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ESG: opportunities linked to a paradigm change

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Impacting all aspects of corporate life, ESG (environmental, social and governance) criteria are also shaking up taxation, prohibiting certain optimization practices that were commonplace in the past.

While the letters ESG resonate in most people’s minds as a tool for developing more sustainable practices in all sectors of activity, the full scope of their application is not always understood. The CSR model of yesterday, in which companies used to fund one-off humanitarian projects, is definitely outdated. ESG criteria are much broader and need to be implemented at every level of the organization. “It’s really about adopting a sustainable mindset,” explains Namik Ramić, Corporate Partner at Dentons in Luxembourg, a global law firm. “Depending on the company’s activity, they will need to consider different aspects: waste and energy management, organizational governance, sustainable and ethical sourcing, diversity and inclusion, etc. The goal is to continue to produce, to deliver services, while considering these ESG criteria.”

The goal is to continue to produce, to deliver services, while considering these ESG criteria.
Namik Ramić

Namik Ramić,  Partner Corporate M&A,  Dentons

Moreover, the public, media and regulators have become wise to greenwashing, and are now demanding evidence of sustainable practices across the organization. “It is no longer possible, on the one hand, to burn forests in the Amazon and, on the other, to plant a tree in a park in London and say that you are thus offsetting the harmful effects of your activity,” explains Namik Ramić. “Indeed, the public, which is increasingly sensitive to these issues, always ends up knowing whether a practice is greenwashing or whether it has a real impact. Companies need to make ESG a priority now: without a clear policy on this level, the risk to their reputation is indeed too great.”

A change in the tax paradigm

In terms of taxation, the ESG movement builds on wider legislative trend we have seen over the past few years, as regulators at the EU, OECD and national level seek to improve transparency and, ultimately, ensure companies and individuals pay their fair share of tax. The last decade has brought the OECD BEPS, the EU Anti Tax Avoidance Directives and BEPS 2.0 with the Pillar One and Two rules, to name just a few.

“We have witnessed a real paradigm shift in terms of taxation,” says Jean-Luc Fisch, Tax Partner at Dentons in Luxembourg. “The goal is no longer to pay as little as possible through aggressive tax optimization. On the contrary, companies need to develop a fair and sustainable tax strategy, or face the risk of seeing their reputation degraded and the attractiveness reduced in the eyes of investors – not to mention the risk of investigations or sanctions by the tax authorities.”

We have witnessed a real paradigm shift in terms of taxation.
Jean-Luc Fisch

Jean-Luc Fisch,  Partner Tax,  Dentons

The role of the tax lawyer

The lawyer or tax adviser, who assists individuals and companies in managing their tax affairs, must not only ensure compliance with current legislation, but must also be able to anticipate future changes. This means having a sharp ability to identify what is ethical and what is not. “Looking back a decade or so ago, the question we had to answer was whether a given tax structure was legal. Today, you have to be able to identify whether an approach crosses or could be seen to cross an ethical line, and warn the client,” explains Jean-Luc Fisch. “This is not always a comfortable position: ultimately, you need to walk away from a client relationship if certain standards are not met.”

In order to provide real added value to clients, the lawyer must also be able to see further ahead, to assess what will no longer be acceptable tomorrow at the ethical level. This requirement certainly increases the complexity of the profession, but has become indispensable.

“In such an environment, it is helpful for lawyers to have clear guidance about what is expected of them. For example, our Europe Tax practice developed a ‘Tax Code of Conduct’ to provide clarity not only to our lawyers, but also to our clients and the general public on our approach to ethical tax advice. We have also implemented a global tax Ethics Committee, whom our lawyers can consult in complex situations,” says Jean-Luc Fisch.

“There is a significant risk in missing the ESG train”, believes Namik Ramić. “We are already seeing more favorable financing arrangements for companies which meet their ESG commitments. However, in the very short term, investors, regardless of the sector, could simply refuse to place capital in companies that are not ‘ESG compliant’. Being more sustainable has therefore become a condition of survival for many companies. This is also the case for us, as a law firm: our clients are now not only asking to be ESG compliant, but also to prove the implementation of such compliance.’

For the two Dentons Luxembourg partners, it is important not to lose sight of the fact that, beyond the constraints, the adoption of ESG criteria also represents a wealth of opportunities… in the long term. “There is a general movement for better quality, for production that is more respectful of the environment and of people. There are therefore enormous opportunities for companies that adopt the right practices now. They can develop stronger brands, more engaged employees, and more loyal customer relationships,” concludes Jean-Luc Fisch.