ESG stands for environmental, social and governance and refers to a set of standards used to measure an organization’s environmental and social impact. It’s typically used in the context of investing, although it also applies to customers, suppliers, employees and the general public.
ESG is an acronym that stands for environmental, social, and governance. Environmental factors refer to an organization’s environmental impact and risk management practices. The social aspect refers to an organization’s relationships with stakeholders.
Corporate governance refers to how the organization is led and managed like how leadership’s incentives are aligned with stakeholder expectations, and what types of internal controls exist to promote transparency and accountability on the part of leadership.
The main characteristic of ESG is how social impact expectations have extended outside the walls of the company and to supply chain partners, particularly those in developing economies where environmental and labour standards may be less robust.
Much of the focus among ESG proponents has been on environmental factors, and rightfully so. This focus includes six objectives as defined by E.U. Taxonomy Regulations:
Relevance of ESG
The social aspects of ESG go beyond making products or services accessible to different groups in society. It also goes beyond providing employment to all individuals, no matter their gender, race, religion, etc. While these things are important they do not fully encompass what it is to be socially responsible.
The social impacts include the outside world though and it also includes how the employees of the company are treated and how well they are taken care of. Maternity leave, sick leave, vacation time, pay equality, and so on- all of these things affect both the employees and their families as well as how they interact with society.
ESG known widely as “climate risk” or “environmental, social, and governance”, is a concept of non-financial reporting that provides valuable insights into the company’s internal controls over its financial reporting.
The world is facing new challenges on creation of true value for companies today and companies are changing business models, adopting sustainable strategies that are both profitable and inclusive of all stakeholders.
It is at this point that ESG is gaining importance as it provides information to stakeholders, thus giving them the ability to assess the quality of its business practices and corporate responsibility in a way that used to be exclusively in the hands of management.
Tax Transparency and ESG
In 2019, Business Roundtable ( BRT ) released a new Statement on the Purpose of a Corporation, signed by 181 CEOs of American firms who committed to lead their companies for the benefit of all stakeholders—customers, employees, suppliers, communities, and shareholders. ESG advocates believe that companies that adapt to changing socioeconomic and environmental conditions are better positioned to see strategic opportunities and create competitive advantages over less ESG-focused enterprises.
ESG standard setters have called for greater public disclosure around tax governance and payments. In 2019, the Global Reporting Initiative (GRI) issued GRI 207, setting standards for the reporting of tax governance, control and risk management – as well as for public CbCR that includes disclosures of profits, employees and taxes on a per country basis.
There is a newly approved directive in the EU which will require member countries to bring public CbCR legislation into force by mid-2023 and the rules will become applicable in 2024, meaning that the first reportable year, for calendar year taxpayers will be 2025, with reports due 12 months after the balance sheet date. Additionally, there is a proposal in the US that would mandate public CbCR, however, it is unclear whether this will be approved.
An ESG score is used to track a company’s ESG performance, providing greater visibility into its operations for investors, stakeholders and regulatory bodies. Organizations that provide more robust ESG reports typically score higher, whereas those that don’t track or showcase their ESG performance will often have a lower ESG rating.
The Task Force on Climate-related Financial Disclosure (TCFD) is an organization that provides a set of recommended climate-related disclosures that companies and financial institutions can use to inform shareholders. Similarly, the Sustainability Accounting Standards Board (SASB) has helped establish and maintain industry-specific standards to guide the disclosure of organizations’ sustainability information.
Impact of ESG on Corporate Tax Departments
The corporate tax departments will be expected to play an increasingly important role in determining ESG standards. While creating effective tax governance the company should review and align the tax strategy with the corporation’s sustainability strategy, which itself should include elements of the U.N.’s Sustainable Development Goals.
Volunteering information such as a list of risk management initiatives or tax contribution figures is worthwhile. And it should, of course, be in alignment with the corporation’s overall approach to transparency. Willingness to adhere to both the law and society’s unwritten rules as it relates to corporate tax.” The overall risk management efforts of the corporation and the corporate tax department should include factors such as environmental and social issues that impact the business.
Conclusion
The COVID-19 pandemic quickly exposed the fragility of companies’ supply chains, health and financial services, as well as the climate itself. In the face of uncertainty, scholars grew concerned that companies would deprioritize their ESG initiatives to stay afloat. And while this was the case in some instances, an interesting discovery was made: companies that had strong ESG performance were better equipped to weather the pandemic as they had already accounted for the possibility of disruption.1
It’s a powerful reminder that ESG is more than just metrics, regulations and frameworks. At its core, ESG is an actionable way to measure progress and take steps towards a more sustainable future.
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