ESG has become a vital component to business, with increasing scrutiny on companies to achieve sustainability-related goals. Join us as we examine how to add value to your ESG agenda through the latest global tax and ESG developments.

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Environmental, social, and governance (ESG) considerations are now wielding an increasing influence over corporate strategies and investment decisions. Many businesses now have a stated carbon reduction target, and most governments have committed to economy-wide targets aimed at moving towards net-zero emissions.

Organisations could benefit significantly from understanding the role tax plays in adding value to these goals. For instance, many organisations are already bearing the costs of existing environmental taxes. By understanding what these costs are, and why, can help define clearer strategies aimed at diminishing both these costs and, as a result, your organisation’s environmental impact. 

“These taxes are mostly above-the-line operating costs on inputs to supply chains, including plastic, landfill, forestry-use, transportation, energy and, of course, carbon emissions. And there are more taxes coming.

The extent to which a business can absorb them or not depends on foresight and your organisation’s place and power in a supply chain.” Nicolas Alegria, Lead partner, Tax consulting, Grant Thornton Chile

This is most evident in industries such as transport or heavy manufacturing, but also applies to any entities that are actively making investments such as banks, private equity, and investment funds. For these organisations, it’s vital that any investment models and forecasts consider any future environmental tax burden on the organisations being invested into. 

Through conducting this form of horizon-scanning, tax can add significant value simply by understanding what is going to affect your cost base and implementing change if that impact is significant. However, tax leaders must also be involved with ESG at a high organisational level to enact the change required, and to demonstrate the value of this tax-centric forward-facing analysis. 

"There are more taxes coming. The extent to which you can absorb them or not depends on foresight and your place and power in a supply chain.” - Nicolas Alegria, Lead partner, Tax consulting, Grant Thornton Chile

"The more carbon tax you have already suffered in the supply chain, the less CBAM you should suffer at the border." - Dan Dickinson, Partner, Tax, and ESG and Tax lead, Grant Thornton UK

How will the CBAM influence the global economy? 

In isolation, the EU’s CBAM may help certain economies that already have existing carbon taxes in place when considered in isolation. The more carbon tax that has been incurred before a product reaches the EU border, the lower the CBAM you will have to pay. 

“From a UK steel industry perspective for example, it may be the case that exports to the EU start to look slightly more competitive given that the UK already has a relatively high carbon tax burden. But the carbon tax has been suffered and potentially will be passed through the supply chain, it’s just been incurred elsewhere rather than at the EU border.” 
Dan Dickinson, Partner, Tax, and ESG and Tax lead, Grant Thornton UK

Over time, certain organisations may look to push for global coordination on this, with recent OECD work already in this area. This raises the question of whether there will be a longer term move towards harmonisation, given both the importance placed on this issue by global governments and the potential for tax competition and inflationary impacts.   

Scanning the horizon for further value

When considering the impact of tax on ESG and the value it can add, there’s a clear need for organisations to conduct thorough horizon-scanning. Outlining what countries’ policies will impact your organisation’s direct cost-base, what costs are being passed on by suppliers, or even the cost-base of the entities you invest in, will allow you to develop a much more informed strategy around tax and ESG. You need to understand supply chains and keep a close eye on where policy appears to be heading in the key countries related to those supply chains. 

According to Dan Dickinson, Partner, Tax, and ESG and Tax lead at Grant Thornton UK, “this horizon-scanning must then be overlaid onto the environmental data that your organisation is already producing” He continues by stating that, “if you take carbon as an example, your organisation is likely already measuring emissions and actively looking to decrease them. You can overlay tax sensitivity onto that data to see how much tax costs might increase in the future due to carbon emissions.” 

Tax has an impact on every facet of an organisation’s ESG agenda, and this type of proactive approach will enable you to add the most value possible from a tax point of view. As tax leaders, the more involved you can get with ESG at your organisation, the earlier you can make an impact. 

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