www.pwc.com Tax Executives Institute Western Michigan Chapter Sustainability How Going Green Can Help Your Bottom Line Focusing on sustainability as a business opportunity 17 February 2011
Agenda 1 Why focus on sustainability now? 2 Revenue enhancement and supply chain considerations 3 Green tax incentives and credits 4 Trends in sustainability reporting 5 Pulling it all together 6 What s next in energy legislation? 2
Tax Executives Institute Why focus on sustainability now? 3
Your green initiatives tax fits into a larger story Tax incentives are important but only part of an overall strategy on climate change Companies are going green to reduce costs, manage risks, and generate new revenue opportunities To get there, companies need to - Have a carbon strategy that emphasizes carbon value management - Understand where carbon emissions occur in their processes and supply chain - Develop the ability to accurately account for and report climate change data to stakeholders - Start working on projects that minimize carbon risk and enhance carbon value 4
Tax Executives Institute Revenue enhancement and supply chain considerations 5
How has CR really evolved? CR has evolved from philanthropy to responsibility although there are differences between US and European approaches Access and speed of information Increased scrutiny of business High profile campaigns Inter-relationships between issues Shift in public attitudes on the role and responsibilities of business Corporate responsibility is not about what you do with your profits, it s about how you make them (FT, 2001) 6
What are the real benefits of engaging on CR? Although the perceived (or real) benefits of addressing sustainability impacts are significant, many elements are difficult to quantify in the P&L Improved operational efficiency Enhanced brand and reputation Customer attraction and retention Enhance human capital Attracting and retaining talented staff Improving risk management Preserve licence to operate Promoting and increasing innovation Improved access to capital Build and sustain shareholder value Identification of new opportunities Generating increased revenues 7
What are the real benefits of engaging on CR? If you have or are developing a strategy for corporate responsibility, how important is it to your company that this strategy meets the following objectives? (% of all respondents selecting critically important category) Source: Economist Intelligence Unit 8
Walmart s supplier GHG innovation program What is Walmart doing? Feb, 2010: announces plan to eliminate 20 million metric tons of GHG emissions from its global supply chain by 2015 Requesting suppliers reduce the carbon impact of products sold in Walmart stores and of their own operations Two main drivers: doing the right thing for the environment and saving Walmart customers money Project team will work with Walmart buyers, merchandising, business unit sustainability leaders and others to identify projects that will achieve significant GHG reductions and related financial benefits. How is supporting? will be assessing completed supplier application packages and their GHG reduction claims Guidelines for eligible project activities established by Walmart Suppliers supported in their submissions by Walmart and ClearCarbon Consulting First insights likely late next year 9
Walmart s supplier GHG innovation program Walmart has established criteria against which eligible project activities will be assessed to see if they qualify toward the GHG reduction target Source: Walmart Supplier GHG Innovation Program: Guidance Document (V1.0, Aug, 2010) 10
Insights from recent work in the chemicals sector is supporting a global chemicals company assess downstream sustainability demand by market segment to drive new revenue Challenge Approach Strong portfolio of products with environmental and health benefits relative to alternatives Difficulty in leveraging these benefits as a competitive differentiator Primary sustainability benefits accrued to downstream users of their products, rather than their direct customers To capture value from their products' sustainability attributes, the company needed to assess downstream sustainability demand by market segment Develop strategy and implementation roadmap Generate market pull for products. Re-focus marketing efforts with OEMs or retailers of the final product. Benefits Stronger relationships thru internal workshops and dialog with customers/oems Methodology development around driving revenue growth from sustainability Market-specific sustainability strategies to extend and deepen that capability across the customer businesses. 11
