ESG’s Biggest Champion Talks Tax Transparency And Reporting

Eelco van der Enden, the new CEO of the Global Reporting Initiative, discusses the growing environmental, social, and governance landscape and why tax is a necessary and important part of ESG reporting.

This transcript has been edited for length and clarity.

David D. Stewart: Welcome to the podcast. I’m David Stewart, editor in chief of Tax Notes Today International. This week: tax and ESG.

Environmental, social, and governance performance, also known as ESG, has become increasingly important. Investors, employees, and the public are interested in what companies’ ESG activities look like and the transparency ESG reporting provides. 

As multinationals broaden their ESG reporting, there have also been calls for expanded transparency in tax reporting, especially as it relates to the social metric of ESG.

What does the intersection of tax and ESG look like? What kind of ramifications would increased tax reporting transparency have?

Tax Notes contributing editor Nana Ama Sarfo will discuss more about that in a minute. 

Later in the episode, we’ll have Tax Notes State columnist Steve Wlodychack discuss his article on recent state passthrough entity tax legislation.

But first, Ama, welcome back to the podcast.

Nana Ama Sarfo: Dave, thank you so much for having me back.

David D. Stewart: Now, I understand you recently spoke with someone about tax reporting and ESG. Could you tell us about your guest and what you talked about? 

Nana Ama Sarfo: Yes, so I spoke with Eelco van der Enden, who is the new CEO of the Global Reporting Initiative (GRI). GRI is an international ESG standard setting organization. It actually produces the world’s most widely used ESG reporting standards.

van der Enden, who took his post in January, is a very exciting choice for CEO because he’s a dyed-in-the-wool tax practitioner. He previously was a tax partner at PwC, and he helped write GRI’s reporting standard for tax, which is a public country-by-country reporting standard.

We spoke a bit about his vision for GRI. GRI approaches reporting from a stakeholder economic vision, which is that multinationals should be accountable to all stakeholders, not just investors, but also their employees and the communities in which they operate.

He discussed why public tax disclosures are so important in a stakeholder economic model, and also trends he’s seeing in the tax reporting space like multinationals greening their tax reporting. He also talked about what is at stake for multinationals if they fail to be transparent about their tax activity, and in doing so, kind of lose the public narrative.

David D. Stewart: All right. Let’s go to that interview.

Nana Ama Sarfo: Eelco, thank you so much for joining us on the podcast.

Eelco van der Enden: Thank you for having me.

Nana Ama Sarfo: Can you describe for our listeners, those who aren’t familiar with the GRI, a little background about its sustainability reporting framework?

Eelco van der Enden: GRI was founded in 1997 in the United States to provide businesses with a framework of reporting standards on social and environmental topics. In those days where there was the big oil spill in Alaska, there was social unrest, and what international accounting and financial accounting standards did not provide for was a clear framework to report one’s social and environmental endeavors in such a way that it would create comparable data for wider society.

That, for GRI, is extremely important because our purpose is basically to provide support for impact reporting, to have an open and transparent discussion on topics that affect society as a whole. It’s climate, it’s socioeconomic cohesion, and all the topics that are aligned.

Why do we think this is important? Because the world does not only exist for capital markets and investors themselves, but it also exists for a broader humanity and humankind as it is.

What GRI typically does, and what GRI provides, is a framework for what the effects are of business endeavors in pursuing their strategies on the environment and on society as a whole.

Now, what do we see in development when it comes to sustainability reporting? ESG and sustainability became household definitions of late. There is this discussion around and about the alphabet soup that there are so many organizations dealing with sustainability and ESG that there is no clear picture anymore because it’s muddled with these many, many acronyms.

Let me demystify the alphabet soup when it comes to sustainability reporting. There are only two standard setters that deal with ESG as a standard. That is the Sustainability Accounting Standards Board (SASB) that now has been incorporated in the International Sustainability Standards Board (ISSB), which is a sister organization of the International Accounting Standards Board under the umbrella of the International Financial Reporting Standards foundation on one side.

On the other side, you have the European Financial Reporting Advisory Group that is responsible for setting ESG standards and mandatory sustainability standards for Europe. They have this co-creation agreement with GRI.

What is the big difference between them? That is extremely important to know, especially when it also comes to tax, which is an S social topic in ESG.

First of all, ISSB is about financial reporting. It’s about financial materiality. It is intended for investors and shareholders. It drives financial information, the enterprise value reporting of the reporting entity.

What is the European initiative? What is GRI all about? It is what we call “double materiality.” It’s not the financial effects of the reporting entity. No, it is its effect on climate and society, which has a different lens, but that’s logic because they have a different audience they take care of.

GRI Europe is a wider audience society, whereas the objective of ISSB or SASB is investors.

