Rethinking Sustainability Reporting with Reference to the Inflation Reduction Act

Abstract

This article explores the possible effects of the Inflation Reduction Act (IRA) on stand-alone corporate sustainability reporting and assurance on such reports. To this end, we use stakeholder theory to examine the potential impact of the IRA on sustainability reporting, which includes environmental, social, and governance indicators. It also explores the various ways of implementing measures to achieve high-quality sustainability reporting and guidelines for assurance of such reports. This article provides one of the first frameworks for organizations to initiate action on climate change.

Keywords

Inflation Reduction Act sustainability reporting assurance on sustainability reporting

Introduction

Sustainability reporting is a common practice among companies (Mahmood & Uddin, 2021) and crucial for policymakers (Peters, 2021). With the passing of the comprehensive climate, healthcare, and tax bill on August 17, 2022, called the Inflation Reduction Act (IRA), sustainability reporting takes on a whole new significance due to its focus on the environment and society. Notably, the IRA places the US on course with the UN Sustainable Development Goals. This study presents ways to improve sustainability reporting in an agency rule-making process, so as to be in harmony with the IRA.

The IRA comes on the heels of the Securities and Exchange Commissions (SEC) acknowledgment in March 2022 that “climate change poses an urgent risk for investors, companies, capital markets, and the economy.” The SEC clearly states that its climate “proposal would require these disclosures to be filed with the Commission, phase reporting requirements over time based on a company’s size, and importantly, includes a phased-in requirement for verification or ‘reasonable assurance’ of GHG Scopes 1 and 2 for larger filers to help ensure the reliability of these disclosures” (SEC, 2022). Both initiatives point toward a concerted proactive effort to mitigate climate change and bring systematic change within society and its institutions. Many government leaders, political figures, and business executives welcome this (Greer et al., 2022).

The US government seeks to bring about systematic organizational change to combat climate change, for which the IRA aims to a forceful and effective instrument. Stakeholder Theory suggests why corporations publish sustainability reports, why the IRA will change sustainability reporting guidelines, and why corporations will be part of the process of this change and will adopt such change.

The normative approach to stakeholder theory “identifies moral or philosophical guidelines for the operation and management of corporations.” (Donaldson & Preston, 1995, p. 71). Since “businesses have long promoted themselves to their shareholders and the world as moral, socially conscious entities engaged in the community, social activists naturally try to engage corporations in their causes” (Lin, 2018, p. 1567). Due to this, the normative approach of stakeholder theory may very well compel businesses to align with IRA goals (Valentinov et al., 2019).

Industry leaders realize that they need to take immediate action to minimize the adverse effects of climate change (Sayce et al., 2022). Moreover, other developed countries worldwide have taken significant strides in adopting rules similar to the IRA (e.g., the UK, Germany, and Spain; Galvin & Healy, 2020), and such actions will motivate the US to take an analogous path.

The economic downturn experienced during the COVID-19 pandemic differs from the ones experienced in the past and has been particularly devastating. “Rebuilding G20 economies after the COVID-19 pandemic requires rethinking what type of economy we need and want in the future. Reviving the existing ‘brown’ economy will exacerbate irreversible climate change and other environmental risks. For G20 economies, investing in a workable and affordable green transition is essential” (Barbier, 2020, p. 685). The G20 is a coalition of 19 countries and the European Union (EU) formed in 1999, which identifies and tackles current global challenges, such as social inequality and climate change (https://www.g20.org/italian-g20-presidency/priorities.html). In an ambitious plan, the EU announced a timetable to achieve “climate neutrality” by 2050 (Eaton, 2021).

