Episode 14: ESG and how it relates to tax, with Sue Bonney

The following transcript has been lightly edited for clarity. Sue Bonney can be contacted on sue.bonney@forward.institute or via her LinkedIn page.

Intro: Hello and welcome to The LCN Legal Podcast, bringing you expert views and analysis of the legal aspects of transfer pricing compliance. Our focus is always on real world, practical insights that you can apply in your everyday work. In this episode, we look at Environmental, Social and Governance: ESG.

LCN Legal’s co founder Paul Sutton, talks to Sue Bonney. Sue is a former Vice Chair and Head of ESG at KPMG UK, and was previously KPMG’s head of tax for the EMEA region. She is now an independent ESG adviser. In that role she helps business leaders and large organisations to shape strategic responses to the responsible business agenda and ESG.

Paul and Sue discuss, among other things, what ESG really is, and what an effective ESG strategy should include. Her view on ESG scores, and in what respects they can be meaningful. And how tax and TP professionals should take account of ESG in the advice that they provide. We hope you enjoy the discussion.

Paul Sutton: Hello Sue, thank you so much for joining us for this podcast and talking to us about ESG and tax. Before we dive in, I have to say it’s something that comes up a lot in the transfer pricing conferences that I tend to go to, and I always tend to leave these sessions feeling just a little bit hazy about, well, what does this actually mean and what is the connection? And so on. So I’m really delighted that you’ve taken the time to speak to us today.

Sue Bonney: Thank you. It’s good to be here.

PS: So, just to set the scene, I know that you had a leadership role in KPMG’s tax practice, and you were also a client-facing tax advisor. So what was your role into ESG?

SB: OK, well, I was Head of Tax and Legal for the EMEA region for KPMG for some years, and it was quite a tough job because I took it on in 2008, which, as many of you will remember, wasn’t the best time economically. But what it did do was make me develop a really sort of strategic board-level type perspective, if you like, because we were helping clients put tax in the boardroom and at the heart of their organisation’s strategy. But then I also had my own responsibilities as a leader to try and grow the tax and legal services business across EMEA for KPMG itself. And as I say, that was in a recession, so it gave me that focus. And at the same time as well, we had a big focus on responsible tax, which was all about setting out the principles that you needed for a tax strategy rooted in the sort of commercial reality of the client’s business. And I guess for people listening today, that might seem pretty obvious, particularly those involved in transfer pricing and those sorts of things. But at the time, for lots of organisations, this was pretty different, because they’ve become used to this kind of drug of the artificial, highly complex tax structuring that had become the norm.

And I used to stress then how tax needed to be at the heart of the business and at the heart of the corporate strategy. Anyway, given all that, when I came to the end of the role, it was quite natural to move into a client-facing role that was kind of broader and more strategic. It was beyond tax, but it had this kind of responsible business lens. And what I was doing then was helping the leaders in our largest and most important clients look beyond just this profit focus – ‘Profit at all costs; only our shareholders matter’ – to something that was way more sophisticated and holistic. And then as ESG emerged as a way of measuring that sort of approach, I moved from that more general role to become our first head of ESG, sitting on the board and helping our clients, and indeed KPMG itself, work through that agenda.

PS: Yeah, and I definitely remember those days… it was all about tax advantage and going to counsel and saying, ‘What are the percentage chances of success and what’s the tax saving?’ And it was definitely part of a community in flux, wasn’t it?

SB: It so was. And we’ll come back to it, maybe. Is it completely dead? I don’t know. But certainly it was a world apart from today, I think.

PS: Yes. So, from a high-level perspective, how would you describe the relationship between ESG and tax?

SB: I think it’s important to think about what ESG really is. So the underlying rationale of ESG and ESG ratings is this idea that a company which pays attention to a broader range of stakeholders – so not just its shareholders, but also dealing responsibly with its customers, with its employees, with the communities it works in, the governments, the NGOs, all these people – those companies are more likely to be more resilient and long-lasting, and so they should be a better place to put your capital investment. That’s the underlying rationale. So it isn’t some CSR or narrow sustainability thing about taking plastic cups out of your offices. It’s a business, it’s a strategic issue. And that’s the same with tax: touching all parts of the business. And both of them, I think, need to be owned by the board, but are often poorly understood by the board. And I think if you think of it like that, with this kind of emphasis, both on responsibility, but also resilience. It’s quite natural to see how tax could be an integral part – should be an integral part – of any ESG strategy.

