Businesses must bring ESG targets into focus or risk viability

Businesses must focus on environmental, social and governance (ESG) concerns in 2023 as they become increasingly key to viability, tax professionals say.

Tighter regulations, stricter compliance and demands from stakeholders are combining to put ESG at the top of the agenda just as surveys highlight how much ground business has to make up.

More than 44 per cent of small businesses have failed to devote any time or resources to ESG, according to CPA Australia’s Asia-Pacific Small Business Survey. 

Recent research by PwC revealed growing concerns among consumers, stakeholders, investors and employees that businesses improve their ethics and integrity. More than 60 per cent of individuals now based purchases decisions on sustainability criteria with many prepared to pay more for ethically sourced products. 

At the same time, the study found that action by ASIC and the ACCC on greenwashing would force businesses to meet the claims they make or face possible legal action. 

“We expect to soon see many more legal and regulatory actions relating to ESG claims and performance in Australia, including more shareholder resolutions filed by bodies such as the Australasian Centre for Corporate Responsibility and other investors,” said PwC. 

“Companies should ensure that any green claims are clear and able to be substantiated, as this will be an enforcement focus for Australian regulators going forward.” 

“As well as demanding greater translation of ambition to action and genuine transparency, consumers and investors will also be asking about the quality of ESG actions.” 

PwC’s report also found businesses needed to have a greater focus on their supply chain not only for security and resilience as magnified during the COVID-19 pandemic but also for ESG goals. 

The ever-growing regulations regarding ESG have meant firms must be aware of the sustainability strategies of their supply chain with scope three emissions forcing businesses to take responsibility for their entire supply chain. 

“Sustainability in supply chains will be a key criterion for investment decisions over the next decade as investors increasingly seek evidence of integrity, circularity, and alignment with frameworks such as the Equator Principles and UN Sustainable Development Goals,” said PwC’s report. 

“In 2023 we anticipate that the demand for reporting of scope three emissions will rise, as will expectations to reduce them – a challenging area for many.” 

“Moving towards lower carbon supply chains is a critical priority in any organisation’s attempt to reduce its overall footprint.” 

BDO’s advisory partner Aletta Boshoff said the increasing regulations such as the incoming International Sustainability Standards Board (ISSB) framework would force businesses to focus on scope three emissions, which meant small firms would be pressured by those in their supply chain to tidy up their carbon footprint. 

“The introduction of mandatory sustainability disclosures will be a game-changer for Australian companies, giving them a clear picture of what they need to achieve and report,” said Ms Boshoff. 

“If mandatory reporting is coming to the big end of town, when they do their carbon footprint, and they look at scope three, which are the suppliers, they will expect suppliers to reduce their footprint in order for the big end of town to reduce their total footprint.” 

“So if the SMEs are not reducing their footprint, the large end of town can’t reduce their footprint because the SMEs are captured in the scope three often, so I don’t think SMEs can avoid it, they’ll have to get on the front foot in order to stay suppliers for a lot of these large entities.” 

Acting deputy commissioner at the ATO, Faith Harako, said tax was “the silent T in ESG”. 

“Paying tax is one way for individuals and businesses to contribute to the wellbeing of our communities. For businesses, paying tax is therefore a critical (albeit indirect) aspect of their social contribution and contract to operate within the community (the S),” said Ms Harako in a speech at the recent International Tax Administration Conference in Sydney. 

“Put another way, a company that avoids its compulsory contribution to S has not truly achieved its ESG framework, no matter how much voluntary contribution it boasts.”

“Taxes are also used by government to fund infrastructure and services directed at reducing environmental damage and promoting environmental protection. The tax contribution of businesses will therefore have a similar indirect contribution to their environmental performance and sustainability within the ESG framework (the E).”

Ms Harako said for businesses to accurately meet the G in ESG they had to achieve tax compliance as it reflected proper governance within a firm. 

“Corporate tax governance is a very important component of the G in ESG,” she said. 

“Having a well-designed and effective tax governance framework that is lived in practice provides a strong foundation for boards to be confident that tax risks are identified and managed, and the organisation is complying with its tax obligations.” 

“It reduces the likelihood of inadvertent positions being taken due to errors or risky positions being taken which are inconsistent with the company’s risk appetite (or indeed their desire to contribute to the S).”