Team participates in Stewardship Day activity outdoors

Guidance for financial institutions to help with voluntary ESG-related reporting

As companies, including financial institutions, increasingly engage in voluntary reporting of policies related to environmental, social and governance (ESG) principles, they also need to get smarter about how they share their ESG efforts with stakeholders. Customers of banks and other financial institutions expect greater sustainability and accountability from companies they do business with. While laws and regulations related to official reporting of ESG-related policies are limited in the U.S., the concept of voluntary ESG reporting is taking root in many companies to demonstrate they are operating in a fiscally and socially responsible manner.

As it relates to banks, ESG centers around socially responsible investing as a defining theme for a financial institution’s investment portfolios, as well as business operations that support representation within and access for underrepresented populations. The concepts behind ESG have been around for years; new markets tax credits, solar tax credits, EPA regulations, and anti-sexual harassment laws are all concepts that are being included under the umbrella term “ESG.”

Consumer expectations relative to ESG extend to sustainability related to tax incentives. A primary driver of the federal and state government’s ESG toolbox is tax credits. Tax credits are used to encourage investments in projects to create jobs and revitalize communities where private investment alone is inadequate. The tax system is also used, whether through levies or credits, to nudge companies to adhere to specific federal or state environmental protection laws.

Financial institutions need to prepare how they will present their ESG positions because they will get requests from customers for disclosures about their tax strategy and tax payments. For example, customers are increasingly interested in whether companies they may want to do business with – banks or any other business – are paying their fair share of taxes (sales, income, state and municipal, even international taxes) to the right place. This is especially true for companies with offices located in cities and communities that can benefit from various tax credit programs.

The interplay of ESG and tax is visualized in this perspective from the law firm Mayer Brown:

A high-ranking U.S. senator sends a letter to the CEO of a Fortune 500 company demanding information about the company’s low effective tax rate. During an earnings call, an analyst asks about a tax risk factor discussed in a U.S. Securities and Exchange Commission (SEC) filing. A newspaper lists a number of multinational companies that are not paying their “fair share” of income tax. A global investment fund requires a company to disclose its global tax policy before making an investment. A disgruntled employee becomes a whistleblower providing information about a company’s tax planning strategies to a taxing agency.

While the three ESG concepts inherently overlap, below is a list of some of the tax-related credits or disclosure considerations that financial institutions should consider as they move toward transparency with, and voluntary reporting to, their customers and stakeholders.


Tax credits are often included in environmental legislation to encourage participation by companies, including financial institutions, and must be included in the creation of a sustainable environmental tax strategy. Current credits include, but are not limited to:

  • Alternative energy tax credits – The federal government and a number of states provide an investment tax credit for a percentage of the cost of various types of renewable energy projects, most notably solar and wind. Other alternative energy tax credits relate to research and development for specified eligible technology, fuel cells, waste energy recovery, microturbines, combined heat and power sources, and geothermal energy.
  • Qualified reuse and recycling property allowance – This allowance applies to any kind of equipment or machinery, along with any software used in conjunction with it, dedicated to collecting, distributing or recycling certain materials.
  • Tax risk – Tax indemnities provided by the developer or tax insurance can act to protect tax-equity investors in the event that the investment structure and allocations are not respected, the investor does not qualify for the projected credits, or tax credits are recaptured during the five-year recapture period.

The recently enacted Inflation Reduction Act includes numerous tax provisions providing credits and incentives for the production and consumption of clean energy, carbon emissions reduction, electric vehicle purchases and promoting domestic energy security and manufacturing; see “Congress passes the Inflation Reduction Act” (Aug. 12, 2022).

Financial institutions also need to be aware of environmental quality incentive programs managed by the U.S. Department of Agriculture. These programs offer guidance on agricultural, structural and management conservation planning and practices — with economic assistance.


A financial institution’s relationships with a community’s health and safety, preservation, and economic development are at the forefront of tax within the “social” aspect of ESG. Federal and state governments have been nudging corporate America towards good social policy to rebuild inner cities and low-income communities with tax credits as the catalyst. Credits included in creating a sustainable social tax strategy include:

  • New Markets Tax Credits – The federal tax code authorizes a 39% tax credit for many types of investments in low-income communities, ranging from housing to commercial enterprises. This tax credit is earned over seven years and is subject to recapture under specified circumstances. Insurance can be used to protect against specified events of recapture.
  • Low Income Housing Tax Credits and State Historic Tax Credits – Generally structured as allocated tax equity credits whereby the state tax credit is allocated to the owner of an equity interest in a partnership that in turn is the owner of the project.
  • Charitable deductions for easements – A tax deduction for qualified real property contributed to a qualified organization exclusively for conservation purposes.
  • Work opportunity tax credit – A credit available to employers who hire applicants with work entry barriers, such as the developmentally disabled, veterans, individuals with temporary assistance and food stamps, and convicted felons.
  • Barrier removal tax credit – A deduction for modifying a facility or public transportation vehicle to make it more accessible.
  • Disabled access credit – A non-refundable credit for a small business that incurs expenditures for providing access to persons with disabilities.

Executives, management and boards of directors drive the culture of a financial institution. Their behavior toward employees and other stakeholders, their attitudes toward tax policy, ESG, cultural acceptance, operation of business and communication of these commitments to customers and other stakeholders are part of sustainable governance practices. Governance can be qualified and quantified. The following provides an example of this approach.


  • Company’s core tax principles and strategies
  • Disclosure of tax policy or strategy
  • Impact of taxes and tax credits – community development, socioeconomic impact-jobs growth, economic boost; “greener” communities; other.


  • Disclosure of total tax contribution, summary of taxes paid, and detail of types of taxes paid and the government entities they were paid to
  • Disclosure of corporate income tax paid on a country-by-country basis
Your ESG journey

Financial institutions engaging in voluntary reporting of ESG-related policies and products should market their efforts in a manner that stakeholders (including employees and shareholders) can easily understand. Companies should have an easily accessible and updated list of projects and investment relating to conservation, preservation and stewardship.

The financial institution also may consider preparing specific ESG-related reports, such as the following:

  • Report on risk assessment related to companies that engage in greenwashing, e.g., actions where a company provides misleading information about the environmental soundness of its products.
  • Indices that rate ESG performance on a 1-10 scale that clients, lenders and leaders can quickly understand and utilize.
  • Any SEC-required reports relating to ESG risk.
  • Reports on the impacts of the following when performing an analysis of a company and its assets:
  1. Climate change
  2. Severe weather events
  3. Supply chain vulnerability
  4. Natural resource scarcity
  5. Price volatility
  6. Stranded assets
  • Report on the total assets in ESG/sustainability funds. This will demonstrate recognition of the impact of ESG-related factors on a company’s share price and prospects within an investment portfolio.

Customers and stakeholders of a financial institution have questions about the environmental and social interactions of financial institutions they might do business with. Leading companies are paving the way in setting examples, such as BlackRock. There’s a question on many investor’s minds regarding a sustainable world and asset management companies are taking a lead in moving to answer and take actions to sustain not only the business world as we know it but a long-term eco-valued business model.

These concepts are front-of-mind for investment companies as business markets change and U.S. and international regulations are introduced and implemented, affecting environmental, societal and governance standards. All of these affect the way a business runs as well as its tax impacts.

There are several reporting frameworks that can be leveraged to create reports and meet investor needs; Baker Tilly can help identify the most relevant framework and help build compliant reports.

Find out today your ESG story and tax footprint. This will position you where you need to be as business continues to evolve in the changing landscape of ESG.

Mark Herzinger
life sciences professional in lab
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