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ESG’s Greatest Champion Talks Tax Transparency And Reporting

Eelco van der Enden, the brand new CEO of the World Reporting Initiative, discusses the rising environmental, social, and governance panorama and why tax is a obligatory and essential a part of ESG reporting.

This transcript has been edited for size and readability.

David D. Stewart: Welcome to the podcast. I’m David Stewart, editor in chief of Tax Notes Right this moment Worldwide. This week: tax and ESG.

Environmental, social, and governance efficiency, also called ESG, has turn into more and more essential. Buyers, staff, and the general public are fascinated with what firms’ ESG actions seem like and the transparency ESG reporting supplies. 

As multinationals broaden their ESG reporting, there have additionally been requires expanded transparency in tax reporting, particularly because it pertains to the social metric of ESG.

What does the intersection of tax and ESG seem like? What sort of ramifications would elevated tax reporting transparency have?

Tax Notes contributing editor Nana Ama Sarfo will focus on extra about that in a minute. 

Later within the episode, we’ll have Tax Notes State columnist Steve Wlodychack focus on his article on current state passthrough entity tax laws.

However first, Ama, welcome again to the podcast.

Nana Ama Sarfo: Dave, thanks a lot for having me again.

David D. Stewart: Now, I perceive you lately spoke with somebody about tax reporting and ESG. Might you inform us about your visitor and what you talked about? 

Nana Ama Sarfo: Sure, so I spoke with Eelco van der Enden, who’s the brand new CEO of the World Reporting Initiative (GRI). GRI is a global ESG normal setting group. It truly produces the world’s most generally used ESG reporting requirements.

van der Enden, who took his publish in January, is a really thrilling selection for CEO as a result of he’s a dyed-in-the-wool tax practitioner. He beforehand was a tax accomplice at PwC, and he helped write GRI’s reporting normal for tax, which is a public country-by-country reporting normal.

We spoke a bit about his imaginative and prescient for GRI. GRI approaches reporting from a stakeholder financial imaginative and prescient, which is that multinationals needs to be accountable to all stakeholders, not simply traders, but additionally their staff and the communities by which they function.

He mentioned why public tax disclosures are so essential in a stakeholder financial mannequin, and in addition tendencies he’s seeing within the tax reporting house like multinationals greening their tax reporting. He additionally talked about what’s at stake for multinationals in the event that they fail to be clear about their tax exercise, and in doing so, type of lose the general public narrative.

David D. Stewart: All proper. Let’s go to that interview.

Nana Ama Sarfo: Eelco, thanks a lot for becoming a member of us on the podcast.

Eelco van der Enden: Thanks for having me.

Nana Ama Sarfo: Are you able to describe for our listeners, those that aren’t accustomed to the GRI, just a little background about its sustainability reporting framework?

Eelco van der Enden: GRI was based in 1997 in america to supply companies with a framework of reporting requirements on social and environmental subjects. In these days the place there was the massive oil spill in Alaska, there was social unrest, and what worldwide accounting and monetary accounting requirements didn’t present for was a transparent framework to report one’s social and environmental endeavors in such a manner that it will create comparable knowledge for wider society.

That, for GRI, is extraordinarily essential as a result of our goal is mainly to supply assist for influence reporting, to have an open and clear dialogue on subjects that have an effect on society as an entire. It is local weather, it’s socioeconomic cohesion, and all of the subjects which are aligned.

Why do we expect that is essential? As a result of the world doesn’t solely exist for capital markets and traders themselves, however it additionally exists for a broader humanity and humankind as it’s.

What GRI sometimes does, and what GRI supplies, is a framework for what the consequences are of enterprise endeavors in pursuing their methods on the atmosphere and on society as an entire.

Now, what can we see in growth in terms of sustainability reporting? ESG and sustainability turned family definitions of late. There’s this dialogue round and concerning the alphabet soup that there are such a lot of organizations coping with sustainability and ESG that there isn’t a clear image anymore as a result of it is muddled with these many, many acronyms.

Let me demystify the alphabet soup in terms of sustainability reporting. There are solely two normal setters that cope with ESG as a typical. That’s the Sustainability Accounting Requirements Board (SASB) that now has been included within the Worldwide Sustainability Requirements Board (ISSB), which is a sister group of the Worldwide Accounting Requirements Board underneath the umbrella of the Worldwide Monetary Reporting Requirements basis on one facet.

