Sustainability is at the top of many, if not all, organizations’ agendas. With climate change bearing down on us and employees demanding that their organizations be more purposeful and sustainable,1 executives are keenly aware that, in a sustainable future, they must consider their (and their organization’s) role in being good stewards of our planet’s limited resources. While the overriding goal might be clear, the devil is in the details, and executives continue to work to understand how sustainability should be defined and what it means for their organization.
This is particularly true for an organization’s tax leadership. Unlike operational departments, the day-to-day activities of an organization’s tax team have negligible direct impact on an organization’s environmental footprint. However, tax does have a great deal to contribute to achieving an organization’s sustainability and environmental, social, and governance (ESG) goals, and tax leaders are increasingly aware that their teams should play a greater role in efforts to achieve these goals.
Typically, there are only three groups in an organization that work across its full scope: human capital, information technology, and tax.2 Of these three, only tax has experience in building a single coherent picture of how an organization’s resources are being deployed. This creates an opportunity for tax leaders to leverage their teams’ unique position and expertise to help the organization navigate the complex regulatory terrain of sustainability. Helping to untangle the Gordian sustainability knot can cement tax’s position as a team that uncovers insights into possibly the most important business issue today.
Sustainability is complex—there are no simple solutions. A well-intentioned intervention to address one problem might cause unintended problems elsewhere. Banning single-use plastic shopping bags, for example, can drive up consumption of single-use plastic garbage bags, undermining the intent of the ban.3 Or assumptions underpinning the intervention might not hold in practice, such as when the reusable bags designed to replace the single-use bags are not reused often enough to offset their larger environmental footprint.4
As a systemic problem, sustainability requires a systemic response. This is at odds with current practices that take a piecemeal approach, where sustainability targets are reduced to initiatives driven by various cost center. These initiatives are commonly managed as a single program or project portfolio under the mandate of an ESG executive (increasingly, a head of sustainability). However, buried within individual initiatives are assumed answers to important questions, such as, what is included and what has been excluded from the initiative’s scope? Will this initiative affect others across the organization or be affected by others? Are we solving the problem or simply moving it around? Interactions between sustainability initiatives, and with other ESG initiatives and an organization’s commercial goals, are hidden behind operational assumptions. Unintended consequences are common, as with banning single-use plastic shopping bags.
Creating sustainable organizations requires moving beyond this piecemeal approach to determine more holistic sustainability targets. Many organizations base their targets on regulatory demands, as regulation can be thought of as a social consensus on best practice. While regulation is an important tool for establishing consensus across industries and communities on suitable sustainability targets and strategies, reducing these targets to discrete initiatives driven by different cost centers also reduces complex and nuanced decisions to a single parameter: cost.
Consider steel production. We might see this as a simple process: Ore is mined in one location, transported to a second for processing into iron and then steel, and then onto a third where the steel is used to fabricate some component (a train wheel, perhaps), before finally being delivered to a waiting customer in a fourth location.
The intermediate steps in this process—ore refining, processing, and fabrication—have historically been located where labor costs are the lowest, as the cost of shipping between each location used to be negligible. Consequently, bulky ore might be shipped over a significant distance via ships that create substantial pollution. Ore processing and fabrication might be done in regions that rely on fossil fuels to generate electricity,5 by a workforce compelled to work in dirty and dangerous conditions, and without the environmental practices and safeguards required to ensure that processing is done in a sustainable and safe manner. Labor costs might be low due to lax workplace safety regulation or problems with local immigration practices that enable modern slavery.
A typical cost center–driven approach to sustainability would have an organization’s various operational groups attacking different parts of the problem: Human resources drafts a multinational labor standard that attempts to be both sensitive to local customs while also adhering to global modern slavery reporting standards, procurement requires all transportation suppliers to have carbon-neutral operations, and so on.
This is complicated by the disaggregated nature of modern organizations, which are better thought of as extended ecosystems than the monolithic entities that economist Ronald Coase envisioned.6 Key activities and decisions that affect an organization’s end-to-end sustainability performance are increasingly hidden behind partner agreements or sourcing contracts, spread across a wide range of geographies and jurisdictions. Organizations have less influence and control over, and visibility into, operations of the partners and suppliers that are part of their extended ecosystem.
The question then naturally turns to how we can unbundle an organization’s sustainability initiatives, uncovering the hidden assumptions and interactions and empowering decision-makers to weigh the various options before committing the organization to action.
