ESG Strategies Are Driving Corporate Investments in Renewable Energy

Date: November 30, 2021

Publication: Thompson Hine Business Law Update

Environmental, social and governance (ESG) refers to three key factors that measure the sustainability and ethical impact of an investment. ESG has emerged as a major influence on corporate policies and practices as businesses and investors are increasingly called upon to address topics such as inclusion, workplace safety, environmental equity and access to affordable health care. The global pandemic is accelerating the impact of ESG as businesses face unique challenges and adapt to rapid change and new ways of operating and decision making.

Many large public companies are at the forefront of ESG strategies and are implementing sustainability measures. Smaller public and private companies will need to follow their lead. ESG disclosure obligations and reporting of ESG progress and policies are increasingly shaping how businesses allocate investment dollars in growing international markets. For example, businesses are now required to report the proportion of total investment that is considered sustainable under new European Union (EU) regulations. Along with expanding regulatory requirements, market forces will continue to impact ESG investment, and companies will commit more and more capital to sustainable practices. Businesses and their suppliers and customers are creating new connections, strategic alliances and partnerships to reduce their environmental impacts and advance sustainability.

Environmental issues often drive social and governance practices. Climate change is having a major effect on the ways that businesses plan, assess risk and deploy resources. Investors are asking how businesses are reducing their carbon footprint. Companies must demonstrate real progress, and there is increasing demand for investments in fossil fuels not to exceed a certain share of total spending. Businesses are responding to these influences by developing and executing ESG strategies that include four main steps: renewal, recovery, removal and reporting. Renewal means executing a transition towards sourcing more renewable energy. Recovery means addressing improvements in energy efficiency. Removal means reducing greenhouse gas emissions. Reporting means measuring and tracking sustainability performance, including internal and external performance audits. ESG rating agencies are starting to evaluate how quickly companies decarbonize their energy mix.

All this is fueling the dramatic growth of renewable energy, especially investment in solar power. In 2020 the United States saw its fifth consecutive year of renewable energy growth, reaching a record high 12% of total energy consumption according to the U.S. Energy Information Administration (EIA). Total corporate spending for solar projects, including venture capital funding and debt financing, reached $13.5 billion in the first half of 2021 compared with $4.6 billion in the same period last year. By 2030, renewable energy is forecast to produce 22% of U.S. electricity generation, surpassing both coal and nuclear power.

Market leading companies such as Walmart have seen their commitment to solar energy pay off. Walmart has become the number one commercial solar energy user according to the Solar Energy Industry Association and is now recognized as the largest onsite renewable energy user in the United States by the EPA Green Power Partnership. Apple, Amazon, Google and Target are other household names expanding the use of solar power nationally.

The 26% federal investment tax credit, combined with state and local programs, policies and incentives, renewable energy credits (RECs), declining installation costs, improved technologies such as battery storage, and creative financing arrangements provide strong reasons for businesses to invest in solar power as part of their ESG initiatives. Projects can be sized to meet the needs of customers and energy consumers, ranging from parking lot canopies to rooftop systems to large ground-mounted facilities. Even small businesses have the option to match their energy usage requirements to the scale of their investment in solar resources.

For businesses investing in solar power for the first time, the process of evaluating and choosing vendors and determining the right ratio of investment to return can be challenging. Working with experienced and knowledgeable developers and contractors is an important step in effectively managing risk and maximizing results. Multiple factors influence performance, from site selection to optimizing discounts, rebates and tax incentives. Additionally, many businesses are engaging in energy performance assessments and independent audits to help evaluate opportunities for additional savings through the installation of “smart” systems and equipment and even steps as simple as substituting more efficient LED bulbs in light fixtures.

Thompson Hine works closely with lenders, investors, developers and contractors, among others, to help our clients implement effective ESG strategies, including structuring innovative solar and cleantech projects that can generate significant financial benefits while reducing and offsetting greenhouse gas emissions. We help clients select business partners and “right size” projects to maximize their economic value through creative and efficient financing arrangements and skillfully negotiated contract terms.

Please contact Greg Chafee in our Energy group to learn more about how we may be able to help your business.