On the opposite facet, you will have the European Monetary Reporting Advisory Group that’s answerable for setting ESG requirements and obligatory sustainability requirements for Europe. They’ve this co-creation settlement with GRI.

What’s the large distinction between them? That’s extraordinarily essential to know, particularly when it additionally involves tax, which is an S social matter in ESG.

Initially, ISSB is about monetary reporting. It is about monetary materiality. It’s meant for traders and shareholders. It drives monetary data, the enterprise worth reporting of the reporting entity.

What’s the European initiative? What’s GRI all about? It’s what we name “double materiality.” It isn’t the monetary results of the reporting entity. No, it’s its impact on local weather and society, which has a distinct lens, however that is logic as a result of they’ve a distinct viewers they handle.

GRI Europe is a wider viewers society, whereas the target of ISSB or SASB is traders.

Are these two competing forces? No, they aren’t competing forces. They strengthen one another. They need to drive in the direction of a company reporting atmosphere on a worldwide scale that’s primarily based on two pillars. Then you will have a whole image the place you will have the monetary pursuits and societal curiosity being reported on equal footing, whereby and solely then, it is possible for you to to assert that we’re shifting from a shareholder capitalistic-centric mannequin to a stakeholder capitalistic-centric mannequin.

What do I imply by that? I do not just like the phrase “capitalistic.” I like a “stakeholder-centric financial mannequin” as a result of that is the place we’re shifting to. If you happen to wouldn’t have the two-pillar method with monetary and sustainability reporting at equal footing and equally essential, you can not converse of a stakeholder-centric financial mannequin.

Everybody agrees that monetary knowledge is essential for traders. Therefore the introduction of obligatory, worldwide accounting requirements for listed firms to supply traders with comparable knowledge. It was in these days of shareholder-centric mannequin, whereby the thought was that the only real accountability of enterprise is making revenue on behalf of its shareholder. It’s completely fully logical to introduce obligatory monetary reporting to allow these traders to make correct validated selections on comparable knowledge.

If we now declare, as lately Larry Fink of BlackRock Inc. did, that we’ve to maneuver in the direction of stakeholder-centric financial mannequin — and never solely BlackRock is claiming that, but additionally the World Financial Discussion board and Worldwide Enterprise Council — then will probably be very bizarre to not have a reporting normal that’s there to feed the wants of the society that the stakeholder-centric financial mannequin tries to assist.

You possibly can’t have a stakeholder mannequin with out sustainability reporting on behalf of society. If reporting could be in contrast as a coin, these are the 2 sides: the monetary reporting and the sustainability reporting. That is precisely the second half, the sustainability reporting, that GRI does. It has carried out so over the previous couple of years fairly efficiently.

Nana Ama Sarfo: About 5 years in the past the GRI board determined to create a public reporting framework for tax, which known as the GRI 207 normal. GRI 207 is essential as a result of it’s the first international reporting normal for country-by-country tax transparency. You co-wrote that normal if you had been a accomplice at PwC, so I’m hoping which you could stroll us by that course of.

First, why did the GRI board resolve that tax is essential for ESG reporting? What are a few of the most essential components of that normal, and why had been they included?

Eelco van der Enden: Initially, the initiative to draft a typical on tax was taken by U.S. personal fairness companies. It was not nongovernmental organizations. It was U.S. traders that reached out to GRI to say that they needed to see extra detailed data on tax, as a result of it instructed them one thing concerning the threat urge for food, concerning the high quality of the earnings themselves, and concerning the hyperlink between the sustainability coverage firms have and tax, whether or not there was a hyperlink in, let’s name it the administration of tax habits in terms of social subjects.

There have been numerous the reason why these traders had been fascinated with getting extra data on the market. The requirements board of GRI, which is the group inside GRI that takes care of the usual setting and growth processes and the upkeep technique of the requirements, determined to place collectively a group of specialists that turned the tax technical committee. I used to be kindly invited to affix that as a consultant of intermediates, on this case, the massive audit companies.

We began to debate some subjects that we thought could be attention-grabbing for a multi-stakeholder group to take discover of. Many mentioned that with such a delicate matter as tax, this may not be potential, however they had been folks out of the tax communities that mentioned that.

In actual fact, one of many points is that I believe that many tax folks oversensitivize tax as a subject. It isn’t that delicate. In actual fact, after a 12 months and a half, we had been carried out, which is kind of quick, the place all contributors within the committee signed off. Then the primary draft was despatched for public session.

