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NB. This article is part of our recent publication, Tax: An Investor Guide.
Sebastien Akbik is a Governance Specialist at Principles for Responsible Investment (PRI), where promoting tax responsibility and transparency is one of his focus areas. He led an investor group on responsible tax to help investors integrate tax-related issues into their ESG practices and worked across various markets on policy engagement and advocacy relating to ESG issues, such as tax transparency.
Starting off with a broad question, why should investors care about tax?
As ESG becomes more mature, and as the responsible investment movement becomes more mature, we can’t afford not to look at tax. From a risk management perspective, if you’re not looking at tax, you might be missing out on some key risks that the business might be facing. Companies whose profitability is overly reliant on artificial tax structures are unsustainable, volatile, and vulnerable to regulatory changes. Aggressive tax planning may indicate poor governance, excessive short-term focus, or a higher propensity for risk tolerance, which can spill over into other areas of business. Conversely, when it comes to the businesses that do have responsible tax practices, I think it’s fair to properly reflect this commitment in their ESG credential assessments as it bolsters their social license to operate for instance. Another risk to consider is that aggressive tax practices shift the tax burden to other businesses and individuals, and they can lead to an underfunding of essential public services such as infrastructure and education. All of these consequences are harmful for diversified investors, as their returns also depend on the overall health of the economy and the key infrastructure that underpins it.
How is tax linked to ESG?
Tax plays a significant role in ESG. Companies that promote ambitious ESG goals but fail to address their tax practices send mixed messages. Transparency about tax behaviour is fundamental to demonstrating the genuine integration of sustainability into the business strategy. Furthermore, regulations like OECD Pillar 2, which establishes a global minimum tax, and frameworks like the SFDR increasingly include tax in sustainability agendas. Governments and stakeholders are placing greater focus on tax practices, driven in part by post-pandemic deficits and a push to end the “race to the bottom” in corporate taxation.
For responsible investors, I think one of the key reasons to look at tax and managing tax risk are the SDGs, the Sustainable Development Goals. For any investor looking into ESG, it’s clear that they should look at tax and the tax profile of their investments, because we’re not going to achieve the SDGs without stable tax systems and tax revenues.
What role can engagement play in promoting responsible tax practices?
Investors have a range of tools that they can use. They can submit questions at AGMs, they can file proposals, they can send letters to company boards, and they can make public their expectations. Simply having publicly available expectations on responsible tax practices sends a strong signal to companies. We can align our expectations with frameworks like GRI 207, the B Team Responsible Tax Principles, the PRI’s recommendations, and so on. All of these standards, frameworks, and guidelines are very aligned when it comes to expectations for companies on tax.
Since tax is a complex issue, engaging companies can be very effective and, when there is a lack of disclosure, essential. It’s very rewarding for investors as well, because when you look into a company’s taxes, you really get to the core of the business model and get a better understanding of the company and how and where it creates value. By engaging with policymakers, investors can advocate for stronger tax transparency requirements, such as public CbCR.
What are examples of successful engagement on tax?
PRI coordinated a collaborative engagement from 2017 to 2019, and I think it was a very useful engagement to educate investors and equip them to have more robust dialogues with companies. One of the things that I think was positive about that engagement is that investors were able to exchange notes and insights on how to best engage, and challenge, companies. I think we’ve been able to derive a lot of learning from that engagement. What was good about the engagement was that we did not wait to have the perfect expectations, set of questions, KPIs, or frameworks to start a dialogue with companies – because otherwise, we would have waited for a very long time. Engagement also provides the opportunity to test expectations, frameworks, and the KPIs that you’re using to assess companies and refine them over time.
When it comes to sovereign engagement, PRI engaged with the EU when they were considering CbCR; the Australian Treasury, who recently adopted a CbCR reporting regime similar to that of the EU; and the Financial Accounting Standards Board in the U.S. to request more information on income tax disclosures under the U.S. Generally Accepted Accounting Principles (GAAP).
Another example – although it’s not collaborative engagement – is an initiative that has been very helpful in providing a template for how we can influence companies. The French Sustainable Investment Forum (SIF) did this; for three years, they asked a question on tax to some of the largest companies in France. I think that was very helpful in making sure companies got the same message and understood that tax was on the agenda.
How is investor engagement on tax evolving?
Investor interest in tax is growing, driven by regulatory developments such as the SFDR in the EU, which mentions “tax compliance”. Early efforts focused on transparency, like CbCR, but now investors are moving toward deeper analyses of tax practices, including uncertain tax positions and effective tax rates.
Collaborative engagement is also becoming more prominent. Platforms like the PRI’s Tax Signatory Reference Group and initiatives like Shareholders for Change allow investors to pool resources, align strategies, and send unified messages to companies. Such efforts have proven effective in driving change, as seen in coordinated engagement on tax transparency with major corporations.
What challenges remain in advancing responsible tax practices?
One challenge is ensuring data availability and granularity. While tax transparency has improved, there’s still room for more sophisticated analysis of companies’ tax practices to assess their practices. We could look beyond transparency and more into the data – really understanding the different tax rates that we could use and having some sort of red flag system, perhaps adapted to specific industries and geographies as well. We should also incentivise and engage data providers to make tax a key part of their assessments.
Another challenge lies in encouraging companies to not only disclose data but also explain it. Investors and stakeholders value qualitative narratives that contextualise tax data, addressing any seemingly suspicious elements. However, there’s a lot that we already know. So, like with many other issues, trying to look for the perfect data will be a secondary concern. We can be humble when working with companies and tax directors, but we don’t want companies to assume we don’t know what we want. We know ultimately what we want, so we’ve got an angle.
Finally, there’s the complexity of defining responsible tax practices. Unlike clear-cut and quantifiable goals in climate action, tax involves navigating nuanced issues like balancing tax efficiency with ethical responsibilities. The focus should remain on creating consistent frameworks and incentivising companies to integrate responsible tax behaviour into their broader ESG strategies.
