ESG

Green investments bring big tax breaks

Savvy investors buy tax credits from banks to reap green incentives.
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Grant Thomas

· 4 min read

There’s no better feeling than stumbling on a buy one, get one deal, and that applies to tax professionals as well as frugal holiday shoppers seeking gifts for that relative who always shows up unannounced.

Tax equity investing is a way to reap tax benefits while collecting a tax write-off. It’s garnered the attention of corporate types under ESG pressure over the last year, Mike Bernier, partner of credits and incentives at EY, told CFO Brew. And experts tell CFO Brew that after the introduction of the Inflation Reduction Act and recent tax legislation, tax incentives for renewable (or green) projects have blossomed (pun very much intended).

“Over the last 12 months, [we] have seen a significant uptick in corporate interest in tax equity,” Bernier said “If we go back prior to that, almost all of the tax equity players were what we call financial service companies: banks, insurance companies, investment banks, or your really big-name tech companies.”

Deals, deals, deals: One reason that green tax incentives are attracting the attention of financiers is that they can lower costs in a tight macroeconomic environment. As ever, taxes are top of mind, Gary Blitz, global co-CEO of Aon M&A Transactions Solutions told CFO Brew, and there’s a real desire to add certainty in an extremely uncertain environment. But green tax incentives can be a win-win, both for the investor and the company receiving the investment.

“Just think of a developer building a solar farm,” Blitz explained. “They need money to build it, and they’re able to go to financial institutions, or a lot of tech companies [that] do this and say, ‘If you invest [in us], you’re gonna get this tax credit.’”

ESG pressure: Some companies are getting into the space due to pressure from leadership to pursue ESG projects, Bernier told CFO Brew. The problem is when these investments begin to look like the evolution of greenwashing, or using products or strategies to make a company appear more environmentally friendly than it is.

In these instances, however, investors are seeking out the green products not for their environmental bona fides, but for the tax break. The appearance of being green friendly is just an added benefit.

Currently, investors can receive renewable energy certificates (RECs), which demonstrate that a company is using green energy through tax write-offs. And while the tax incentive is granted because of the investment in a green project, it doesn’t necessarily mean that the company itself is going green, Bernier said, despite what it may put in its sustainability report.

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“There can be some greenwashing…[but] there are other people that say, ‘Well, no, I’m going to get the RECs as part of the deal,’” he added.

The question for the consumer then becomes: Is this a kind of greenwashing if a tax incentive was rewarded, and green certificates were added to a company’s website, even if the company isn’t all that “green” itself? Put another way: If the investment helped fund a separate renewable energy project, the end result is a benefit to the environment, regardless of the company’s motivation.

However, an accounting technicality has kept some companies from pursuing these tax incentives, Bernier told CFO Brew. In August, the Financial Accounting Standards Board (FASB) released a proposal that would modify the accounting for tax credit investments. “Currently, how the accounting rules work, these investments can result in pre-tax losses with the tax credit taken in the tax provision. Pre-tax income is closely watched by [Wall] Street for many companies. For qualifying investments, the exposure draft would eliminate the pre-tax losses, moving everything into the tax provision,” Bernier explained in an email.

And, while the standards board accepted comments on the proposal until early October, a change to the current system would only go into effect after being voted on by the board and subsequently implemented, which can take awhile—sometimes years in the most complex cases—to complete.

Sourcing such deals has historically been a headache as well, but banks have been buying tax credits and selling them en masse to companies over recent months, Bernier told CFO Brew. Purchasing the tax incentives from banks has cut much of the red tape for companies who can then present the deal to their boards, backed by a bank they do business with instead of an unknown solar company name.

“Under the IRA, you can now very simply transfer the credit. In the past, you had to do a partnership or a lease, now you can just effectively sell it,” Blitz told CFO Brew, “It’s going to expand the corporate base dramatically.”—KT

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