ESG in the USA
ESG initiatives are gaining significant momentum across the US economy, in most part due to the Biden Administration driving growth in this area.
This is also evidenced in the finance sector, with capital being allocated based on ESG (environmental, social and governance) information and ratings, providing a strong indicator that ESG is becoming the industry standard as climate concerns increase and US consumers gravitate towards brands and services that address ESG issues in ways that align with their own values.
This backdrop is creating opportunities for overseas businesses that are aligned to the ESG agenda to establish or expand US operations.
This guide is for non-US companies looking to establish a commercial presence in the States. We consider the different reasons why the USA is the destination for ‘green and clean’ businesses, looking at the financial incentives introduced under the Inflation Reduction Act 2022.
We are specialists in US visa and immigration matters. If you have questions about the type of visa you’ll need to move your business and employees to the USA, contact us.
What do we mean by ESG?
In the modern world, successfully running a business is not just about ensuring that the business is profitable, with a positive cash flow position, although inevitably money matters. Still, in a socially conscious era, a business must also be seen to be acting responsibly within an environmental and social context. Equally, when it comes to accountability, the way in which a business and its’ people are managed also counts.
ESG in the USA — standing for Environmental, Social and Governance — is a collective term or set of standards used for measuring the impact of a business on environmental and social issues, as well as its governance beyond solely generating revenue or making a profit. These standards, or ESG pillars, as they are often described, switch the focus from financially-related measures, such as gross turnover and costs, to measures that show a business’s impact on the environment, local communities and on their own workforces.
In broad terms, ESG is all about the overall impact that a business has on both the environment and society, and how transparent and accountable its’ governance is in terms of company leadership, executive pay, audits, internal controls and shareholder rights. In a nutshell, ESG is all about ensuring that an organization acts as a responsible custodian of the environment, as a good corporate citizen and is led by accountable management.
US Government focus on ESG in business
Recently described in the Financial Times as having “big subsidies and shovel ready sites”, various US states are looking to “woo clean energy firms”. In short, the increased importance of ESG in the USA, with environmental, social and governance considerations all becoming key priorities for the United States Government, it has never been a better time for green and clean businesses to take advantage of what is on offer by way of incentives to relocate.
The federal spending that is being invested in the States, especially in environmental matters, is not only encouraging home-grown businesses to become greener and cleaner, but also in attracting overseas green and clean businesses to the USA. In fact, the level of investment is so significant that this has even sparked debate around unfair competition from European leaders. Indeed, in February 2023, French and German economy ministers traveled to Washington to lay bare their concerns about unfair competition following a whopping $370 billion directed toward federal US subsidies for clean energy.
There is also an additional layer of US government support over which other countries have less sway, namely, the various green incentives offered by different states and localities, where developers of projects from electric car plants to green hydrogen refineries have been receiving the red-carpet treatment from state and local officials. With different states long vying with one another for inbound investment, some have revamped subsidy schemes in response to the landmark Inflation Reduction Act (IRA) that came into law last year. The IRA has essentially serve to prompt more serious conversations in US states about how to capture clean-energy investment and attract businesses willing to invest in this way.
For example, in the state of Georgia, a Norwegian battery company announced a factory investment of in excess of $2.5 billion having received approximately $360 million worth of subsidies from the state. The local Coweta County Development Authority also offered 20-year property tax breaks and job creation grants worth $250 million to the same company. Similarly, the state of Michigan in Autumn of last year awarded at least $715 million in incentives to secure a deal with a Chinese battery company, which will build a factory in Grand Rapids worth over $2 billion. The states of Georgia, Texas, Kentucky, Illinois and South Carolina were also in the running for the same factory.
State and local economic development agencies in the USA have for decades offered tax breaks and other subsidies to existing companies considering expansion or overseas companies considering relocation. With the increased focus on federal spending from the US Government, this has had a ripple ‘green and clean’ effect across the whole of America, where overseas developers can now take advantage of significant financial support, thanks to the many federal IRA subsidies and state programs, not to mention the practical incentives on offer. Ohio, for example, is keeping 25 or more properties ready for large-scale industrial projects, while Michigan has already touted 3 different sites with power, water and rail lines in place, and Indiana is said to have half a dozen “shovel-ready sites”.
The new climate law has also effectively changed the equation, making it likely that more of these sites will be used for manufacturing of electric vehicles, batteries or renewable energy equipment, all of which benefit from new or expanded federal tax credits.
What is the Inflation Reduction Act (IRA) 2022?
The IRA is the most significant climate legislation in US history. This offers extensive funding, programs and tax incentives to boost domestic clean energy production, accelerating the transition to a clean energy economy. This means that there are now a number of ways in which overseas green and clean businesses can benefit from this, and why those looking to establish a commercial presence in the USA should act now.
The IRA was signed into law on 16 August 2022 in a bid to help reduce carbon emissions and fight climate change. This legislation represents a game-changing investment in the nation’s economy and the most significant action that has ever been taken by Congress in response to the climate crisis. Behind this move, the USA aims to reduce the United States’ share of global greenhouse gas emissions by approximately 40% or more by the year 2030.
