Tax, investment and salaries in an ESG focused world

All corporate decisions linked to ESG targets
The driving forces in an ESG focused world will be inclusion, equity, diversity and comprehensive availability. All corporate decisions will be linked to ESG outcomes.

During the Covid-19 pandemic, a realisation dawned on the entire planet that we need to focus on our commitment to limit temperature increase to 2 degrees Celsius in the next decade. The 17 sustainable development goals (SDGs) announced by the United Nations in 2015 were dusted out and serious implementation efforts began to meet them by 2030. environmental, social, and governance (ESG) came to the centre stage as all sovereign wealth funds and large agglomerations of resources beamed their attention on the meeting that announced the ESG targets and actions.

Boards brought the sustainability agenda to the top table and regulators and standard setters got active in bringing order to the world by harmonising reporting and standardising measurements. The language and grammar of sustainability will come into place in two years.

Action is happening as we speak. Innovation will reach warp speed. Cure for cancer may emerge sooner than expected, cash will become a distant memory, semiconductors will be everywhere and in everything, wearable technology will blur the lines of realty, digital entertainment will take centre stage, autonomous vehicles will reach the fast lane, green, 3-D printing driven machines will rule manufacturing, renewable energy will exceed 75% in five years, and reimagined companies will make the world better.

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Technologies to drive ESG focused world

The ESG focussed world that comes after multiple centuries of human effort and destruction of habitats has assets valued at $400 trillion at constant prices. Alas, a fourth of these assets are now stranded or in need of repair and renewal. While technology has created a veritable revolution, capital and converging technologies are causing continuous stranding and obsolescence.

As a species, humans have emitted 1900 gigatons of carbon, causing typhoons, extreme weather events, desertification and other scourges. It was identified systematically in 2017 that we need to draw down at least 1050 Gigatons by 2040 to reach a tolerable level for the human race to survive. Reductions will come from reimagining food production, energy transition, changed land use, educating and including women and girls, deploying new materials, greening buildings and cities, and making mobility fossil fuel free.

The world must achieve net zero status by 2050 and India must soon announce her own target. Hydrogen, solar and wind will need to replace fossil fuels. As soon as this is visible, the value of the Indian rupee shall soar. Back this by a visible commencement of semiconductor manufacture and Indian IT prowess will be valued far more.

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Future business decisions and ESG targets

All capital allocation decisions must henceforth be made using the ESG lens. If the Centre adopts a green budget, this will percolate down to Panchayats through states, districts and towns. Corporates will announce net zero commitments as the requirement of BRSR kicks in and the tap of global investments can be turned on only with an ESG visibility. Young and trained workforce will commit itself only to ESG compliant companies.

As strategic plans begin to display gross zero approaches, and science-based targets get committed to, the entire tide of investments will change. The metrics deployed to support decision making will all bear a green fingerprint. As financial reports get reimagined, the entire audit profession will pivot to Integrated Reporting and assurance of six capitals as opposed to just one as happens today. Actions and outcomes will alone speak to investors. All investor conferences will begin to have a ESG agenda. This is the ESG focused world that is rapidly emerging.

The much touted 15% global minimum tax announced with fanfare by the G-7 is a bridge at least 5 years away. It is focused on capturing some tax from 57 out of the world’s top 100 corporations that are from the US. These will be prevented from changing their tax base and shift profits to low tax jurisdictions. Pushbacks will come from export dependent countries, R&D focussed enterprises with low average tax rates, definitions of what constitutes profits in each jurisdiction, cost allocation mechanisms, application of double tax treaties, and the difficulties of policing and collecting penalties.

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The world needs honest and accountable governments raising no more than 15% of the world’s $90 trillion GDP. Capital so raised should be redeployed in redistribution, protection, infrastructure creation, education and healthcare. Simple, fair, digital, and litigation free taxes must replace the complex systems.

Investments need to pivot to meeting net zero targets. This may amount to 25% of global GDP for a 10-year run. This may stabilise at 15% of GDP in the long run for maintenance capex. Technology investments must rise from the current low levels to 15-20%. Only converging technologies will deliver the productivity gains to raise all boats in the world. The remaining resources may be allocated to providing high quality health and education to a stabilising population which will peak at 9 billion.

The driving force will be inclusion, equity, diversity and comprehensive availability. World and corporate investments will pivot from pure return to sustainable outcomes in a free and liberal environment of collaboration. The investment paradigm is undergoing fundamental transformation. The world will emerge abundant, clean, green and highly satisfying to 9 billion people.

Salaries will be linked to ESG outcomes, vary with levels and sharpness of skills, and will be determined objectively by nomination and remuneration committees. Often, distributions will be made automatically to implicit and explicit requirements. Work from home, hybrid home and office work and work from anywhere from comfortable offices will drive the smart contracts that will, in turn, drive job seekers to becoming micro entrepreneurs. Share based incentives with long period locks will be the norm. Collaboration and joint venture driven enterprises of appropriate scale will be the new world.

Role of corporate boards

  • In such a world, lets contemplate the role of Boards.
  • To ensure compliance using digital platforms and aim for a litigation free enterprise.
  • Digitise and portalise taxes both direct and indirect and let the finest platform as a service manage the entire pay obligations.
  • Advocate fair, simple and digitally determined taxes.
  • Participate in warp speed increments in healthcare, reskilling, education and reimagining processes.
  • Risk manage upward and downward scaling of all operations in a capital light, super productive world.
  • Build relationships and partnerships continually.
  • Get into smart, enforceable and fair contracts and variabilise all costs.
  • Partner with machine learning and artificial intelligence driven processes. Embrace data-led, benchmarked and cloud-based operations.
  • Harness quantum computing, 3-D printing, VR-AR, and 5G networks.
  • Bring forward your net zero commitments continually.
  • Communicate wide and frequent in a way that sharing of insights and best practices happens always.
  • All stakeholders including chambers of commerce, industry bodies and NGOs will need to align actions to support this emerging ESG focused world.

(Shailesh Haribhakti is a renowned chartered accountant and corporate leader based in Mumbai.)

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