Are these two competing forces? No, they are not competing forces. They strengthen each other. They should drive towards a corporate reporting environment on a global scale that is based on two pillars. Then you have a complete picture where you have the financial interests and societal interest being reported on equal footing, whereby and only then, you will be able to claim that we are moving from a shareholder capitalistic-centric model to a stakeholder capitalistic-centric model.

What do I mean by that? I don’t like the word “capitalistic.” I like a “stakeholder-centric economic model” because that’s where we are moving to. If you do not have the two-pillar approach with financial and sustainability reporting at equal footing and equally important, you cannot speak of a stakeholder-centric economic model.

Everyone agrees that financial data is very important for investors. Hence the introduction of mandatory, international accounting standards for listed companies to provide investors with comparable data. It was in those days of shareholder-centric model, whereby the idea was that the sole responsibility of business is making profit on behalf of its shareholder. It is absolutely completely logical to introduce mandatory financial reporting to enable these investors to make proper validated decisions on comparable data.

If we now claim, as recently Larry Fink of BlackRock Inc. did, that we have to move towards stakeholder-centric economic model — and not only BlackRock is claiming that, but also the World Economic Forum and International Business Council — then it will be very weird not to have a reporting standard that is there to feed the needs of the society that the stakeholder-centric economic model tries to support.

You can’t have a stakeholder model without sustainability reporting on behalf of society. If reporting can be compared as a coin, these are the two sides: the financial reporting and the sustainability reporting. That’s exactly the second part, the sustainability reporting, that GRI does. It has done so over the past couple of years quite successfully.

Nana Ama Sarfo: About five years ago the GRI board decided to create a public reporting framework for tax, which is called the GRI 207 standard. GRI 207 is important because it is the first global reporting standard for country-by-country tax transparency. You co-wrote that standard when you were a partner at PwC, so I’m hoping that you can walk us through that process.

First, why did the GRI board decide that tax is important for ESG reporting? What are some of the most important elements of that standard, and why were they included?

Eelco van der Enden: First of all, the initiative to draft a standard on tax was taken by U.S. private equity firms. It was not nongovernmental organizations. It was U.S. investors that reached out to GRI to say that they wanted to see more detailed information on tax, because it told them something about the risk appetite, about the quality of the profits themselves, and about the link between the sustainability policy companies have and tax, whether there was a link in, let’s call it the management of tax behavior when it comes to social topics.

There were various reasons why these investors were interested in getting more information out there. The standards board of GRI, which is the organization within GRI that takes care of the standard setting and development processes and the maintenance process of the standards, decided to put together a community of specialists that became the tax technical committee. I was kindly invited to join that as a representative of intermediates, in this case, the big audit firms.

We started to discuss some topics that we thought would be interesting for a multi-stakeholder community to take notice of. Many said that with such a sensitive topic as tax, this would not be possible, but they were people out of the tax communities that said that.

In fact, one of the issues is that I think that many tax people oversensitivize tax as a topic. It’s not that sensitive. In fact, after a year and a half, we were done, which is quite fast, where all participants in the committee signed off. Then the first draft was sent for public consultation.

In December 2019 we came out with it and the official launch was at the London Stock Exchange in January 2020. We were rather surprised by the voluntarily uptake of many, many large multinationals to indeed embrace this standard.

Why is this standard then so liked? Because it provides a platform to provide comparable data. That’s important to investors. That’s important to society; that they can compare likes for like.

GRI is the world’s largest sustainability standard setter. It has been endorsed by the OECD and by the United Nations. Why should I not use the GRI 207 standard when I use GRI already for all the other things that I’m reporting?

There’s more than 10,000 companies that use GRI. The pickup has been quite high already. Whereas the only year that we basically ask, if you are a GRI reporter, please start using 207 from 2021, which was last year, but already before many started to use them.

Also, when you look at or have discussions with boardrooms, with audit committees, with CFOs, because it is a real standard, there has been this huge due process behind it with this multi-stakeholder environment of professionals out of various constituencies that have been drafting this.

Nana Ama Sarfo: I think that overview was so fascinating to hear the background behind how this tax standard started. I didn’t realize that U.S. private equity firms had a huge hand in this. But then also to hear that it moved from that sector into a more multidisciplinary conversation, I think is very interesting and very helpful to know.

Now, as you had mentioned, the GRI standards generally and 207 have witnessed a really great adoption, but I think we also have to look at the other side of the coin, which is that the idea that corporations have this public responsibility to share their tax data is not universally accepted.

Over the years, we’ve seen some major multinationals decide to publicly share their tax data, but then others have been reluctant, citing business confidentiality. What is at stake here if corporations are not transparent about their tax activity?

Eelco van der Enden: Tax is just another topic. Let us be perfectly honest. With all introductions of new reporting standards, you will have people that will come with the evergreens of why not to report. There are always people that say, “Well, the burden is too heavy. We don’t like it, blah, blah, blah.”