According to leading economists, in addition to helping to fight climate change, the IRA will also help to reduce the deficit to fight inflation in the USA, as well as to support strong, stable economic growth through the creation of millions of new jobs across various industry sectors. This anticipated growth in employment not only includes jobs within the clean energy sector, but will also extend to clean manufacturing supply chains, clean transportation and electric vehicles, energy efficiency improvements for homes and buildings, environmental justice and climate resilience, and in natural infrastructure.
What financial incentives are available under the Inflation Reduction Act?
The IRA directs billions of dollars in federal funding to clean energy technology, with the goal of substantially lowering America’s carbon emissions by 2030. These funds will be delivered through a mix of tax incentives, grants and loan guarantees, with clean electricity taking the largest slice, shortly followed by electric-vehicle incentives. This is because the transportation sector in the USA represents the single largest source of greenhouse gas and health-harming emissions, surpassing even industrial emissions, where a significant transition to cleaner vehicles will be necessary if the US is to meet its climate goals.
By awarding a combination of rebates, grants and loans toward the cost of sustainable improvements, the IRA is motivating companies in every industry to step up and make a difference. Below we set out some examples of the funding options and financial incentives that may be available to those thinking of setting up business in the United States:
Clean energy projects
When it comes to clean energy, various financial incentives have either been extended or newly-established under the IRA, including investment tax credits (ITCs) and production tax credits (PTCs) for clean energy deployment. This is where businesses can offset some of the cost of projects and purchases through tax credits, although to receive the full value of the tax credit, say 30% as opposed to 6% of of project costs, prevailing wage and apprenticeship requirements must also be met. ITCs or PTCs include the production of electricity using wind or solar power. There are also bonus credits available, including a domestic content bonus credit for utilising domestic iron and steel or an energy communities bonus credit for qualified facilities.
Clean technology manufacturing
The IRA makes the largest ever investment in US manufacturing of clean energy technologies, including solar, wind, batteries and electric vehicles. These investments are seen as absolutely necessary to build secure domestic supply chains instead of relying on overseas production marred by high pollution. Here, financial incentives include an extended investment tax credit for establishing or retooling a factory to produce a broad range of clean technologies, including renewable energy and electric vehicle components. The IRA also includes a production tax credit for manufacturing wind, solar and battery components, as well as for processing critical minerals, like aluminium, lithium, cobalt and nickel to incentivize the building of new facilities to support clean energy supply chains at a globally competitive scale.
The IRA provides auto supply chain manufacturing grants and loans, including the advanced technology vehicle manufacturing loan program which provides direct loans to manufacturers to re-equip, expand and establish facilities producing clean vehicles and their components. There are also domestic manufacturing conversion grant’s available to support the domestic production of electric and hybrid vehicles.
Other incentives and credits under the IRA, especially in the context of construction and manufacturing projects, include the Environmental Product Declaration Program. This will provide $250 million to support the development and optimisation of environmentally-approved construction materials and products. This covers materials and products that have a lower carbon footprint, and demand less energy during manufacturing processes.
The government also promises to provide businesses with an additional $250,000 of refundable Research and Development (R&D) tax credits, which a business can utilize towards transitioning to clean energy and lowering business costs. This instant working capital, at a time when both energy costs and inflation are soaring, can give companies a much-needed operational boost while still progressing toward clean energy targets.
Equally, the Energy Infrastructure Reinvestment (EIR) Program is an important loan program aimed at helping to retool, re-power, repurpose or replace dormant energy infrastructure, or to optimise the efficiency of infrastructure that is currently running, where a total of $5 billion will be allocated to carry out EIR through to September 2026.
Standardizing ESG policies in the US
As the effects of climate change are becoming obvious, with incidents of natural disasters becoming progressively common in the United States, ESG policy has become more and more prominent in recent years. It, therefore, follows that the environmental aspect of ESG very often takes center stage. However, over the past few years, ESG has taken on a much broader meaning, where social and governance policies also encompass those factors which contribute to the creation of a business that does good instead of causing harm, including but not limited to environmental protection. Other key factors include worker health and safety, racial and gender diversity, as well as transparent administration and accountability.
Importantly, many of the provisions in the IRA, including the investment and production tax credits, seek not only to encourage investment in clean energy projects, but for businesses to comply with prevailing wage and apprenticeship requirements. In this way, the provisions of the IRA prompt strong labor standards at the same time.
Along with the IRA, the introduction of various other important pieces of legislation are anticipated in the USA over the coming years. Equally, regulatory agencies such as the Department of Labor (DOL), the Occupational Safety and Health Administration (OSHA) and the Securities and Exchange Commission (SEC), have all made public their determinations to focus on ESG policy in the near future. As such, ESG policies are soon likely to become standardized, with minimum standards imposed on all businesses.
Additionally, with this, it is also likely that there will be increased disclosure requirements when it comes to ESG compliance. For example, the most recent disclosure policy development in the USA is a proposal by the SEC that would obligate companies to disclose information related to their environmental footprint. Any information concerning climate-related risks that are reasonably likely to have a material impact on a business will need to be reported, along with a report on a company’s greenhouse gas emissions.
However, ESG in the USA is not designed to make operations more difficult, but rather to make the way in which a business is run more efficient, safer and better for the world — and a place where green and clean businesses can feel proud to be making a difference.