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As businesses seek to address sustainability concerns, tax departments are getting increasing attention. As they well should.


In brief
  • Companies face mounting pressure to act on sustainability amid new ESG requirements.
  • Tax is often overlooked in sustainability strategies, despite its potential for funding and risk mitigation.
  • To achieve sustainability goals, leaders must recognize the role of tax and engage it strategically.

The pressure is rising

 

On the government and regulatory front, new ESG requirements, legislation and guidelines are coming into force with increasing frequency.

 

And from the ground up, growing voices from multiple stakeholders put pressure on companies to take action on sustainability measures – voices too loud to be ignored.

 

It’s no wonder that most C-suites feel a growing urgency to act. But they also feel uncertainty (if not trepidation) about how to formulate and follow through with a sustainability strategy. A common thread is the unfortunate reality that tax as a whole is often not a key part of ESG strategy conversations.

 

Moving tax from the back office to the boardroom

 

Tax can – and should – play a significant role in sustainable business practices … more so than most tax departments are doing today. And that applies equally to value creation and funding opportunities like the Inflation Reduction Act (IRA), as well as ESG risk mitigation and governance efforts.

 

Many tax departments are charged with understanding sustainability tax funding and how it applies to their organization. Still, organizations don’t connect tax with broader sustainability goals.

 

When it comes to funding, grants and incentives enacted into law, business leaders are often unaware that they may qualify. But this is tax’s sweet spot, including an awareness of the timing/process for disbursements. This means that the business may have access to money through credits and incentives to directly fund sustainability initiatives.

 

An upcoming EY Sustainability Tax Pulse survey of global tax and finance department leaders found that only 41% of senior tax leaders are “very confident” that their tax function has maximized its use of sustainability tax credits and incentives throughout the supply chain. The same study showed 94% of senior finance and tax leaders reporting that a lack of consultation leads to decreased tax credit eligibility.

 

Leaders should include tax as part of their sustainability strategy, having a voice in its planning early and often. It can make all the difference in achieving sustainability goals.

How tax policy can lead to tangible, sustainable progress

Governments around the world are using tax policy to incentivize investment in decarbonization and clean energy technologies, making tax an important tool in advancing the clean-energy revolution.

Globally, tax policy is being used to build and strengthen the market for clean energy technology and investment. The pressure is rising:

  • In the US, the IRA includes US$370 billion in tax incentives for climate change initiatives.
  • To the north, Canada announced planned legislation, including CA$80 billion in tax credits for clean technology over the next decade, with CA$25 billion earmarked for clean electricity.
  • In the European Union, one-third of the NextGenerationEU Recovery Plan’s
    €1.8 trillion in investments and the EU’s seven-year budget will go toward financing the European Green Deal.

Tax policy is key to transition. And that means that tax should have a seat at the sustainability table.

A question of survival...

Businesses should avail themselves of every available resource to bring resiliency and transition to sustainable operating models. Tax is one such resource: an important, tremendous and largely untapped resource in addressing sustainability issues.

… and an opportunity to excel

Three takeaways for including tax in your company’s sustainability strategy:

Summary 

Amid new ESG requirements, companies are under increasing pressure to prioritize sustainability. Governments worldwide utilize tax policy to drive clean energy investment. To successfully achieve sustainability goals, leaders should acknowledge the crucial role of tax and strategically incorporate it. Unfortunately, tax is often neglected in sustainability strategies, despite its potential for funding and risk mitigation. This oversight results in organizations missing out on valuable credits and incentives. By integrating tax into broader sustainability goals, companies can increase their impact and align financial incentives with environmental objectives.

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