Guidance for financial institutions to help with voluntary ESG-related reporting

As companies, including financial institutions, increasingly engage in voluntary reporting of policies related to environmental, social and governance (ESG) principles, they also need to get smarter about how they share their ESG efforts with stakeholders. Customers of banks and other financial institutions expect greater sustainability and accountability from companies they do business with. While laws and regulations related to official reporting of ESG-related policies are limited in the U.S., the concept of voluntary ESG reporting is taking root in many companies to demonstrate they are operating in a fiscally and socially responsible manner.

As it relates to banks, ESG centers around socially responsible investing as a defining theme for a financial institution’s investment portfolios, as well as business operations that support representation within and access for underrepresented populations. The concepts behind ESG have been around for years; new markets tax credits, solar tax credits, EPA regulations, and anti-sexual harassment laws are all concepts that are being included under the umbrella term “ESG.”

Consumer expectations relative to ESG extend to sustainability related to tax incentives. A primary driver of the federal and state government’s ESG toolbox is tax credits. Tax credits are used to encourage investments in projects to create jobs and revitalize communities where private investment alone is inadequate. The tax system is also used, whether through levies or credits, to nudge companies to adhere to specific federal or state environmental protection laws.

Financial institutions need to prepare how they will present their ESG positions because they will get requests from customers for disclosures about their tax strategy and tax payments. For example, customers are increasingly interested in whether companies they may want to do business with – banks or any other business – are paying their fair share of taxes (sales, income, state and municipal, even international taxes) to the right place. This is especially true for companies with offices located in cities and communities that can benefit from various tax credit programs.

The interplay of ESG and tax is visualized in this perspective from the law firm Mayer Brown:

A high-ranking U.S. senator sends a letter to the CEO of a Fortune 500 company demanding information about the company’s low effective tax rate. During an earnings call, an analyst asks about a tax risk factor discussed in a U.S. Securities and Exchange Commission (SEC) filing. A newspaper lists a number of multinational companies that are not paying their “fair share” of income tax. A global investment fund requires a company to disclose its global tax policy before making an investment. A disgruntled employee becomes a whistleblower providing information about a company’s tax planning strategies to a taxing agency.