In today’s business climate, it’s not enough to simply generate a strong bottom line. Many companies aim to meet Environmental Social Governance (ESG) criteria.
To satisfy these criteria, an organization must meet certain benchmarks when it comes to sustainable initiatives and reporting. But what often gets left out of the equation is the intersection between ESG and taxes. This article will explain the overlap between tax and each component of ESG criteria.
What Is ESG?
Environmental Social Governance (ESG) criteria have become something of a measuring stick for evaluating a company’s ethical soundness. ESG policies relate to how well a company cares for the environment, offers transparency in its financial reporting, or pursues diversity and inclusion in its workforce.
For rising generations of investors, these values are paramount. Many investors are eager to put their money where their values are, so to speak, and existing shareholders may be quite vocal about their expectation that a company pursues sustainability.
Tax and Environmental
How does corporate taxation intersect with the “environmental” side of ESG? Consider the following:
In some industries, companies may have to pay additional taxes for engaging in activities that are environmentally damaging. Likewise, tax breaks may be available for those who engage in activities intended to preserve the environment.
This arrangement may be particularly relevant to those in the energy sector, though any company may encounter these taxes when seeking to manage environmental risk.
Carbon offsets are just one of the ways that companies can mitigate their impact on the environment. A company calculates how much carbon they emit through waste and then seeks to offset this amount through other initiatives or by purchasing “carbon credits” that equate to the amount of carbon they generate.
In most cases, these carbon credits can be used as tax deductions.
Some companies may be eligible for certain green incentives, such as the electric vehicle (EV) incentives that apply to companies that use electric or hybrid technology for their commercial vehicles.
Companies that take advantage of these incentives may enjoy a lower tax payment, as well as the ability to communicate their compliance to their shareholders.
Tax and Social
The “social” dimension of ESG relates to the workplace culture itself. Here are two ways that today’s companies are expected to meet certain benchmarks:
First, how is your organization treating its employees? To satisfy ESG criteria, you’ll generally have to ensure that you provide adequate pay as well as a comprehensive benefits package that includes health insurance, a retirement plan, and more.
Additionally, companies are gaining traction by offering further flexibility to their workers, giving them a chance to work from home when the need arises, as well as opening their doors to independent contractors and others who take part in today’s “gig economy.”
Naturally, these trends have a direct impact on your payroll taxes, but the benefits you provide can give you tax breaks when paying your corporate income taxes.
Equality matters in today’s workplace, and this means that your workers should be paid a fair wage regardless of race, gender, or sexual orientation.
In recent years, there’s been increased scrutiny of the compensation differences men and women experience. Companies must ensure that they provide women the same opportunities as their male counterparts, and this includes the salaries and benefits that they receive.
Tax and Governance
Finally, companies aiming to meet ESG criteria must pay attention to the area of “governance.” Specifically, organizations must pay attention to the following areas:
Tax Reporting and Shareholder Communication
Shareholders are taking an increasingly active role in the way a company is run. To satisfy ESG criteria, you’ll want to pursue maximum transparency throughout all of your financial processes, and this includes the way you report your taxes.
In other words, while this transparency won’t change your tax liability, ESG criteria demand that you share with your stakeholders the amount of taxes that you pay each year.
Similarly, companies must enact certain process controls and compliance management systems to ensure that they operate in good faith.
The right system can mitigate your overall tax liability, even as you enhance your ability to satisfy the criteria listed above. This overlap means that the system that keeps your company running efficiently can also reduce your overall tax burden, which is good news for your employees and shareholders alike.
An Evolving Landscape
Keep in mind that even though ESG criteria have attained great popularity, they are still relatively new. American businesses should therefore anticipate that these criteria will continue to evolve, which highlights the continued need for adaptability in today’s business landscape.
Still, it’s clear that a new day has dawned, one where environmental and social ethics matter just as much as the company’s bottom line.
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