Engagement International: Addressing responsible tax

Engagement International  helps institutional investors act as active responsible owners through corporate engagement.  

We believe that addressing sustainability outcomes through investor stewardship efforts can contribute to the long-term value creation for our clients’ beneficiaries and other stakeholders. We would like to contribute to solving global systemic issues by engaging with companies with the highest risk of adverse impacts related to the UN’s Sustainable Development Goals (SDGs), the UN Global Compact, the OECD Guidelines for Multinationals, the UN Guiding Principles on Business and Human Rights and other relevant international norms and conventions. Most of the companies we engage with are identified by the World Benchmarking Alliance as those that are most influential to achieving the SDGs.  

Why we are tackling responsible tax engagement

We decided to address corporate tax for two reasons: it was an area of interest from our current and potential clients expressed an interest in the topic, and tax avoidance has the potential to have company-specific and systemic, widespread negative impacts.  

Aggressive tax planning can pose earnings risks, governance problems, reputational risks and brand value damage to listed companies. On a macro scale, and in connection with sustainability outcomes, aggressive tax planning can also lead to macroeconomic and societal distortions. Firstly, it can erode governments’ tax revenue and make them less able to finance essential services, crisis response, and the SDGs. According to a study quoted by the IMF, annual loss of corporate tax revenue due to the use of tax havens was estimated to be between USD$500 and USD$600 billion, of which USD$200 billion was from low-income economies. Secondly, it can encourage unfair competition between companies and countries. For instance, instead of competing against other companies on business model, product quality, operational efficiency etc, companies may focus instead on aggressive tax planning. 

Addressing tax is also aligned to our approach to addressing the SDGs. We believe that tax underpins all the SDGs as taxation provides the revenue that states need to generate resources and support a country’s infrastructure. 

What we are doing

In June 2018, we partnered with the Danish city of Aarhus to call on companies to adopt responsible tax strategies and to ensure that they have effective governance and management measures. The focus of this engagement was on considering corporate tax as an ESG issue, rather than a compliance issue, where loopholes may be found. Under this lens, the use of tax havens and aggressive tax planning without good explanations were as controversial and unacceptable as corruption and bribery. 

We have collaborated closely with MSCI since 2014, and they have provided us with ESG research data to help us identify our target companies and monitor progress. Collaboration with stakeholders, including NGOs and academics, was also crucial in developing our methodology. 

We decided to engage 10 companies to begin with: Apple, Google, Microsoft, Amazon, Credit Suisse, UBS, Deutsche Bank, Societe Generale, Royal Dutch Shell and Procter and Gamble. These companies were selected because they had the greatest number and severity of corporate tax controversies at the time of assessment at the beginning of the project, according to MSCI ESG Research. 

Our dialogue was oriented around 25 KPIs and five milestones related to corporate tax: 1) recognition and commitment; 2) strategies; 3) risk management and governance; 4) performance; and 5) transparency. Our assessment framework was grounded in the widely accepted international guidelines and best practices (such as the OECD, the PRI, the Global Reporting Initiative and B Team) and allowed us to monitor progress of companies in these areas. 

We prepare for when companies may be unresponsive, and have a stepped approach to escalate engagement. Possible actions could include: 

• Raising concerns with the company’s top executives and chairman of the board; 
• Raising our concerns with a company in the public domain;  
• Coordinating with other networks to gather greater support for our engagement; and  
• Encouraging clients to consider using their voting rights to express dissatisfaction with a company. 

The results

Most of the companies do not currently exhibit adequate management efforts across the five areas. However, some more proactive companies have undertaken notable initiatives to improve preparedness and transparency. We have also found some companies to be less present in tax havens and more transparent in terms of country-by-country reporting. 

We hope that ongoing engagement will lead to strengthened company progress across our five key milestones, which in turn may lead to increased payment of tax. However, we have decided to focus on company practice, as it is difficult to measure how much our engagement has contributed to the increased payment of tax. 

After three engagement and reporting rounds, we are now expanding the list of tax-related engagement cases from 10 to 25. We are also working on integrating proxy voting through our partner Minerva Analytics to complement our engagement efforts.