Minimizing a corporation’s taxes through legitimate tax planning is perfectly legal, whereas tax evasion is a compliance issue. Somewhere in between is a plethora of other tax issues, making tax transparency an important environmental, social, and governance (ESG) consideration for organizations.

On the surface, corporate taxes may not appear to be an ESG issue. But look more closely and it becomes apparent that taxes can impact all three elements of ESG. Environmental issues can trigger taxes or tax credits based on the company’s activities. Social issues can have similar effects with taxes, such as those associated with health or credits for social investments. And governance may have the most direct connection with taxes, since this is the category under which transparency is measured and through which disclosures—both required and voluntary—are made in financial reports, websites, and other channels. Additionally, paying taxes is increasingly viewed as one way companies can demonstrate their commitment to supporting society through government-funded programs.

Increasingly, stakeholders want to know what taxes are being paid and why, which taxes are being avoided and how, and where all this fits with the values of the company and stakeholders. For example, did the company avoid or significantly reduce its income taxes by earning credit for responding to an environmental or social investment incentive? Or did it do so by establishing shell companies in tax havens to shelter income from taxation in countries in which most of its operations are carried out?

If this is something you haven’t given much thought to, you’re in luck. There’s a lot of guidance out there on this issue. The Organisation for Economic Co-operation and Development has done much work on curbing tax avoidance, and the United Nations Principles for Responsible Investment (PRI) has published some useful guidance on the issue.^[1] Additionally, there are standards, such as GRI 207 from the Global Reporting Initiative^[2] and its Sustainability Reporting Standards.^[3]

Key among the significant disclosures to be made in this area are information about the organization’s tax strategy and how this strategy relates to both the business and the sustainable development strategies of the company. That can be uncomfortable if there is no connection.