As businesses navigate the relatively new landscape of environmental, social, and governance (ESG) issues, the focus on ESG legislation in the United States continues to intensify.
To date, the ESG-related strategies among companies have primarily been a voluntary effort fueled by increased pressure from investors and other stakeholders. That, however, is poised for change. Risk and compliance teams may soon find mandated ESG activities in their fold as the call for new ESG legislation heats up.
What are the latest ESG laws?
In the first half of 2021, President Biden issued several climate change-related executive orders, such as E.O. 13990 and E.O. 14030, and stated, “Together, we must combat the climate crisis with bold, progressive action that combines the full capacity of the Federal Government with efforts from every corner of our Nation, every level of government, and every sector of our economy.”
Also in 2021, the Securities and Exchange Commission (SEC) announced the creation of a Climate and ESG Task Force in the Division of Enforcement, and proposed rule changes that would require businesses to make certain climate-related disclosures.
In October 2021, The Financial Stability Oversight Council (FSOC) released a new report on climate-related financial risk that recommends new actions on climate change data, disclosure, and scenario analysis.
ESG laws in 2022
Additionally, the U.S. Department of Labor (DOL) released a final rule in November 2022 under the Employee Retirement Income Security Act (ERISA) that enables retirement plan fiduciaries to consider climate change and other ESG factors when making investment decisions and exercising shareholder rights such as proxy voting.
And, in Europe, new ESG reporting requirements in the European Union (EU) require large companies to publish regular reports on the social and environmental impacts of their activities. This is expected to impact U.S. businesses that fall within the scope of the new EU rules.
Clearly, there are a lot of moving parts and, in many respects, more questions than answers as companies and firms navigate upcoming changes. What is clear is that ESG issues are shifting from a voluntary-led effort to a mandated one.
What does this new ESG legislation mean for tax?
Given the call for greater reporting and transparency, tax must become part of a company’s sustainability objectives going forward, if it isn’t already. They must be prepared and able to comply with new ESG legislation.
According to the 2022 BDO Tax Outlook Survey, 53 percent of tax executives surveyed said they believe they should be very involved in strategic conversations on their organization’s ESG program. Nearly half (49 percent) are already involved.
Advancing corporate tax transparency is a key ESG issue and, according to the findings, 95 percent of tax executives said their department played a role in developing tax transparency reporting programs. More than half said they have qualitative disclosures in place; just under half (44 percent) have quantitative disclosures.
That’s not to say that challenges don’t exist. In fact, according to the BDO survey, the greatest challenges facing tax executives regarding greater tax transparency reporting include data collection and analysis (62 percent) and lack of clarity on reporting standards (41 percent).
How can firms get started with ESG strategies and planning?
To help companies develop an ESG-driven tax strategy, consider the following steps to get started:
- Communicate the company’s tax priorities and educate all team members across the organization about the function’s principles through a written tax policy and strategy. Update it as needed.
- Establish a framework focused on strengthening risk awareness and transparently communicating governance activities to both internal and external audiences when appropriate.
- Begin thinking about quality data collection and analytic capabilities to help incorporate tax into ESG practices and strategy. Consider partnering with in-house IT functions or external consultants for help and support.
What is an ESG narrative and why is it important?
Communication about a company’s ESG-related activities is most effective when it tells a story. How are these activities creating value for society? For the economy?
Forming a narrative can be powerful and, in order to meet increased demand for ESG-related strategies, companies would be wise to incorporate ESG into their value creation narrative.
Consulting firm Prophet believes there are five storytelling essentials that companies must consider when developing their ESG narrative:
- Use individual storytelling touchpoints as opportunities to go deeper on one or two intersecting topics at a time.
- Know what your audience wants and expects. For instance, investors may desire facts and figures; employees and customers may better connect with stories.
- Be candid about the work that has yet to be done and the problems yet to be solved.
- Use language that will excite, inspire, and rally people around those efforts.
- As new events and social causes arise, companies must look for opportunities to authentically tie them back to their story.
The future of ESG legislation
With increased government considerations and heightened investor interest, ESG legislation continues to gain momentum. As companies navigate the complexities and look to ensure compliance, the role of ESG strategies and planning will become increasingly critical.
For more information on ESG accounting and reporting, read our blog that covers ESG accounting and what it means for auditors.