The evolving role of tax and ESG

Today, environmental, social, and governance (ESG) objectives are climbing higher on the corporate agenda - and tax is increasingly an important component of ESG strategy. As the finance leader and member of the leadership team your guidance is needed to align tax with the company’s overall ESG strategy.

Under the current political and social spotlight, tax is evolving beyond just a cost to be managed to an indicator of your company’s willingness to be transparent, environmentally conscious, and socially responsible. Increasingly, companies are being more transparent about their tax affairs – sometimes to demonstrate how their approach to tax is advancing their ESG commitments, sometimes to regain public confidence that they pay a ‘fair share’ of tax, and sometimes to achieve both these objectives.

Companies that have already developed robust tax policies and strong tax governance can more easily provide tax transparency with accurate data and relevant context. Effective tax structure, within ESG includes

• Tax Code of Conduct: mission statement and tax guiding principles
• Tax policy Framework: policies by which tax should be managed
• Tax Risk Assessment Framework: procedures to identify, access, and report tax risk
• Tax Control Framework: the governance, controls, monitoring, and required processes
• Implementation: implementation of the framework

As stakeholders look for companies to make progress in their ESG journey, tax will increasingly become part of that story. But accurately telling that story is complicated. This is because tax is both a measure of sustainability (e.g., paying a ‘fair share’) and a driver of sustainability (e.g., tax incentives designed to promote public policy, such as renewable energy). This has led some stakeholders (including ESG rating agencies and investors) to incorrectly conclude that a company is overly aggressive in their tax affairs when the reality is that their effective tax rate is lower than their peers because of their investments in ESG priorities.

To ensure stakeholders have an accurate understanding of your company’s approach to tax, you must tell your own story with a commitment of the necessary time, effort, and resources to develop the right internal and external narrative. As the CFO you can bring together finance, operations, supply chain, corporate communications, investor relations, other business areas, and C-suite buy-in to coordinate this effort.