This article provides companies and other organizations with one of the first blueprints to move forward and take positive action related to sustainability performance and reporting. The study will be of interest to regulators, policy-makers, companies, industries affected by climate change, and academics. The research findings will convey to regulators and policy-makers the extent to which companies/industries are prepared and how earnest they are in their response to climate change. Such information will help regulators and policy-makers discern the differences in company/industry sensitivity to climate change and provide support accordingly for enhanced corporate sustainability reporting and assurance. Further, it will help companies, industries, and governments comprehend how improvements can be made to sustainability reporting and assurance, which has become a significant issue (Pellegrino & Lodhia, 2012).

What is Sustainability Reporting?

Sustainability reporting is the communication at a multiple-dimensional level of the economic, social, environmental (Farooq & de Villiers, 2019), and governance (Correa-Garcia et al., 2020; Zhou, 2019) performance of organizations. For example, companies report on environmental management, cleaner production practices, social activities both inside and outside firms (del Mar Alonso-Almeida et al., 2014), data on greenhouse gas emissions, water consumption, volumes of waste generated, and company influence on biodiversity (Ben Ismail et al., 2021).

Usually, such communication takes the form of a separate stand-alone report on a company’s website. These are known by various names such as triple bottom line report, social and environmental reports (Lodhia & Sharma, 2019), CSR (Cordeiro et al., 2018), corporate citizenship report (Camilleri, 2017), and corporate responsibility report (Bjørn et al., 2017). I will use the term sustainability reporting to refer to reports that disclose organizations’ economic, environmental, social, and governance performance. Creating, publishing, and seeking external assurance for sustainability reports are mostly voluntary (Thijssens et al., 2016) but sometimes mandatory (Romero et al., 2019). It is up to the corporations to decide which issues are relevant for the report, which ones to include, and whether to seek assurance (Morioka & Carvalho, 2016). The Global Reporting Initiative (GRI) is an institution that provides frameworks/standards for companies in different industries to report on sustainability (Sethi et al., 2017). Other institutions that offer standards for sustainability reporting include Social Accountability—SA 8000, and International Organization for Standardization—ISO 14000 and 26000 (Morioka & Carvalho, 2016). Investors use the information in corporate sustainability reports to make judgments about investing in the company (Brown-Liburd & Zamora, 2015). Stock exchanges and stock indices (e.g., Dow Jones Sustainability Indices and FTSE4Good index) use the information in sustainability reports to keep track of corporate environmental, social, and governance activities and as a screening tool for good corporate behaviors (Idowu & Papasolomou, 2007). Other users are corporate managers to monitor their credibility and ethical practices (Hąbek & Wolniak, 2016), financial analysts to rate companies and make earnings forecasts (Dhaliwal et al., 2012), and governments to regulate disclosure (Dubbink et al., 2008).

The KPMG Survey of Sustainability Reporting 2020 (KPMG, 2020) provides sustainability reporting figures for the top 100 companies in 52 countries (N100), the largest 250 companies in the world by revenue (G250), and significant developments in sustainability reporting across the globe. For example, it reports that the Securities and Exchange Board of India (SEBI) provides a directive urging the top 500 listed companies to adopt integrated reporting voluntarily.

Third-party assurance of sustainability reports is standard worldwide, with 71% of the G250 and 51% of the N100 engaging an external auditor to verify the information in their sustainability report (KPMG, 2020). The GRI framework is one of the most widely accepted sustainability reporting frameworks (Einwiller & Carroll, 2020). GRI (2013) defines external assurance as “Activities designed to result in published conclusions on the quality of the report and the information (whether it is qualitative or quantitative) contained within it” (p. 13). Companies seek assurance for their sustainability reports to improve the credibility and reliability of their sustainability information and augment their reputations (Maroun, 2019).

