A fiscal policy is essential for Environmental, Social and Corporate Governance strategy.
The Sustainability Accounting Standard Board (SASB) recently issued the first sustainability accounting standards to help entities around the world identify and monitor financial impacts of ESG criteria, and also to help communicate these results to stakeholders. Some prominent companies already implementing SASB standards are Gap Inc., Medtronic, Bloomberg, JetBlue and Verizon. In Latin America, several companies have taken the lead to provide benchmarks in terms of sustainability reporting, such as Banco Do Brasil, Natura, CMPC and BRF.
In a global context, the attention companies devote to sustainability continues to grow as a response to requirements demanded by consumers, consumer behaviour, the path indicated by SDGs and different government policies, and also the importance that financial markets have placed on ESG.
Among the institutional investors enforcing ESG criteria are: Norges Bank Investment Management’s fund, which excludes investment entities that do not comply with its ESG regulatory framework; and the Strategic Investment Fund of Ireland, which integrates ESG factors among its Irish portfolio.
The government investment and regulatory authorities of France, the Netherlands and the UK have proposed regulations that require institutional investors and asset managers to publish reports on all their investment policies, defining the integration of ESG criteria, tax strategies, risk management, and their perspectives on fiscal planning.
The OECD Action Plan on Base Erosion and Profit Shifting (BEPS) is also a catalyst for increasing tax transparency. BEPS addresses many aspects of tax planning, including the search for international treaties, the implementation of measures to tackle tax evasion, improving the consistency of international tax rules, and ensuring a more transparent tax environment.
The Role of the CFO in ESG strategy
In our dynamic international context, where markets are evolving towards new forms of responsible and impactful investment, the CFO (or the Chief Tax Officer) has a key role in defining the tax aspects involved in a firm’s overall ESG strategy. Some considerations for this can be:
- Aligning the fiscal strategy with the company’s sustainability strategy, which in turn must include elements of the UN Sustainable Development Goals (SDGs). Taxation plays an important role in achieving SDGs as it provides governments with the necessary funding.
- Increase transparency, accountability, and include environmental and social issues in your current and future risk profiles. For example, provide information on initiatives to manage the tax risks of each entity, which consequently would adjust the company’s general approach to transparency of its corporate strategy.
- Have a practice of tax integrity, which can be defined as “the will to comply” with both the law and the implicit rules of society with respect to Corporate Taxes.
As part of due diligence, investors might consider the following:
- If the entity has a tax risk policy or declaration.
- If the entity includes fiscal risk as part of the risk oversight function of the Board of Directors.
- If there is the fiscal function of the entity, endowed with professionals with the appropriate competencies.
- If the entity uses complex tax structures.
- If the Effective Tax Rate (ETR) seems reasonable, both by jurisdiction and as a whole.
A tax strategy that proactively provides accurate tax risk management and includes environmental, social and governance considerations can better position the company as an integral member of the societies, markets and countries in which the company does business.
The International Business Council of the World Economic Forum (IBC) recently included tax information in its proposal for ESG metrics and disclosures. They mention that an organisation could report on its contribution to prosperity for equitable and innovative growth of societies through the effective and responsible fulfilment of its fiscal strategy. This strategy is in line with SDG No 1: End poverty, No 8: Decent work and economic growth, No 9: Industry, innovation and infrastructure, and No 10: Reduction of inequalities and others.
All these make clear the relationship between the roles of companies, taxation, and their relationships with society through ESG criteria.