Driving Innovation and Strategic Financial Decisions Through ESG Regulation
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
-
The regulatory landscape is evolving across the globe, largely driven by ESG initiatives.
-
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.
-
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
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
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?
General Disclaimer
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.
Terms of Use
The contents herein may not be reproduced, reused, reprinted or redistributed without the expressed written consent of Aon, unless otherwise authorized by Aon. To use information contained herein, please write to our team.
Aon's Better Being Podcast
Our Better Being podcast series, hosted by Aon Chief Wellbeing Officer Rachel Fellowes, explores wellbeing strategies and resilience. This season we cover human sustainability, kindness in the workplace, how to measure wellbeing, managing grief and more.
Cyber Labs
Stay in the loop on today's most pressing cyber security matters.
Cyber Resilience
Our Cyber Resilience collection gives you access to Aon’s latest insights on the evolving landscape of cyber threats and risk mitigation measures. Reach out to our experts to discuss how to make the right decisions to strengthen your organization’s cyber resilience.
Employee Wellbeing
Our Employee Wellbeing collection gives you access to the latest insights from Aon's human capital team. You can also reach out to the team at any time for assistance with your employee wellbeing needs.
Environmental, Social and Governance Insights
Explore Aon's latest environmental social and governance (ESG) insights.
Q4 2023 Global Insurance Market Insights
Our Global Insurance Market Insights highlight insurance market trends across pricing, capacity, underwriting, limits, deductibles and coverages.
Regional Results
How do the top risks on business leaders’ minds differ by region and how can these risks be mitigated? Explore the regional results to learn more.
Human Capital Analytics
Our Human Capital Analytics collection gives you access to the latest insights from Aon's human capital team. Contact us to learn how Aon’s analytics capabilities helps organizations make better workforce decisions.
Insights for HR
Explore our hand-picked insights for human resources professionals.
Workforce
Our Workforce Collection provides access to the latest insights from Aon’s Human Capital team on topics ranging from health and benefits, retirement and talent practices. You can reach out to our team at any time to learn how we can help address emerging workforce challenges.
Mergers and Acquisitions
Our Mergers and Acquisitions (M&A) collection gives you access to the latest insights from Aon's thought leaders to help dealmakers make better decisions. Explore our latest insights and reach out to the team at any time for assistance with transaction challenges and opportunities.
Navigating Volatility
How do businesses navigate their way through new forms of volatility and make decisions that protect and grow their organizations?
Parametric Insurance
Our Parametric Insurance Collection provides ways your organization can benefit from this simple, straightforward and fast-paying risk transfer solution. Reach out to learn how we can help you make better decisions to manage your catastrophe exposures and near-term volatility.
Property Risk Management
Our Property Risk Management collection gives you access to the latest insights from Aon's thought leaders to help organizations make better decisions. Explore our latest insights to learn how your organization can benefit from property risk management.
Technology
Our Technology Collection provides access to the latest insights from Aon's thought leaders on navigating the evolving risks and opportunities of technology. Reach out to the team to learn how we can help you use technology to make better decisions for the future.
Top 10 Global Risks
Trade, technology, weather and workforce stability are the central forces in today’s risk landscape.
Trade
Our Trade Collection gives you access to the latest insights from Aon's thought leaders on navigating the evolving risks and opportunities for international business. Reach out to our team to understand how to make better decisions around macro trends and why they matter to businesses.
Weather
With a changing climate, organizations in all sectors will need to protect their people and physical assets, reduce their carbon footprint, and invest in new solutions to thrive. Our Weather Collection provides you with critical insights to be prepared.
Workforce Resilience
Our Workforce Resilience collection gives you access to the latest insights from Aon's Human Capital team. You can reach out to the team at any time for questions about how we can assess gaps and help build a more resilience workforce.
More Like This
-
Article 7 mins
Better Decisions in Trade, Technology, Weather and Workforce
From global supply chain risks to climate insecurity, organizations face challenges and complexities on a scale rarely seen before.
-
Article 9 mins
Risk Capital and Human Capital Perspectives
Risk Capital CEO Andy Marcell and Human Capital CEO Lambros Lambrou discuss how innovations in Risk Capital and Human Capital can help organizations boost resilience and navigate volatility.
-
Report 31 mins
Evolving Technologies Are Driving Firms to Harness Opportunities and Defend Against Threats
While advancements in AI, cyber and data technology are helping companies operating in an increasingly digital world gain a significant competitive edge, they also introduce new and evolving risks.