Why do I think that is not entirely true? Why would some organizations try to push back on this or don’t want to report on it? There can be various reasons. There are also very legitimate reasons.

In some countries you are not allowed to disclose too much information on certain contracts. We know this from China and the Ivory Coast. You just cannot publish it. But you have to look at this through a broader business strategy lens.

If you are a large business and you have an ESG policy and your ESG policy is basically the engine that helps you to commit to achieving the sustainable development goals that everyone in the world signed up to, and all large business signed up to, how do you do it? We look more at the environment. We look more at social topics and we look more at governance.

If you have a policy around that, then how does tax interact with that? If you want to be more transparent beyond what you are legally obliged to do in the financial reporting, and you have endorsed, or you use SASB standards or GRI standards, then why wouldn’t you report on tax?

Because tax is an ESG metric, not because I say so or because the World Economic Forum said so in their 2020 report. One of the 22 core metrics to report on is tax. So what would then be the reason? What type of information would yield more business secrets than, for example, the technical explanations on how you reduce your carbon emissions, which is at the core of your production processes?

Also taking into account that tax data can be extracted from annual financial reports filed at Chambers of Commerce with a bit of effort, you can do deep dive in unstructured data, et cetera, et cetera. If you have this vision on sustainability and stakeholder-centric model, why would you exclude tax? You know that society’s interested in tax and tax positions.

I mean, we are ending the COVID-19 pandemic that has cost states hundreds and trillions of millions of dollars. Before the large financial crisis, we have seen that there are some big things to cover. We have issues on climate. We have large demographic issues. This all needs to be taken care of by civil society and by governments, for which they need, of course, tax.

They want to see what contributions are by businesses on behalf of society, and not on a consolidated basis, but also basically in the communities where you operate. You do not only provide that information because Tax Justice or Oxfam is shouting off the roofs that it’s not fair or whatever. No. You want to share that information because your suppliers, your clients, the communities you operate in, your employees, they are interested in that information.

What is so sensitive not to provide that data? To some, there is a very deep, politically rooted aversion to provide more than beyond what is legally necessary. I respect that because if that’s your view on how things should work, then that’s your view on how things should work. I’m not trying to say what morals of others should be. But if you do not have this political conviction that providing data on tax is wrong by itself, then you need to have very good arguments why not to provide that information.

Because when it comes to business secrets, the secret basically you deal with in tax mostly is why you are paying what you pay, and not so much on secret formulas or competitive price mechanisms.

Nana Ama Sarfo: I think you raised some really, really great questions as to why multinationals might oppose this and why their opposition might not make a lot of sense.

Now, I do think that the current debate over public tax disclosures feeds into a much larger discussion about the kind of economic system we should have, which is a point that you raised earlier.

Should we have a stakeholder-centric economic system or a shareholder-centric economic system, which right now seems to be the predominant model? Is tax transparency more or less important in one model versus the other?

Eelco van der Enden: I think in both models it is important. Let’s not forget that by far the majority of multinational companies play an extremely fair tax game. Absolutely. They have nothing to hide. There is nothing to hide. I mean, they are a totally fair contributor to society with jobs, investments, and their tax contributions. In both models, it is important, and I call that a “neoliberal tax paradox.”

By not paying tax as an idea to maximize your profit over time, you will see a lot of value destruction of your organization since the environment you operate in will not be able to support your business. It’s shortsighted. That’s why I like the 207 standard, because it clearly shows what a stakeholder-centric economic model means and what society does for a company and what a company does for society. They are two sides of the same coin.

Nana Ama Sarfo: Now, you had mentioned that most multinationals are operating above board. They’re not engaging in serious tax evasion, avoidance, or anything like that.

Given that, why do you think that there is this persistence to hold up tax as this precious thing that cannot be revealed? That it’s best for the tax community to determine what should be disclosed instead of just adhering to these common ESG standards?

Eelco van der Enden: The reasons we hear are sometimes simple and very operational and very down to Earth. Sometimes it’s not that people don’t want to do it, but they say, “We just do not have the capacities to start this up. We do not have our systems in place to attract that information and process it easily. It will mean an investment and I am already understaffed.” It is also sometimes an operational thing.

When it comes to year-end closing, there is a merger, there is an acquisition, there is some case or an investigation by tax administrations. These departments are stretched and stressed and then think, “Oh my God, then I also need to have a GRI 207 report to publish. Where the hell do I find people to do it?”

That is really a reason we hear quite often, which then again, of course, that is an interest of investors. It tells you something about the level and the quality of your internal controls and the efficiency of how you manage your organization. But it is a first step.

The second one we sometimes hear is that people just have no clue that it does exist, and they don’t understand the concept of sustainability reporting, financial reporting, financial materiality, or double materiality. Those concepts are not very well known in the tax community, for which you cannot blame them because they’re mostly specialists that understand and do a great job in following the law.

