The link between sustainability and tax will need to be stronger

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The limited time available to deal with the climate crisis has spurred an unprecedented flurry of new sustainability laws and regulations in a very short period of time. It has prompted companies all across the world to contemplate on how this affects them and how they can contribute to achieving the climate goals. Helene Geijtenbeek and Patrick van Min, Tax Partners at Deloitte, see that their clients are absolutely willing to take action. And yet, they do not make the connection with tax, or do not do so enough .

Once it is know what can be done, gains can be achieved in every department.

Sustainability has received more and more attention over the past years and its environmental, social and governance (ESG) factors even more so. Sustainability has long passed the stage of being just about the environment or the climate. Topics like a responsible remuneration structure, diversity, or an organisation’s data privacy are now being discussed, too.

Companies across the globe are contemplating on how this affects them and how they can contribute to achieving the climate goals. A crucial issue, since the latest scientific consensus shows we have about nine years to tackle the climate crisis and this has been a great incentive for the push towards the current flurry of new sustainability laws and regulations being drafted and implemented.

Helene Geijtenbeek has been in the business for twenty years but this ‘tsunami of laws and rules’ is something she has never witnessed before. She’s excited about it. ‘If we leave this to people’s good intentions or chance, we are not going to make it’, says Geijtenbeek. She has been involved in environmental sustainability and innovation for years and is an expert on incentives, tax incentives, energy taxes and local taxes. ‘It increases the sense of urgency, too, everyone feels now is the time to act’, says her colleague Patrick van Min, an expert on governance, responsible tax and tax transparency.

While their clients are absolutely willing to take action they do not make the connection with tax, or do not do so enough, according to Geijtenbeek and Van Min. ‘I often see clients focus on minor components of the overall ESG policy and then think it’s okay’, says Van Min. ‘Like companies that only focus on the environmental impact but fail to address governance, or vice versa. Many clients don’t seem to properly grasp the entirety of measures because they haven’t thoroughly explored them.’

Both Tax partners say there’s a world to be won if people would only know about the opportunities available. ‘There is a lack of knowledge about the connections between sustainability and tax’, explains Geijtenbeek. ‘Governance is often an obvious topic for companies, because it’s akin to more familiar themes such as responsible tax or corporate income tax. But people who know about the environmental and social sustainability benefits to be gained are few and far between.’

‘Take social sustainability, where responsible remuneration structures for CEOs and CFOs come to mind’, says Van Min. ‘The way you set up your bonus and remuneration policy has huge tax consequences.’

Many tax incentives tend to misfire, notes Geijtenbeek. ‘One of the questions we will ask a manufacturing company’s management is what investments they make to achieve cleaner processes. Their tax department subsequently gains a tax benefit that doesn’t flow back to the business itself .’ Geijtenbeek says this is why such incentives are often not applied for, even though they can make a tremendous difference for a business case.

If you can factor in the value of incentives in your investment decisions, you’ll be more inclined to make environmentally friendly investments.

In its effort to make Europe climate neutral, the European Commission has introduced a colossal package of legislative proposals. And there’s much more to come, stresses Geijtenbeek. ‘Consider things like guidelines on CO2 levies on houses and cars and a major expansion of the obligation for almost all European companies with more than 250 employees to keep ESG documentation. Although this will not be mandatory until 2023, companies should be preparing for this now. Sitting idle for the next two years means you’ll be too late.’ Van Min: ‘Starting on time will allow companies to check whether their current tax departments have enough expertise in-house, or whether they will need to hire new staff.’

In supporting companies in this, Van Min and Geijtenbeek have already started to discuss this subject with a few large companies. Apart from wanting to find out about the companies’ needs, they also want to expand their own knowledge about what is needed.

One thing is clear, sustainability and tax can no longer be seen as two different things.

Van Min: ‘The outcome of our conversations is one of the things we will be sharing at the TaxLab, Deloitte’s annual tax event, in September. It will be all about sustainability and tax this year. We will be showing what is needed in the coming years, the efforts we ourselves can make and what clients can already put into practice.’

Geijtenbeek: ‘Meanwhile we will soon know the new laws and regulations back to front, on top of which we will closely collaborate with various departments within Deloitte, including Risk Advisory, where they know everything there is to know about reporting on these subjects. ESG is not only a theme for the tax department, the whole company needs to know something about that.’

Their meetings are barely underway and Van Min and Geijtenbeek already see they are well worth the effort. ‘One of our clients said they are now thinking about putting the theme of energy and environmental taxation back on the tax director’s central agenda, rather than in the business of which it is traditionally part’, says Geijtenbeek. Van Min has similar experiences. ‘One client told me that our conversations about this gave them reason to review everything they do with ESG and tax within the company.’ It’s exactly how the tax partners envisage the future. Van Min: ‘It will take us just two years to put sustainability and tax on the map and help many companies to comply with everything they are required to do in this area.’ Geijtenbeek: ‘What’s more, every tax professional will be deeply aware of the subject of sustainability and tax because it will be part of their daily work.’