Should you publish a separate sustainability or tax report, in addition to your CSRD report?
To conclude the subject of our first set of sustainability & ESG in Tax blog posts, I wanted to reflect on the impact that CSRD (Corporate Sustainability Reporting Directive) has on companies’ approach to sustainability reporting, their treatment of certain topics as material or not under CSRD, and in particular how it impacts the publication of separate tax transparency reports – or sustainability reports with tax sections. While I believe these reflections are applicable to other sustainability topics than tax, I will focus here on tax disclosures, so some of the reasoning will be specific to tax reporting.
When first reading through CSRD, I thought that one of the consequences would be that impacted companies would integrate their whole sustainability reporting (including their tax disclosures) in their annual report. My intuition was as well that, as a consequence, some of the topics covered in current sustainability reports might be dropped, while new topics identified as material under CSRD would now be reported on.
I was – and still am – curious about how companies will manage their CSRD-compliant reporting. How will they cover all necessary disclosures and data points, stay readable and informative, while keeping the report within a manageable size?
My curiosity has only increased as I have recently been reading the annual reports of many European companies who have already started partially reporting in line with CSRD. Most of these companies explain that they are adapting the structure and style of the report, and that this year’s sections of their sustainability statement that are CSRD-aligned are limited to the ESRS topics they identified as material.
Nevertheless, for a number of these companies, there are signs that indicate that tax will be treated as a material sustainability topic in next year’s report. For instance, some refer to tax as a sustainability issue, or point to their tax contributions as a social contribution, add tax in the governance topics, or list their tax policy together with other sustainability-related corporate policies.
However, recent conversations with companies and colleagues around the world have shown me that some businesses are considering publishing a separate tax report (or a tax section in a separate, non-CSRD sustainability report) in parallel to their CSRD-compliant sustainability reporting. The reasons for doing so vary, but include the following arguments:
1. Tax has not been identified as material during the initial double materiality assessment (‘DMA’), but there is still appetite to report on the topic.
2. The ESRS make for dry writing and reading, so reporting on tax in a separate report allows for more freedom to make it an approachable and reader-friendly reporting. Similarly, some companies are attached to their existing reporting framework, strategy, and style, and do not wish to lose it by integrating it in their CSRD-compliant reporting.
3. The fact that an “integrated” annual report would simply become too long and unwieldy, hence the need for a separate tax report.
I have been grappling with these arguments for the past couple of weeks, weighing the pros and cons. And while I find each of these to be the expression of valid concerns, I ultimately find them not strong enough, neither individually nor collectively, to support maintaining a parallel reporting to the CSRD-compliant reporting process.
Below, I will address these three arguments and explain why I would personally recommend that companies do not publish separate tax reports in addition to their CSRD-compliant reporting, while offering avenues of reflections on how to solve some of the issues raised by these arguments. I will finish with some of the risks and issues I believe companies would face if choosing to report on their tax affairs in a separate report.
Argument 1: tax has not been identified as material, but there is still appetite to report on the topic
As mentioned above, at the time of writing (April 2024), it appears that most companies who will soon be required to report under CSRD conducted a first double materiality assessment in 2022-2023, often starting by going through the published ESRS and assessing the materiality of those topics for their company. This would explain why, for many companies, entity-specific topics such as tax are yet to be explicitly identified.[1]
The question of the materiality of tax has been discussed in a previous blog post by my colleague Nynne-Maria Holst. In my view, most multinational companies should identify tax as a material topic. For companies who have already been reporting on their tax affairs in the past, I would even argue that their starting position should be that tax is a material topic under CSRD, and that they need a compelling argument to explain why it is not.
Sustainability teams driving their companies’ double materiality assessment must make sure to engage with all relevant internal stakeholders and key external stakeholders. In turn, heads of tax must engage in this process and provide their sustainability colleagues with the information necessary to comprehensively assess and confidently conclude on the materiality of tax. If this bottom-up process does not lead to tax being identified as material, but appetite to report on tax affairs remains, heads of tax should escalate the issue, and senior management or the board (who is ultimately accountable for tax affairs and risks) should make a decision on including tax under CSRD reporting.
This reasoning should be applicable to other topics – not just to tax. Ultimately, a topic that was previously included in a company’s sustainability report but fails to be identified as material under CSRD should require a well-documented argument for the decision to hold. In addition, if there is still an appetite in part of the organisation to report on said topic, the analysis should be carefully reassessed. The willingness to spend time and resources to report on a topic is arguably in itself an indicator of materiality.
