ESG: a critical part of the tax agenda

As environmental, social and governance (ESG) considerations become ever more central to the business of doing business, tax is assuming greater importance as a critical ESG factor, under the spotlight of legislation, regulation and increasing focus from investors, employees, customers and other stakeholders on ESG strategy and behaviours.

As a response to stakeholder focus on the way businesses contribute to the broader community and society we live in, businesses are now expected to set out clear tax policies which align with their ESG commitments and positions and to follow those policies rigorously. A transparent tax policy can be a powerful tool for businesses to communicate and demonstrate their wider economic and social contributions and build public and stakeholder trust.

In addition, as economies change and adapt to match emerging decarbonisation goals, taxation is likely to become an important governmental tool to incentivise behavioural changes. As a response to both hard economic incentives and wider societal pressures the business strategy and operating model of many businesses may change. The tax implications of such change will need to be carefully assessed, including to ensure that:

• any public tax strategy document is reviewed and updated to align with ESG commitments and goals;
• any business changes are in accordance with the public tax strategy and that unintended tax consequences do not undercut ESG commitments;
• transfer pricing models and documents are updated where applicable; and
• the business is properly able to demonstrate (both to tax authorities and stakeholders) its entitlement to any relevant tax incentives or reliefs.

A business’ tax function will need to stay on top of these developments and embed ESG into their day-to-day operations.