As every Chief Sustainability Officer knows, ESG has become a strategic imperative for organisations. Understandably, most sustainability discussions focus on environmental practices, social impacts and economic growth; not many CSOs have tax on their to-do lists.
Yet effective tax management can add substantial value to a firm’s sustainability ambitions – something that’s often overlooked.
Tax has a bearing on all four stages of your ESG strategy: development, execution, governance and engagement.
Stage by stage
Development
Funding sustainability activities can be expensive. That’s why governments around the world are introducing grant funding and tax incentives to encourage sustainable investment.
Integrating these into your sustainability strategy can boost the cash available to spend on decarbonisation activities, green technologies, renewable energy and so on.
Sustainability teams should build considering whether your business qualifies for such reliefs into their strategic planning cycles, and partner with their tax colleagues to make the most of the reliefs that are available to them.
Execution
As you roll out your ESG strategy, maximising tax reliefs will be critical.
For example, there are R&D tax credits on offer for innovation in waste reduction, sustainable materials and eco-friendly product designs. The savings generated from these can be reinvested into your sustainability initiatives, creating a virtuous cycle of innovation and improvement.
Your strategy might also require the use of power purchase agreements, or internal carbon-pricing policies and mechanisms. These can have complex tax implications that will need to be managed.
Tax is typically seen as a cost. But available tax reliefs can add value, allowing the firm to ‘green’ more of its operations, faster.
Governance
Effective governance is critical to the success of a sustainability strategy – and tax governance is an important part of that.
This is reflected in some of the new mandatory sustainability reporting frameworks – such as CSRD – which can have specific tax-governance requirements.
Sustainability and tax teams will need to work closely on this. Establishing clarity of roles, responsibilities and accountability for tax-related sustainability issues will be vital. For example, ‘pseudo’ taxes like the EU’s CBAM scheme will likely require input from both departments.
Tax governance will also be crucial to your firm’s ability to take advantage of ‘green’ tax incentives globally, where qualifying conditions are met. That will mean keeping track of what’s available, and compiling the necessary documentation on your sustainable practices.
Engagement
Engaging and aligning your stakeholders with your sustainability strategy will be critical.
At its heart, tax is a sustainability issue – the tax your business pays is central to how it contributes to society. A clear, authentic narrative about your approach to tax can enhance stakeholder trust. Communicating a positive tax strategy will bolster your company’s reputation as a responsible taxpayer, by demonstrating its financial contribution to the communities in which it operates.
At the same time, explaining how tax supports your ESG efforts could appeal to sustainability focused stakeholders.
All of which can improve the company’s brand, and drive consumer and investor engagement – which will be crucial to the long-term success of your sustainability initiatives.
In summary
Embedding tax into your sustainability strategy can bring a range of benefits. It enhances the financial feasibility of your sustainability initiatives, builds trust, reinforces governance, and increases stakeholder engagement.
Understanding the intersection between tax and your sustainability strategy is therefore crucial to your ability to achieve your sustainability ambitions. It goes far beyond saving money; it will enable you to invest more effectively in the future of the company.
Please get in touch to see how our experts can help you integrate tax into your sustainability programme.
