table of any power and utility organization. With other requirements potentially on the horizon, such as the SEC proposed rules or Scope 1 and 2 emissions reporting, it will be critical that the broader finance group also has a seat at that table, alongside operations.
Aligning these stakeholders under the stewardship of a chief sustainability officer poses a unique opportunity for power and utility companies as they work to develop the needed processes and ecosystem that will facilitate regulatory compliance and advance the organization’s ESG-related goals. Those companies that implement the IRA’s climate provisions will be contributing to US progress and leadership in addressing climate change and building a more sustainable future.
Here are four immediate steps that utilities should consider to help achieve this collaborative operating model to facilitate use of the IRA provisions:
- Change traditional organizational perspectives of tax and finance functions.
- Strengthen collaboration between tax and finance and with other departments.
- Improve and upgrade data collection and sharing within the organization.
- Establish and define a clear role for the chief sustainability officer.
Summary
The Inflation Reduction Act of 2022 features nearly $270 billion in tax incentives – out of an overall investment of $369 billion – to speed the development of clean and renewable energy sources, including the transition to electric vehicles. Tax and finance professionals will need to work with nonfinancial areas of the organization to capture and collect data to help power and utility companies qualify for these incentives, representing a dramatic shift in responsibilities.
