A few weeks ago I was lucky enough to attend the “Sustainability and ESG in taxation” conference in London. As I write this short blog post regarding the conference, three key messages emerge that I would like to reflect on:
- Firstly, when it comes to tax transparency reporting in a world where businesses and investors are crying out for standardized disclosures, I believe that GRI 207 remains the gold standard with its range of qualitative disclosures and country-by-country reporting on a consolidated basis, allowing stakeholders to compare one company’s reporting to another, and to its own financial statements.
- Secondly, while there is no “T” in ESG, I believe that there cannot be corporate sustainability without tax. For businesses, their Heads of Tax are key internal stakeholders and contributors to their companies’ sustainability and ESG strategies.
- Finally, there is growing consensus that the world cannot reach its decarbonization targets without effective tax policymaking. It is this last point that was the most striking realization for me and for many others in the room, and therefore, it is the key message which I would like to further discuss.
How to help encourage green investments?
As was noted by the panel, as things stand today, we simply do not have the technology necessary to achieve net zero, which entails that massive, targeted public and private investment is necessary. In, for example, the UK alone, it has been estimated by the Office for Budget Responsibility (OBR) that investments worth £1.4 trillion will be required to achieve net zero by 2050.
To encourage investments where they are needed, such as into renewable energy production, and to shape the behaviour of businesses, such as carbon emission reduction, I see one of the most powerful tools at the disposal of governments being tax.
Reluctancy towards tax incentives
As seen in the EU’s Fit for 55 plans, and in recent major legislative packages passed elsewhere, policymakers regularly make use of both “the stick and the carrot”. However, as pointed out by the panel, tax incentives remain a subject that can carry a bad reputation with the public, as well with some politicians.
This reputation seemingly stems from sometimes poorly designed incentives and breaks; incentives promised or given by politicians to specific businesses, often seen as abusive or corrupt by their constituents; the unhealthy competition it may lead to between cities, regions, and countries; or simply because of the direct cost and the cost of opportunity some of these breaks represent for local communities, particularly in poorer and developing countries.
This has led to tax incentives now being used less than they could, and arguably less than they should, even more so in Europe than in other parts of the world. It even appears that when the EU sets up investment programs, incentives and grants, the communication around them is sparse and many companies who could make use of these programs aren’t even aware of their existence. Some companies are even reluctant to use them as they see a tension between reporting on their tax contribution, whilst also receiving breaks and incentives.
It appears to me that it is urgent to rehabilitate tax incentives in the mind of the public, in order to drive investments where they are most needed in the fight to lower emissions and limit global warming. A starting point is recognizing that there have been shortcomings in the past, and that not all incentives and tax breaks are equal or valuable. It must be a joint effort by policymakers, politicians, businesses, and tax advisers to regain the public’s trust.
Businesses who are already taking steps to repair that trust are striving to ensure that they consider each tax incentive against their own sustainability goals or ESG strategy before utilizing it. Those who can be transparent about the use of the incentive and are able to communicate the benefits to both the company and other stakeholders, particularly society and the environment, can really start to show the potential benefits such policies can have.
Taxation used as a “stick” is a necessary, but often relatively blunt, tool, where tax incentives, when well designed by lawmakers and responsibly used by businesses, can be efficient and finely tuned policy tools. Finding the right balance and using both the stick and the carrot is expected to be essential to collectively overcome the global challenge of climate change.
1 Office for Budget Responsibility, “Fiscal risks report”, July 2021, https://obr.uk/frs/fiscal-risks-report-july-2021/