Tax in ESG

Over recent decades, there has been a gradual shift towards a new global commitment to Environmental, Social and Governance (ESG) standards – together with an emphasis on more rigorous reporting and accountability. Correspondingly, a commensurate realisation that there is a business imperative to address sustainability in the business arena. What that means today is that ESG standards have been integrated into mainstream finance, regulatory developments and corporate commitments to sustainability, as well as become central to standardised and accountable reporting.

South Africa proactively encourages ESG reporting and the adoption of sustainable operational practices. Sustainability can no longer be viewed as a fringe concern. Societal expectations have evolved and ESG has become more mainstream: it is recognised as a critical component of long-term risk management and value creation. Over and above enhancing a business’s reputation, its ESG profile can help enhance resilience, mitigate risk and improve return on investment (ROI).

A wide range of stakeholders are interested in the ESG profile of businesses:

Governments - in the form of ESG regulation
Investors - who are turning away from making non-sustainable investments and are starting to feel the financial impact of poor ESG decisions in the supply chain
Employees - who want to work for ethical companies, some of which are now having to make ESG-influenced decisions in-house
Businesses in the supply chain – who are required to calculate the impact of ESG on their upstream and downstream interactions
Customers - who want to give their money to businesses with values in line with their own and have become aware of the financial impact of ESG-blindness in their favourite brands.

Tax occurs in each element of the ESG agenda and tax leaders – and their consultants - are increasingly called upon to help businesses reach their wider sustainability-related goals. This means that ESG is on the board agenda for all businesses, from multinationals through mid-sized suppliers and private equity through to other investors such as high-net-worth individuals and family-owned firms.

Tax in ESG can involve compliance with environmental taxes or changing attitudes towards acceptable tax compliance behaviours; but, in all instances, it is vital that there is increased transparency and robust tax governance structures embedded in organisations to ensure tax policies reflect wider sustainability efforts.

Within the context of ESG, tax is viewed as a contributing factor to costs, a deterrent to undesirable economic behaviour and, in its purest form, a valuable contribution to society. The cost and deterrence factors of tax and levies are addressed below under Environmental taxes and Social taxes. The governance factor is also addressed in a separate section: ESG tax reporting and disclosure services.

Environmental taxes involve:

Compliance and reporting requirements
Net zero carbon emission initiatives
Taxes on carbon and plastic use
Green subsidies and incentives
Carbon adjustment mechanisms.

Social taxes involve:

Flexible workforce and global mobility
Equal pay and remuneration
Supply chain ethics
Ethical investments and purposeful business
Philanthropy
Paying a fair tax share
Transparency and disclosures.

Governance taxes are focused on:

Aligning ESG policy with tax behaviour
Tax reporting
Stakeholder communication
Process controls and compliance assurance programmes
Total tax contribution.

How BDO can help
You can read more about how we at BDO support the transition to a low carbon economy on our global sustainability microsite. From our commitment to net zero, through how we help our clients integrate sustainability into their businesses, to our full range of sustainability services, BDO provides guidance for every business to drive the sustainable future we all want to see.