The importance of Environmental, Social, and Governance (ESG) has grown rapidly in recent years, as consumers, governments and investors take an ever-greater interest in business practices, and it is driving new business concepts such as the Triple Bottom Line (TBL) – profit, people and planet.
Regulatory developments have also focused on ESG, including recent changes in legislation and certifications such as the European Union’s Sustainable Finance Disclosure Regulation, the British Standards Institution PAS 2060 standardised framework, and even the Prudential Regulatory Authority pledging that from 2022 it will embed climate change within its supervisory approach and actively supervise firms in line with their ESG expectations.
Developing the technological infrastructure to be able to monitor ESG-related KPIs in real-time and ensuring compliance with regulation and standards has never been more important.
“E” refers to the environmental element of ESG which assesses the impact of business activities on the planet. With the growing concern over pollution and climate change, organisations have been severely punished for failing in this area. For example, in 2016, a failing by Thames Water caused sizeable volumes of untreated sewage to escape into Hogsmill River and a popular recreational park, leading to a fine of £4 million. This was the result of more than five hours delay between the first alarm (warning of underground sewage build-up) and the arrival of the first engineer at the scene to commence remedial action. By that time, nearly 50 alarms were already set off.
It is our belief that emerging technologies such as Internet of Things (IoT) and Big Data have the potential to aid organisations such as Thames Water by facilitating real-time monitoring more accurately. This enables effective preventative measures and a reduction in Mean Time to Resolution (MTTR), thereby providing improved management of risks.
In addition, we are seeing increased use of ‘behavioural taxes’ in this area – such as landfill tax / plastic packaging tax. As the name suggests, these taxes, although administered by the UK tax authorities, are not intended to raise significant revenue – in fact, the more successful they are, the less revenue they should raise, as businesses and consumers change their behaviours.
“S” stands for social, and this element of ESG evaluates how companies manage relationships with employees, suppliers, customers and the wider community where they operate. With companies being put on the spot by both regulatory and societal pressures, businesses are pressed to uphold principles and values such as diversity and inclusion, in line with ever-changing social expectations.
A recent failing by electronic gaming giant, Activision Blizzard resulted in an investigation by the SEC on allegations of repeated discriminatory practices and abusive behaviour. This led to the departure of co-leader, Jen Oneal, who wished to focus her efforts on promoting diversity in the gaming industry. Following this, employees staged walkouts to demand a change in leadership. In addition, bankers and analysts downgraded Activision for fear of boycotts from customers and talent turnover. These events led to the stock price tumbling to its lowest levels in more than a year.
BDO is aware of innovative solutions under development that seek to implement the use of AI and Machine Learning to scan company communication and media for warning signs. By leveraging such technologies, companies can undertake real-time data analytics and identify breaches in the company’s code of conduct that would have otherwise gone unnoticed or unreported.
“G”, the governance element of ESG, refers to leadership within the business and its ability to build trust with its stakeholders. This is often made possible with competent leadership, appropriate company policies and effective internal controls. One of Europe’s most prominent scandals - the horsemeat scandal (a.k.a. Horsegate) in 2013 - exposed vulnerabilities in the bloc’s supply chain network. This was the result of inadequate internal controls to prevent its occurrence or contain the situation before it became unmanageable. As a result of this scandal, Tesco was forced to re-test and recall products, as well as seek new suppliers. Tesco’s stock price tumbled since its quarterly news release in June that year, and never recovered to pre-Horsegate levels.
BDO’s technology specialists believe that such problems can be eliminated by using Distributed Ledger Technologies (DLT). Since the successful integration of DLT in 2019, French multinational retailer Carrefour claimed to have gained improved oversight of its supply chain and the ability to promote transparency to its customers by providing them access to a fully auditable and traceable supply chain analysis. As a result, Carrefour began reaping the rewards in the form of strengthened trust with its customers and increased sales.
In many instances, R&D will be required to either build or apply technology to create the ESG monitoring or reporting solution your business needs. As avid advocates of ESG, we at BDO are keen to help organisations improve their ESG profiles through responsible use of technology, both current and emerging.
We were one of the first UK accountancy practices to employ multi-disciplined engineers, which has delivered invaluable benefits for our clients, including engineer-to-engineer discussions, a better understanding of the R&D tax definitions and an established, HMRC-agreed process for R&D tax relief claims.
Additionally, tax governance and responsible tax behaviours are increasingly being recognised as key elements of the ESG agenda. Increasing guidance has been released in this area – from the World Economic Forum to The ‘B’ Team to GRI 207 – all linking strong tax governance to sustainability and other ESG measures. Technology will inevitably play a part in this – it plays a key role in risk management (within the increased use of ERM systems); in transparency and compliance (providing businesses with real-time oversight of global compliance and total tax contribution); and enabling increased digital interaction with tax authorities (such as Making Tax Digital). All of this combined, enables businesses to demonstrate their risk appetite and engender a culture of ‘no surprises’ when it comes to tax governance and risk management.
For more advice and guidance on the tax treatment of the technological advancement you are developing, please contact us.