How can ESG help tax functions evolve?

Particularly since the global financial crisis of 2007-8, corporate responsibility has become a hot topic in public and political debate. An increasingly varied stakeholder base now looks to corporates to be environmentally and socially responsible, and transparent about governance.

Tax is a big part of this – and yet the tax function is often peripheral to conversations on the environmental, social and governance (ESG) agenda. 

Tax needs to get 'in the room'

We've seen many examples where a particular corporate’s tax position has harmed that business’s reputation. This focus on tax has led to a raft of extra regulations in the UK and globally, for example the requirements to publish tax strategies in the UK for larger businesses. We’re also seeing an increasing number of groups choosing to voluntarily publish their total tax contributions. Other rules in the UK, such as the Corporate Criminal Offence and Senior Accounting Officer rules, are effectively tax governance  – the ‘G’ of ESG – borne out of a focus on corporates’ societal impact. Even the OECD's BEPS and Pillar 2 rules are such responses to the ‘S’ of ESG.

Everyone on our sessions agreed that tax plays a critical part of an organisation achieving its overall ESG aims. However, it can be the case that the tax function has a hard time advocating for its role in achieving those aims. Almost everyone on the forums said tax was more peripheral than other functions, such as legal or risk. One person shared that, on ESG projects, they don’t know any head of tax who sits at their desk and has people come to them. They’re the ones knocking on doors, even when there is a clear compliance risk, or an opportunity.

While it's frustrating for the tax function to have force itself into ESG discussions, the consensus was that ESG offers an opportunity for tax to elevate its entire profile within a business.

As my colleague, Harry Simpson, said in our Northern Forum, it’s easy to get buy-in from leadership when there’s a cash output; it’s much harder on risk. But, say you have government contracts, what happens if you receive a Criminal Finance Act fine? If the tax function is handling all of these issues without much challenge from the tax authorities, then you're already adding value to your organisation’s ESG agenda and you should talk about that. That’s more than fulfilling compliance obligations; it’s protecting your firm’s reputation around the S and the G.

Using the language of ESG can help you tell a compelling story about processes and projects that might otherwise be a hard sell. Telling that story, though, is much easier if you’re already in the room.

How is ESG changing tax?

One strand that participants really grabbed onto in our forums is that, because ESG cuts across a business, the traditional structure of tax functions may need to be reconsidered. It was pointed out that most tax professionals come through a traditional route: training at a large firm and then moving into industry. But businesses are likely to need a blend of different skills to deliver on what's needed in the new world of 'tax and ESG'.

A long-term strategy should be focused on building a function that enables effective business partnering. For example, plastic packaging tax (PPT) queries are directed to tax because it’s called ‘tax’. Are we the best people to deal with it when we’re usually not close enough to procurement data and decisions to understand how much plastic we actually have in the packaging? A better way of managing this might be to have a tax person in the supply chain who reports into the head of supply chain.

The need for a more agile approach is only going to become stronger as more and more countries introduce regulations to proactively influence corporate behaviour. Whereas the US, and to some extent Canada, are relatively more keen on incentives, the UK, EU and Australia tend to prefer using the tax ‘stick’. As well as PPT, carbon taxes – such as the Carbon Border Adjustment Mechanism (CBAM) – are already in the EU and will be in the UK from 2027 (subject to consultation this year).

If your organisation has a CBAM filing requirement, the mix of skills and data needed to meet those obligations includes tax, customs, supply chain/procurement, and carbon emissions measurement and assurance. Even where your organisation does not have a direct filing requirement, if you ultimately use (directly or indirectly) the products covered by CBAM then you may see an increase in your cost base as the CBAM costs are passed on to you.

Again, a different collection of skills and information is needed to assess the potential impacts on your business.

What's the key takeaway?

Our in-house tax forums are open spaces to have conversations without any pressure to convert them into actions. But the key takeaway on ESG and tax is that tax does need to get to a place where other departments know the story about the value tax adds – on ESG and other issues – and are knocking on your door to hear it.

For more insight and guidance, get in touch with our team: Dan Dickinson, Harry Simpson and Hannah Cooke.