Why are ESG issues so interrelated with Tax?

In an era of ever increasingly ESG conscious consumers, considering ESG issues when reviewing your business strategy can create growth opportunities, reduce costs and protect your brand.

When people and even business owners think of ESG issues, they usually don’t appreciate how interrelated they are with the tax system.  In fact, taxes, tax credits and incentives are often the fundamental tools of ESG conscious governments to change corporate behaviour regarding ESG issues.

For example:

Environmental 

To promote better environmental protection, governments use a combination of measures to encourage businesses to progress towards climate change goals. Such as:

• taxes such as carbon taxes and excise duty on petroleum products; 
• incentives such as green subsidies, free energy audits, and favourable finance deals; and
• tax credits eg for R&D and for land & water conservation. 

Social 

The collection of tax and spending it on public facilities such as adequate heath care and education is central to a country reducing social inequality.  Rising budget deficits due to the Covid-19 pandemic have further emphasised the role tax will play in future efforts to balance public budgets.

Governance

Public expectations of tax transparency and governance are increasing, with numerous proposals globally to broaden both the data that must be provided by businesses and the stakeholders to whom it must be reported (e.g. Global Reporting Initiative (GRI) and public Country by Country Reporting)

Who is responsible for helping a business leverage ESG opportunities?

The short answer is that it should be a team effort!

The directors/business owners should be considering ESG issues when developing their business strategy.  And, they need to ensure that an ESG conscious culture filters through the organisation and its employees.

Many people would say that it’s the Purchasing Department’s responsibility to ensure ESG criteria are complied with.  Without a clear understanding of the business’s ESG policy, the Purchasing team might be focussed on getting products at the cheapest possible price rather than, for example, only purchasing environmentally sustainable materials and/or doing the digging to ensure that suppliers are meeting acceptable ESG standards eg not polluting, not using slave labour etc.  However, how are they to know that there are incentives available to purchase one type of raw material versus another (or worse still a punitive levy to be paid for purchasing one versus the other)?  This is where the finance team needs to help.

Obviously, the resources available to a Small Business is different to those of a Large Business but where possible, your finance team should be looking to:

• Understand the organisation’s ESG objectives and strategy and use these to develop a strategy to make the most of credits & incentives and avoid any punitive levies; and
• Proactively keep abreast of new ESG initiatives and measures in Australia and abroad, and their tax implications; and
• Ensure tax governance and transparency reporting is maintained by developing and implementing KPIs to monitor & report on ESG progress, financial benefits and operational benefits. 

What key ESG metrics should we measure & monitor?

With consumers becoming more aware of greenwashing it is important to be able to substantiate and show improvement in your ESG credentials by being able to measure appropriate aspects of your business:

Environmental metrics

• Percent of reduction in energy used
• Percent of products sustainably sourced/manufactured
• Reduction in quantity of waste; and versus increase in recycling 
• Number of water intensive operations in locations of high baseline water stress
• Amount of management pay tied to achievement of ESG targets

Social metrics

• Types of employee wellness initiatives
• Percent of gender and racial/ethnic group representation
• Percent of employees digitally upskilled
• Median hourly gender pay gap 
• Percent of employee retention
• Number of suppliers identified with high-risk labour conditions and actions taken
• Donations contributed by Employee Workplace Giving program

Governance

• Number of female directors,
• Diversity of board and senior management to include people with variety of skills and life experience
• Board oversight of climate & social issues including development of ESG Strategy
• Executive compensation
• Tax transparency
• ESG reporting

So, regardless of size, all business owners need to be conscious of ESG issues and develop an overall business strategy that incorporates ESG issues & opportunities, and share that strategy with their team as well as their clients and suppliers.  And, use their finance team (or accountant/business advisor) to stay up to date with and make the most of any ESG incentives available. 

There is obviously lots of information available on the net on ESG issues.  We also recommend you look at Be Slavery Free or AICD.  And, of course, if you would like to discuss any of these issues in more detail please do not hesitate to contact us.

Sourced from The Tax Institute – Tax Summit 2022 – paper presented by Sarah Saville, ATI, PwC and Jayde Thompson, PwC Oct 2022.