This is something a bit more holistic, perhaps not that concrete. There is not a lot of interaction between civil society and the tax community. That’s also due to the very technical nature of tax. That is one.

The other one is that some companies just don’t want to disclose because they are afraid that there will be a lot of turmoil in the market or by the public when they provide information. All those companies that are reporting under 207 had to take the first step and like, “Oh my God, what’s going to happen when we go live?” Now, not one of them got negative comments on the reports themselves or were crucified in the press for publishing the information.

There were companies that had discussions with some NGOs on whether it was sound or not sound business to have a hub on the Virgin Islands or that was indeed aggressive tax explaining, but at least they had a debate on facts and not on perception.

This fear element for many appears to be completely untrue, and now they love publishing it and doing it, especially the tax departments. They love it because they have more grip and get more understanding for what they do.

But then as always, you have also some organizations, who are really the minority, that have such aggressive tax structures that when they come into the open, they will have a serious debate with society and shareholders and investors like pension funds on, let’s call it, the moral acceptance of the structures in certain cases. But that is also a question of time, of rethinking your communication and your tax strategy to bring it more in line with your ESG strategy.

Nana Ama Sarfo: That’s great to know. I also appreciate you mentioning the concepts of the materiality and double materiality, because that segues into my next question for you.

As you are very well aware, there’s been a lot of discussion about the concept of materiality and ESG reporting. That is, how do companies define or identify material information that should be disclosed? The GRI believes that materiality is double, that it is both financial and nonfinancial. In the tax world, what exactly does double materiality look like?

Eelco van der Enden: Have a look at GRI 207. It’s not only the financial data on a per-country basis, but also your strategy, your risk management, and your engagement with society. If you look at various pockets and pieces in the United Kingdom, filing your tax strategy is already a legal obligation. That part is already there. Your risk management and control framework.

If you fall within the scope of a cooperative compliance model of horizontal monitoring type of things, you have to have your tax control framework in place otherwise it will not work and you will not get your ruling or your agreement with the tax administration. That’s the second pillar of 207.

The third one is your stakeholder engagement, or what do you disclose, what your mobile activities are, your relationships with NGOs, what your views are on tax as a part of society, which most companies have already included in a corporate communication stuff. Then it’s about the tax data itself. These are nonfinancial metrics, of course, because it’s not on the balance sheet or in your profit and loss. It’s just a story behind how you manage it, and then, of course, you have per-country data that gives insight in what you say if your strategy indeed is true.

It does not grow overnight because companies are living bodies that constantly change and move. That’s why the story behind the data is also important. You can have a very low tax rate for a very good reason. You can have a very high tax rate for a very bad reason. It’s just explaining to society.

That is the double materiality of 207. It is outside just the financial reporting whereby financial materiality is also defined as a monetizable risk of a certain magnitude that could affect your growing concern.

Nana Ama Sarfo: To close, the creation of the GRI 207 standard was a very high-profile task, but now you have an even more high-profile job as the new CEO of the GRI. I’m hoping that you can share for our listeners some of your goals for advancing tax transparency in the short and long terms.

Eelco van der Enden: The strategic objective in three words: alignment, alignment, alignment.

We must align with the ISSB. We must align with the International Federation of Accountants (IFAC), and we must make sure that we will have a comprehensive set of corporate reporting standards that both address financial as well as sustainability topics, preferably in a global framework.

Everything that is possible to cooperate with ISSB and IFAC is something we are pushing and pursuing. That is what we call this two-pillar environment, this two-pillar strategy. That is the most important task I think I have to make that happen.

On a more operational point of view, as an organization, it is finding the means indeed to maintain, support, and make better more standards on some topics that society — and society is, by the way, politicians, and large businesses, and other constituencies that ask us to make and draft. The part of finding the means and the people to support our organization to grow the standard setting, that is the second most important topic.

When it comes to tax, there is indeed a tremendous uptake of the 207 standard. What I would like to see is that countries do not reinvent the wheel. There is a tested, proven tax transparency standard. I hope the EU will not start to redesign or rethink its own reporting standards under public country-by-country reporting, or that the OECD will add to base erosion and profit shifting 13, and things like that. There is a standard. Just use it. It is free to use, it is tested, it’s widely respected, and well used. So just do it.

Nana Ama Sarfo: Well, Eelco, this has been a truly enjoyable conversation, and thank you for shedding some light on this very dynamic world of ESG reporting and how it interfaces with tax. We are really grateful for your time and thank you so much for coming on the podcast.

Eelco van der Enden: Thank you very much. I’m sure we’ll meet soon again.

David D. Stewart: If you’d like to learn more about van der Enden’s thoughts on ESG and tax, you can check out Ama’s article, “New GRI CEO Shares Vision on ESG Tax Disclosures.”