In an era of increasing social awareness, ESG (environmental, social and governance) is not a “box ticking” exercise. A shift in focus to ESG is led by a genuine desire to make a difference and, as a result, we are seeing more SMEs working towards developing their organisation’s ESG values. A large part of this is outlining significant long-term values/measures that an organisation aims to take within a given time frame.
While these long-term goals for ESG targets are valuable for your reputation as an ESG-conscious business, have you considered how your tax footprint could help to support this? When it comes to finding clients, recruiting new employees or attracting investors, a consistently healthy tax footprint could be just as beneficial in solidifying the long-term plan for how you will reach specific ESG values.
Today’s Tax Tuesday focuses on how to reframe perspectives on your business’ tax obligations to understand how they can support your commitment to ESG values.
What is ESG?
ESG, which stands for environmental, social and governance, refers to how a business interacts with the environment and society around it, as well as the durability and transparency of its governance. A commitment to the framework allows stakeholders to decide whether an organisation aligns with their own values before becoming involved with them. In this context, ‘stakeholder’ can refer to investors, clients or potential employees – any individuals or bodies that support your business’ success.
So, how does ESG relate to my business’ tax obligations?
In recent years, there has been increased media attention drawn not only to the ESG values of organisations, but also to how compliant they are with tax obligations. This can, of course, differ depending on the nature of your organisation, and different factors will influence which areas of your tax footprint will need to be most transparent for increasing stakeholder trust.
There are several environmental tax measures designed to encourage companies to consider the impact that their operations have on the environment, and therefore operate more sustainably. It’s inevitable that altering the way your organisation functions, for example by reducing the amount of plastic packaging used, cannot be done overnight. However, compliance with the Plastic Packaging Tax, alongside a public commitment to reducing single-use plastic consumption, will help to support your reputation as an ESG-conscious organisation.
Your organisation’s tax compliance and transparency makes up a large part of the social aspect of ESG. Taxes are used for the maintenance of society, such as the NHS, education and infrastructure – ensuring that you comply with all your organisation’s tax obligations can demonstrate your financial contributions to the communities that you are involved with. This will help to maintain stakeholder trust in your business. Furthermore, if your compliance slips – prompting a tax investigation – this could damage your reputation significantly as an organisation, as well as leading to penalties.
Since 2016, there has been a requirement for large businesses (those with a turnover above £200 million and/or a balance sheet over £2 billion) to publish their tax strategy for each financial year. The tax strategy verifies the integrity of the business’ operations, outlining current and future plans for tax governance across the organisation. By sharing how the tax strategy is executed, the business demonstrates the durability and transparency of the organisation’s governance, which contributes to public confidence in the business. As the importance of ESG increases, we may see a trickle-down effect requiring SMEs to provide similar levels of transparency.