Driving Innovation and Strategic Financial Decisions Through ESG Regulation

Driving Innovation and Strategic Financial Decisions Through ESG Regulation
September 14, 2023 18 mins

Driving Innovation and Strategic Financial Decisions Through ESG Regulation

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Not only does ESG regulation have the potential to make or break an M&A deal, but failure to comply could also significantly damage a business.

Key Takeaways
  1. The regulatory landscape is evolving across the globe, largely driven by ESG initiatives.
  2. ESG regulations should be treated as more than just a check-the-box exercise, and instead embraced as an opportunity to make strategic decisions for a sustainable future.
  3. With expanded tax credits, renewable energy companies and projects present an efficient and effective investment opportunity.

Environmental, Social, and Governance (ESG) is now an increasingly accepted framework for evaluating companies’ related practices. Its strong influence on the regulatory landscape can be seen through the following recent updates:

  • Two-thirds of global executives and leaders at corporations with at least $500 million in revenue consider ESG to be of high or very high importance in M&A activity. In fact, leaders are evaluating their portfolios from an ESG perspective and making acquisitions to address ESG goals.1
  • The European Union’s (EU’s) Sustainable Finance Disclosure Regulation (SFDR), coupled with the impending Climate Disclosure Rule by the Securities and Exchange Commission (SEC) in the U.S., are among a few evolving ESG regulatory requirements that set expectations for wider disclosures, help level the playing field, and provide consistent, comparable, and clear information for the investment decision-making process.
  • In the Asia Pacific region, ESG regulations continue to make progress. Sustainable taxonomies, mandatory climate disclosures, and ESG fund rules are growing. India, Japan, and South Korea are focusing on eliminating greenwashing and developing ESG fund rules.2
How the IRA is Helping Dealmakers Make Strategic Financial Decisions

The Inflation Reduction Act (IRA), signed into law on Aug. 16, 2022, is impacting investors based in the U.S. and across the globe. As a result of its tax credit incentives, investment is flooding into the U.S. This could potentially cause other countries to implement their own regulation to encourage similar levels of inbound investment. 

It’s possible that tax credits — now more accessible under the IRA — will become a global phenomenon. In fact, there is evidence that this is already occurring. For instance, in addition to solar and wind, technologies such as standalone battery storage and dynamic glass now qualify for tax credits.

The IRA has led to nearly $110 billion in U.S. clean-energy projects, 60 percent of which come from foreign companies. Fifteen of the 20 largest investments — nearly all battery factories — involve businesses overseas.3

The IRA: A Catalyst for Change
The IRA permits the transfer of tax credits. This enables corporations to purchase tax credits from renewable energy sponsors and developers through simple purchase and sale agreements — a concept known as transferability. 

Prior to the IRA, corporations interested in obtaining renewable energy tax credits had to form complicated tax equity partnerships with renewable energy sponsors and developers. But now, transferability means less documentation — which leads to increased efficiency and the potential for a faster overall timeline.  

Through the sale of tax credits, the sponsor and developer can also access capital from the purchaser of tax credits to invest in growth initiatives and new projects.
The IRA: A Potential Blueprint
To continue the steady development of renewable energy projects, sponsors and developers will need to invite new parties to invest in and purchase additional credits. Forecasters estimate that the IRA could bring in roughly $3 trillion in total clean-energy investments over the next decade.4

In response to the IRA, the EU released its own Green Deal Industrial Plan in February 2023.5 Canada is also considering its own response in its federal budget.6

Maintain Vigilance to Ensure Optimal Tax Credit Outcomes

Where there was once uncertainty around the long-term future of renewable energy tax credits, there is now a 10-year runway. Corporations and other tax-paying entities have the confidence to spend, and the effort and energy, to make well-informed investments and tax credit purchases. However, wrapping tax credits with tax insurance will be important to provide strong assurance that allows the purchasers to sell the transaction internally up the chain for approvals.

For corporations purchasing tax credits, always remember there’s a risk that tax credits could get clawed back. The tax authority could also successfully challenge the amount or qualification. Tax insurance protects against these challenges, providing more opportunity for tax credit success and a gateway for meeting ESG goals and driving meaningful change. 

1 ESG can drive value in M&A – if companies will let it | Deloitte
2 Sustainable Fitch: Taxonomies, Mandatory Climate Disclosures and ESG Fund Rules Gain Ground
3 The Biggest Winners in America’s Climate Law: Foreign Companies | Wall Street Journal
4 The Biggest Winners in America’s Climate Law: Foreign Companies | Wall Street Journal
5 The Green Deal Industrial Plan: putting Europe’s net-zero industry in the lead | European Commission
6 Will the Response to the US Inflation Reduction Act Reveal Canada’s Lack of a Green Industrial Policy?

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The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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