Tax in the age of ESG

The global pandemic has elevated and accelerated the profile of ESG for all businesses. The 2021 COP26 Conference focused on environmental issues, where governments proposed wide-ranging, transformational policies and remedies to address the climate crisis.

ESG is now a measure of corporate behavior, and it has become an integral part of branding, customer choice, responsible investing and financing. It extends to the war for talent, with millennials and GenZ paying particular attention to business policies and actions related to ESG.

While, understandably, the debate has been focused on the environmental aspects, there are growing discussions regarding business obligations for private businesses under the social elements of ESG and how tax can play a role in shaping their strategies. The debate over how governments will pay for the enormous costs of COVID-19 has heightened the profile of tax, and private businesses will be expected to pursue responsible tax policies from a reputational perspective, given how embedded they are in local communities.

This environment gives private businesses a unique opportunity to review their tax affairs from a social responsibility perspective and present them in a way that enhances their brand and underpins its reputation.

There are four main areas where tax and ESG overlap, and each has a strong social responsibility theme:

• Green taxes and regulatory changes.
• Tax transparency, ESG governance and tax impact reporting.
• Business transformation driven by changing business models, evolving supply chains and hybrid working models.
• Increased focus on tax revenues, scrutiny of company structures and holistic tax contributions to governments and, in turn, society as an outcome of COVID-19.

This is, of course, in an era of responsible tax.

There is an evolving narrative regarding tax and its societal benefits. The Friedman doctrine holds that a company’s first responsibility is to its shareholders, and it is obligated to generate profits. The pandemic has brought forward the alternative view that corporations have a responsibility to deliver benefits to a much broader population of stakeholders.

In addition, does a business have a wider obligation to pay its taxes rather than sustain the employment of a large community of workers and return profits to shareholders – which might be viewed as a purpose-driven business? Wherever a private business sits on this spectrum, it is absolutely apparent that the role of tax in the S of ESG has never had such a high profile.

As ESG evolves and develops, an increasing body of evidence suggests businesses that embrace the opportunities in this space outperform their competitors for the following reasons:

• ESG is a facilitator for top-line growth in accessing new markets and using trust to expand into new areas.
• ESG reduces costs.
• ESG compliance minimizes regulatory and legal intrusion.
• ESG increases employee productivity.
• ESG optimizes investment and capital expenditures.

Private companies are particularly well placed to move quickly in this environment, and agile, entrepreneurial businesses can (and should) adopt ESG compliant strategies to drive both top- and bottom-line growth.

The increased focus on social factors emphasizes social and ethical integrity as a determining factor by which company products and services are purchased by consumers, and tax is now a key part of this debate.

There are a number of reasons why businesses should review their tax affairs in light of social responsibility:

• Green taxes and regulatory change
  So much legislation has been enacted in recent months that it is key for companies to review their tax affairs from an ESG perspective. This isn’t just about compliance but ensuring that they have benefited from any green credits and incentives that they may be entitled to. At the very least, businesses have a social responsibility to ensure that they are complying with this new regulatory environment, and they also the opportunity to publicize adherence as part of their ESG reporting.
• Transparency
  Many businesses have publicized their tax strategy and policies and have been explicit in the direct and indirect tax contributions they’re making to their economies. Given the fast-changing environment, there is an opportunity to reinvent current tax strategies and policies and ensure that they are fit for purpose. For those who haven’t done so already, this will quickly be a societal norm that should be addressed now. Transparency is relevant to all stakeholders of a business and is an area of focus for customers and financial institutions alike.
• Transformation
  Many businesses are driving decarbonization, and the pandemic has transformed supply chains and value chains which have evolved quickly. In addition, hybrid working models have transformed employment policy, labor conditions, pay equity and mobility.

Businesses, understandably, have focused on enabling this change and responding to the challenges presented by the pandemic. Now is the time to ensure that they are also underpinning and supporting their ESG strategy by reviewing their tax affairs in light of the regulatory changes, requirements for tax transparency and the transformation of their businesses over the past two years. A key aspect of this review will be ensuring that these changes and revised policies are deemed to be socially responsible and an essential part of their ESG strategy.

Sound tax advice is now more crucial than ever with private companies around the world facing new opportunities and challenges of geopolitical shifts, technological innovation, globalization and new business and consumer demands.

I invite you to visit the KPMG Private Enterprise tax website for further insights on how the right tax strategy can help you successfully navigate both the growth of your business and your social responsibilities.