Marrying ESG initiatives to business tax planning.

• Author: Shodhan, Pinky

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 leverage the opportunities associated with ESG matters. Companies must now focus on how ESG initiatives affect their financial performance, market position, and ability to execute strategy. A key component, especially as stakeholder interest and disclosure requirements increase, should be tax policy and planning.

ESG background

The ESG landscape covers overlapping environmental, social, and governance topics that must be addressed to ensure a company's future success. ESG components include:

* Environmental concerns, including climate risk, emissions, energy efficiency, air and water pollution, waste management, and clean technologies;

* Social concerns, including working conditions, labor relations, diversity and inclusion, human rights, and tax and other contributions to communities; and

* Governance concerns, such as oversight of ESG matters, board diversity, risk tolerance, business ethics, information reporting, and tax strategy.

As a term, ESG was coined in 2005 in a milestone study, Who Cares Wins. This report was compiled based on the request of United Nations

Secretary-General Kofi Annan. Its mission was the development of guidelines and recommendations on how to better integrate ESG issues into the current business environment. The areas covered included asset management, securities brokerage services, and associated research functions. At the same time, the "Freshfields Report" (Freshfields Bruckhaus Deringer, A Legal Framework for the Integration of Environmental, Social and Governance Issues Into Institutional Investment (2005)) revealed that ESG issues are also relevant for financial valuation. These two reports formed the backbone for the launch of the Principles for Responsible Investment, a United Nations-supported organization that encourages investors to incorporate ESG considerations into their investment decisions.

Today's ESG is no longer just a buzzword resulting in the ticking of boxes on a checklist; instead, ESG is a set of standards used to assess a company's behavior by socially conscious investors. Until recently, most investors made decisions without considering the impact their investment portfolio might have on the environment, society, communities, or the overall well-being of stakeholders. However, a significant and growing number of investors are now considering these impacts as part of their decision-making process.

The coordination of federal income tax and ESG principles

As ESG matters grow in relevancy, public support, and government regulation, there can be no doubt that they are integral to an organization's bottom line. When one assesses an entity's financial performance, tax liabilities and effective tax rates are often areas of focus. But, while not reflected in the ESG acronym, tax elements...