PS: Right. Makes sense. So obviously there are a lot of different aspects here in terms of their relationship. How would you break it down into buckets or different themes?

SB: Yeah. And I think it’s important to do that because otherwise it can feel a bit overwhelming. So let’s come up with a few buckets. I think one is just basic compliance. So that’s complying with the local tax laws, having the processes for preparing and submitting accurate tax returns, paying the right amount of tax, so really protecting the company from breaches and fines. But that’s fairly straightforward, fairly core competence for tax.

I think you then go on and you can put on a commercial lens. So is tax properly being factored into business plans and investment proposals? And ESG is driving loads of these. So new carbon border taxes change the dynamic in the supply chain. You have costs if you’re diversifying your supply chain and buying from different countries to mitigate your ESG risk. So there’s tax related to that. And then if you do that, does that change where you’re making your profits? And does that impact on the overall sort of net return? So this thing that’s really at the heart of broader business decision-making.

And then I think there’s a couple of other bits. So there’s opportunities. So this is where the tax guy – or person or whatever you want to say – can be the real hero. So if the company is one that’s trying to become more green – or even reinvent its business, from being an oil company to renewables, those sorts of things – can you access grants or tax incentives, which might really, really help the funding or the ROI? You can even make some of the changes pay for themselves. And as I say, that’s the way to make yourself a real hero for the business.

And then I think the final one is this responsibility point. And as we said earlier, I think most businesses today do recognise that they’ve got some kind of responsibility to contribute to the countries they operate in through the tax system, because it pays for the infrastructure they need, it supports the local people they need, either as their employees or as their customers, or both. So this isn’t just about altruism, it’s about making good business sense. And I was reflecting when we were coming up to this talk, it might be hard to believe now, but when in my early years as a tax professional, there was this American magazine called CFO Today and it used to rank hero CFOs. And the hero CFO definition was one who could get his effective tax rate as close to zero as possible.

And I think we have moved on a lot from that. I think we probably would all roll our eyes at that, if I’m honest. Although there is still a little bit of speaking out of both sides of your mouth, because I do think some companies get it, but there are some who still can’t help themselves seeking out these artificially low tax rates. But anyway, I think the key here is having an explicit tax strategy which spells it out, and being transparent about what you pay where. So some of those reporting rules that we have now go a long way, I think, to focusing the mind on that.

PS: Right, totally. And what’s your view of ESG scores? Is it the case that the scores are just about the robustness of the system and it’s totally unconnected to doing the right thing? Is that how we should look at it, or how do you see it?

SB: To answer your last question, I don’t think that’s how we should look at it. Do I think people are looking at it a bit like that? I think there is a risk.

When I’m talking to clients, I say you have to remember that the ESG scores are the outcome of what the business is doing. They’re not just a standalone thing. If you see it as a standalone thing, then it’s easy to get into that kind of tickbox mentality, or you get overwhelmed by the demands for information. Some companies are getting questionnaires and demands every day and they’ve got a business to run. So it can be a bit overwhelming and then you lose the value of it. I do know why people are sceptical. But I think that, like them or loathe them, they are a fact of life. So you do need the quality data and you need as much of the positive stuff that you’ve got out there, because having best kept secrets is no good if people don’t know about it. I think what companies need to do, what I advise companies to do, is really get a clear set of actions around the things that matter most in the business and where they can make the most difference.

If you are a carbon intensive business, then you do need to be addressing your carbon levels. If you’re perhaps a professional services firm, carbon might be less critical, but some of the other things – like tax – you might dial up. So you need to work out what’s important, and then you get the data to see where you are, where you want to be and then evidence how you’re moving along and you report that to your stakeholders. And then that of itself should drive these higher scores. But at the same time as driving better business returns. It’s easy to be cynical, I think, and I get it, but I think they are a fact of life.

PS: Yeah. Presumably these kind of scores can never be a measure of morality. It can never be an ethical rating. And I assume – I haven’t got involved in the weeds of this at all – that it’s more about the robustness of the evidence and the transparency and the reliability of the information that’s being put out.

