Accounting
An ESG backlash erupts in Europe on world’s strictest rules
For
Exxon’s aggressive oil and gas strategy has been rewarded by investors, with its shares more than doubling in the past three years. For Europe’s second-biggest oil company, in contrast, pressure on the region’s asset managers to invest using environmental, social and governance standards has capped gains and prompted Pouyanne to
The French oil giant isn’t alone in pointing to the skewing effect of ESG regulations that critics say have put European businesses at a competitive and valuation disadvantage to their U.S. peers, with potentially long-lasting effects for the bloc’s economy. Companies from Mercedes-Benz Group AG to
Andrea Gjestvang/Bloomberg
Over the past five years — a period during which Europe started formulating the world’s most ambitious ESG regulatory framework — the U.S.’s S&P 500 Index has soared more than twice as much as Europe’s benchmark Stoxx 600 Index. Although
European energy firms broadly trade at a 40% discount to their U.S. peers. If TotalEnergies were valued in line with the average big U.S. crude producer, its market capitalization would be boosted by $108 billion, based on earnings multiples calculated by Bloomberg.
TotalEnergies reaffirmed the views expressed by its CEO on Europe’s ESG policies, declining to say more. Exxon, for its part, said its strategy is to provide products the world needs, while it also invests $20 billion through 2027 in areas like carbon capture and low-emission fuels.
Faced with diverging ESG rules between the U.S. and Europe, some companies have
“The biggest risk of the European approach is that it has put energy-intensive industry at a significant competitive disadvantage,”
The number of EU companies in the Fortune Global 500
“While EIIs (Energy Intensive Industries) in other regions face neither the same decarbonisation targets nor require similar investments, they benefit from more generous state support,” former European Central Bank President
European officials acknowledge problems with the fast pace and complexity of the regulations rolled out since 2019, adding, however, that the measures are needed to avoid a dual climate and biodiversity crisis. “There are short-term pains, obviously, because it requires some effort, but the benefits are starting to emerge,” said
The U.S. has reams of environmental-protection rules, but its overall framework is dwarfed by the breadth and depth of the EU’s, particularly around disclosure. Also, the
As the EU expands regulations — over the European Parliament’s last five-year term about 8,000 acts were adopted, many environment-related — the U.S. is offering incentives. President Joe Biden’s signature climate law — the Inflation Reduction Act of 2022 — is a package of tax credits and rebates intended to propel investment in everything from electric vehicles to solar panels. Goldman Sachs Group Inc. estimated it could unleash as much as
Europe’s approach is more about “telling companies what to do,” said Tal Lomnitzer, a senior investment manager on the global sustainable equity team at Janus Henderson Investors.
The EU’s
But the appeal of the U.S. program is sucking up investment, with more than 60 European and Asian companies announcing projects in the year after the IRA was passed, an analysis by Bank of America Global Research showed.
“A lot of corporates have found this scheme very attractive, very efficient, very quick to implement versus Europe, where things are a bit slower sometimes,” said Panos Seretis, head of global sustainability research at Bank of America.
Norway’s FREYR is
“The IRA creates a positive and stable investment environment with a simple regulatory framework,” RWE CEO Markus Krebber said.
For Estelle Brachlianoff, the CEO of French water-treatment company Veolia Environnement SA, “the US wins.” Dutch Bank ING Groep NV’s CEO, Steven van Rijswijk, said the U.S. is doing better on luring investments. European regulations are “out of touch, they put a break on investments,” said Repsol CEO Josu Jon Imaz San Miguel, an oil and gas producer shifting toward cleaner energy. He wants Europe to “learn a lot from what’s being done in the U.S.”
Unlike the U.S., where the federal government can offer tax breaks, EU taxation rests with member states, leaving the bloc to work largely through
Climate directives — with acronyms like CSRD, SFDR or CSDDD — have cemented Brussels’ reputation as the ultimate
The Corporate Sustainability Reporting Directive will compel companies to provide
The Corporate Sustainability Due Diligence Directive mandates detailed corporate transition plans and opens businesses to lawsuits if there are ESG violations in their value chains. For companies with hundreds of global suppliers, that can get “very complex,” said
Compliance costs are soaring. Olga Smirnova, internal audit director at Heineken NV, says money spent by the Dutch brewer on ESG reporting has grown at an “exponential” rate. Desiree Fixler, previously a sustainability head at Deutsche Bank AG’s investment arm DWS before becoming a high-profile whistleblower, now denounces European ESG regulations on social media.
