International tax and ESG
The changing international landscape
ESG is the common banner under which sustainable, ethical and responsible activities are being badged. In 2025, companies are adapting their ESG strategies to focus on material risks and opportunities and good corporate governance.
At the same time, organisations are also needing to continually adapt to the current changing world in which they operate, with tariff wars, geopolitical trade shifts, increasing costs globally and the advancement in AI and other technologies.
Ultimately, for many organisations, it is currently a balancing act between pursing their planned ESG agenda and being able to adapt their organisation to be flexible and profitable within the current changing environment. Unfortunately, the two may not always easily align from an ESG perspective.
Reducing emissions
Reducing emissions and achieving Net Zero is crucial to limit global warming to 1.5°C above pre-industrial levels and avoid the most catastrophic impacts of climate change. An increasing number of organisations have now realised the strategic role that Net Zero plays in addressing climate change and are working to align their business strategy and activities with a Net Zero path.
By considering the opportunities afforded by a lower carbon economy, successful international organisations are updating their products, services and employment approach to be aligned with changing demands and thereby seek to obtain a competitive advantage.
Unccessful organisations will be those that make ESG commitments, set targets to achieve them, measure and analyse their emissions. They should also be able to adapt, innovate and identify opportunities in the rapidly changing world we are currently living, so that they can add value to their customers, employees and local communities.
Taxation
In addition to ESG, tax has also become a reputational risk to organisations. Organisations now operate in a world where tax is considered a moral issue, with headlines frequently appearing in the news with regards to how an organisation manages its tax affairs. Consequently, many boardrooms and owner managers are focused on ensuring that their tax status is seen positively by their stakeholders, employees and society, and that they do not face any negative publicity from their tax affairs.
The increased daily news items on taxation, tariffs, sustainability, recycling and reuse is going to ensure that the green agenda and taxation remain topical areas of consideration in the short to medium-term.
Tax is therefore becoming pivotal in the ESG debate as most actions which an organisation undertakes will have a tax consequence. Highlighted below are four themes we are seeing, and which will increase in importance during 2025 and beyond.
Many governments have now introduced a range of taxes, levies and other measures as a mechanism to incentivise organisations to adopt improved environmental and sustainability strategies. The measures largely consist of additional taxes and reporting obligations as well as additional incentives to encourage organisations to adopt greener practices, purchase and/or sell environmentally friendly products. For many countries, this is focusing on using cleaner energy sources, fully electric / green transport alternatives, better protection of the natural environment and the adoption of innovative technologies.
Environmental taxes
To meet these objectives, we can expect further environmental taxes to be implemented over the next few years. International organisations and finance functions therefore need to be prepared and have adaptable processes to be able to manage the additional compliance burden these will bring, along with how any new taxes will impact their operating profits, pricing, cashflow and forecasting models.
Tax incentives
The other way to change behaviours is to offer tax incentives. Many governments globally are seeking to provide reliefs to different types and sizes of organisations to encourage them to innovate through research and development, to use greener sources of fuel, for example, biogas or hydrogen, invest in heat pumps or insulation products or purchase energy-efficient technologies, electric or low-emission vehicles.
In addition, some governments, such as the UK, are providing tax reliefs and incentives for employers to provide and employees to choose ‘green’ transportation options including the installation of a charging point at an employee’s home with the provision of an electric company car.
With the UK government planning to ban the sale of new petrol and diesel cars and vans from 2030, and other countries making similar commitments, alongside media and environmental campaigners focussing on this area, we can expect to see further changes in this area in the future.
Clearly such tax incentives go some way to encouraging international organisations to invest in the production of, and people to buy, energy efficient products, although there really needs to be a fundamental global shift if we want to change the decision making and buying habits of people in Europe and across the world.
As organisations continue to operate and establish operations in overseas countries, they are going to need to proactively monitor and adapt their strategy to the ESG related policies and taxes in each overseas territory in which they operate. There is no uniform set of ESG taxes that are being applied across all jurisdictions.
Each country is making its own commitments in relation to meeting its environmental, sustainability and social responsibility obligations for its citizens. Therefore, each will potentially be taking a different route in the way that they achieve their objectives depending on the socio-economic factors that are relevant to their countries’ population.
Institutional investors, banks and fund managers are now seeing ESG as being one of the criteria used to inform their investment decisions, to ensure investment strategies shift towards sustainable and responsible investing and are focussed on businesses and territories that do not have weak reporting strategies.
In addition, an organisation’s ESG considerations need to be sincere, embedded within an organisation’s strategy, and not be seen as obvious “greenwashing”, which can cause more harm than good to an organisation’s reputation.
This trend in tax governance scrutiny and social responsibility will become of increasing importance not only to multi-national organisations, but also to SME businesses that are seeking to expand and grow internationally.
Many large international organisations already have a requirement to consider and provide transparency around their taxation affairs. We are seeing a shift away from not just being compliant and reporting information on their tax affairs / tax strategy, but to organisations seeking to demonstrate as to why an approach has been adopted and how this interlinks to their wider purpose and ESG strategy.
This approach is also starting to be mirrored by some forward-thinking SME organisations, who may not have an obligation to report, but wish to disclose their approach to be able to demonstrate their sustainability and social capital credentials within the community in which they operate.
What should organisations do?
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In the context of taxation, in our experience, there are five actions we recommend organisations take to ensure that the full range of benefits from their ESG initiatives are delivered.
As the pace of change increases and as world events impact organisations, environmental/sustainability matters continue to increase in significance; it will be important for international organisations to have robust processes and controls in place to enable their ESG strategy and tax affairs to be integrated. This could, for example, be changes within the organisation, such as implementing new international supply chains, handling new environmental taxes, identifying and maximising global reliefs from available tax incentives, dealing with increased compliance requirements from ESG reporting and tax digitalisation or entering new geographical markets. |
Final thoughts
In the short-term, there will be a tension between ESG and flexibility/profitability for many organisations as they face global challenges outside their control. However, successful organisations will be those that continue with their international ESG strategy, recognising that there is likely to be a lot of change in this area and that some of it is likely to move at quite a pace, driven by the media and campaigned by interested stakeholders.
Tax will be a critical tool in the development of global ESG governmental policies. Not keeping abreast of changes in this area is likely to lead to international organisations being on the back foot compared to their competitors. Those organisations that are forward-thinking and are able to embrace ESG for the benefit of their global business, their employees and wider communities should be able to prosper, achieve positive reputational benefits and a real competitive advantage.
For any further help and assistance for your organisation, please do contact Simon Crookston or your usual Crowe contact.