SB: I think so. I mean, you can get perverse results because each different rating agency weights things in different ways. So you could take something like Tesla and some agencies would give it a high ESG rating because it’s leading the electrification of cars. But others would say, ‘Oh, yeah, but what about recycling the batteries? That’s a big environmental problem.’ So they’d mark them down for that. Or, completely differently, they look at the governance arrangements and how they’re run as a business and they’d mark them down for that. You could perversely end up with it having an A+ score or a C-. You’ve got to look at them with common sense. Which is why I say, I don’t think you can chase the rating. You have to chase what you’re doing in the business, believe in it, and then educate people of the good things you’re doing. Get the good news out there backed by data, because you’re absolutely right. You do not want to be accused of greenwashing, and there’s a lot of greenwashing going on.

PS: Yeah, totally. And do you see a link between ESG ratings or ESG generally and the approaches of individual tax authorities? For example, in Australia, the ATO’s ‘justified trust’ approach to transfer pricing and tax compliance generally in terms of looking at corporates and the approach to audits and so on.

SB: You’re testing me because it’s some time since my days as an active tax practitioner! But I do watch tax developments in this space, even if it’s from a little more distance. And from what I know about the ATO approach, it’s based on, I think, OECD principles around this. Yeah, I think you can make a link because you could argue that in a mature society, the company and the tax authority have a shared objective that the right amount of tax is paid. I mean, maybe that’s a bit idealistic, but I think it’s essentially true, even if there are differences in interpretations and differences in particular areas. By and large, people want to pay the right amount of tax, and the authorities want them to do the same. But the theory here is: if you can demonstrate good governance and ethics – good processes and controls around data and compliance, and transparent and constructive dealings with the tax authority – then the tax authority, ATO in this case, can legitimately treat you as a lower-risk taxpayer and they could have a lighter touch and a more risk-based approach to the relationship. So that feels totally in tune with this kind of maturity around how you deal with that particular stakeholder.

I think whether that plays out in practice depends on a lot of factors: whether there’s authenticity, whether there’s trust, whether the contacts on both sides have got the maturity of skills to work in this way, as well as the quality of data, because if you say something but the data doesn’t back it up, you’re quite rightly in trouble. So we go back to these kind of greenwashing challenges again. But I think the theory, to answer your initial question, I think it is totally aligned with ESG.

PS: Yeah, I would agree as well. Just from a high-level perspective, it’s all about the reliability of the intents. In other words, what you say that you’re trying to achieve, is that believable? And is it backed up by the systems necessary to produce reliable data?

SB: Yeah. Which is trust. Trust at the heart of that, isn’t it? But you have to earn that trust with those different features.

PS: Cool. Just picking up on responsibility. I think that responsibility was the fourth bucket that you mentioned and we were just talking about transparency in terms of disclosure. So obviously, in some countries, corporates are required to publish their tax strategies. And perhaps in the past, or maybe still, it’s the case that a lot of these tax strategies are just extremely bland. How can we get beyond that? Or is it necessary to get beyond that?

SB: I think if they’re going to mean anything, it is necessary to get beyond that. But I think in the UK, these came in when I was Head of Tax. (I think that’s right.) I think this is partly about mindset and partly about authenticity. It’s a bit like… I always think it’s hilarious when you’re asked in the US customs declaration to say whether or not you’re a terrorist. I mean, who’s going to say yes? And just saying that you have a tax strategy, and that you pay all the taxes you legally have to, doesn’t really add hugely much to the sum of knowledge. But I think there’s two things. I think the act of doing it does actually focus the mind of those outside the tax department on the fact that they’re signing off on something that they’re saying publicly. That was a bit like the SRO rules in the UK some years back. So maybe that just of itself achieves something. But I think the real power is when companies use it as a focus for really thinking about what those statements actually mean and then using that.

PS: Yeah, totally. I haven’t done a comprehensive survey or anything like that, but a lot of the tax policies or tax strategy statements say not a lot more than ‘We pay the tax that we’re legally obliged to do’. Can you give any examples of corporates who you think are doing better than average or doing it right or something for us to look at as a positive example?