“Most companies are absolutely suffocating in the amount of data capture they have to do,” Fixler said.
While the EU has encouraged electric vehicles, investors in Porsche AG recently
Despite the protestations, though, there are some who warn of a climate reckoning further down the road.
For now, “oil and gas may outperform, but if that sector doesn’t shrink, then the effects in terms of extreme weather and so on will cause absolute performance across large portfolios to actually be lower than it could otherwise have been,” said Eric Pedersen, head of responsible investments at Nordea Asset Management.
Onerous as disclosure rules are, Johan Floren, senior ESG adviser at $100 billion Swedish pension fund AP7, says he needs them to do his job. “Without information, the market doesn’t work,” he said.
Some of Europe’s biggest financial firms are purging their books of ESG risks. BNP Paribas SA, the EU’s largest lender by assets, is
The fund will only invest in companies that “are on a pathway in the transition to a sustainable economy and companies that don’t harm climate or biodiversity,” Harmen van Wijnen, chairman of ABP’s board of trustees, told Bloomberg.
The EU may just be ahead of the game on ESG regulations. Efforts are underway to make sustainability-reporting global, with countries representing almost
Some say there is no other way. After two decades of coaxing markets to address climate change, it’s clear voluntary measures have failed, said Simon Braaksma, senior director for sustainability at Royal Philips NV.
“The people who are crying, maybe they should roll up their sleeves and contribute more to addressing those societal issues,” he said.
Final regulations now identify certain partnership related-party “basis shifting” transactions as “transactions of interest” subject to the rules for reportable transactions.
The final regs apply to related partners and partnerships that participated in the identified transactions through distributions of partnership property or the transfer of an interest in the partnership by a related partner to a related transferee. Affected taxpayers and their material advisors are subject to the disclosure requirements for reportable transactions.
During the proposal process, the Treasury and the Internal Revenue Service received comments that the
- Increased dollar threshold for basis increase in a TOI. The threshold amount for a basis increase in a TOI has been increased from $5 million to $25 million for tax years before 2025 and $10 million for tax years after.
- Limited retroactive reporting for open tax years. Reporting has been limited for open tax years to those that fall within a six-year lookback window. The six-year lookback is the 72-month period before the first month of a taxpayer’s most recent tax year that began before the publication of the final regulations (
slated for Jan. 14 in the Federal Register). Also, the threshold amount for a basis increase in a TOI during the six-year lookback is $25 million. - Additional time for reporting. Taxpayers have an additional 90 days from the final regulation’s publication to file disclosure statements for TOIs in open tax years for which a return has already been filed and that fall within the six-year lookback. Material advisors have an additional 90 days to file their disclosure statements for tax statements made before the final regulations.
- Publicly traded partnerships. Because PTPs are typically owned by a large number of unrelated owners, the final regulations exclude many owners of PTPs from the disclosure rules.
The identified transactions generally result from either a tax-free distribution of partnership property to a partner that is related to one or more partners of the partnership, or the tax-free transfer of a partnership interest by a related partner to a related transferee.
Bloomberg via Getty Images
The tax-free distribution or transfer generates an increase to the basis of the distributed property or partnership property of $10 million or more ($25 million or more in the case of a TOI undertaken in a tax year before 2025) under the rules of IRC Sections 732(b) or (d), 734(b) or 743(b), but for which no corresponding tax is paid.
The basis increase to the distributed or partnership property allows the related parties to decrease taxable income through increased cost recovery allowances or decrease taxable gain (or increase taxable loss) on the disposition of the property.
The Treasury Department and the Internal Revenue Service proposed new rules for the tax credit for qualified commercial clean vehicles, along with guidance on claiming tax credits for clean fuel under the Inflation Reduction Act.