Stakeholders are invested in or affected by company performance—both financially and non-financially. Stakeholders may include governments, communities, and consumers (Chiappetta Jabbour et al., 2020), employees (Akisik & Gal, 2017), and those with less voice and power such as women, and illiterate or indigenous peoples (McCarthy & Muthuri, 2018). An example of women standing up for their rights can be found in an organization called Women Working Worldwide, whose female members campaigned for several years for improved conditions, the application of internationally agreed upon codes of conduct, and women’s participation in auditing processes within the global supply chain (Grosser, 2009, p. 301). Indigenous peoples are significant stakeholders in the mining industry, where a few big companies dominate the marketplace. The mining company often provides money to build roads, railways, medical facilities, and utilities (Banerjee, 2001, p. 45). The interaction between the indigenous people who worked at the Ok Tedi mine in Papua New Guinea and the Australian mining giant BHP is a lesson about the consequences of ignoring and denying the adverse social and environmental effects of mining on the Yonggon people. Although BHP was allowed to close the mine and be exempt from future litigation after its exit, “crucial issues of environmental governance, accountability, and social justice continue to reverberate throughout the region and the country” (World Resources Institute Report, p. 9 http://pdf.wri.org/wr2002_case_oktedi_papua.pdf).

Sustainability Reporting in Practice

Sustainability reporting guidelines and standards do not fully determine sustainability reporting practice. Like all other corporate publications, the information chosen in sustainability reports is influenced by managers’ incentives, regulations, and litigation risk. For instance, despite the Norwegian government providing the most significant catalyst for corporate sustainability reporting in the form of legal regulation, a mere 10% of companies conform with environmental reporting regulations, and only about 50% of companies comply with the working environment and gender equality requirements. The reasons given are limited public scrutiny, ambiguous wording of the environmental provision, and lack of sufficient monitoring (Vormedal & Ruud, 2009). In such a situation, many managers have incentives to not comply with the requirements because doing so saves them time, effort, and money.

Hummel and Schlick (2016) present evidence that high-caliber sustainability performers adopt high-quality sustainability disclosure, whereas low-caliber sustainability performers adopt low-quality sustainability disclosure. Dong and Zhang (2019, p. 873) examine how litigation risk affects voluntary disclosure in the US and find that “litigation risk increases disclosures because disclosures help to fend against the claim that the firm withholds information from investors, and they help to reduce stock price crashes, which are often the trigger of investor lawsuits.” This shows that managers choose to disclose when litigation alters their incentives. Nègre et al. (2017) demonstrate that French companies disclose workforce reductions opportunistically: “evidence suggests that firms may be using impression management to maintain organizational legitimacy” (Nègre et al., 2017).

Stakeholders play an important role in assigning a favorable or unfavorable reputation to a company (Ji et al., 2017). In addition, stand-alone sustainability reports can be used as a tool for reputation improvement among professional stakeholders like financial analysts and institutional investors. Credibility with stakeholders is crucial for companies that want to hone their competitive advantage (Rahi et al., 2022). Financial stakeholders want sufficient environmental and social information to know that the company will access critical economic resources (Herremans et al., 2016). Lützkendorf et al. (2011, p. 485) classify and provide examples of financial stakeholders: “Financial stakeholders are very heterogeneous. They have diverging individual or institutional goals, different fields of activities and responsibility, and different areas of influence and possible courses of action. For example, banks and insurance companies can indirectly influence third-party activities by issuing favorable loans and conditions for sustainable construction and refurbishment projects. In addition, they can influence other actors through their consultancy and advisory services.”

How Will the IRA Impact and Change Sustainability Reporting?

First, steps should be taken to ensure that corporate sustainability reporting is reliable, verifiable, timely, and integrated. These qualitative characteristics are adopted from those of financial reports. They have analogous meanings in the current context. Sustainability reports will be reliable if companies disclose all of their social, environmental, governance, and economic activities, do not hide any negative information, and do not add or aggrandize their activities beyond what is justified by facts. Governments can mandate sanctions for inaccurate reporting or non-disclosure (Lee et al., 2015).

Sustainability reporting will be verifiable if the information in the report can be corroborated with documents, anonymous surveys, or other evidence. Governments can provide incentives in the form of awards, certifications, and support for conducting verification (Giannarakis et al., 2018).