SB: Yeah, I think a lot of them have come a long way, and some of them go a little bit beyond what you’re saying. But yeah, again, some are pretty anodyne. But I think there are some good ones around. I quite like the Vodafone one. If you look at that, it’s actually a document, but it’s a public document, and it’s really thoughtful. It qualifies the sort of bland statements and it attacks head on some of the things which can be ambiguous and problematic. So it spells out the different areas like business partnering. It addresses lobbying – where that may or may not be appropriate. And they talk about what they mean by tax value. So I think it’s really excellent. I think going to the question, does it add something to your appreciation of what they’re doing for tax? I think it does. So I think that one’s definitely worth a look.

PS: Great. Thank you. It’s always good to have a positive model to look at. So if we take the ESG theme and apply this specifically to tax advisors, transfer pricing advisors, the advisory world, how do you think the approach of advisors need to change to take into account ESG as an issue that their clients are facing?

SB: Yeah, I don’t think they should change because of ESG so much as an extension of what I think has been happening anyway, the trend you and I have just been talking about. OECD pressures and so on, particularly around things like transfer pricing. So setting pricing to genuinely fairly reflect the value that you’re generating in a country, the profit that you’re making there. We can all think about some tech or online extremes where you’ve got an entity in a country, it’s employing loads of people, it’s got loads of customers, they’re paying loads of revenues. Sometimes there’s even tangible goods floating around. And just intuitively, everyone would feel you should be making a profit there and paying tax. And then they’re not, because everything’s stripped out to a low-tax jurisdiction with royalties and interest and management charges and product handling and all that stuff. And I think you just have to say, is that fair? Is it respecting the community? I think this isn’t a bad test: could you justify it to your mother or your grandmother or your kids? Sometimes people say, does it really honestly stack up? And I think that’s not a bad filter.

No one’s saying you should pay more tax than you should, but it should be fair. And then I think there’s just a more general thing: you need to recognise the business changes which ESG is prompting. So loads of companies are looking at – I touched on it earlier – if your supplier of your components in a country is increasingly prone to floods, the business will look at diversifying its supply chain to mitigate the risk. You’ll buy from another country or whatever. Or if you’re exporting to a country with a carbon tax, you might change your production processes to reduce the carbon in your product so that it stays competitive. And as a business partner, as tax people, you really want to be at the heart of those discussions and decisions because you really want to make sure all the tax aspects are properly factored into that transformation, so they don’t just make the switch and then suddenly they’re shocked because the business plan looks totally different, the projection of profits. So I think that’s just the same as before. But ESG does mean you’ve got to dial it up a bit, I think.

PS: Fine. So from the perspective of a Head of Tax of a large corporate, what does that mean? Is it about maintaining or increasing visibility within the organisation so that you get advanced warning of these projects? Are there other specific things that heads of tax need to specifically think about now that maybe they haven’t been thinking about in connection with ESG?

SB: Yeah, certainly that point is critical. And I think you have to keep pushing at that, honestly, because the business can forget. So they need to do that. A few extra things I think they need to do. I mean, I go back to what I said at the start: this isn’t some little CSR thing about taking plastic cups out. It’s not a small CSR thing. This is business-centric. And it’s not good enough, I think – for anyone in the business, but we’re talking about tax professionals – it’s not good enough to not understand what this is about. This is a core competency now, I think, for anybody in business. And so I think, as a Head of Tax in any kind of organisation, I think you need to make sure your team really get that. You’ve really got to set the base so that they understand what ESG is about, understand how it impacts the business, and then they can start to think about how that impacts and how they contribute to the business. And you know, the flip of this is people are really interested in this stuff. You start educating them around climate change and how it might impact them, they love it. I mean, they really love it.

So there’s a dual thing, I think, in that. So that education thing, I think is really important. And then I think you have to do something to really start to think about where you can play a constructive role helping the organisation deliver against the ESG strategy and improve its ESG ratings. We’ve talked about how important they are. They are a fact of life. So what I would suggest there is, I think you need to do a bit of work with your team to work out what’s material in your type of business, what you should prioritise, what data you’ll need to monitor the progress and measure the success. That might not be easy to get. So how do you go about that and really start to have a bit of a plan? And then, we’ve said it, be really effective business partners. So, armed with that, make sure they’ve got the right business and relationship skills, understand where they can add value and plug into the business. And kind of make yourself do it, because sometimes it’s easier to watch from the sidelines… really make sure you’re in the mix.