Insights from recent work in the chemicals sector is supporting a global chemicals company assess downstream sustainability demand by market segment to drive new revenue Client Supply Chain Intermediaries End Users Final Product Consumer Consumer health campaigns, media coverage Coca-Cola Nestle General Mills Shareholder resolution to remove BPA from can linings Recall, government investigation due to ink migration into infant formula Voluntarily replaces BPA in organic tomato can Common demand drivers for sustainable coatings in three sample markets Voluntary standards for green buildings (GHGs, VOCs) Herman Miller PPG Corus Greenguard certified furniture Tool to search products according to LEED, VOC standards Colorcoat pre-finished steel contributes to BREEAM certification Energy cost reduction, labor health & safety Toyota Ford BMW Eliminate drying ovens & reduced CO2 emissions 15%; switch to 3-wet process Eliminate formaldehyde from assembly line in 4 years; switch to 3-wet process, Reduce energy use by 30% 12
Ongoing challenges: how to reach consumers? 13
Ongoing challenges: how to value sustainability? Management teams need comparable frameworks and/or metrics to understand and evaluate sustainability opportunities $ Potential range Estimated impact Tighter regulation of certain product lines Diversification of existing IP and skills into new ventures New regulation to underpin demand for new products and services EBITDA 2010 EBITDA 2015 14
Views on what CR has achieved to date Notwithstanding the uncertain regulatory environment, some clients are making real progress on this agenda Distilling macro themes into company-specific issues is crucial Growing understanding that non-financial issues may represent material financial exposure or latent upside in some sectors Consumers willingness to pay more for green is fickle Continued scepticism by some that CR is simply PR Difficulties in assessing comparative CR performance to drive value 15
Tax Executives Institute Green tax incentives and credits 16
The green tax incentives landscape Significant energy provisions in three enacted economic recovery bills allow businesses of all types and sizes to take advantage of billions of tax and other incentives for going green. The Emergency Economic Stabilization Act of 2008 (EESA) included $17 billion in energy tax provisions The American Recovery and Reinvestment Act (ARRA) added $60 billion in direct spending and $20 billion in tax incentives for renewable energy and energy efficiency over the next 10 years The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Act ) extended many of the provisions created in both the EESA and the ARRA 17
Tax credits Tax credits/deductions incentivize renewable investments and energy saving improvements: Foundational tax incentives - Renewable energy production tax credits (PTCs) - Energy property investment tax credits (ITCs) Grants in lieu of energy credits Election to claim ITC instead of PTC Energy-efficient commercial building deduction Alternative fuel credit Alternative motor vehicle credit Alternative fuel vehicle refueling property credit 18
Renewable energy production tax credits Generated from the production of energy from certain renewable sources The credit is based upon kilowatt hours that are: - Produced by the taxpayer - From a qualified energy resource - At a qualified facility during the 10 years following the placed-in service date (definitions differ among the various types of energy) - Sold by the taxpayer to an unrelated person (although sales to a member of an affiliated group is allowable) Considered a general business credit eligible for one year carryback and 20 year carryforward but credit is nonrefundable Credit amount reduced by amount of any subsidized financing received 19
Qualified energy production resources Wind (placed-in-service before 2013) Biomass (open- and closed-loop) (placed-in-service before 2014) Geothermal (placed-in-service before 2014) Hydropower (placed-in-service before 2014) Marine (waves and tides) (placed-in-service before 2014) Municipal solid waste including landfill gas (placed-inservice before 2014) Small irrigation (150 kilowatts to 5 megawatts) (placedin-service before 2014) Refined coal (placed-in-service before 2010) 20
Energy property investment tax credits Section 48 provides an investment tax credit for energy property as a percentage of the property s basis: Solar providing either electricity or light inside a structure (30% credit through 2016) Geothermal (either 10% without placed-in-service date, or 30% credit through 2013; see below) Fuel cell (30% credit through 2016, capped at $1,500 per half-kilowatt of capacity ) Microturbine (defined as less than 2,000 kilowatts) (10% credit through 2016, capped at $200 per kilowatt of capacity) Small wind (defined as 100 kilowatts or less) (30% credit through 2016, with no credit cap for tax years after 2008) Combined heat and power systems (10% credit through 2016) After December 31, 2008, the property s basis is not required to be reduced by the amount that the Section 48 credit is subsidized by energy financing under a federal, state, or local program Considered a general business credit eligible for one year carryback and 20 year carryforward but credit is nonrefundable 21