The
The credit is the lesser amount of either 30% of the vehicle’s basis (15% for plug-in hybrid EVs) or the vehicle’s incremental cost in excess of a vehicle comparable in size or use powered solely by gasoline or diesel. A credit up to $7,500 can be claimed for a single qualified commercial clean vehicle for cars and light-duty trucks (with a Gross Vehicle Weight Rating of less than 14,000 pounds), or otherwise $40,000 for vehicles like electric buses and semi-trucks (with a GVWR equal to or greater than 14,000 pounds).
“The release of Treasury’s proposed rules for the commercial clean vehicle credit marks an important step forward in the Biden-Harris Administration’s work to lower transportation costs and strengthen U.S. energy security,” said U.S. Deputy Secretary of the Treasury Wally Adeyemo in a statement Friday. “Today’s guidance will provide the clarity and certainty needed to grow investment in clean vehicle manufacturing.”
The NPRM issued today proposes rules to implement the 45W credit, including proposing various pathways for taxpayers to determine the incremental cost of a qualifying commercial clean vehicle for purposes of calculating the amount of 45W credit. For example, the NPRM proposes that taxpayers can continue to use the incremental cost safe harbors such as those set out in Notice 2023-9 and Notice 2024-5, may rely on a manufacturer’s written cost determination to determine the incremental cost of a qualifying commercial clean vehicle, or may calculate the incremental cost of a qualifying clean vehicle versus an internal combustion engine (ICE) vehicle based on the differing costs of the vehicle powertrains.
The NPRM also proposes rules regarding the types of vehicles that qualify for the credit and aligns certain definitional concepts with those applicable to the 30D and 25E credits. In addition, the NPRM proposes that vehicles are only eligible if they are used 100% for trade or business, excepting de minimis personal use, and that the 45W credit is disallowed for qualified commercial clean vehicles that were previously allowed a clean vehicle credit under 30D or 45W.
The notice asks for comments over the next 60 days on the proposed regulations such as issues related to off-road mobile machinery, including approaches that might be adopted in applying the definition of mobile machinery to off-road vehicles and whether to create a product identification number system for such machinery in order to comply with statutory requirements. A public hearing is scheduled for April 28, 2025.
Clean Fuels Production Credit
The Treasury the IRS also released guidance Friday on the Clean Fuels Production Credit under Section 45Z of the Tax Code.
Section 45Z provides a tax credit for the production of transportation fuels with lifecycle greenhouse gas emissions below certain levels. The credit is in effect in 2025 and is for sustainable aviation fuel and non-SAF transportation fuels.
The guidance includes both a
“This guidance will help put America on the cutting-edge of future innovation in aviation and renewable fuel while also lowering transportation costs for consumers,” said Adeyemo in a statement. “Decarbonizing transportation and lowering costs is a win-win for America.”
Section 45Z provides a per-gallon (or gallon-equivalent) tax credit for producers of clean transportation fuels based on the carbon intensity of production. It consolidates and replaces pre-Inflation Reduction Act credits for biodiesel, renewable diesel, and alternative fuels, and an IRA credit for sustainable aviation fuel. Like several other IRA credits, Section 45Z requires the Treasury to establish rules for measuring carbon intensity of production, based on the Clean Air Act’s definition of “lifecycle greenhouse gas emissions.”
The guidance offers more clarity on various issues, including which entities and fuels are eligible for the credit, and how taxpayers determine lifecycle emissions. Specifically, the guidance outlines the Treasury and the IRS’s intent to define key concepts and provide certain rules in a future rulemaking, including clarifying who is eligible for a credit.
The Treasury and the IRS intend to provide that the producer of the eligible clean fuel is eligible to claim the 45Z credit. In keeping with the statute, compressors and blenders of fuel would not be eligible.
Under Section 45Z, a fuel must be “suitable for use” as a transportation fuel. The Treasury and the IRS intend to propose that 45Z-creditable transportation fuel must itself (or when blended into a fuel mixture) have either practical or commercial fitness for use as a fuel in a highway vehicle or aircraft. The guidance clarifies that marine fuels that are otherwise suitable for use in highway vehicles or aircraft, such as marine diesel and methanol, are also 45Z eligible.
Specifically, this would mean that neat SAF that is blended into a fuel mixture that has practical or commercial fitness for use as a fuel would be creditable. Additionally, natural gas alternatives such as renewable natural gas would be suitable for use if produced in a manner such that if it were further compressed it could be used as a transportation fuel.
