How Taxes Factor Into Your Institution’s ESG Considerations

By Adam Aucoin December 15, 2022

ESG (environmental, social and corporate governance) is certainly a buzzworthy topic, especially given the SEC involvement with ESG and proposed reporting guidance. I’d be remiss if I didn’t first point out a couple other articles BNN has authored on the topic lately. This article is meant to focus on ESG tax considerations, but these other articles handle ESG in broader terms (and current discussions) and provide an excellent primer on the topic for those who may need a refresher:

• ESG 101
• ESG Lessons Learned from the Field

But as a self-proclaimed “tax person”, my initial reaction has always been that of how do taxes and the tax world have any bearing on ESG reporting and disclosures? It didn’t take too much research though, especially with the recent changes from the Inflation Reduction Act, to see how ESG tax considerations and reporting can interact with overall ESG strategy.

Taxes in general

One of the key components of ESG consideration is to show that one is a good corporate citizen.  In many cases, banks can demonstrate this by simply disclosing the amount of taxes they pay back to the government and related communities. This goes beyond just income tax as well. Banks often have many branches and employees and, as such, pay a lot of property taxes, payroll taxes, and, in some cases, use/sales taxes. Banks can use this data to illustrate how they act as a good corporate citizen.

With ESG reporting, there remains to be seen what mix of quantitative and qualitative factors will need to be reported, but one’s overall tax position could use a blend of both sets of data. Paying more tax than the bank down the road does not necessarily mean that bank is a better corporate citizen, but the narrative around one’s tax position becomes crucial to put things in context. Size, scope, investment decisions, and such can really move the needle here, so the qualitative factors are critical.

Tax credits

Tax credits might be one of the bigger areas of the tax world a bank could use to tell its ESG story. Several credits that banks regularly invest in provide either environmental or social benefits.

Perhaps the easiest credit to think about here is the Section 48 investment tax credit. This is often associated with solar, but there could be other benefits as well. Whether a bank embarks on its own clean energy adventure or invests in another company (and utilizes the benefit of the credits) this can go a long way to meeting ESG goals. Additionally, the Inflation Reduction Act also added transferability provisions to many clean energy credits so a bank may now be interested in buying credits directly without a tax credit equity investment (in which they own a piece of the underlying entity). Again, this can help support meeting ESG goals, especially if it is a goal of investing in cleaner energy.

Another very popular credit is low income housing investments. These can be a powerful tool to invest directly in a community and provide significant social improvements. The New Markets Tax Credit is another similar investment that can provide ESG reporting benefits. While certainly the bank can meet CRA goals or tax goals with these credits, they also could meet ESG goals.

Many other tax credits can come into play here too, for example, the work opportunity credit and the hiring of targeted groups. Perhaps you endeavor on a research and development expedition that could result in favorable ESG goals (perhaps significant paper reduction or a more efficient process that cuts back on use of non-clean energy use). It all comes down to your goals and what these credits can provide. The narrative again is important here to put the quantitative data in the correct light.

Once you understand the tax credit you can and want to invest in, then you may also want to consider planning to determine how much you want to invest. Each tax credit works differently, and you will want to know how much you are investing in each type of credit, while also understanding your tax credit capacity. You may not want to be creating credit carryforwards and carrybacks, so balancing of these investments could be crucial. For instance, the low-income housing credits come over 10 years and you could be locked into them. So perhaps you want that to be 50% of your portfolio of tax equity investments. The remaining 50% could be solar or other clean energy credits. As these are typically one-year credits, depending on projected taxable income, you could adjust the solar credit investments up and down annually to stay within tax credit capacity.

Tax and ESG planning next steps

For many community banks, ESG reporting may not be an immediate concern. Currently, reporting is mainly completed by larger publicly traded entities. However, this could continue to change over time, so it is likely something to consider going forward. Additionally, some banks may be B Corporations or just have ESG as a valuable element of their culture. For these banks, as they look to show to stakeholders their ESG impact, an often overlooked impact could be taxes and tax credit investments.

So what does that mean for institutions and how they factor in taxes to any ESG reporting? This is going to vary from institution to institution. However, following are a handful of recomendations:

• For any ESG committee, consider adding a finance team member to the group to help point out tax or accounting considerations.
• Determine how taxes could figure into your ESG goals. For example, if there is a goal to help the community move to solar energy production. From there you could investigate how much money has gone into these investments, how many loans there are in the sector, etc.
• Measure and report on set goals in both quantitative and qualitative terms.
• Make sure there is proper governance in place to meet and report on goals. Like most things in accounting, good internal controls and proper reporting are key.

Not every institution, at least right now, will have the same goals. For some, this may be a future concern, for others it may be a new endeavor, and for others it may already be a firmly entrenched area of concern. There is no one answer. Each bank needs to consider its mission and goals and understand what is important to their individual institution and related stakeholders.

Conclusion

ESG is a topic that seems unlikely to go away anytime soon. Whether reporting and disclosure is in the near future or longer term, it seems like it will be a factor – even if just for stakeholder purposes. Every bank needs to assess its own goals and mission and use that as a framework to discuss ESG goals and how ESG tax considerations can support those goals.

For more information or a discussion on how this may impact your bank, please contact Adam Aucoin or your BNN tax advisor at 800.244.7444.