Elevating Tax Strategy in the ESG Era: A Boardroom Imperative

By:

Pauline Koh, Pauline Koh, Partner, Tax Governance and IGH & Manufacturing, Tax, KPMG in Singapore and Regional Leader ESG Tax, KPMG Asia Pacific.

Mark Addy, Partner, Energy & Natural Resources, Telecommunications, Media & Technology, Tax, KPMG in Singapore

This article was first published in the SID Directors Conference 2024 e-Book in October 2024.

In today's fast-paced business world, tax strategies are essential to sustainability efforts, moving beyond their traditional confines. With increasing shifts toward holistic corporate sustainability and governance, tax strategies are being scrutinised not only for their financial implications but also for social and environmental impact.

Integrating tax strategies into the environmental social, and governance (ESG) framework also sends a strong signal to stakeholders that the company’s leadership is committed to long-term and responsible growth.

The board of directors plays a pivotal role in promoting and implementing responsible and sustainable tax practices to steer their organisations through the complex interplay between tax requirements and ESG expectations. This links back to the board’s overall responsibility for ensuring that the company's strategic direction aligns with its mission and legal obligations.

In the context of ESG, the board's duties involve safeguarding the firm’s reputation, managing risks and ensuring sustainable growth. This includes having the foresight to adapt to new changes and proactively finding ways to integrate ESG principles into the organisation. For example, by embedding tax strategies within the ESG framework to enhance transparency and governance.

Stakeholders, including investors, customers and employees expect companies to not only legally contribute to their fair share of taxes, but also to be in line with the values of the community in which the company operates.  

Investors and regulators are increasingly pushing companies to incorporate tax strategies into their ESG plans. Technological advancements and strict compliance demands have given tax authorities unprecedented access to data, allowing for more precise audits. Investors and stakeholders are keenly assessing tax transparency and governance, and financial institutions are linking financing to ESG criteria, including carbon reduction efforts.

Despite these changes, many companies still underestimate the role of taxation in their ESG agendas, which can lead to significant risks. One observation is that taxation is often viewed as a downstream compliance issue that is meant to be the sole responsibility of finance departments, rather than it being an important component of the company’s overall business strategy.

Neglecting tax strategies within ESG frameworks can lead to reputational and financial setbacks. Reporting requirements frequently demand disclosure of total tax contributions, which reflects a firm’s commitment to pay its fair share of taxes. Tax management is seen as a reflection of a company's ethics, heavily influencing investment decisions. Failing to align tax strategies with ESG goals may lead to penalty exposures, reputational risks, restricted financing access, among others, ultimately undermining a firm’s commitment to responsible governance.

To manage tax risks effectively, a robust governance framework is essential. This framework should mirror the company’s culture and approach to tax risks, with strong board support. The board plays a vital role, holding responsibility for the firm’s tax risks. Establishing clear channels for elevating significant tax issues to the board ensures comprehensive oversight. The board will need to be accountable in ensuring that these tax strategies are also aligned with other areas of the firm’s priorities, such as in compliance or remuneration policies, for example.

Adopting technology to improve tax data management is critical. By using artificial intelligence, machine learning and data analytics, companies can enhance data accuracy, automate reporting and gain deeper insights. This integration not only strengthens tax governance but also mitigates risks and supports sustainable growth. Accurate data management is vital, requiring precision, strong governance, security and thorough employee training.

A comprehensive tax strategy should also address environmental factors like decarbonisation. Managing tax-related regulations and incentives proactively is crucial for compliance and strategic advantage.

Environmental taxes usually target areas such as energy usage, emissions, waste, infrastructure or transport. Understanding the cost of carbon emissions both now and in the future is essential for planning, especially as countries are expected to significantly increase carbon prices over the next five to 10 years to meet their climate-related commitments.

Singapore is an example of the increasing cost of carbon being used as a tool to drive decarbonisation and greener practices, with rates scheduled to rise to between $50 and $80 per tonne of carbon emissions by 2030. Companies who do not take action to address environmental concerns are at risk of being left with increased costs and reputational damage as pressure from stakeholders continues to ramp up. 

As companies expand and operate across multiple jurisdictions, they will also need to be mindful of their corresponding value chain activities and how this will lead to them managing a growing range of ESG-related tax disclosures. These developments highlight the need for firms to adjust and align their strategies.

The global context from the Conference of the Parties (COP) emphasises international commitments to climate change mitigation, influencing national policies and corporate strategies. Aligning tax strategies with these global frameworks can boost a company’s sustainability credentials and meets international expectations.

Incorporating tax strategies into ESG frameworks is more than a regulatory requirement. It is a strategic opportunity to enhance governance and sustainability and form a critical part of building trust with stakeholders.

As tax considerations gain public attention, companies that adapt their strategies to integrate ESG principles will enjoy long-term benefits. By ensuring transparency and seizing opportunities in this evolving landscape, firms can turn challenges into opportunities for sustainable growth and ethical progress on a global scale.