ESG stands for Environmental, Social, and Governance. It refers to a set of criteria used to evaluate a company’s performance and sustainability practices.
Environmental factors consider the company’s impact on the natural environment, such as its carbon emissions, waste management, and resource conservation.
Social factors focus on the company’s impact on society, including employee welfare, community engagement, and diversity and inclusion.
Governance factors assess the company’s leadership, transparency, and ethical practices.
2. ESG and tax
Increased stakeholders are demanding visibility over tax footprints of the multinationals.
As stated earlier, countries have started levying several forms of environmental taxes/ levies. Carbon-pricing measures (like carbon taxes and the carbon border adjustment mechanism) is amongst one of them.
Carbon tax rates worldwide as of April 1, 2022, by country (in U.S. dollars per metric ton of CO2 equivalent)
Other variants of taxes like plastic taxes
– Europe Green Deal, also known as FitFor55, where the continent expects to reduce carbon by 55 % in 2030 also includes revision in the energy taxation directive
Tax incentives and tax credits:
Governments around the world have recognized the importance of incentivizing sustainable practices through tax policies.
Tax incentives are provided to businesses that adopt environmentally friendly technologies, invest in renewable energy, or promote social welfare initiatives. For example, investing in renewable energy projects may make a company eligible for tax credits and incentives.
For ex:
R&D tax credit of 12% to 13% for certain climate-related investments in the UK.
Production-linked incentives for solar PV modules in India.
Tax Reporting and Transparency:
Transparent tax reporting builds trust among stakeholders and enhances a company’s reputation as ethical and socially responsible organization.
Companies with robust ESG profiles and tax strategies that align with sustainability goals are more likely to attract investment and enjoy long-term stability.
Country-By-Country Reporting
Country-by-country reporting (CbCR) was introduced as part of OECD’s base erosion and profit shifting (BEPS) initiative. The Country-by-Country Report provides aggregate data on the global allocation of income, profit, taxes paid, and economic activity among tax jurisdictions in which a company operates. Several companies have started voluntarily making CbCR publically available.
International Tax Cooperation for Sustainable Development
International tax cooperation is vital for promoting sustainable development globally. Multinational companies operate across borders, and their tax practices can have significant implications for ESG and sustainability efforts.
Collaborative efforts among countries to combat tax evasion, profit shifting, and base erosion ensure that companies contribute their fair share to society. International tax cooperation also helps prevent harmful tax practices that could undermine sustainable development goals.
3. Considerations For Organisations From A Tax Perspective To Align With ESG