In December 2019 we got here out with it and the official launch was on the London Inventory Trade in January 2020. We had been reasonably shocked by the voluntarily uptake of many, many massive multinationals to certainly embrace this normal.

Why is that this normal then so appreciated? As a result of it supplies a platform to supply comparable knowledge. That is essential to traders. That is essential to society; that they’ll evaluate likes for like.

GRI is the world’s largest sustainability normal setter. It has been endorsed by the OECD and by the United Nations. Why ought to I not use the GRI 207 normal once I use GRI already for all the opposite issues that I am reporting?

There’s greater than 10,000 firms that use GRI. The pickup has been fairly excessive already. Whereas the one 12 months that we mainly ask, in case you are a GRI reporter, please begin utilizing 207 from 2021, which was final 12 months, however already earlier than many began to make use of them.

Additionally, if you take a look at or have discussions with boardrooms, with audit committees, with CFOs, as a result of it’s a actual normal, there was this big due course of behind it with this multi-stakeholder atmosphere of execs out of assorted constituencies which were drafting this.

Nana Ama Sarfo: I believe that overview was so fascinating to listen to the background behind how this tax normal began. I did not notice that U.S. personal fairness companies had an enormous hand on this. However then additionally to listen to that it moved from that sector right into a extra multidisciplinary dialog, I believe may be very attention-grabbing and really useful to know.

Now, as you had talked about, the GRI requirements typically and 207 have witnessed a extremely nice adoption, however I believe we even have to take a look at the opposite facet of the coin, which is that the concept firms have this public accountability to share their tax knowledge shouldn’t be universally accepted.

Through the years, we have seen some main multinationals resolve to publicly share their tax knowledge, however then others have been reluctant, citing enterprise confidentiality. What’s at stake right here if firms aren’t clear about their tax exercise?

Eelco van der Enden: Tax is simply one other matter. Allow us to be completely sincere. With all introductions of latest reporting requirements, you should have folks that can include the evergreens of why to not report. There are at all times people who say, “Nicely, the burden is simply too heavy. We do not prefer it, blah, blah, blah.”

Why do I believe that isn’t completely true? Why would some organizations attempt to push again on this or do not need to report on it? There could be numerous causes. There are additionally very reputable causes.

In some international locations you aren’t allowed to reveal an excessive amount of data on sure contracts. We all know this from China and the Ivory Coast. You simply can’t publish it. However you need to take a look at this by a broader enterprise technique lens.

In case you are a big enterprise and you’ve got an ESG coverage and your ESG coverage is mainly the engine that lets you decide to attaining the sustainable growth targets that everybody on the planet signed as much as, and all massive enterprise signed as much as, how do you do it? We glance extra on the atmosphere. We glance extra at social subjects and we glance extra at governance.

If in case you have a coverage round that, then how does tax work together with that? If you wish to be extra clear past what you’re legally obliged to do within the monetary reporting, and you’ve got endorsed, otherwise you use SASB requirements or GRI requirements, then why would not you report on tax?

As a result of tax is an ESG metric, not as a result of I say so or as a result of the World Financial Discussion board mentioned so of their 2020 report. One of many 22 core metrics to report on is tax. So what would then be the rationale? What sort of knowledge would yield extra enterprise secrets and techniques than, for instance, the technical explanations on the way you cut back your carbon emissions, which is on the core of your manufacturing processes?

Additionally bearing in mind that tax knowledge could be extracted from annual monetary stories filed at Chambers of Commerce with a little bit of effort, you are able to do deep dive in unstructured knowledge, et cetera, et cetera. If in case you have this imaginative and prescient on sustainability and stakeholder-centric mannequin, why would you exclude tax? You already know that society’s fascinated with tax and tax positions.

I imply, we’re ending the COVID-19 pandemic that has price states a whole lot and trillions of thousands and thousands of {dollars}. Earlier than the massive monetary disaster, we’ve seen that there are some large issues to cowl. We now have points on local weather. We now have massive demographic points. This all must be taken care of by civil society and by governments, for which they want, in fact, tax.

They need to see what contributions are by companies on behalf of society, and never on a consolidated foundation, but additionally mainly within the communities the place you use. You don’t solely present that data as a result of Tax Justice or Oxfam is shouting off the roofs that it isn’t truthful or no matter. No. You need to share that data as a result of your suppliers, your shoppers, the communities you use in, your staff, they’re fascinated with that data.