An integrated approach treats complex issues such as sustainability in a holistic manner, where regulatory, commercial, and sustainability goals can be considered together rather than separately. In the steel value chain example above, a sustainable value chain will balance multiple factors against each other. While ore is necessarily mined where it is found, an organization’s decision on where ore is processed into iron and then steel must balance the environmental and social footprints of all the activities involved with steel production. Organizational leaders might choose to migrate ore processing to be closer to where the ore is mined, trading increased labor costs for decreased emissions from transport as processing reduces the volume of material to be transported. This might be balanced by preferring a location that is also close to renewable sources of energy, in a region with less problematic labor practices, and so on.
This approach encourages organizations to look at initiative portfolios in a broader regulatory and sustainability context and identify opportunities for collaboration with the government, industry players, and regulators to significantly improve the cost-effectiveness of sustainability investments. An integrated and holistic view of regulatory change transforms the agenda from compliance cost to value creation and organizational strategy. This has the potential to drive behavioral changes that help organizations, and eventually their industries, become more sustainable.
Many organizations are already seeking input from a broad range of stakeholders, both in and outside the organization, to better understand the sustainability implications of many quotidian decisions. In another example, a heavy machinery manufacturer developed targeted irrigation systems to help farmers adapt to water constraints.7 Incorporating sustainability data into product development empowered designers to evaluate the sustainability impacts of the materials under consideration and determine how they would support (or detract from) the company’s sustainability goals. The enabler for this approach is a coherent picture of the organization’s end-to-end sustainability and commercial performance.
Tax comes to the fore in such situations. Sustainability goals interact with an organization’s commercial goals within a framework developed and managed by the tax team. The final choice of an ore-processing location, as discussed before, might require the development of new partnerships or new capabilities, and reconfiguring a value chain will have tax and commercial implications that must also be factored in, such as transfer-pricing issues. Commercial goals and nonsustainability regulatory requirements must be balanced with potentially conflicting sustainability goals, as an organization only has so many resources that it can deploy, resources that are also subject to tax and industrial regulation constraints.
The tax function has a unique role, where it works across an organization’s entire ecosystem and integrates disparate data sources into a single coherent picture. Along with its experience with regulatory frameworks and regulators, this positions it as the natural group to create a single coherent view of an organization’s sustainability, compliance, and commercial goals, and performance.
Improving tax transparency is already on many organizations’ agenda. What isn’t is how the systems renovation required for tax transparency can also help an organization work toward its sustainability goals. While tax already holds responsibility for determining the structure of initiatives and their reporting obligations, broadening the function’s remit to include reporting on an organization’s sustainability data streams helps generate a holistic view of the organization’s sustainability efforts, highlighting the trade-offs between initiatives and exposing the hidden assumptions. This holistic view also allows tax to use its wealth of experience in navigating complex regulatory landscapes and in working with regulators. In “attribute banking,” for example, sustainability approaches might be negotiated with and preapproved by a regulator rather than being developed on the run. In addition, as the world becomes more multilateral, less globalized, and more complex, tax’s expertise in franking credit predictions for future dividends, acquisition and divestment, and what-if scenarios to explore the transfer-pricing implications of supply chain reorganizations will be essential tools to understand the sustainability possibilities available to others in the organization.
For tax to do all this, tax leaders will need to improve their teams’ understanding of the types of projects on which their business is embarking as part of sustainability strategies. Tax leaders will also need to work with other organizational leaders because tax’s responsibility is separate from the responsibility for commissioning, funding, and coordinating all the organization’s sustainability initiatives. Many organizations are already investing in sustainability and ESG and hiring chief compliance officers (legal experts typically under the chief financial or information officer) to both manage an organization’s portfolio of sustainability initiatives and track the organization’s progress against targets, under the purview of a head of sustainability. Tax needs to develop a strong working relationship with this emerging ESG leadership: While tax brings access to data, an understanding of regulatory and reporting requirements, and a wealth of experience in modelling the consequences of various investment strategies, sustainability leaders bring insight into the sustainability options available to an organization, how to best structure an organization’s sustainability targets, and whether a given initiative can achieve the practical outcomes the company is seeking to achieve.
Tax can play a key role in helping organizations navigate the inherent complexity of sustainability efforts, as organizations grapple with the balance between their sustainability aspirations and the practical realities of achieving such aspirations.
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