As corporate tax activities increasingly are being integrated into companies' sustainability and ESG strategies, the new Tax Sustainability Index can help organizations align their tax practices with broader environmental and social goals
Corporate taxes are an important funding mechanism for the communities in which companies operate, helping to fund schools, roads and other public goods. This underscores the important role that a companies’ internal tax functions play in sustainability and environmental, social & governance (ESG) strategies.
To better help corporate tax leaders align their activities to sustainability goals, Suzanne Alcock, Managing Director of Tax Depreciation and ESG Tax Services at FTI Consulting, spearheaded an effort to develop a tax sustainability index.
The journey towards tax sustainability began for many companies as ESG considerations became more important with various stakeholder groups, Alcock says, recounting how initial internal discussions led to broader conversations with clients and partners and how they revealed a clear need for a more structured approach to integrating tax operations with ESG principles.
The result was the creation of the Tax Sustainability Index (TSI), a tool designed to help organizations understand and navigate the complex interplay between tax and sustainability.
Understanding the TSI and its use cases
The larger purpose of the TSI is to create a “tangible way for a tax department to really position itself, to understand where it sits in sort of a tax sustainability landscape. And then from there, it can be used as a basis to take the conversation to the boardroom,” Alcock explains.
The TSI itself is built around five pillars, each representing a critical aspect of tax sustainability:
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- Governance — This pillar emphasizes the importance of having robust governance structures in place to ensure that tax practices align with broader corporate values and ethical standards.
- Tax risk & planning — Here, the focus is on viewing tax as a consequence of business activities rather than a driver. This approach encourages companies to integrate tax considerations into their overall business strategy without letting it dictate business decisions.
- International compliance — This pillar addresses the necessity of paying the right amount of tax in the right place, reflecting the global nature of modern business while acknowledging the increasing scrutiny of tax practices by international regulators.
- Stakeholder engagement — Recognizing the growing interest in tax practices from a wide range of stakeholders, this pillar highlights the need for transparency and effective communication about tax strategies and their impact on society.
- Environmental impact — This pillar focuses on the role of taxes in supporting environmental sustainability efforts, including the use of environmental taxes and incentives to drive corporate behavior towards net-zero goals.
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The TSI can aid both tax departments and broader corporate leadership. For tax departments, it provides a tangible framework to assess their current position in the tax sustainability landscape and identify areas for improvement. It also facilitates strategic discussions with the board and other senior leaders, ensuring that tax considerations are integrated into the company’s overall sustainability strategy.
At the C-Suite level, the TSI helps chief sustainability officers and other leaders understand the critical role that tax plays in achieving sustainability goals. By highlighting areas in which tax practices can support or hinder these efforts, the TSI enables more informed decision-making and fosters a holistic approach to corporate sustainability.
Why stakeholder engagement has sparked need for new skills
One of the most notable shifts in the role of corporate tax departments is the increased emphasis on stakeholder engagement, in large part, because of the role that corporate taxes play in funding local communities. Historically, taxation was a private matter between the company and government tax authorities. Today, a diverse array of stakeholders — including employees, customers, non-governmental organizations, and investors — are keenly interested in how companies manage their tax affairs.
Engaging with many stakeholder groups with diverse perspectives makes necessary the development of a new skill set for tax leaders, who must now be adept at storytelling and communication to convey the rationale behind their tax strategies effectively. “It represents the impact of tax on the company and its external stakeholders, as well as how the external environment and stakeholders impact the tax department,” Alcock says. “Stakeholder engagement better represents the idea of considering all stakeholders and communicating with them effectively.”
Moreover, this shift requires tax departments to move away from a purely compliance-focused mindset and toward one that considers the broader social and governance implications of tax practices. This approach not only helps build trust and credibility with stakeholders but also aligns tax practices with the company’s overall ESG goals.
Transparency at the center of future tax governance
The future of corporate tax governance is likely to see increased focus on transparency, stakeholder engagement, and sustainability considerations. In the Europe Union, for example, there already is a strong trend towards the polluter pays principle, with thousands of environmental taxes and obligations being implemented. The EU is rolling out measures like the Carbon Border Adjustment Mechanism, which is being mirrored by other countries.
By contrast, the United States has taken more of an incentive-based approach, offering tax breaks for investments in renewable energy and other green initiatives. However, there is growing demand for tax transparency in the US as well, with new legislation like the Corporate Transparency Act coming into effect.
Looking ahead, politics will continue to have a major influence on corporate tax governance approaches across jurisdictions. However, there may be more push from the private sector to self-regulate and voluntarily adopt sustainability practices, rather than waiting for government mandates. In this case, multinational corporations will need to navigate differing rules across regions, as individual US states and EU member countries implement their own interpretations of broader tax policies.
No matter the geo-political implications, companies and their own internal tax functions will need to assess their own unique circumstances to figure out the appropriate tax governance strategy.
You can find more insight on the challenges faced by corporate tax departments here.
