Globalisation, the digital revolution, COVID-19… businesses have been hit by successive waves of disruption over recent years.
Yet the biggest disruptor of all is only just beginning to take effect – and that’s the ESG agenda.
At the time of our recent Future of Tax event on tax’s role in ESG, Europe was sweltering in an extreme heatwave. That’s nothing new: record-breaking temperatures have been seen every year in the life of anybody under 21.
But with the climate crisis growing more urgent, businesses are under intense pressure from their stakeholders to tackle it. And organisations are responding: 80 per cent of the world’s top-earning companies now report on sustainability.
Yet the ESG agenda needs to go further still. Firms must act on diversity, equality and inclusion; modern slavery and worker exploitation; and much more.
Given the scale and complexity of the issues involved, retrofitting ESG initiatives to a business strategy won’t work. ESG must be a company’s strategy if it’s going to meet stakeholder expectations.
ESG impacts every part of a business, and each function has a unique contribution to make. For its part, tax can play a leading role on several fronts.
Tasks for tax
1. Understanding the tax landscape
Tax leaders can help the business understand the tax risks facing it – including:
- Regulation: The global landscape is complex, and changing fast. Authorities worldwide are imposing punitive measures, such as plastic taxes and the EU’s Carbon Border Adjustment Mechanism (CBAM).
- Reporting: What do different tax disclosure rules and reporting standards require? How can the firm comply with these?
- Data: Much of the data you’ll need to meet regulations and reporting standards may not yet be available within the organisation. Or it may sit in other functions, such as finance, procurement and HR. What is your plan to bridge this gap?
2. Identifying opportunities
Tax functions can also identify opportunities that will help their organisations meet their ESG commitments. What milestones has your firm promised to reach in the short, medium and long term? How can the tax team help deliver them?
Authorities are introducing new reliefs and incentives, to promote investment in sustainable R&D, cap ex, supply management, employee benefits, and more. Tax leaders are uniquely positioned to identify and act on these opportunities to generate significant savings. And the money saved can be used to fund wider ESG efforts, such as the transition to Net Zero, which for many will be expensive.
3. Telling the whole story
Stakeholders want to know that firms are paying what they should. Pressure for greater tax transparency is on the rise around the world.
Tax teams must be equipped to convey their organisation’s complete tax picture. That’s not just the effective corporate tax rate; it’s why the ETR is what it is, and what other taxes you’re contributing to society.
Getting that across demands a complete understanding of the tax position, and how it will be received by stakeholders and wider society. How will you explain your position in a clear and understandable way for readers?
The C-Suite will be responsible for overall ESG reporting. For tax leaders, early engagement with the C-suite can encourage proactive and consistent messaging on tax. And it can ensure that tax disclosures reflect what’s actually been done in practice.
4. Responding to supply chain disruption
As businesses work to make their supply chains sustainable, new business and operating models are emerging.
We’ve seen consumer goods manufacturers move into recycling, creating new profit centres. Some oil and chemical producers now supply EV charging, offering a capacity-based service alongside their traditional, commoditised product. And manufacturers are shifting their key value drivers away from operational efficiency, to sustainability measures such as energy use and ethically sourced raw materials.
Transformations like these have far-reaching tax implications. They take organisations into new markets and value chains – and therefore new tax models and transfer-pricing scenarios.