To drive sustainability, companies need to define what sustainability means to their business based on stakeholders’ expectations. They also need to develop an ESG framework and regularly communicate ESG performance to stakeholders.
Tax material to sustainability
Regulators have started to use tax as a mechanism to influence ESG-related behavior, including carbon and environmental taxes. As ESG tax policies evolve, companies are likely to face greater uncertainty. Therefore, many leading companies today consider responsible tax management as a material sustainability issue.
Likewise, a company’s ability to manage its tax risks is one key area that investors look at when it comes to assessing ESG performance. To attract investors, companies will need to communicate their tax strategy as part of their risk management and sustainability plans. Lenders will also consider a borrower’s tax risk — specifically whether the company’s creditworthiness is likely to suffer due to new tax transition policies.
On the regulatory front, it is important for businesses to be aware of the various forms of carbon and environmental taxes so that they can be fully compliant in the face of such tax exposure. Proactive companies will be on the front foot in navigating the regulatory environment. For instance, several companies in Singapore already put in place their own internal carbon pricing mechanism, even before the carbon tax was introduced by the government. Consequently, these progressive companies are already shielded from impending regulatory changes, and will be more competitive when they go to market as they would have achieved a level of efficiency that would limit their tax liability.
Close monitoring and keeping up-to-date with the tax regulatory environments — from the introduction of new environmental or carbon tax laws to tax incentives and credits available to companies — is important. To this end, the global EY Green Tax Tracker can serve as a useful tool to help companies keep pace with the various sustainability incentives, regimes and taxes.
While there are many ESG-related risks for corporates to navigate, they should also look for opportunities to burnish their ESG credentials. Companies that demonstrate better management of their ESG risks will be better placed to bolster their reputation, manage tax costs, attract more investments and unlock long-term value.
Summary
Companies can drive sustainability by defining what it means to their business with stakeholders’ expectations in mind, developing an ESG framework and communicating ESG performance to stakeholders regularly.
They also need to keep abreast of tax regulatory developments as non-compliance can impact investors’ assessment of their ESG performance. Better ESG risk management can help companies lower costs and attract more investments.
