When Tax Accountants Lobby for Sustainability

The current economic system isn’t being leveraged to drive sustainability at the environmental, social and governance levels in companies today.

We need a simple, global scoring system so B2B and B2C customers can quickly assess the sustainability impact of any financial decision.

An assessment, scoring & reporting system could be rolled out first at a voluntary and then mandatory at the national level for transparency, with a 5-10 year plan to add tax and tariff advantages for companies that obtain higher levels of environmental, social and governance benefits for society.

This system of advantages for companies creating sustainability benefits could be integrated via national tax, VAT or preferential access and tariffs in Regional Trade agreements. This could be regulated by local governments, national governments or trade blocks.

Using a system of assessment and certification like the B Lab’s Benefit Impact Assessment, which is already used in 70+ countries, a simple and easy to use global standard could be implemented — similar to the International Financial Reporting Standard (IFRS).

The benefit would be internationally comparable sustainability performance, aligning private and public incentives to respond to the climate action imperative.

Aligning public and private interests to fulfil the climate action imperative

In 2050, an average 3 degrees Celsius temperature increase over land translates into 4 to 40 days with temperatures over 30 degrees over land in Central Europe.

This is a future of scorching heat and drought, where the rivers dry up, while large parts of Africa, Asia and Europe must move to technology-assisted agriculture or suffer massive crop failures.

Tax accountants may not be the intuitive choice to stand against this troubling trend, but they actually have a critical role to play.

Tackling this challenge will require a sea change in how governments, private sector actors and other important stakeholders work together, so that the worst of this climate-related devastation is avoided and the ambition of the Sustainable Development Goals is achieved.

A major part of this challenge is that market incentives are not fully linked to sustainability concerns, meaning that private sector actors are not being driven to adapt towards a net-zero carbon emissions strategy.

One way to make this connection in the market is for governments to incorporate into their regulatory frameworks the use of Environmental, Social and Governance Criteria to benchmark private sector performance.

ESG Criteria: The current landscape

Environmental, Social and Governance (ESG) Criteria refer to the three factors in assessing the sustainability and ethical impact of an investment or purchase from a business.

Environmental criteria look at how a business performs as a steward of natural resources. Social Criteria review how relationships with employees, customers, suppliers and communities where they operate are managed. Governance criteria consider a business’ leadership, executive pay, audits, internal controls and shareholder rights.

Today, there are a host of corporate assessments and certifications that already purport to convey this information, through the use of ESG criteria to assess company performance. These assessments and certifications are normally provided by non-profit and for profit actors.

These include the Global Reporting Initiative, Sustainability Accounting Standards Board (SASB), Carbon Disclosure Project (CDP), Dow Jones Sustainability Index (DJSI), Future Fit Business Benchmark and numerous industry specific initiatives to assess, report and certify sustainability.

The major challenges with this cornucopia of public and private standards is their complexity. They aren’t easily comparable, and industry expertise is necessary to interpret the significance of the reported performance.

Consumer choice is best served by a Universal Standard that is immediately understandable by all – backed by in-depth assessment.

Nutrition labels on food are a good analogy. Even children can understand the number of calories or protein, but the simple label is backed by detailed nutritional analysis.

International Financial Reporting Standards

To properly align market signals toward sustainability, we need a “Universal Sustainability Standard” that would deliver a standard for sustainability reporting, similar to the International Financial Reporting Standards (IFRS) for business accounts.

The IFRS provides a common global language for business affairs, so that company accounts are understandable and comparable across international borders.

Before IFRS, the assessment and comparison of financial reporting crossed borders poorly. Over the past 50 years, IFRS went from 10 countries agreeing to adopt it in 1973 to nearly all countries today.

It is well accepted that companies with sustainable operations regularly deliver superior shareholder returns. The leader of the pack for a broadly applicable certification is the non-profit B Lab’s Benefit Impact Assessment, which started certifying firms in 2007 and offers both a free, “uncertified” version, as well as a B Lab certified version.

Today the B Impact Assessment is used in over 70 countries, by more than 50,000 organizations. Final scores range from 0 to 200, with the average company scoring a 55 and certified B Corporations receiving at least 80 of 200 points today.

There are different versions of the assessment by industry, geography and company size, with simplified versions for small and medium-sized enterprises. In 2020 this will include an integration of the Sustainable Development Goals.

Certification is done by B Lab analysts, but the B Lab also trains B Leaders, consultants who support companies in assessing and improving performance. This is a rich area of opportunity for the professional services’ advisors and consultancies.

The need for a scale-up in adopting ESG criteria

The examples listed above provide promising signs of action by corporate and non-profit actors alike. But the speed of the transition today is inadequate to reach the net zero carbon emissions by 2050 that we need.

Companies that operate unsustainably are rarely obligated to pay the costs of the social and environmental externalities they produce, proving that market incentives are not aligned with sustainability concerns.

Externalities such as the health, social and environmental costs of unsustainable growth fall onto governments to manage and fund, which will only increase over time due to factors such as pollution or population growth.

It is therefore imperative for governments to change their approach to the private sector, and to incentivize a greater uptake of ESG criteria by rolling out an ESG Preference system over 10 years.

This 10-year plan would begin with voluntary reporting and compliance by companies to governments on whether they are fulfilling a set of ESG criteria, which eventually transforms into mandatory reporting in the longer term, with financial and tax advantages for those who do so, and financial disadvantages for those who do not.

Reporting could be to provincial or national governments for tax, or to foreign governments to ensure preferential access tariffs under Regional Trade Agreements.

The Sustainable Development Goals mapped out a compelling vision for a more sustainable world.

We need national governments to respond with a regulatory framework for the market economy that addresses the competitive realities of the world in 2020 and the needs of the world in 2050, and we need for the private sector to work with them to translate this vision into action.