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Corporations & Shareholders

Marrying ESG initiatives to
business tax planning
Environmental, social, and governance
(ESG) initiatives by businesses provide
investors, customers, employees, and
other stakeholders with insight into
a company’s position, strategy, and
performance on sustainability-related
topics. ESG focuses on how companies
prioritize and monitor key nonfinancial
areas that impact success and valuation
through effective governance structures
designed to manage the risks and Secretary-General Kofi Annan. Its mis- The coordination of federal
leverage the opportunities associated sion was the development of guidelines income tax and ESG principles
with ESG matters. Companies must and recommendations on how to better As ESG matters grow in relevancy,
now focus on how ESG initiatives integrate ESG issues into the current public support, and government regula-
affect their financial performance, business environment. The areas cov- tion, there can be no doubt that they are
market position, and ability to execute ered included asset management, secu- integral to an organization’s bottom line.
strategy. A key component, especially rities brokerage services, and associated When one assesses an entity’s financial
as stakeholder interest and disclosure research functions. At the same time, performance, tax liabilities and effective
requirements increase, should be tax the “Freshfields Report” (Freshfields tax rates are often areas of focus. But,
policy and planning. Bruckhaus Deringer, A Legal Framework while not reflected in the ESG acro-
for the Integration of Environmental, nym, tax elements are central to each of
ESG background Social and Governance Issues Into Insti- the ESG principles, too. Consider the
The ESG landscape covers overlapping tutional Investment (2005)) revealed numerous federal income tax credits and
environmental, social, and governance that ESG issues are also relevant for incentives, whether existing, extended,
topics that must be addressed to ensure financial valuation. These two reports or newly introduced, that align with
a company’s future success. ESG com- formed the backbone for the launch of ESG topics. The impact this legislation
ponents include: the Principles for Responsible Invest- has on taxpayers cannot be understated.
■ Environmental concerns, including ment, a United Nations-supported Environmental behavioral tax incen-
climate risk, emissions, energy organization that encourages investors tives and credits aimed at addressing
efficiency, air and water pollution, to incorporate ESG considerations into greenhouse gas emissions and reme-
waste management, and clean their investment decisions. diation, renewable energy, and energy
technologies; Today’s ESG is no longer just a efficiency (discussed below) are crucial
■ Social concerns, including working buzzword resulting in the ticking of to businesses because they reduce tax
conditions, labor relations, diversity boxes on a checklist; instead, ESG is a liabilities, but they also drive more
and inclusion, human rights, and tax set of standards used to assess a com- sustainable behavior. A growing number
and other contributions to com- pany’s behavior by socially conscious of businesses are acknowledging that
PHOTO BY TWENTY47STUDIO/GETTY IMAGES 2005 in a milestone study, Who Cares the impact their investment portfo- to their communities and build public
investors. Until recently, most investors
proper ESG tax planning provides a
munities; and
■
made decisions without considering
Governance concerns, such as
mechanism for companies to contribute
oversight of ESG matters, board
lio might have on the environment,
diversity, risk tolerance, business
trust as a responsible corporate actor.
society, communities, or the overall
ethics, information reporting, and
Tax governance must now evaluate tax
strategy along with business objec-
well-being of stakeholders. However,
tax strategy.
a significant and growing number of
tives and stakeholder communications
As a term, ESG was coined in
around tax reporting.
investors are now considering these
“Stakeholders” means those who are
Wins. This report was compiled based
impacts as part of their decision-
on the request of United Nations
February 2023 7
www.thetaxadviser.com making process. most important for the success of the