Revenue agencies will be leaders in driving sustainability
July 7, 2022
10-MINUTE READ
Organisations know the importance of accelerating progress to net zero. In fact, our research found that 72% of CEOs see sustainability as an immediate priority as they deal with the fallout from the pandemic.
But while there’s clear willingness to act on climate change, there’s less clarity on tangible steps forward. In Europe, for example, around two-thirds of companies haven’t set science-based targets for net zero.
Governments in many countries will employ a range of policy levers (regulatory, fiscal and tax) to drive faster change. Businesses also recognise the need to address climate concerns. They will work in concert with governments on aspects like disclosure/reporting, grants/subsidies and fiscal/tax support (particularly for organisations with high levels of emissions, like steel, cement or utilities companies).
There’s an urgent need for stronger action to protect the planet. As shown in the table below from the OECD’s document on tax policy and climate change, current targets for emissions reductions won’t be enough to limit global warming to 1.5 or even 2°C.
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Figure A A.1. Global CO2 projections and pathways for warming targets From: https://www.oecd.org/tax/tax-policy/tax-policy-and-climate-change-imf-oecd-g20-report-september-2021.pdf
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Sitting at the intersection of public sector, private sector, investors and citizens, Revenue agencies have an opportunity to play a leading role in driving sustainability. In this blog, we aim to answer two key questions:
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- How might Revenue agencies perform this role?
- How should they prepare for future government action on climate change?
What’s happening?
There are several key shifts changing the sustainability landscape. In recent years, more publicly listed organisations and corporates have started reporting on their environmental, social and governance (ESG) performance. Reporting can be voluntary or mandatory. And since COP26, disclosure norms are becoming more stringent.
For example, recent changes to the EU Taxonomy have made climate reporting mandatory for around 50,000 companies — up from just 11,000.
As reporting becomes more commonplace, we’re seeing increased convergence in the sustainability standards landscape (which used to be highly fragmented). Although the standards are still evolving, the direction is clear.
Government sustainability efforts are currently aimed at reducing greenhouse gas emissions. For example, switching to renewable energy and greening their buildings, vehicles and IT. Governments are also bringing in measures on carbon pricing and taxes, feebates, along with green grants and subsidies to help overcome some of the market barriers to a green transition. And as reporting capabilities improve, they’re likely to introduce more sophisticated policies in these areas.
Three distinct roles for Revenue agencies
Against this backdrop, Revenue agencies will play three distinct roles as they embrace sustainability:
- Implementing government policy
- Becoming leaders in adopting good practice
- Providing assurance for organisations’ sustainability claims
Let’s explore each of these areas in more detail.
Implementing government policy
Revenue agencies will help administer governments’ new environmental policies. These are likely to include carbon pricing and taxes, offsets and trading schemes, green schemes and grants. The EU also suggests further measures such as carbon border adjustment mechanisms (CBAMs) – levying carbon taxes on imports to help ensure a level playing-field for carbon-intensive goods produced domestically and abroad.
To administer these programmes and schemes, Revenue agencies will need new processes, systems and skills. For example, they’ll need new technology to extract, record and verify ESG data from company reports. And they’ll also require a deep understanding of sustainability reports and standards, which will underpin the new initiatives. Revenue agencies need to start building these capabilities now.
Becoming leaders in adopting good practice
Sustainability reporting will increasingly capture, report and integrate new data across all businesses. Government agencies may not be at the vanguard of this rollout. But Revenue agencies have particular reasons to be early adopters and leaders in sustainability reporting. Why? Because future taxation policy is likely to evolve to incorporate these standards.
Revenue agencies need to acquire sustainability reporting skills and understanding to effectively administer policy. Early adoption of industry-standard sustainability reporting (e.g. TCFD) will provide Revenue agencies with the knowledge to guide government in details of policy formulation. Sustainability reporting can support the development of appropriate compliance skills and knowledge, and to be exemplars of governments’ sustainability progress and standards. And it provides a clear focus for their own efforts to combat climate change, as the reports measure their progress in greening IT operations, procurement and suppliers.
Providing assurance for organisations’ sustainability claims
Looking further ahead, we foresee that Revenue agencies will go beyond verifying that organisations’ sustainability disclosures are accurate. They also have a huge opportunity to provide public assurance for organisations’ sustainability claims by sharing companies’ compliance with sustainability standards. This creates a new, different and very important role for Revenue agencies in helping to address broader concerns over greenwashing. In turn, it helps them play a more significant role in achieving government policy on sustainability. And it creates an opportunity for Revenue agencies to drive green public procurement, by verifying that businesses comply with relevant ESG standards.
What’s more, Revenue agencies can showcase examples of companies that excel in ESG reporting and performance. This could recognise and reward organisations’ efforts, promote positive behavioural changes in industry and create a spirit of healthy competition.
Revenue agencies are in a powerful position because they’re trusted. They can provide a credible information framework to help businesses, investors and consumers make and justify costly but sustainable decisions. In other words, they can help drive significant change at scale.
The conclusion? It’s time for Revenue agencies to take the lead
It’s clear that Revenue agencies have a huge opportunity to enable public policy on sustainability and create a greener future. They’re uniquely positioned to implement policies, set a good example and provide assurance. And crucially, they’re trusted.
It’s prime time to act. Adopting standard sustainability reporting now creates the foundation for Revenue agencies’ future as leaders in this space.
Stay tuned for our next blog, where we’ll take a closer look at which sustainability reporting standards Revenue agencies might adopt, and what needs to be put in place to support appropriate measurement. We’ll also explore how Revenue agencies’ assurance can help strengthen sustainability reporting and standards, to help businesses, investors and citizens make greener decisions.
Meanwhile, thanks for reading. We’d love to hear your thoughts.
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