Sustainability reports will be timely if the information within them is made available quickly so that decision-makers can use them to assess the company’s current condition. This is important because non-financial activities can greatly impact corporate financial performance (Chen et al., 2018). Finally, sustainability information should be integrated with financial data, and companies should provide detailed explanations of how their sustainability activities shape and modify their financial performance and vice-versa. In this connection, higher environmental performers, government ownership of companies, and independent environmental performance verification positively affect corporate climate change disclosure (Giannarakis et al., 2018).

Focus on the IRA Mission

The IRA aims to reduce greenhouse gas emissions by about 40% by 2030 and includes several outlays for clean energy production via tax credits and grants. Hopwood (2009, p. 433) emphasizes that “accounting has already started to be implicated in the consideration of environmental issues, and the probability is that its involvement will develop further over the coming years.” With climate change and its profound implications, this statement is more valid than ever. Various scholars discuss these sustainability practices and how the IRA can adopt them to achieve its aims. As examples, some sustainability practices are discussed below.

Carbon Accounting

The IRA should make it mandatory for companies and industries to assess carbon risks, opportunities, strategies, and emission levels. The cost of carbon alone is estimated to be USD 115.5 trillion (Linnenluecke et al., 2018). For this purpose, the SEC proposal involving company disclosure of climate-related risks and impacts will be especially relevant. This will call for implementing the specific practices and procedures stated in the SEC proposal, such as reasonable assurance, third-party verification, and bringing emissions disclosures under the purview of internal control over financial reporting. In addition, the US can partially emulate the EU example (Delbard, 2008) and make environmental policies that directly affect corporations. To begin, benchmarks could be established in the social, environmental, and governance areas that are in harmony with IRA goals. Companies with more than a minimum number of employees (e.g., 1,000 employees) could be required to report on specific social and environmental benchmarks. Companies that have more than, say, 10,000 employees could be required to provide governance benchmarks in addition to the social and environmental ones.

Corporate activities are responsible for a large proportion of greenhouse gas emissions (Sullivan & Gouldson, 2013). Companies play a crucial role in developing a sustainable society (Perkiss et al., 2021). Corporate initiative is essential for shifting to a low-carbon economy (Persson & Rockström, 2011). To achieve the latter, countrywide plans to reduce greenhouse gas emissions should be converted to corporate-level targets (Krabbe et al., 2015). The IRA can help companies determine material topics to report on and support companies that want to improve.

Corporate Social Reporting

Companies above a specific size threshold could report on their social, environmental, and governance performance concerning the benchmarks for the entire company and for each of its segments. These benchmarks should connect a company’s attainable goals (over the short and long term) and its business mission and strategy. A company should focus on those benchmarks that significantly impact its mission and that its stakeholders consider necessary by its stakeholders (Van Den Brink & van Der Woerd, 2004). The IRA could help companies implement the plan of action and mechanisms to attain the benchmark levels.

Further, sustainability reports should include relevant information on subcontractors and suppliers that are part of the organization’s supply chain. For example, Ramudhin et al. (2010, p. 30) discuss the configuration of supply chains that combine carbon emissions and logistics costs and provide an illustration from the steel industry. Their model “allows decision-makers to evaluate the trade-offs between total logistics costs and carbon offsetting under different supply chain operating strategies, environmental regulatory constraints, and carbon market evolution.” Such models can help companies address sustainability throughout the supply chain and bring smaller and diverse companies into the IRA fold. As another example, Schlossberg and Zimmerman (2003) develop a set of sustainability indicators that provides a consolidated view of sustainability practices in the State of Oregon as well as a separate picture of social, environmental, and economic sustainability for state-level policy-makers interested in incorporating sustainability principles into their decision making. Such indicators cater to specific circumstances and provide decision-makers with optimal information to continue improving sustainability goals and help with IRA targets within a state.

