Amid increased stakeholder pressure on environmental, social and governance (ESG) factors, tax transparency is now a major consideration for businesses striving to comply with regulations.
ESG is changing how organisations in Asia Pacific operate, select vendors, and make investment decisions.
According to Goldman Sachs, ESG policies in the region have doubled within the span of half a decade, and now contributes a significant 20 percent of global ESG policy.
Most recently, the Association of Southeast Asian Nations (ASEAN) released the ASEAN Taxonomy for Sustainable Finance, a roadmap for relevant stakeholders to promote the transition of activities in the real economy onto a more sustainable footing, as well as provide a framework for discussions.
In Singapore, the Singapore Exchange (SGX) recently announced its roadmap for issuers to provide climate-related disclosures based on recommendations of major ESG standards and frameworks.
And in Malaysia, the Joint Committee on Climate Change (JC3), co-chaired by the Securities Commission and Bank Negara Malaysia (BNM) and comprising of Bursa Malaysia and other industry participants, announced their support for financial institutions to make mandatory climate-related financial risk disclosures based on the Task Force on Climate-related Financial Disclosures-aligned (TCFD) Application Guide from 2024.
As a result, corporate disclosure has improved, with average ESG disclosure in most regional markets now in line with or exceeding that of the US — but still lag behind the EU.
While the topic remains high on the agenda for companies in a post-pandemic era, with some firms elevating ESG conversations to the boardroom and initiating strategy for compliance, only a small percentage have actually developed ESG frameworks and procedures rigorous enough for the demands of today’s economy.
Evidently, ESG decisions have material tax consequences. These are important to stakeholders and play a critical role in strategizing corporate changes, which necessitates companies in Asia Pacific to ask themselves how to adequately balance the needs of all their stakeholders.
Tax and ESG
There are no two ways about it, pursuing a responsible ESG tax policy is just simply unavoidable for board members across Asia Pacific today. With added pressure from clients, employees, investors, and other stakeholders, incorporating a tax perspective into ESG strategy builds stakeholder trust and demonstrates a commitment to value optimization, rather than mere profit maximisation.
The Deloitte 2022 CxO Sustainability Report revealed that 79% of executives (from 21 countries with 24% from Asia Pacific), see the world at a tipping point in response to the climate change issue, with 88% agreeing that immediate action can limit the worst impacts of climate change.
Thus, formulating an ESG tax policy necessitates a thorough analysis of the current ESG state and future targets. ESG reporting frameworks and their corresponding tax disclosures must be assessed.
Including ESG items in tax risk appetite statements facilitate an enterprise-wide, risk governance structure that improves the assessment of risk versus return as well as strengthens corporate risk awareness.
Organisations that have implemented an ESG-enabled GRC platform are already one major step ahead of the curve in being able to measure and report their ESG scores. At this stage, these organisations already have data gathering framework in play and it only comes down to filtering the ESG data into insights and intelligence from an existing GRC platform and measuring it against industry standards.
Regulatory Developments
There are more than 1,000 sustainable taxes across Organisation for Economic Co-operation and Development (OECD) member countries.
However, there are acute challenges that affect the viability of the regions ESG transition, namely a lack of and inconsistent ESG data across issues, ever evolving measurement and reporting standards and frameworks, as well as regulatory variability.
Within the region, there are several reporting standards and frameworks that have been implemented.
While the Global Reporting Initiative (GRI) offers overarching sustainability reporting standards aimed at all stakeholders, the Sustainability Accounting Standards Board provides sector-specific reporting framework focused on financial materiality and geared towards investors.
The regions other notable ESG standard is the Task Force on Climate- Related Financial Disclosures, which focuses on the financial impact of climate-related risk disclosure.
Organisations need to determine what information is required for their reporting. Sources of ESG data that may impact taxes include internal ESG, financial and operational systems as well as external data aggregators that provide publicly available data. Utilizing a technology solution that can aggregate and store ESG metrics, integrate data and generate reports under multiple frameworks is critical.
Performing materiality assessments, selecting appropriate frameworks for reporting, setting up metric data capture processes, establishing the link between different types of data, and automating data collection are all important parts of the process.
ESG will continue to gain prominence as the global consensus for action is getting stronger every day. Even though several ESG measures have already been enacted, many more are planned.
With them, tax considerations will be a critical component to business growth and resilience.
MetricStream APAC Managing Director Michel Feijen has over 25 years’ experience in the technology sector with a strong track record in digital transformation for large companies across various industries in ASEAN. He has lived in multiple South East Asian countries as well as China, and is currently with MetricStream, the global market leader in integrated risk management (IRM) and governance, risk, and compliance (GRC).
