The importance of tax within ESG

ESG is undoubtedly an area of ever-increasing importance for businesses – having significant influence over corporate behaviour and decision making. There is increasing desire within and substantial pressure on businesses to implement ESG positive policies, and ensure they are compliant with new ESG related reporting requirements.

Tax itself has gained additional prominence on the Board room agenda in recent years. This follows increasing rates and complexity, and adverse media scrutiny on large multinationals who may have operated strategies, which despite following the letter of the law, sought to reduce their tax base through ‘aggressive’ tax planning. This scrutiny has only been enhanced by the COVID-19 pandemic and the rise of the ESG agenda, as more focus is on businesses having responsible tax strategies.

Taxes play a pivotal role in incentivising and regulating corporate behaviour across the ‘environmental’, ‘social’, and ‘governance’ dimensions.

From an environmental perspective, taxes such as carbon and plastic levies are essential tools for discouraging harmful practices and encouraging sustainable alternatives. They drive businesses to reduce their carbon footprint and adopt eco-friendly practices, aligning with global efforts to combat climate change and environmental degradation.

On the social front, taxes fund critical social services like healthcare, education, and pensions, contributing to a business’ social responsibility and its impact on communities. Moreover, tax policies related to equal pay, living wages, and remuneration policies promote fairness and equity in the workplace. Businesses also have an opportunity to separate themselves from their competitors and demonstrate they are taking their social responsibilities seriously, by supporting the long term financial, mental and physical wellbeing of their staff through dynamic benefits, remuneration and equity incentives.

Lastly, in terms of governance, taxes are closely tied to transparency, tax reporting and compliance, all of which are crucial components of good corporate governance practices.

Whilst tax incentives and reliefs offer significant opportunities to businesses, new reporting requirements and environmental taxes often present a challenge, with rising costs and additional complexities to manage.

Ensuring tax is front of mind when implementing ESG policies will help businesses make the most of the incentives available to them, whilst also avoiding any unnecessary pitfalls.

Key tax considerations often include:

Environmental

1. Environmental taxes e.g. carbon and plastic taxes – managing the costs and administration burden
2. Green subsidies and tax incentives – optimising reliefs available to provide funding for ESG projects and other business needs

Social

1. Social insurance, health care and pensions – tax relief may be available and such measures help promote employee wellbeing and workforce engagement
2. Equal pay, living wages and remuneration policies – adherence to the law in these areas is monitored and enforced stringently by HMRC
3. Tax efficient and ‘green friendly’ employee incentives – offering incentives which are both environmentally friendly and tax efficient is now seen as a real positive to existing employees and during recruitment
4. Socially responsible and tax efficient Exit strategies – for example, management buy-outs, or Employee Ownership Trusts

Governance

1. Tax governance, reporting and transparency – there has been a huge increase in recent years in the amount of tax governance legislation that businesses must adhere to, both domestically in the UK and internationally