Today’s guidance publishes the annual emissions rate table that directs taxpayers to the appropriate methodologies for calculating carbon intensities for types and categories of 45Z-eligible fuels.
The table directs taxpayers to use the 45ZCF-GREET model to determine the emissions rate of non-SAF transportation fuel, and either the 45ZCF-GREET model or methodologies from the International Civil Aviation Organization (“CORSIA Default” or “CORSIA Actual”) for SAF.
Taxpayers can use the Provisional Emissions Rate process to obtain an emissions rate for fuel pathway and feedstock combinations not specified in the emissions rate table when guidance is published for the PER process. Guidance for the PER process is expected at a later date.
Outlining climate smart agriculture practices
The guidance released Friday states that the Treasury intends to propose rules for incorporating the emissions benefits from climate-smart agriculture (CSA) practices for cultivating domestic corn, soybeans, and sorghum as feedstocks for SAF and non-SAF transportation fuels. These options would be available to taxpayers after Treasury and the IRS propose regulations for the section 45Z credit, including rules for CSA, and the 45ZCF-GREET model is updated to enable calculation of the lifecycle greenhouse gas emissions rates for CSA crops, taking into account one or more CSA practices.
CSA practices have multiple benefits, including lower overall GHG emissions associated with biofuels production and increased adoption of farming practices that are associated with other environmental benefits, such as improved water quality and soil health. Agencies across the Federal government have taken important steps to advance the adoption of CSA. In April, Treasury established a first-of-its-kind pilot program to encourage CSA practices within guidance on the section 40B SAF tax credit. Treasury has received and continues to consider substantial feedback from stakeholders on that pilot program. The U.S. Department of Agriculture invested more than $3 billion in 135 Partnerships for Climate-Smart Commodities projects. Combined with the historic investment of $19.5 billion in CSA from the Inflation Reduction Act, the department is estimated to support CSA implementation on over 225 million acres in the next 5 years as well as measurement, monitoring, reporting, and verification to better understand the climate impacts of these practices.
In addition, in June, the U.S. Department of Agriculture published a Request for Information requesting public input on procedures for reporting and verification of CSA practices and measurement of related emissions benefits, and received substantial input from a wide array of stakeholders. The USDA is currently developing voluntary technical guidelines for CSA reporting and verification. The Treasury and the IRS expect to consider those guidelines in proposing rules recognizing the benefits of CSA for purposes of the Section 45Z credit.
Accounting
IRS and Treasury propose regs on 401(k) and 403(b) automatic enrollment, Roth IRA catchup contributions
The Treasury Department and the Internal Revenue Service issued proposed regulations Friday for several provisions of the SECURE 2.0 Act, including ones related to automatic enrollment in 401(k) and 403(b) plans, and the Roth IRA catchup rule.
SECURE 2.0 Act passed at the end of 2022 and contained an
One set of
The proposed regulations include guidance to plan administrators for properly implementing this requirement and are proposed to apply to plan years that start more than six months after the date that final regulations are issued. Before the final regulations are applicable, plan administrators need to apply a reasonable, good faith interpretation of the statute.
Roth IRA catchup contributions
The Treasury and the IRS also issued
That includes proposed rules related to a provision requiring that catch-up contributions made by certain higher-income participants be designated as after-tax Roth contributions.
The proposed regulations provide guidance for plan administrators to implement and comply with the new Roth catch-up rule and reflect comments received in response to
The proposed regulations also provide guidance relating to the increased catch-up contribution limit under the SECURE 2.0 Act for certain retirement plan participants. Affected participants include employees between the ages of 60-63 and employees in newly established SIMPLE plans.
The IRS and the Treasury are asking for comments on both sets of proposed regulations.
New IRS regs put some partnership transactions under spotlight
Treasury, IRS propose rules on commercial clean vehicles, issue guidance on clean fuels
IRS and Treasury propose regs on 401(k) and 403(b) automatic enrollment, Roth IRA catchup contributions
New 2023 K-1 instructions stir the CAMT pot for partnerships and corporations
The Essential Practice of Bank and Credit Card Statement Reconciliation
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