Can tax be used to incentivise meaningful corporate environmental responsibility?
Recent research has shown that of 405 recorded extreme weather events, 70% of them were made worse by human-caused climate change. Around the globe, devastating and unpredictable weather events are becoming more common. Combined with rising air pollution and rising temperatures, they are evidence of the increasing urgency of the climate crisis. As a result, governments are setting ever more stringent targets to drive sustainability.
The COVID-19 pandemic has only served to add momentum and opportunity to rethink how the tax system can drive action.
The challenges of using tax to “fix” the environment
A recent article from PwC highlights three key challenges associated with using the tax system to incentivise meaningful environmental corporate responsibility:
- Societal expectations: from assets and investments to products and jobs, businesses are facing pressure from consumers, investors and wider society to show how they are addressing climate-related issues and policies.
- Developing tax systems: as governments rethink how taxes can be used to address climate change, CEOs and leaders need to reevaluate their strategies, risks, and business models.
- Approach to tax transparency, governance and reporting: as tax transparency frameworks evolve, businesses are grappling with designing and implementing their approach to tax transparency, aligned with their broader sustainability strategy.
Incentives and penalties for ethical business practices
With governments increasingly setting stringent targets to encourage businesses to reduce their carbon footprint and reach net-zero, their policies largely fall into two categories: incentives and penalties.
Incentives, including grants and tax credits, are often favoured by more progressive nations as they encourage business growth, entrepreneurship and foster innovation. However, incentives can be expensive - a potential hurdle for governments finding themselves cash-poor in the wake of the COVID-19 pandemic.
Arguably, punitive measures are less progressive, but they can be a source of much-needed revenue during tough economic times. On the positive side, a move towards stricter penalties creates an incentive for polluters to come forward and report accidental, yet criminal, environmental harm to local agencies. By reporting, they can enter into a legally binding agreement with the regulator which helps them to take steps to cease illegal activities which cause environmental harm.
Reputational damage: A more powerful motivator?
In our post-COVID world, environmental, social, governance (ESG) is proving to be a runaway-train with the investment market, and businesses are in danger of being left behind. Investment firms and private equity houses are putting ESG at the heart of what they do. But it’s not only for tax benefits.
In Q4 2021, Marks Sattin hosted a roundtable with risk, audit and tax professionals from leading financial service institutions, and the importance of ESG was a topic spoken about at length. For attendants, prospective tax incentives and penalties were not necessarily the driving factor for ESG trends, it was their reputation.
One leader in the session spoke about how unethical practices in their supply chain had diminished confidence of their young and socially conscious customer base, and it is now a business priority to restore faith and rectify the offending practices.
The consensus of the professionals present was that there needs to be a real push for auditing risk to reputation and compliance. However, there was a fear amongst attendants about the risk of being called out for being inauthentic, or ‘woke’ virtue signalling. And were they risking accusations of ‘greenwashing’?
Our network of tax, audit and risk professionals
Irrespective of tax incentives and penalties, the potential for reputational damage and negative perception from investors, the workforce and consumers is too great to ignore.
At Marks Sattin, we have a network of tax, audit and risk specialist recruitment consultants who can place talented professionals in your business to consult on environmental tax, and green fiscal policy. This, coupled with our experience crafting inclusive talent strategies, will help your organisation to make informed strategic decisions and take advantage of emerging opportunities.
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