Companies might offer new jobs to reduce greenhouse gas emissions. These could take the form of manufacturing additional components or accessories to make tools, machinery, and appliances more energy-efficient, new investments in electricity generation and transmission, new transportation facilities that include bridges, high-speed rail, and electric cars, state-of-the-art water treatment, distribution, and sewage systems (Brown & Ahmadi, 2019). The IRA could make it mandatory for companies to report on the number and type of new jobs created, the salaries/wages paid for each job title, and individuals education levels. Bivens (2019) predicts that these new jobs are more likely to be unionized and skewed toward white male workers. Unionization is expected to give workers collective bargaining power, hence better wages and treatment (Reiff, 2020). To counter skewing in favor of white males, the IRA could also mandate corporate policy disclosure to provide equal employment opportunities to people of other genders, races, colors, and economic strata.

IRA Policy Implementation and Creating New Requirements for Sustainability Reporting

This study suggests ways to improve sustainability reporting in agency rule-making processes, so as to be in harmony with the IRA. The White House website specifies that the IRA will be implemented by federal, state, local, tribal, and territorial governments, which makes room for sustainability reporting at all of these levels. Further, section 2, part (b) of the IRA states that the US climate goal is to reduce greenhouse gas emissions 50% to 52% below 2005 levels in 2030. What follows are several initiatives that have been implemented so far and make suggestions for future sustainability reporting.

The IRA allocates funds and provides authority and specific tools to certain organizations to achieve its goals. However, the IRA legislation shies away from imposing mandated rules, requirements, and regulations, compatible with the minimum free-market interference doctrine. Instead, it relies on incentives, subsidies, cap-and-trade programs, grants, loan guarantees and related monetary benefits to induce a shift toward clean energy (Glicksman, 2023). Most businesses will see the advantage of these benefits and will choose to exploit them.

This paragraph and the next two discuss IRA implementation and how sustainability reporting can be altered. The IRA gives the US Environmental Protection Agency (EPA) “the authority and the funding to deploy air-quality sensors and support monitoring of pollutant emissions in low-income and disadvantaged communities, and it makes grants available to states to adopt zero-emissions standards for new cars and trucks” (Glicksman, 2023, p. 84). The EPA should use the information from the air-quality sensors and emissions to track and reward companies that make sufficient progress toward IRA environmental goals. Conversely, the companies that are driving poor air-quality and elevated emissions can be sanctioned by imposing fines. The IRA should give authority to the SEC, similar to the above-mentioned EPA empowerment, to make rules about disclosing rewards and fines of this nature in the companies’ financial statements and sustainability reports.

To achieve reductions in greenhouse gas emissions, the IRA includes clean building tax credits (Falcioni, 2022), expands production tax credits for manufacturing solar panels, wind turbines, and, batteries, electric vehicle tax credits, and funding for farmers and forestland owners to be part of climate change solutions (Barbanell, 2022). To encourage companies to report claiming these tax credits and subsidies in the above sectors, under the IRA governments can provide further incentives to various appropriate parties. These incentives can take the form of further tax credits, awards for excellence and guidance for future reporting, so as to be consistent with the minimum free-market interference doctrine.

Connection between Sustainability Reporting and Broader Climate Goals

Policymakers, activists, citizens, and other stakeholders should care about sustainability reporting and its veracity because there are likely to be inconsistencies in disclosure practices, lack of context, presentation of non-comparable information, partial reporting, not reporting events that might tarnish company images, among other machinations to obfuscate sustainability performance. These are likely to lead to serious negative consequences because corporate efforts are indispensable to combat climate change, as they are some of the biggest organizations in existence and control enormous resources.

