The Growing Importance of ESG for Corporate Tax Departments
What’s tax have to do with environmental, social, and governance issues? A lot

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Nancy Hawkins

For many reasons, organizations in diverse industries and sectors of the economy are becoming more cognizant of ESG (environmental, social, and governance) issues. We wanted to get a better handle on what’s happening in this arena and why tax departments should be interested, so we turned to Nancy Hawkins, vice president of research products at Thomson Reuters, for this Perspective piece. Michael Levin-Epstein, Tax Executive’s senior editor, interviewed Hawkins in February.

Michael Levin-Epstein: What is ESG, and why is it relevant to corporate tax departments?

Nancy Hawkins: Starting with what ESG is, it’s an umbrella term used for a broad range of environmental, social, and governance issues. There’s no standard or universally accepted definition of ESG, and the factors relevant to a particular company depend, in part, on the industry and jurisdictions in which the entity operates. Why is it relevant to corporate tax departments? Corporate tax professionals want to act as and be seen as trusted advisors to their companies and C-suites. As ESG is more widely embraced by both public and private companies and their stakeholders, corporate tax professionals are well positioned to help drive and influence their company’s ESG strategy. While public companies are more likely to have hired ESG leaders and embrace ESG programs and frameworks, private companies are also recognizing the importance that ESG plays for them, as ESG can be good for business. There are many studies that show that companies with an ESG focus benefit in a number of ways. This includes being able to attract and retain talent. Deloitte published a 2021 survey which found that thirty percent of respondents said they would consider switching jobs to work at a more sustainable company. Likewise, a 2021 Gallup survey found that seven in ten US job seekers care at least somewhat about a potential employer’s environmental record. Companies can also increase sales when they focus on ESG, making themselves more attractive to customers—whether businesses or consumers—who are increasingly interested in purchasing goods and services from companies that can demonstrate that they are more conscious of ESG-related issues. Embracing ESG can also make a company more attractive to sustainability-conscious investors who are increasingly using ESG data to make investment decisions. Indeed, there are investors who have adopted policies that require responsible investing and seek to invest in companies that are sensitive to ESG issues and that are incorporating ESG into business strategies at all levels. Investors can acquire information on a company’s ESG stance through ratings entities who are pulling publicly available information on both public and private companies. Finally, companies with an ESG focus are obviously better prepared to respond to future regulation. This is beneficial, as ESG regulation comes in many forms across many jurisdictions.

Levin-Epstein: What parts of ESG should tax departments be familiar with?

Hawkins: The intersection of tax and ESG actually goes much deeper than just the general health of the company based on the factors I just covered. Depending on where the company operates, the practice and regulations may be in different stages of development. But as governments make pledges to reduce emissions and to address climate change, they are developing supporting policies. And these policies often include tax as a carrot and a stick. There may be tax incentives to encourage green behavior and green technologies, and also tax costs and penalties to discourage behaviors and technologies that add harmful emissions. Governments are also using sustainability tax measures to raise revenue and fund important policy objectives. As governments are doing this, in turn companies are developing their own sustainability objectives and compliance regimes. At a high level, many in-house tax departments support their company’s sustainability objectives to find tax savings, to mitigate risk, to reduce resource consumption, and generally to reach their sustainability and social goals. The tax department can support these areas by creating tax policies and also engaging in planning and advisory activities that include finding incentives, credits, and grants that help the company’s sustainability initiatives or perhaps donate to other private and public social programs outside of the company. Tax departments can also help by running financial models based on tax legislation and regulation to see what jurisdictions or activities are most advantageous to the company. Even tax transparency is a lever that can be used to show a company’s social responsibility as to paying its “fair share” of taxes. Therefore, voluntary tax disclosures can be used to help tell the company’s ESG story. It can be as small as the tax section of an ESG or sustainability report, or it could be as big as disclosing the company’s total tax contributions worldwide. This is really where the tax department can lead on telling the tax story for the company and influence the greater ESG story.

Additionally, there may also be a larger role to play from a compliance or governance standpoint, depending on the industry of the company or where it operates and does business.

Levin-Epstein: According to your research, where’s the typical tax department on this ESG journey?

Hawkins: We’ve seen tax departments at various stages across the spectrum of this ESG journey. We recently asked thousands of in-house tax professionals whether they were “significantly” involved in their company’s ESG activities, and we only found a handful who characterized themselves that way. We have heard that many corporate tax professionals are too busy with the fires that are burning right now and don’t have time to think about what ESG-related legislation is coming, or how it may be clarified upon further regulation. And others have been involved in analyzing and complying with green tax credits and incentives for years, long before they were considered part of a company’s ESG strategy or story, and therefore consider this work “business as usual” and not under an ESG umbrella. On the other side of the spectrum, there are in-house tax departments who are a part of their company’s ESG fabric. They are part of workstreams to consider how best to implement and leverage ESG rules and regulations that involve tax. They are consistently working with cross-functional teams to create internal and external ESG reports, and they influence the company’s ESG policies where appropriate.

Levin-Epstein: What advice would you give corporate tax professionals who want to get started in this area?

Hawkins: Likely most of your members and most corporate tax professionals already have a deep understanding of the industry in which their company plays. If not, they should dig in to better assess what issues are most material to their company’s ESG story from a tax perspective. They can assess what their peers are doing around ESG reporting by reviewing publicly available financial and sustainability reports. Corporate tax professionals can also review tax-related sustainability reporting standards to understand at the very least the types of issues that standard-setting organizations consider relevant. Corporate tax professionals should also identify and reach out to the person in the company with the primary ESG remit. This could be a director of ESG, a compliance officer, a sustainability officer, or even the communications or marketing departments. Create a relationship with whoever “owns” the ESG story and work to understand what their remit is. Ask how the tax department can play a role. Getting up to speed on ESG now will benefit corporate tax professionals in the long run. While there are certainly political overlays to ESG, and some may believe that, at least for the United States, ESG focus may go away with a different administration, it’s important to note that a lot of corporate ESG activity is primarily driven by the market and not the regulators. Therefore, it’s likely here to stay in some form or another. Many companies have found that the reputational risk of doing nothing is just too great.

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