Grants in lieu of energy credits ARRA and the 2010 Tax Act create a new grant program option in lieu of the energy production credit or the energy investment credit The grant amount is 30 percent of the depreciable or amortizable basis of the energy property in the case of wind, biomass, section 45 geothermal, solar, landfill, gas, trash, hydro, marine, qualified fuel cell, or small wind property The grant amount is 10 percent for microturbine, combined heat and power, small irrigation, section 48 geothermal, and geothermal heat pump The basis of the underlying property must be reduced by 50 percent of the amount of the grant The grant program will be administered by the Treasury Secretary Consideration: Construction risks associated with "placedin-service" requirement Construction must begin by the end of 2011 22
Election to claim ITCs instead of PTCs ARRA and the 2010 Tax Act provide an election allowing qualified production facilities (other than solar, refined coal, or Indian coal) to elect the 30 percent investment credit in lieu of the production credit The election applies to the eligible basis of depreciable (or amortizable) qualified production property placed in service between January 1, 2009 and December 31, 2013 (December 31, 2012 for wind facilities) Qualifying property must be tangible personal property or other tangible property not including a building or its structural components if such property is integral to the facility Consideration: day-one tax benefits vs. year-over-year production credits 23
Energy-efficient commercial building deduction Energy efficiency is the low hanging fruit for emissions reduction, and tax can make returns even better The costs of energy-efficient commercial building property placed-in-service before 2014 are allowed as a deduction pursuant to IRC Section 179D for otherwise capital costs: The basis of any energy efficient commercial building property must be reduced by the amount of the deduction The deduction is treated as depreciation The deduction is limited to the square footage of the energy efficient commercial building property multiplied by $1.80 Must achieve certain energy reductions relative to a building baseline to be eligible for full credit Reduced deprecation cap may still be available at $0.60 per square foot Government contractors may be eligible to have agencies assign them this deduction 24
Alternative fuel credit Tax code provides various excise and income tax credits for certain non-petroleum fuels sold or used by taxpayer The 2010 Tax Act extends these credits through December 31, 2011 depending on fuel type Although there is also no requirement that the taxpayer be subject to federal excise tax on the purchase or use of the fuel, the credit must be used against certain fuel excise tax first, and then may be applied against income tax There is no limitation on the amount of the credit (i.e., no cap or phase-out). Thus, the entire amount of the credit is claimable Credits: - Alcohol mixtures- up to 60 cents per gallon - Biodiesel mixtures- up to $1 per gallon - Alt. fuel and alt. fuel mixtures- 50 cents per gallon or gasoline gallon equivalent 25
Steps to obtaining green tax incentives Many of the new green tax incentives require registration with the IRS or application to the Department of the Treasury As a result, these programs may require additional tax compliance measures or new administrative efforts. This can include: Determining initial eligibility for an incentive program based on current or planned operations Filing proper IRS registration documents and subsequent weekly, quarterly or annual forms to claim alternative fuel payments Assembling the Treasury application required for the grant-in-lieu-of credit program 26
Financing considerations Renewable Bonds Energy Subsidized Financing States offer various incentives including: Income tax credits and state tax exemptions Property tax exemptions and credits Rebates Grants Loans Bonds There are hundreds of different state incentive programs; it pays to shop for them! 27
Tax Executives Institute Trends in sustainability reporting 28
Current regulatory and voluntary reporting Mandatory GHG reporting effective 2010 for facilities that emit more than 25,000 tons GHGs per year SEC interpretive guidance issued on climate change disclosures Voluntary registries of facility emissions with specific methodologies Encourages transparency regarding water strategies (including targets and results as well as areas for improvement) A record 101 climate and energy-related resolutions were filed with U.S. and Canadian companies as part of the 2010 proxy season. 29
Carbon Disclosure Project The Carbon Disclosure Project is an independent not-for-profit organization holding the largest database of primary corporate climate change information in the world. Voluntary Disclosure Program for S&P 500 and Global 500 Backed by 534 institutional investors representing $64 trillion in assets under management 349 or 70% of S&P 500 responded in 2010 Why do companies disclose? Increasing pressure from their shareholders Increase in shareholder resolutions Rising focus for socially responsible investing CDP data available on Bloomberg and Google finance Pressure from their customers, vendors and other stakeholders Benchmarking to peers 30