Dedicated effort from corporations and other organizations will save infrastructure, assets, and lives all over the world. Forbes magazine (Forbes, 2020) points out several advantages of having a sustainability strategy that, which lead to more efficient use of resources. (1) Sustainability can lead to optimizing cooling systems, power, water usage, and networks, (2) It gives rise to an innovative work culture in which employees find better ways of working toward established goals, (3) Investors gravitate toward sustainability investments, (4) Sustainable ways of operating, such as using clean energy and e-waste management, saves costs, (5) As governments across the globe are implementing or strongly encouraging climate goals and expect corporations to enthusiastically participate, it is prudent for corporations to invest in infrastructure and assets that work toward those climate goals, and (6) Clean energy has become increasingly accessible, and, it will save businesses time, money and effort to use it for their day-to-day operations. The following paragraphs describe efforts that have already begun that link to IRA technical aspects, IRA policy goals, and public values.

One of the most important technical aspects of the IRA and policy goal is to reduce greenhouse gas (GHG) emissions 50% to 52% below 2005 levels by 2030. A bright spot, however, is that “the number of companies reporting against the guidelines provided by the Task Force on Climate-related Financial Disclosures (TCFD) has nearly doubled.”

Sustainability reporting is buttressed by the TCFD, which was established in 2015 to help identify climate related risks and opportunities. The TCFD provides guidance to organizations including corporations to develop more effective climate-related financial disclosures through their existing reporting processes. Its 2022 report presents a description of ongoing corporate disclosure practices related to TCFD recommendations. This report notes that organizations report on TCFD recommendation on climate related risks and opportunities more than on any other recommendation. However, only 34% of companies disclosed how they managed climate-related risks, and 37% disclosed if such processes are integrated into overall risk management. In line with the minimum free-market interference doctrine, the TCFD encourages but does not mandate disclosure. Additionally, these disclosures are not verified or audited by any independent third party.

Another technical aspect of the IRA is to involve as many institutions as possible to achieve its goals. The IRA can encourage sustainability reporting by cities, states, and universities by providing access to funding for various projects that are deemed significant by appropriate authorities. In this regard, tax incentives and funding can be extended to cities and states to develop policies, plans, and targets to address climate change, while supporting an economic development agenda. Cities can be provided further incentives to report environmental data to the Carbon Disclosure Project (CDP, 2023)—International Council for Local Environmental Initiatives (ICLEI) collaboration, which is the leading platform for city climate reporting. The CDP website lists the following advantages of disclosing city environmental data: improving engagement, centralizing data, and tracking progress. The federal government can organize competitions among cities, states, and universities that are of similar size, with prizes being offered to high achievers and high disclosers. These competitions will pave the way for cities to improve their performance and put in greater effort for the future (Franken & Brown, 1995). These competitions can be judged by climate and impact experts, who can attest to the veracity of the achievements, disclosure, and impact.

Universities can use funding for new innovative student facilities and research encouragement awards that support IRA climate goals. The Association of Public and Land-Grant Universities (APLU, 2022) states that the IRA “contains several measures of direct interest to public research universities.” For example, universities can seek grants to replace their existing forms of transportation for low-emission vehicles, with the provision that the Department of Treasury will bear up to 25% of the cost.

One of the predominant technical demands of the IRA is to make organizations aware of what their most urgent risks are, so as to make decisions that will impact them in the short- and long-term. This will address the technical aspect and policy goal of confronting many climate risks, evaluating exposure, and ranking them from the most urgent to least, depending on location and needs. The IRA can provide guidance to corporations and other organizations on ranking risks and advise them on developing risk strategies and making investment decisions. This will accelerate understanding of real-time climate event impacts and salvage existing assets, lives, and networks. Additionally, it is likely to generate employment, as new strategies and decisions are implemented. Furthermore, these will mitigate the impact of hot and cold weather spells, floods, intense storms, and, damage to forests and represent a major local impact of climate change.

IRA Administration and Enforcement of Sustainability Reporting

As mentioned in section 5 (IRA Policy Implementation and Creating New Requirements for Sustainability Reporting), the IRA relies on incentives and encouragement to achieve its aims in keeping with the with the minimum free-market interference doctrine. In this section, we address the issues from an administrative point of view. For example, what will the IRA look like administratively? How should administrative agencies manage sustainability reporting and how will it be enforced?