I was reflecting again, looking back at my time as an early tax partner. I had a counselling session with someone who wasn’t in tax and he asked me who my tax role model was. And I gave a name and he gave another name and he said, the reason this person is my role model is because when he’s in a meeting, you don’t know he’s a tax person. And that was actually a really liberating point for me, because I suddenly realised when I was in a session, I had wider views on things which were just as relevant to the discussion as other people’s. And if you, as a tax person, sit in a meeting and when they say, ‘OK, and what about the tax implications, Sue?’, you sit forward and you say, ‘The tax implications are…’ then you sit back down and you shut up, you are not doing yourself justice. You’re not adding the value to the business that you could, and you’re boxing yourself. So I really think this thinking more broadly, recognising that you can contribute to the wider debate in this context around ESG – I think it’s critical around ESG – I just think that makes you a better tax professional all round.

PS: That’s such an interesting point. And obviously it applies to every individual in every role. From the perspective of corporate lawyers, which is what we are, you look back at the former structures that were put in place and how did everyone just remain silent? It’s because they thought their role was just to comment on the share rights or whatever. And it’s not that you kind of hold a monologue every time that things come up, but there is a voice to be heard.

SB: Yes. And as I say, it was liberating. It’s very satisfying.

PS: Yes, totally. Great. So when we were catching up, I think it was last week, and you were talking about your typical role as an ESG consultant, and I think you used the phrase ‘targeted interventions’ in relation to ESG and helping corporates. So what do they look like? And who tends to bring you in on these kind of projects?

SB: What I suppose I’ll say is, nothing we’ve been talking about today is more than common sense. But I do find that the demands of ESG and this whole ESG reporting thing are putting teams under a lot of pressure. They can be really overwhelming. Everyone’s flat out busy already, they don’t need something extra. And so the people who come to me and ask for help are those who feel the weight of that on their shoulders. So sometimes that’s the board and the executive, but it’s also functional leaders working out how to manage with their team, what it means for them. So it could be Finance, could be HR, could be Legal department, or indeed Tax. So what I do – it’s probably in a short workshop – is I do that bit I talked about before. So helping people understand what the context is, but then coming up with this properly prioritised plan by focusing on what matters most to your stakeholders, the different stakeholders in the business, what’s most material, and where you can move the dial, where you can make a real difference.

And then, as one of my clients puts it, you work out what you do now: so the quick wins, the things that can make you an early hero. What you do next: the things that have got a longer lead time, where you need perhaps a bit more work to get them underway, but are really going to have massive impact. And then (this is important, I think) what you do sometime: so things that are really nice to do, but you know what? If you never get around to doing them, that’s absolutely fine.

And I think if you do it like that, it can be very liberating because it gives you a focus. It shows you how you can make a difference and how you can articulate how you’re making a difference. But importantly, I think it shows you how you can embed that in business as usual – because this is business as usual, it’s not going to go away.

PS: Right. Really interesting. So it sounds like your role in this space is not purely about the interaction between ESG and tax and that interface, although you have particular experience there. It’s a wider ‘back to the drawing board’, or starting with a blank sheet role to ESG and what do you want to get out of it, what do you need to get out of it.

SB: It is, but then it’s making it relevant to people. So I’ve done one recently with an HR team. And so I think you do need this broader context – because go back to what we’ve just been saying. If you box yourself into a tiny bit, you’re doing yourself down in the business sense. You have to understand the wider context and understand the stakeholders who matter, who are critical to your business. And then you look with your lens, your tax lens, to see whether that’s cash flows, profit hits, whether it’s incentives…all those sorts of things. Where you can make a difference to that agenda given your functional specialism, and how you then play that in as part of a structured plan.

PS: Fantastic. Great. Well, Sue, thank you so much for spending some time with us. I certainly feel a lot clearer about the whole area, albeit we’ve only just scratched the surface. So thank you again for sharing your thoughts with us.

SB: Good talking to you, Paul.

Outro: Thanks for listening to The LCN Legal podcast. We’d love to hear what you think. You’ll find the contact details on our website: lcnlegal.com. And in the blog section of our website you’ll find a transcript of this episode with Sue Bonney’s contact details. And in the blog and the training hub section, you’ll find more discussion of some of the issues that were touched on in this episode. If you enjoyed this episode, please subscribe: go to your podcast provider and search for the LCN Legal podcast. Thank you and goodbye.