Companies missing opportunities to see green with sustainability efforts
Ernst & Young LLP survey finds that due to lack of collaboration between tax and sustainability departments, companies missing key financial opportunities
New York, 19 March 2012 – There’s a lot of talk about the other green of sustainability – financial savings. However, a recent survey from Ernst & Young LLP found that many companies might be missing opportunities, as tax departments and sustainability programs lack integration. Only 16% of companies that either have or are developing an environmental sustainability strategy said their tax or finance departments are actively involved in it, according to the survey entitled Working Together: Linking sustainability and tax to reduce the cost of implementing sustainability initiatives.
The survey included responses from 223 senior executives at companies predominantly in the United States. Of the survey respondents, 19% were Chief Sustainability Officer (CSOs), while 81% were tax directors or their equivalent. Responses from each group were vastly different, highlighting the lack of coordination between the two groups. For example, only 28% of tax directors believe their company has a sustainability strategy or is developing one, compared to 90% of CSOs surveyed.
“Reducing energy consumption and carbon emissions, switching to alternative energy and fuel sources, innovating for cleaner technologies and offsetting carbon emissions – all of these efforts have tax considerations,” said Paul Naumoff, Global and Americas Leader of Climate Change and Sustainability Services and CleanTech Tax Services. “Companies with tax departments that aren’t taking sustainability efforts into account are missing an opportunity.”
The lack of involvement by the tax department in the sustainability strategy is reflected in the awareness and use of incentives for sustainability initiatives, with over 37% of survey respondents unaware of such incentives. For some incentives, such as federal tax deductions for energy efficient buildings and incentives for renewable energy, awareness levels were over 80%, leaving less than 20% unaware. However, for state tax credits and incentives, awareness levels hovered around 50% and were even lower for local credits and incentives. Even for those who are aware, only 17% of respondents said their companies actually use available green incentives. This lack of awareness represents missed opportunity.
The survey also found that among respondents that have or are developing sustainability strategies, only 19% said their company uses different payback or Return on Investment (ROI) targets to evaluate expenditures related to environmental sustainability projects as compared to required payback period or ROI requirements for typical internal capital expenditure approvals. Given the lower ROI of some sustainability projects, it is important for tax directors to be integrated into the planning process, in order to reduce the overall cost through the use of all available incentives.
Ernst & Young LLP has found that a company can effectively internally communicate sustainability initiatives and identify incentive opportunities throughout the organization by framing the discussion in broad categories:
- Reduce consumption of natural resources and carbon emissions.
- Switch to alternative energy and fuel sources.
- Innovate and develop new clean technology and less carbon-intensive or lower-emitting products and services to meet the demands of the transforming economy.
- Offset carbon emissions.
By implementing these communication best practices and using the Reduce, Switch, Innovate, Offset (RSIO) framework, companies will be able to identify more incentives and tax credit opportunities related to their sustainability initiatives, thereby improving their ROI and allowing for additional green investments. This is especially important for sustainability projects, which sometimes struggle to fit the traditional ROI model because they have longer payback periods and can be more expensive due to emerging technologies.
With all of the tax and other incentives available for environmental sustainability programs, it is important for businesses to analyze the opportunities within the context of their sustainability and revenue goals, as well as factors that may be unique to their region. When developing a sustainability platform, businesses need to start planning early, as many incentive programs require pre-approval and have finite timeframes.
Examples of such incentives include the following:
- Federal: IRC Section 179D: An energy efficiency tax deduction for commercial buildings can help reduce the cost of green building strategies and help building owners minimize energy consumption and improve energy efficiency.
- State: Pennsylvania: The state’s Department of Community and Economic Development offers grants of up to $2 million for high performance building projects (as well as alternative energy projects, clean energy projects), paying up to 10% of the project cost for high-performance buildings.
- LEED Buildings: Businesses can make use of the framework provided by the Leadership in Energy and Environmental Design (LEED) to achieve specific environmental sustainability metrics in their building construction. LEED incentives are currently offered by 5 states, 18 counties and over 69 cities and towns. These include property tax abatements, income tax credits, and non-monetary benefits such as expedited permitting.
- Federal: IRC Section 45 & 48: For facilities that produce and sell electricity generated from certain renewable resources, Section 45 provides an annual credit per kilowatt hour of energy sold to an unrelated person or company for each of the first 10 years of operation of a renewable energy facility.
- State: North Carolina: Offers a tax credit equal to 35% of the cost of eligible renewable property constructed, purchased, or leased by a taxpayer and placed in service in North Carolina during the taxable year. The credit is limited to $2.5 million per installation for all solar, wind, hydro, geothermal, combined heat and power, and biomass applications used for a business purpose.
- Federal: The U.S. Department of Energy’s (DOE) Funding Opportunity Announcements: DOE provides grants for energy efficiency and renewable energy projects.
- State: New Jersey: Offers a 100% tax credit for businesses engaged in manufacturing wind energy equipment, up to $100 million. In order to qualify for the tax credit, a business must make a minimum capital investment of $50 million in a qualifying wind energy facility that employs at least 300 new full-time employees.
- Companies looking to invest in developing countries can leverage Clean Development Mechanisms (CDMs), which, as defined in the Kyoto Protocol, allow companies to invest in projects in developing countries that can be shown to measurably reduce greenhouse gas emissions. After a CDM project has been implemented, project participants receive Carbon Emission Reduction (CER) credits. Companies in industrialized countries can credit the CERs earned through their investments in CDM projects toward their emission targets, sell their CERs to buyers in other industrialized countries or trade them on global carbon markets.
Learn more at www.ey.com/climatechange.
For a more robust discussion of this study, join Ernst & Young LLP for a webinar – Bottom-line benefits of sustainable business practices – on March 19.
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