Argument 2: the ESRS make for dry writing and reading, so a separate sustainability report allows for more freedom to make it an approachable and reader-friendly reporting. Similarly, some companies are attached to their sustainability reporting framework, strategy, and style, and do not wish to lose it
Reading through the ESRS, one could be excused for feeling overwhelmed by the amount of information and data that is required for each topic; the interplay between the topics; and the new vocabulary and definitions to absorb.
The aim of the ESRS (and other reporting standards) is to ensure that, at a minimum, reporting companies provide comparable information and data. This does not mean that all reports must look exactly the same or be a succession of tables of data. One has only to look at the sustainability reports of companies who have been reporting in accordance with GRI to see how varied reports can look, despite following the same standards and providing comparable data. Many companies even follow multiple standards at the same time to cover different topics, which has not stopped their sustainability reports from being approachable and readable.
So, while complying with CSRD and the ESRS will certainly require changes in companies’ reporting, it should not stop them from keeping their reporting unique in style and aligned with their corporate branding. When data must be presented in tables, it can also be visualised, and the narrative can help contextualise the disclosures.
With regard to tax specifically, as we have shown in a previous article, we recommend that companies reporting on tax under CSRD use GRI’s standard, GRI 207, for their tax disclosure. Even without CSRD, GRI 207 is the best choice for companies wishing to report on tax. The only difference between including tax in a company’s CSRD reporting and publishing it separately would then be the CSRD requirement to get an assurance opinion on the reporting.
In our own analysis and previously published reports (FY2021 & FY2022) on tax disclosures by Nordic companies, benchmarked against GRI 207, we saw many different approaches and styles, even between the companies that complied with GRI 207.
Argument 3: an “integrated” report would simply become too long and unwieldy, hence the need for a separate sustainability (or tax) report
The all-in-one annual report with financial reporting and management reporting including CSRD-compliant sustainability report will undoubtedly be a long document. This fact alone may encourage some companies to set a relatively high bar for topics that are material in the hope of shortening their report. Or it might be an argument to only have the strict minimum of CSRD/ESRS information included in the management report and expand on it in a separate sustainability report.
Many companies have for years already been looking for ways of making their reporting more user- and reader-friendly. Strategies include publishing sections of their management and sustainability reports separately, creating reporting websites which can be navigated, include videos, etc.
I would argue that these strategies can basically still be used tomorrow while complying with CSRD. For companies who fear that their annual report would be too long, I would advise that they publish the machine-readable version of their annual report as required under CSRD and possibly publish a PDF version as well (which some stakeholders will want). Then, they should also publish different sections of their reporting in separate PDFs and/or on a dedicated section of their website, in ways that make the reporting more accessible and reader-friendly.
The expectations for tax disclosures are no different than the published ESRS topics, in that there are both qualitative and quantitative disclosure requirements – and companies need to figure out how to integrate both in their reporting. I would expect that, for each material topic, many companies will decide to have a narrative explanation that extracts and explains some of the key data points and refer to the full table of data somewhere towards the end of their report. Similarly, large MNEs with presence in close to 100 jurisdictions are unlikely to explain every single tax data required under the country-by-country disclosure requirements of GRI 207. Instead, they will focus on explaining the points that are out of the ordinary, different from previous years, or that they expect will confuse or trigger questions from readers.
Ultimately, reporting companies may also be encouraged to narrow down their sustainability reporting by focusing on presenting and explaining the mandatory disclosures, which might end up being a positive exercise for both reporting companies and their stakeholders.
Final thoughts – other risks and issues
To finish this blog post, I will raise what I see as some of the risks for companies who decide to publish a tax report separate from their CSRD reporting:
- For one, I expect that companies would be challenged by stakeholders on why. There may of course be other arguments, and ultimately better arguments, than the ones above, but it means that from the start, companies would need to communicate their argument or end up being on the defensive when challenged.
- Second, companies may be accused of choosing to report outside of CSRD/ESRS to (i) avoid presenting standardised/comparable information and/or (ii) avoid providing third-party assurance.
- Third, there is a risk of creating confusion for the readers, who may not realise that the tax reporting is not based on approved/recognised standards.
- Fourth, I expect that the internal governance and processes to manage two similar, but different, parallel reporting processes would create its own issues. Despite their best efforts to avoid this, there is a risk that teams responsible for driving the reports, and the senior management team responsible for approving the reports, end up not putting enough time and resources in the tax report, because the CSRD-compliant reporting will quite naturally drain its resources.
- And finally, why would a company use its limited resources in tracking information and producing a report on a topic that it has argued is not material?