Administering the IRA is a complex task involving significant costs. IRA administration inherently differs from any other legislative or rule of law administration due to its distinct context, objectives, and the briskly materializing climate crisis. First, the IRA has already identified the units in the federal executive branch that will monitor the city, state, and industry levels. These include the Internal Revenue Service (IRS), the Environmental Protection Agency (EPA), the Department of Energy (DOE), and the White House Council on Environmental Quality (CEQ).

The IRA relies on tax incentives to a large extent, so the Internal Revenue Service will be heavily involved. The IRS can implement tax incentives and guide corporate taxpayers. The IRS should train its personnel and establish offices in cities where corporate offices are concentrated. In addition, the IRS can offer guidance via electronic means (e.g., via Zoom or telephone) for small businesses. The IRS (2023) website lists its strategic operating plan related to the IRA, which details its objectives and modus operandi.

Since one of the main objectives of the IRA is to reduce harmful air pollution, the Environmental Protection Agency (EPA) will be actively engaged in the implementation of the IRA. The EPA (2023) has devoted a web page to the IRA that states its three-dimensional goals of tackling climate pollution, advancing environmental justice, and delivering cleaner air. Under each of these three goals, the EPA lists its subsidiary objectives, the amount of government funding devoted to each, individuals, groups, and business owners who are eligible to apply for funding, the process of application, funds’ intended use, and the utilization of monitoring to assess the progress of projects.

Next, the Department of Energy (DOE) will play a significant role in implementing the IRA, as its mission is to address US energy and environmental needs by seeking science and technology solutions. The DOE employs sophisticated modeling techniques to assess the impact of IRA programs on greenhouse gas (GHG) pollution and predicts that these programs will reduce GHG pollution to 40% below 2005 levels. The IRA makes it feasible for the DOE to identify primary factors and priorities contributing to this reduction in GHG levels. These include the power sector, industrial facilities, homes and commercial buildings, transportation, agriculture, and forestry (DOE, 2023).

Tying it all together is the White House Council on Environmental Quality (CEQ), an apex organization. It “coordinates the federal government’s efforts to improve, preserve, and protect America’s public health and environment” (CEQ, 2023). The CEQ owes its existence to the National Environmental Policy Act (NEPA) 1969 and is responsible for advising the President on developing and implementing policies on climate change, environmental justice, federal sustainability, public lands, oceans, and wildlife conservation.

The principal focus of the IRA is providing access to clean energy. The IRA aims to deliver “40 percent of the overall benefits of climate change, clean energy, and related federal investments to marginalized communities, overburdened by pollution, and underserved by infrastructure and other basic services. Further, through an all-of-government effort, the Administration will work to ensure that investments under the Inflation Reduction Act facilitate state and local contracting opportunities for underserved small businesses.” This is called the Justice 40 initiative (TWH, 2023). Justice 40 covers a whole range of programs and requires that they “engage in stakeholder consultation and ensure that community stakeholders are meaningfully involved in determining program benefits.” These programs must report data to evaluate the gains from the funding and the agenda.

The CEQ and the Justice 40 initiative can be the overseers of the IRA. To this end, they have developed a Climate and Economic Justice Screening Tool (CEQ, 2022) that uses US census data to identify communities overburdened by pollution, wastewater, and climate change and face severe challenges in accessing energy, housing, transportation, water, and workforce development. This screening tool includes an interactive map that allows any interested individual to determine such disadvantaged communities in their state. The methodology section of the screening guides the rationale behind including communities in the overburdened and underprivileged categories.

