ESG is a hot topic right now in many industries, but what exactly is ESG? Investopedia defines ESG as “environmental, social, and governance (ESG) criteria [that] are used to screen investments based on corporate policies and to encourage companies to act responsibly.” The environmental piece, or “E,” represents the impact on the environment from running a business. This includes climate, energy, pollution, waste management, and natural resources. The social piece, or “S,” includes labor policies, wellness, diversity, and transparency. The governance piece, or “G,” includes leadership, board and financial transparency, accountability, and stakeholder communication.

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Nowadays, businesses are facing more scrutiny related to their actions regarding ESG. The construction industry is no exception, and many people in this sector have issued a call for change. According to the World Green Building Council, buildings and construction account for 39% of energy-related CO2 emissions. But how is this number even possible? Concrete manufacturing is actually responsible for a substantial amount of greenhouse gases, and buildings also generate additional emissions through heating, cooling, water, and other functions.

In order to mitigate this issue, the most attractive investment opportunities related to ESG currently focus on net zero carbon emissions, sustainable metrics, and other advancements that are tailored to address the ongoing energy crisis. As a result of this initiative, many construction groups and associations are rising to the call for action and are looking at dynamic ways to increase energy efficiencies in buildings and infrastructure. These efficiencies can be built into buildings by including renewable energy sources such as solar, wind, and geothermal. The development of more energy-efficient ways to capture and use natural light and retain heat with insulation will help bring buildings closer to net zero.

In addition to energy-efficient construction methods, the push for increasing corporate and social responsibility has also impacted taxation in the construction industry. Tax planning strategies are a main component of business financial structure, and recent tax incentives have become a driving force for many companies to invest in ESG and quickly adopt new standards. There also has been a major push in the last few years to incorporate “tax integrity” into the business structure by taking advantage of tax-saving policies while also pursuing a sustainability strategy. Many tax credits have now been extended to 2025 as part of the Inflation Reduction Act, including the commercial credit for renewable electricity infrastructure development. Credits for the development of energy properties was extended to 2035, and credits aimed at carbon capture, including those for alternative fuels, was extended to 2033. In addition, building code adoptions are receiving $1 billion to support state and local governments in updating building codes, and $300 million to adopt residential and commercial building codes that meet or exceed the requirements of the 2021 International Energy Conservation Code, the ASHRAE Standard 90.1-2019, or a combination of the two.

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Considering the impact of ESG on business methods and taxation, how can the construction industry continue building a more sustainable framework for the future? Firstly, bringing tax to the table of ESG initiatives needs to be a priority. The potential benefits via tax incentives or funding will help many construction companies prioritize ESG initiatives. There is also a significant push for more ESG reporting and documentation, and tax professionals can help businesses with that process. Secondly, incorporating tax transparency statements into ESG achievements will continue to attract investors looking to engage with more responsible construction companies. Furthermore, having a solid ESG framework and reporting system can help attract more diverse talent to the workforce.

In today’s environment, construction companies will continue to adapt and integrate ESG into their business structure in order to thrive. Contact your local tax professional today and discuss how an ESG tax strategy can help propel your construction business into the future. Having well-rounded conversations on tax planning, initiatives, incentives, and the potentially new carbon taxes will help you determine how your company can achieve sustainability goals.

How Citrin Cooperman Can Help

At Citrin Cooperman, we are committed to the construction industry and stay up-to-date on the current trends affecting the industry. Our Construction Practice can assist your business with identifying the best path forward for incorporating ESG aspects into your business

Citrin Cooperman” is the brand under which Citrin Cooperman & Company, LLP, a licensed independent CPA firm, and Citrin Cooperman Advisors LLC serve clients’ business needs. The two firms operate as separate legal entities in an alternative practice structure. Citrin Cooperman is an independent member of Moore North America.

Jessica Sawyer is a partner with over 15 years of accounting experience. She is skilled in tax consulting and specializes in corporate, partnership, and individual taxation in various industries including manufacturing and distribution, construction, real estate, and technology and life sciences.

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