The role and function of business in society is evolving. Both external and internal stakeholders are taking a keener interest Environmental, Society and Governance (ESG) issues.
There is increasing pressure from the public and from investors for companies to demonstrate that their approach to their business is sustainable, and there is a view that the approach that companies take to their tax affairs is a proxy for their overall approach to ESG issues.
Therefore the organisation’s tax team need to respond.
The tax reporting and governance strategy is central to all of this.
In addition to regulatory requirements, there is a marked move towards voluntary tax transparency across all sectors. So, the tax strategy should support an organisation’s wider purpose and brand and align with internal and external shareholders messaging.
Like it or not, ESG is a reality of doing business in the 21st century, and it should be embedded in the very DNA of an organisation. Failure of businesses to act on any of the ESG criteria will generate financial consequences, either through a loss of trade due to consumer preferences and consumers are having more and more power to actually decide where do they get their products and services.
Also, the impact of the cost of capital or access to capital in the first place, because lenders are also having a big focus on ESG, has stranded assets and of course missed opportunities to capture market growth.
Making sure that an organisation’s ESG approach operates efficiently requires a concerted effort from across the whole business and the tax function is a key stakeholder in mitigating risks, but also in adopting greener policies and spotting opportunities.
Tax has become a real signal of corporate citizenship, and tax transparency is also a huge issue – witness the publicity given to Amazon’s tax bill in recent times.
The tax reporting and governance strategy is central to all of this
In addition to regulatory requirements, it should align with internal and external shareholder messaging.
Turning specifically to environmental taxes, the Treasury defined these taxes as those meeting the following three principles:
- The tax is explicitly linked to the government’s objectives
- The primary objective of the tax is to encourage environmentally positive behaviour
- The tax is structured in relation to environmental directives for example the more polluting the behaviour the greater the tax levied
So far the taxes that have been or will shortly be implemented concentrate on the ‘E’ in ESG and are indirect environmental taxes namely:
- Landfill tax
- Aggregates levy
- Climate change levy
- Plastic packaging tax (PPT)
It’s thought that PPT when introduced in April 2022 will affect a greater number of people than the existing environmental taxes and tax departments may need to start taking responsibility for environmental taxes for the first time.
It is likely that initially this responsibility will fall with the existing inhouse function dealing with VAT, but no doubt there may be a third internal tax team in a few years’ time dealing exclusively with environmental taxes as they become more prevalent.
To perform the task effectively they will no doubt need to become far more familiar with the day-to-day business activities.
KAWC specialise in tax reporting so we won't be directly affected by the taxes above. However, we're very conscious of the issues because our main clients are banks and investment managers for whom ESG is becoming a very important issue and who will doubtless endeavour to incorporate the message in their day to day activities.
This is particularly the case for our clients as their clients are mainly private individuals who may want help in screening potential companies to invest in that meet certain ESG criteria. If the manager of their money does not follow ESG principles itself then it sends the wrong signals and is somewhat hypercritical. In the same vein that investment manager will expect us as a B2B customer also to be ESG aware.
The least that we can do is be conscious of how we manage our own waste such as paper, drink and food containers etc and conserve energy. Even before the pandemic we had a policy of not insisting that staff travel to our office if not absolutely essential. This reduces traffic on the road and the pollution that that this creates.
It is hoped that if we all take small steps in this direction more draconian measures will not be imposed upon us.