Report showcases ESG benefits of US tax credit investments

US investors may want to consider tax credit investments, research suggests

A whitepaper published by Reuters Events and Foss & Company is urging US investors to consider tax credit investments as a way to drive more money into ESG projects and achieve solid returns.

According to the paper, entitled Tax Credit Investments are ESG Investments, some $25bn per year is already being invested in the US tax credit market by corporate and institutional investors, but there are billions of dollars of potential in this “underutilised” area of the market.

Essentially, tax credit investments are a way to redirect a company’s tax liability into certain projects that produce economic, environmental or social benefits.

According to the report, the practice is popular in North America, where the US government offers companies tax credits to incentivise investment in such projects.

An investor (usually a tax-paying corporation) can participate in these projects when a company does not have enough tax credits to fund the entire project. The investor then receives both tax benefits to cancel out a portion of its tax liability and a cash return generated through earnings from the projects.

Bryen Alperin, vice president of Foss & Company’s sustainability practice, said: “Tax credit investments are really about taking responsibility and being intentional with your tax dollars. Instead of wiring estimated tax payments into The General Fund, corporate taxpayers can direct their dollars to worthy projects that match their sustainability goals.”

Long-term incentive

Tax credits can be used to invest in various projects in the US that benefit society and local communities, such as building affordable housing, sustainably energy infrastructure or reducing greenhouse gas emissions.

In a report for HSBC, consultancy East & Partners found that globally, financial returns and tax incentives are the top two drivers of ESG decision making across all issuers and the majority of investors.

Mike Minihan, tax expert and managing partner at business advisory firm BX3, said: “History has shown tax policy to be a highly effective mechanism to drive behaviour. We have seen it before with credits for solar and R&D.”

The whitepaper notes that tax equity investments are “not tax loopholes or tax avoidance”, but rather a way to repurpose estimated tax payments to invest in projects that meet a company’s ESG goals.

Instead of paying taxes to the federal government, the same money goes towards “high impact projects” on the government’s behalf. This way of investing lowers the risk of projects by cutting capital expenditure costs and raising long-term returns, according to the whitepaper.

David Lowman, a partner at law firm Hunton Andrews Kurth, added: “There could be natural synergies between tax credits and ESG because there is any number of large institutional investors in the US that have mandates from management to invest heavily in renewable energy and clean energy-related projects.”

In addition, the practice can help companies increase market value through reputational gains, with the role of such “intangible” assets as a company’s approach to ESG becoming more important for company values over the last few decades, according to S&P Global.

Specific projects

Many financial institutions and other large corporates are already embracing tax credits as an ESG investment opportunity, according to the whitepaper.

For example, BNP Paribas told Reuters Events it “has been successfully investing in renewable energy tax credits for years, which has significantly contributed to [its] ESG goals and objectives”.

Other successful projects include the solar Investment Tax Credit (ITC), which offers funding to solar projects; tax credits for carbon capture; and the Low-Income Housing Tax Credit (LIHTC), which encourages investment in the development of affordable rental housing for low-income families.

Facebook is one of the corporate giants participating in these projects via its 379MW Prospero Solar project. The firm’s energy strategy manager Peter Freed explained: “We were involved very early in this project, much earlier than investors are typically involved in projects, because we wanted to make sure that we can really say that our involvement helped it move forward and got it across the finish line.”

However, as climate change continues unabated, the whitepaper is calling for more companies to get involved in the tax credit market as a way of achieving ESG goals.

Leon Kamhi, head of responsibility, international at Federated Hermes, said: “Any investment, including tax credits, should integrate material and relevant ESG factors and deploy effective stewardship. Anything else, and an investment manager will not be fulfilling their financial fiduciary duty.”