American companies are leading the way in implementing a new set of criteria to screen investment decisions and business practices – in addition to focusing on the bottom line, companies are increasingly evaluating how their actions can positively impact the environment, their broader community, and the health and wellbeing of their employees and shareholders.
This broad set of criteria, known as ESG (shorthand for environmental, social, and governance) can be hard for companies to navigate, because it is new and at times ambiguous. Unlike financial reporting for public companies, which has a standard set of principles and rules governed by the Financial Accounting Standards Board, ESG criteria is not standardized.
The lack of standardization can make it challenging for companies that want to pursue ESG goals. Fortunately, there are several different institutions working on developing a reporting framework for ESG activities, and there is an emerging consensus amongst practitioners that an ESG investment should at its core provide a direct and measurable impact that contributes towards the health of the environment, broader community, or its employees and shareholders.
At Blue Rock we are often asked by prospective investors whether solar tax equity investments can contribute towards a company’s ESG goals. Our immediate answer is always yes – solar tax equity investments can and do provide a number of Fortune 500 companies with a double bottom line benefit of improving profitability while also contributing towards the health and wellbeing of their community, the environment, and their shareholders.
For background, solar tax equity investments by large corporations are structured as equity investments directly into solar energy projects, and the capital is used to build and manage a solar power plant that will generate electricity for decades to come.
The electricity produced by the solar plant will be used by homes and businesses, often at rates lower than their utility bill, and will reduce their greenhouse gas emissions. To build the projects, a construction company will need to employ a team of highly skilled laborers to build the system to a detailed specification, and once the project is operational a team of maintenance professionals will oversee the project to provide preventive maintenance and to respond to unanticipated outages.
The solar property will become part of the tax base in the local community, and these projects are often located in rural communities across the country that are facing a decline in their tax proceeds due to structural shifts in the economy and population. New energy project investments provide a much needed boost to tax revenue, which enables these communities to continue to provide critical services to their population.
Last, solar tax equity investments are profitable for our clients – they increase after-tax earnings, retained earnings, and shareholder value. The capital allocated to solar tax equity investments does not require a company to reallocate cash from other business activities either, but instead to repurpose capital that was allocated to pay the company’s federal tax expense.
All of these benefits are a direct result of the capital provided by the tax equity investor and are quantified and measured throughout the project’s lifecycle. Additionally, for investors that are seeking an independent rating of the ESG impact of their solar tax equity investment, some of the rating agencies offer detailed reporting that quantifies the specific impact of the investment (and Blue Rock can help secure this report in connection with investment close).
As companies increasingly incorporate a new set of ESG criteria to screen investment decisions and business models, solar tax equity investments can be a powerful tool that delivers increased shareholder value. At Blue Rock, we help our clients by originating qualified opportunities, and then provide regular financial and ESG reporting throughout the course of the investment period. If you would like to learn more, please reach out and we would be happy to have a conversation.