As the overseers of the IRA, the CEQ, and the Justice 40 initiative are involved in setting goals and establishing priorities. They must ensure that key performance indicators and proper metrics have been selected for the IRS, EPA, and DOE. Next, they will have to ensure that the employees of these organizations are suitably trained to comprehend, operationalize, and monitor the key performance indicators handed to them. Subsequently, they will have to provide help and guidance in collecting, analyzing, and interpreting data from the IRS, EPA, and DOE to evaluate the extent to which the objectives have been achieved. Evaluations should be performed often to identify deviations from established key performance indicators and quickly take steps to continue as expected. Eckerd and Snider (2017) point out correctly that regular monitoring is critical to achieving outcomes.

The CEQ and the Justice 40 initiative should require companies, universities, cities, and communities that benefit from tax incentives, grants, programs, guidance, and tools under the IRA to file sustainability reports along with reporting back data. These sustainability reports should contain information that provides insight into the advancement of issues for which the above benefits were claimed. Further, the CEQ and the Justice 40 initiative should employ groups of people to monitor the progress of each kind of organization. The roles, responsibilities, and command lines of these groups should be similar to the IRS, the Social Security Administration, the Census Bureau, or some combination thereof to keep track of nearly all individuals or companies. This will enable the CEQ and the Justice 40 initiative to monitor performance and improvements at the grassroots level.

Discussion and Conclusion

To date, companies that issue sustainability reports determine their relevant topics. Companies also have the privilege of deciding how much to reveal and whether they should seek assurance from an external auditor. This is a good time for institutions like the SEC and the US Sustainability Accounting Standards Board (SASB) to step in and develop key performance indicators. These can be modified with the help of feedback to align with the goals of the IRA. Companies could report on key performance indicators that would tell authorities like the SEC, the Financial Accounting Standards Board (FASB), and the Public Company Accounting Oversight Board (PCAOB) how far each company has progressed. The IRA opens up enormous opportunities for companies, sustainability experts, and regulators to begin combating climate change and conform to the requirements of the IRA if they have not started doing so already. In the words of Pearce et al. (1989, p. 2), “Sustainable development involves devising a social and economic system which ensures that these goals are sustained, that is, that real incomes rise, that educational standards increase, that the health of the nation improves, that the general quality of life is advanced.” In some cities (New York City, Los Angeles, Portland) and states (Illinois, Maine, California), it is already underway (https://www.sierraclub.org/trade/green-new-deal-already-underway-states-and-cities).

Sustainability is not achieved through isolated individuals or organizations (Kasymova, 2017). The current analysis is critical because sustainability reporting could be an influential instrument to facilitate the implementation of the IRA through corporate activities that affect individuals, organizations, and societies all over the US. Scholars suggest that corporations wield political and economic power (Mikler, 2018) and, as such, are in a position to be able to help mitigate climate change and some of its ravaging consequences. The gravity of climate change requires that corporations understand the accountability and profound responsibility of exercising a colossal financial and global influence on the majority of people and organizations currently in existence.

On the other side of the coin, sustainability reporting that is congruent with the goals of the IRA will also help companies. “The understanding of a corporation as a legal person with certain, but not all, rights of natural persons is a long-standing hallmark of American Law. If corporations had presented themselves as largely amoral profit-generating machines, engaging them in social activism would likely have been less understandable and less appealing. In contrast, because businesses have long promoted themselves to their shareholders and the world as moral, socially conscious entities engaged in the community, social activists naturally try to engage corporations in their causes. In recent years, billions of dollars have been spent annually as part of corporations’ social responsibility efforts” (Lin, 2018, p. 1567). Due to often vast funds, corporations should spend on issues that matter to their own advancement and generate value in terms of various IRA goals.

Footnotes

Declaration of Conflicting Interests

The author declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author received no financial support for the research, authorship, and/or publication of this article.

ORCID iD

Sunita S. Rao

Author Biography

Sunita S. Rao is an Associate Professor at Washburn University in Topeka, Kansas. Her research interests are sustainability reporting and assurance, firm financial performance, corporate governance and executive compensation. Her recent publications are in Corporate Ownership and Control in Feb 2022 and the Journal of Accounting, Ethics and Public Policy in May 2021.

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