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Putting the ‘T’ in ESG

Sept. 8, 2021, 8:01 AM

ESG can be material to a company’s core strategy and value creation—or destruction. It’s why investors, regulators, and other stakeholders are focused on it. It’s moving way beyond reporting or impacting the operations of a business, it is playing a big role in brand perception. These issues are touching almost every part of an organization, including an area that might not naturally come to mind, but it should—Tax!

While tax may not be thought of as being at the forefront of this revolution, it has been involved from the beginning—and it’s accelerating. Investors are not only asking about the sustainability of tax rates, but internal governance and tax risk monitoring too. The number of rating agencies ranking companies for environmental measures and tax is increasing as well. As is the number of voluntary sustainability reporting boards, such as the Global Reporting Initiative (GRI) and the International Business Council (IBC). And earlier this year, the Securities and Exchange Commission (SEC) issued a request for input on climate change disclosures.

In this new era when everyone is talking about ESG, it’s important to understand how tax fits into the larger picture. Considering tax early and often can provide a strategic advantage for businesses and their stakeholders.

Here are a few things that come up in my conversations with clients that tax professionals and all business leaders can consider.

Include tax in the narrative

This one is pretty simple—make sure tax is a part of your business story! If a business doesn’t tell its story, someone else will—and they may not get it right. It’s important for companies to tell one comprehensive business story, especially around complex, sometimes non-intuitive data (tax reports!). This helps to meet stakeholder needs and expectations and ensures that the data is presented in the right context.

When it comes to tax and ESG, this focus on governance is one way to show that the business is run in a way that’s beneficial to society. It’s not enough for companies to just “talk the talk.” They need to “walk the walk,” too.

Focus on internal controls

Tax authorities, investors, media, and other stakeholders are looking more critically at businesses’s governance and risk management structures. This includes how they collect and report data, as well as the business’ resilience to external tax threats. And those internal controls can be especially important when it comes to ESG. A company’s ESG strategy spans across the organization and requires multiple functions to work together towards common goals and reporting efforts.

As a result, business leaders should focus on the policies and procedures that feed the development of tax and ESG metrics to make sure the data is accurate and consistently prepared. These internal controls also allow the business to prepare for and manage tax risks and other potential threats to the business.

Incorporate tax and ESG into your business strategy

Connecting tax and ESG (and other functions within a business!) encourages a holistic approach to ESG issues. It can help business leaders understand how various departments are affected and how tax touches those areas. Tax leaders can also explain the societal expectations on tax, like regional variations.

There’s no one-size-fits all solution—every business is faced with their own complex systems and unique challenges. But one thing is for sure: It takes a comprehensive approach and a strong overall strategy to determine where the organization is headed and to identify what’s needed for reporting, tax planning, and operations.

Capitalize on ESG’s momentum (and build a more sustainable future!)

ESG offers opportunities for businesses to remain sustainable—economically and environmentally. And tax has a role to play. Whether it’s about available tax incentives or developing metrics to attract private equity capital, tax is part of the process. For example, solid reporting of environmental metrics is crucial—including tax incentives received. But helping the environment, while increasing jobs and profits (on which tax is paid), is also a critical part of the social pillar.

Tax is complicated and often nuanced. Professionals need to understand the legal and regulatory landscape while also working to hold both shareholders and stakeholders in mind. Considering stakeholders and shareholders is not an either/or proposition—it’s an “and” opportunity. ESG creates an opportunity for tax professionals to restart that conversation. Right now, regulators and companies are building ESG standards and practices. Let’s build tax standards along with it, building greater societal trust and resiliency in the process.

This column doesn’t necessarily reflect the opinion of The Bureau of National Affairs Inc. or its owners.

Author Information

Kathryn Kaminsky is Vice-Chair & Trust Solutions Co-Leader at PwC.

Bloomberg Tax Insights articles are written by experienced practitioners, academics, and policy experts discussing developments and current issues in taxation. To contribute, please contact us at TaxInsights@bloombergindustry.com.

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