Environmental, social and governance (ESG) has become a vital component to business, with increasing scrutiny on companies to achieve sustainability-related goals. Join us as we examine how to add value to your ESG agenda through the latest global tax and ESG developments.

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Environmental, social, and governance (ESG) considerations have never been more important for an organisation’s long-term success and its general perception amongst the public. Companies are now more focused than ever on finding ways to align their corporate strategies with broader goals around sustainability. One often overlooked avenue for enhancing an organisation’s ESG agenda is through the strategic management of taxes.

The value of tax extends far beyond simply compliance and financial optimisation. Tax can be a powerful tool for promoting sustainability, social responsibility, and ethical governance within any organisation. From incentives designed to promote green investments, to more transparent reporting mechanisms that can foster real trust and credibility, there are a host of ways for tax to add true value to your organisation’s ESG agenda and actively drive positive change.

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«Tax cuts right across the whole of an ESG agenda.»
Dan Dickinson Partner, Practice leader for Yorkshire

Why does tax matter for ESG?

Tax has the potential to positively affect each individual area of ESG. Through environmental taxes, reliefs and incentives in the ‘E’ bucket, tax contribution to society and public perception in the ‘S’ bucket, and ongoing new obligations, tax risks and controls in the ‘G’ bucket. In fact, according to Dan Dickinson, Partner, Tax, and ESG and Tax lead, Grant Thornton UK, “tax cuts right across the whole of an ESG agenda.”

Environmentally, all organisations will likely have targets in place aimed at reducing their overall perceived damage to the environment. This goes for all manner of organisations, regardless of whether or not an entity’s activities are already considered heavily polluting.

Similarly, there’s now mounting governmental and legislative pressure on organisations to adjust, with many governments across the globe seeking to show progress against their economy-wide targets and legally binding agreements around pollution and emissions. Of course, carbon emissions will typically get the most attention in these conversations, but other factors including non-recyclable plastics and landfill use need to be considered also. In terms of using this to your organisation’s advantage, it’s important to thoroughly analyse the current landscape to try and determine how this will affect you.

«Cost-benefit analysis of change programs is complex, but taxation can add value through foresight, to identify where additional environmental taxes will add costs in their supply chains in the future, as well as incentives that can be accessed to help fund costly change programs»
Eduardo Cosmen Head of Tax - Grant Thornton Spain

Organisations are facing governance requirements that have increased significantly over the last number of years. Taking the UK as an example, there is now a host of legislation that must be adhered to – such as the Senior Accounting Officer regime and the Criminal Finance Act to name but a few.

This increase in oversight is being felt globally, with the Australian Taxation Office’s ‘Justified Trust’ regime or the OECD’s BEPS program just two examples that serve to highlight the growing focus on the importance of tax governance worldwide. Poor results can lead to intense public backlash and increased scrutiny from the tax administration, further emphasising the value of strong tax processes.

«It is becoming increasingly important to understand that the tax department must internally drive compliance with governance requirements from a perspective that looks at environmental, social and corporate governance factors, with more and more tax data reporting requirements that are transparent to third parties and that internally must be complied with in line with OECD recommendations, as a slip in compliance with one of these can undermine an organization's overall ESG strategy and its sustainability image. And if you are already aware of all this, it is time to focus on getting the message across internally and making it a company culture. This helps stakeholders to have a positive perception of an organization and increases the company's value to third parties»
Germán Rodrigo Tax Partner. Grant Thornton ESG Tax Group

 

Understanding the importance of social when it comes to tax and ESG

Public interest in the tax affairs of corporate and multinational organisations has never been higher, with scrutiny arguably increasing steadily since the global financial crisis. There is a clear desire for transparency from organisations, and this has led to a number of consequences from a tax perspective. 

Larger businesses are likely to be familiar with country-by-country reporting rules. With European businesses in particular subject to impending revisions that will put a significant amount of extra tax data into the public domain, where these disclosures are compulsory if above a certain size threshold.

There’s also been a significant shift in the number of organisations now participating in more voluntary transparency initiatives, with tax often included. Approximately half of the FTSE100 listed businesses in the UK voluntarily published total tax contribution documents along with their financial statements earlier this year, in a trend that’s likely to continue as the importance of appearing to be operating in a sustainable manner continues to rise. 

If we look more globally, other standards such as the Global reporting initiative or the Dow Jones sustainability indices are being increasingly considered as an extra tool to provide further transparency around an organisation’s tax affairs. Stakeholders, including customers, employees, investors or lenders will each have certain demands when it comes to transparency and sustainability.

As a result of this public push, certain reporting standards may be effectively forced upon an organisation by stakeholder demand, whether they meet the threshold to be required to report them or not. Organisations can, of course, choose not to undertake these voluntary initiatives, but they have to weigh that choice against the negative impact it may have on their public perception.

How can finance leaders add value to the ESG agenda?

As a finance leader, it’s important that you’re at the table when it comes to ESG policy discussions, given the value you may add. One simple example is to consider your organisation’s decisions around shaping employment packages in line with an ESG agenda. Whether that’s through pension fund choices, mobility packages and policies, overseas employees, and benefits such as electric cars or helping with home insulation – as a tax function, significant value can be added to have a positive impact. 

It's important to fully understand, however, where your organisation is investing the most across each area – environmentally, socially, and from a governance perspective. For larger organisations this could mean approaching the sustainability lead, whereas smaller organisations may include conversations with the board, or owners. Once you have a clear understanding, you’ll be able to fit your tax effort around it and contribute to the positive change being driven by the organisation’s overall ESG agenda.

Next article: Understanding the impact of environmental taxes