What’s so delicate to not present that knowledge? To some, there’s a very deep, politically rooted aversion to supply greater than past what’s legally obligatory. I respect that as a result of if that is your view on how issues ought to work, then that is your view on how issues ought to work. I am not making an attempt to say what morals of others needs to be. However if you happen to wouldn’t have this political conviction that offering knowledge on tax is improper by itself, then you must have excellent arguments why to not present that data.

As a result of in terms of enterprise secrets and techniques, the key mainly you cope with in tax principally is why you’re paying what you pay, and never a lot on secret formulation or aggressive worth mechanisms.

Nana Ama Sarfo: I believe you raised some actually, actually nice questions as to why multinationals may oppose this and why their opposition won’t make a variety of sense.

Now, I do suppose that the present debate over public tax disclosures feeds right into a a lot bigger dialogue concerning the type of financial system we must always have, which is some extent that you just raised earlier.

Ought to we’ve a stakeholder-centric financial system or a shareholder-centric financial system, which proper now appears to be the predominant mannequin? Is tax transparency roughly essential in a single mannequin versus the opposite?

Eelco van der Enden: I believe in each fashions it can be crucial. Let’s not overlook that by far nearly all of multinational firms play an especially truthful tax recreation. Completely. They don’t have anything to cover. There’s nothing to cover. I imply, they’re a very truthful contributor to society with jobs, investments, and their tax contributions. In each fashions, it can be crucial, and I name {that a} “neoliberal tax paradox.”

By not paying tax as an thought to maximise your revenue over time, you will note a variety of worth destruction of your group because the atmosphere you use in will be unable to assist your enterprise. It is shortsighted. That is why I just like the 207 normal, as a result of it clearly reveals what a stakeholder-centric financial mannequin means and what society does for an organization and what an organization does for society. They’re two sides of the identical coin.

Nana Ama Sarfo: Now, you had talked about that the majority multinationals are working above board. They are not partaking in severe tax evasion, avoidance, or something like that.

Provided that, why do you suppose that there’s this persistence to carry up tax as this valuable factor that can’t be revealed? That it is best for the tax group to find out what needs to be disclosed as a substitute of simply adhering to those frequent ESG requirements?

Eelco van der Enden: The explanations we hear are generally easy and really operational and really all the way down to Earth. Typically it’s not that individuals do not need to do it, however they are saying, “We simply wouldn’t have the capacities to begin this up. We wouldn’t have our techniques in place to draw that data and course of it simply. It should imply an funding and I’m already understaffed.” Additionally it is generally an operational factor.

In relation to year-end closing, there’s a merger, there’s an acquisition, there’s some case or an investigation by tax administrations. These departments are stretched and burdened after which suppose, “Oh my God, then I additionally must have a GRI 207 report back to publish. The place the hell do I discover folks to do it?”

That is mostly a purpose we hear very often, which then once more, in fact, that’s an curiosity of traders. It tells you one thing concerning the stage and the standard of your inside controls and the effectivity of the way you handle your group. However it’s a first step.

The second we generally hear is that individuals simply haven’t any clue that it does exist, they usually do not perceive the idea of sustainability reporting, monetary reporting, monetary materiality, or double materiality. These ideas aren’t very well-known within the tax group, for which you can not blame them as a result of they’re principally specialists that perceive and do an excellent job in following the legislation.

That is one thing a bit extra holistic, maybe not that concrete. There’s not a variety of interplay between civil society and the tax group. That is additionally as a result of very technical nature of tax. That’s one.

The opposite one is that some firms simply do not need to disclose as a result of they’re afraid that there might be a variety of turmoil available in the market or by the general public after they present data. All these firms which are reporting underneath 207 needed to take step one and like, “Oh my God, what’s going to occur after we go reside?” Now, not one among them bought damaging feedback on the stories themselves or had been crucified within the press for publishing the knowledge.

There have been firms that had discussions with some NGOs on whether or not it was sound or not sound enterprise to have a hub on the Virgin Islands or that was certainly aggressive tax explaining, however at the very least they’d a debate on information and never on notion.

This concern aspect for a lot of seems to be fully unfaithful, and now they love publishing it and doing it, particularly the tax departments. They like it as a result of they’ve extra grip and get extra understanding for what they do.