Carbon Disclosure Project The CDP process What information is disclosed Governance Climate related risks and opportunities Strategies Emissions reduction activities External communications Data verification Emissions reporting Disclosure score Provides a high level indicator of a company s level of transparency Assesses quality and completeness of a company s disclosure For example: Disclosure points for responding whether company has set emission reduction target, even if response is No Performance score Assesses positive actions disclosed that have been taken to respond to climate change challenges For example: No performance points if no emission reduction target is set New 31
Perspective 2010 CDP results Beyond simple CDP response, more companies are disclosing emissions and making commitments to reduce them 349 companies responded to the 2010 CDP. Of those: 294 US S&P 500 companies disclosed GhG emissions in 2010 (262 in 2009) 170 US S&P 500 companies disclosed carbon reduction commitments in 2010 (169 in 2009) 32
Perspective CDP 2010 Results, continued What are the members of the Carbon Performance Leadership Index doing? 70% of US S&P 500 respondents are actively pursuing commercial opportunities from climate change 68% of US S&P 500 respondents disclosed board or executive-level oversight 35% of US S&P 500 respondents disclosed that monetary incentives to support climate change initiatives have been developed 35% of US S&P 500 respondents disclosed whether its carbon strategy was integrated with the wider corporate strategy 23% of US S&P 500 verify or assure GhG data submitted to CDP 33
CSR reporting trends CSR trends 2010 Survey conducted jointly by Canada and Craib Design & Communications Reviewed 602 companies listed in five Standard & Poor s indices A practical working tool that can be use to meet the expanding expectations of stakeholders for more information 34
CSR reporting trends, continued The big picture No longer just nice to do; CSR has become a core business value... and climate change is still the dominant issue 35
CSR reporting trends, continued CSR efforts are reaching further upstream and downstream 88% of all companies surveyed identified major stakeholder groups and 97% described specific stakeholder engagement methods 83% use the Global Reporting Initiative ( GRI ) guidelines and 69% provided a GRI index table 36
Typico Inc. A framework for GHG reporting An illustration of a statement of greenhouse gas emissions Forward thinking Components of a typical GHG emissions statements MD&A - Statement and notes - Independent assurance 37
Typico Inc., continued The evolution of sustainability reporting Past I have someone who looks after the sustainability agenda Silo Present We need to incorporate the most material sustainability issues into our mainstream thinking and reporting Mainstreamed Future We ve transformed our business model and the culture and values of the company to reflect the new business landscape Integrated Mainstream Reporting Sustainability Reporting Inclusion but isolated Strategic and aligned Hardwired/ DNA 38
Tax Executives Institute Pulling it all together 39
Pulling it all together If your company were actively managing sustainability, what would that look like? Think of sustainability as an opportunity to create competitive advantage: Do you have products with green attributes? Can you save energy (and reduce emissions) while enhancing margins? Use tax and other incentives as public-sector leverage for your sustainability strategy Be ready to tell your sustainability story to both regulators and stakeholders Work cross-functionally within your organization to make sure opportunities are identified 40
Where to start Take advantage of remaining stimulus funding Use tax incentives for renewable energy and energy efficiency Make the connection How can tax help you meet public commitments to reduce your carbon footprint? Government contractors and suppliers Companies with strong, public sustainability commitments Walmart suppliers And keep an eye on Congress 41
Tax Executives Institute What s next in energy legislation? 42
What s next in energy policy? President Obama s budget, released on February 14 th, calls for additional renewable energy incentives, including: Converting section 179D from a deduction to a tax credit and making it available for REITs, but only through 2012 An additional $5 billion of funding for the section 48C tax credit program for alternative energy manufacturers Turning the electric vehicle credit from a buyer s tax credit into a seller s tax credit, so that the consumer perceives it as a point-of-sale rebate Extending the section 1603 grant-in-lieu program through 2012 The President also endorsed significant goals for the use of renewable energy, which could be reflected in a national renewable portfolio standard The Administration is implementing a goal to cut federal government GHG emissions 28% by 2020; this is already affecting federal procurement policies Keep an eye on California Implementation of emissions trading under AB32. 43
Matt Haskins Principal PricewaterhouseCoopers (202) 414-1570 matthew.haskins@us.pwc.com This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. 2011 PricewaterhouseCoopers LLP. All rights reserved. In this document, refers to PricewaterhouseCoopers LLP which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.