Taxation, sustainability and ESG in your business

28/09/2022.
ESG and sustainability are increasingly at the centre of business thinking about a more purpose driven approach to enterprise and therefore to attracting and retaining staff, clients, and capital.

It is rarely out of the news one way or another with, as just one example, the gifting of the outdoor clothing company Patagonia to a trust which will use future profits to combat climate change being widely reported over the last couple of weeks. ESG also attracts some controversy still both from those who are anti-ESG in principle and also those who support its principles but who are concerned that the ESG label can be put on companies or products which don’t merit it. This is a perfectly reasonable concern in the absence of a common set of non-financial reporting benchmarks or of any external assessment of whether a company or product objectively satisfies those benchmarks. The recently released EU Corporate Sustainability Reporting Directive (CSRD), available here, suggests one approach to this but it is still one of several and excludes unlisted SME’s.

We have also seen how external events can change the perception of what should come within ESG. For example, we may think somewhat differently about investment in the defence industry or in nuclear power generation, subsequent to the invasion of Ukraine.

None of this should be particularly surprising since as business evolves to recognise that it maximises shareholder value by satisfying a wider set of stakeholders, it will take time for thinking to evolve, and for common benchmarking standards to be established to create a baseline for non-financial reporting. It does not mean that ESG is likely to be any less important now or for the future.

Let tax lead your ESG thinking now?

Taxation is an integral element of ESG for a whole range of reasons. First, taxation is fundamental to both the social contribution made by the company through payment of taxes, and to governance and purpose since the approach of a business to paying taxation reveals a lot about the leadership of the business, its culture, and its approach to openness and transparency. Second, unlike many elements of ESG, taxation is already part of financial reporting, and it can also be objectively quantified, unlike the sometimes more subjective criteria for other elements of ESG. Third, whilst a long-term objective such as a commitment to net-zero will take years to achieve, taxation paid by a company is current, it says what is happening now. Finally, taxation, and a hostility to corporate tax avoidance, already has very high levels of public awareness.

The approach of a business to taxation now therefore stands as a powerful proxy for a company’s approach to ESG and sustainability, more generally both now and in the future. In this sense it is an early or leading indicator of whether a business is serious about ESG and its wider social purpose. So, thinking about tax strategy and reporting within a business can provide a powerful step for a company serious about ESG, and sustainability, and to building trust around its brand. To find out more about how employers could look to provide employees with access to electric vehicle solutions and/or solar panels by way of salary sacrifice, read our full article here.

What might you do about tax and ESG?

Whilst there some emerging requirements for reporting such as Country by Country Disclosure, at the moment, and particularly for privately owned business, there are two broad approaches that a business can take. The first is to incorporate on a voluntary basis, both in your financial reporting and in your branding, greater transparency in your approach to tax governance and about the tax contribution the business makes. So, you look at your tax reporting through an ESG lens.

Governance will include a statement of strategy (commitment to compliance, avoidance of aggressive tax planning etc) and a control framework to ensure that this is reflected in day to day reality within the business. On tax contribution the starting point for most businesses is to focus on total tax contribution across all areas of taxation. These will typically be not only taxes borne by the company and which appear somewhere in the profit and loss account, but also taxes collected by the company – PAYE, NIC and VAT. Total Tax Contribution therefore arrives at a figure of tax generated by the economic activity of the company.

The business therefore creates a narrative through its financial reporting, and usually on its website too, on how it approaches tax, together with detailing the total tax receipts which it generates. This can help the company build trust around its brand with customers and suppliers and create pride and purpose for employees.

It is nevertheless a narrative created by the business about itself which could be perfectly accurate but nevertheless selective in what it chooses to say. To reinforce trust in the narrative, businesses may choose to take a second step of exploring external third-party accreditation from the Fair Tax Mark. The organisation provides external accreditation focussed on corporate tax only, using a comprehensive scorecard as its basis. A wide range of businesses have accreditation ranging from FTSE 100 companies through to smaller privately owned businesses. Well-known names with the accreditation include Lush, SSE and Watches of Switzerland.

How we can help

We would love to talk to you about how you can make tax one of the central elements of your ESG and sustainability strategy either by developing your voluntary reporting or in addition helping you prepare for an accreditation process.