However then as at all times, you will have additionally some organizations, who’re actually the minority, which have such aggressive tax constructions that after they come into the open, they are going to have a severe debate with society and shareholders and traders like pension funds on, let’s name it, the ethical acceptance of the constructions in sure circumstances. However that can also be a query of time, of rethinking your communication and your tax technique to convey it extra according to your ESG technique.

Nana Ama Sarfo: That is nice to know. I additionally respect you mentioning the ideas of the materiality and double materiality, as a result of that segues into my subsequent query for you.

As you’re very properly conscious, there’s been a variety of dialogue concerning the idea of materiality and ESG reporting. That’s, how do firms outline or determine materials data that needs to be disclosed? The GRI believes that materiality is double, that it’s each monetary and nonfinancial. Within the tax world, what precisely does double materiality seem like?

Eelco van der Enden: Take a look at GRI 207. It isn’t solely the monetary knowledge on a per-country foundation, but additionally your technique, your threat administration, and your engagement with society. If you happen to take a look at numerous pockets and items in the UK, submitting your tax technique is already a authorized obligation. That half is already there. Your threat administration and management framework.

If you happen to fall throughout the scope of a cooperative compliance mannequin of horizontal monitoring sort of issues, you need to have your tax management framework in place in any other case it is not going to work and you’ll not get your ruling or your settlement with the tax administration. That is the second pillar of 207.

The third one is your stakeholder engagement, or what do you disclose, what your cell actions are, your relationships with NGOs, what your views are on tax as part of society, which most firms have already included in a company communication stuff. Then it is concerning the tax knowledge itself. These are nonfinancial metrics, in fact, as a result of it isn’t on the stability sheet or in your revenue and loss. It is only a story behind the way you handle it, after which, in fact, you will have per-country knowledge that offers perception in what you say in case your technique certainly is true.

It doesn’t develop in a single day as a result of firms reside our bodies that continually change and transfer. That is why the story behind the info can also be essential. You possibly can have a really low tax fee for an excellent purpose. You possibly can have a really excessive tax fee for a really dangerous purpose. It’s simply explaining to society.

That’s the double materiality of 207. It’s exterior simply the monetary reporting whereby monetary materiality can also be outlined as a monetizable threat of a sure magnitude that would have an effect on your rising concern.

Nana Ama Sarfo: To shut, the creation of the GRI 207 normal was a really high-profile activity, however now you will have an much more high-profile job as the brand new CEO of the GRI. I am hoping which you could share for our listeners a few of your targets for advancing tax transparency within the quick and lengthy phrases.

Eelco van der Enden: The strategic goal in three phrases: alignment, alignment, alignment.

We should align with the ISSB. We should align with the Worldwide Federation of Accountants (IFAC), and we should be sure that we can have a complete set of company reporting requirements that each tackle monetary in addition to sustainability subjects, ideally in a worldwide framework.

All the things that’s potential to cooperate with ISSB and IFAC is one thing we’re pushing and pursuing. That’s what we name this two-pillar atmosphere, this two-pillar technique. That’s a very powerful activity I believe I’ve to make that occur.

On a extra operational viewpoint, as a company, it’s discovering the means certainly to keep up, assist, and make higher extra requirements on some subjects that society — and society is, by the way in which, politicians, and huge companies, and different constituencies that ask us to make and draft. The a part of discovering the means and the folks to assist our group to develop the usual setting, that’s the second most essential matter.

In relation to tax, there’s certainly an incredible uptake of the 207 normal. What I want to see is that international locations don’t reinvent the wheel. There’s a examined, confirmed tax transparency normal. I hope the EU is not going to begin to redesign or rethink its personal reporting requirements underneath public country-by-country reporting, or that the OECD will add to base erosion and revenue shifting 13, and issues like that. There’s a normal. Simply use it. It’s free to make use of, it’s examined, it’s broadly revered, and properly used. So simply do it.

Nana Ama Sarfo: Nicely, Eelco, this has been a very pleasing dialog, and thanks for shedding some gentle on this very dynamic world of ESG reporting and the way it interfaces with tax. We’re actually grateful to your time and thanks a lot for approaching the podcast.

Eelco van der Enden: Thanks very a lot. I am certain we’ll meet quickly once more.

David D. Stewart: If you happen to’d prefer to be taught extra about van der Enden’s ideas on ESG and tax, you may take a look at Ama’s article, “New GRI CEO Shares Imaginative and prescient on ESG Tax Disclosures.”



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