COVID-19 Resources

Understanding the Accounting and Tax Implications of Adopting ESG Strategies

Written by Paul Perry, William Dow on April 13, 2022

Warren Averett esg accounting image

Environmental, social and governance (ESG) reporting has become popular during the past decade, largely because businesses that consider the impact of their policies on the environment, their local community and the world are positively rewarded—both in society and from a financial perspective.

ESG reporting, also sometimes known as sustainability reporting, makes a company’s ESG activities known to the public and thereby held accountable to consumers and investors.

While ESG discussions tend to focus on how ESG matters will impact a company’s strategy, operations and value, they also affect its financial reporting and tax liability and provide tax transparency.

Warren Averett esg accounting image

ESG Accounting Considerations

In March 2021, the Financial Accounting Standard Board (FASB) published Intersection of Environmental, Social, and Governance Matters With Financial Accounting Standards, also known as the FASB ESG Paper.

The paper highlights the connection between ESG matters and their direct or indirect impact on a company’s financial statements and provides examples of how a company may consider the effects of material ESG matters when applying existing accounting standards.

Some of the topics covered by the FASB ESG Paper include impairment of goodwill and indefinite-lived intangible assets and the useful lives of finite-lived intangible assets and property, plant and equipment.

The SEC has also been active in evaluating the impacts of ESG matters on accounting and financial reporting, issuing several public statements emphasizing the importance of ESG disclosures.

The SEC’s Climate and Environmental, Social, and Governance Task Force (Climate and ESG Task Force) is scheduled to vote soon on a proposed rule for climate-related disclosure statements for all SEC-registered companies.

We can turn to the European Union (EU) for a look at what the future of ESG financial reporting could look like in the United States. In the EU, large companies are required to provide detailed disclosures on a wide variety of ESG matters, including their diversity policies.

But ESG doesn’t just impact financial reporting. Companies can also benefit from tax credits while supporting ESG values.

Warren Averett esg accounting image

Some Tax Benefits of Adopting ESG Reporting

Income tax hasn’t historically been a part of a company’s ESG strategy conversation, but tax incentives are an opportunity for governments to incentivize desired outcomes. In the United States and worldwide, governments have introduced tax incentives to encourage businesses to pursue ESG-related initiatives.

These ESG-related tax incentives can reduce the tax liability of companies while also improving the wellbeing of communities and the world.

ESG-related tax credit programs can include:

Environmental

  • Tax credits for energy-efficient buildings, electric vehicle charging stations, carbon recapture and investing in and producing solar and wind power

Social

  • Tax credits for investing in low-income neighborhoods and building affordable rental housing
  • School and transportation infrastructure bonds
  • Tax credits for employer-provided childcare facilities
  • Tax credits for rehabilitating historic buildings

Governance

  • The Biden Administration has proposed working with Congress to pair environmental tax credits with strong labor standards, which would benefit employers that provide good-paying and good quality jobs. In some industries, this would involve negotiating with labor unions to create sustainable labor policies.

Warren Averett esg accounting image

Global Tax Considerations

Countries around the world have also begun implementing environmental taxes. For example, Finland introduced a carbon tax in 1990, and 18 EU countries have followed since then. The U.K. is introducing a similar tax on plastics, which will impact plastics manufacturers and importers and consumers who buy goods in plastic packaging.

These and other environmental taxes can increase an organization’s cost of doing business and need to be accounted for in the company’s operating and revenue projections.

Warren Averett esg accounting image

Connect with an Advisor About Your Company’s ESG Reporting and Related ESG Accounting and Tax Considerations

Including tax and accounting considerations in ESG conversations will ensure your organization is better positioned to manage potential risks, identify opportunities and communicate with shareholders and regulators about ESG taxes.

As ESG becomes more central to an organization’s business strategy (business operations agreeing with culture and values), tax will play a growing role in defining and shaping ESG initiatives and reporting.

If your company is considering adopting ESG reporting, talk to your Warren Averett accountant or advisor, or ask a member of our team to reach out to you to help evaluate the tax and accounting implications of ESG-related decisions.

New call-to-action

Back to Resources
Top