Environmental, Social and Governance (ESG) investing is seen by many as the fastest-growing investment strategy of the 21st century, with an estimated $40tn of global assets now covered. This tracks the rise of social responsibility around the world and is attractive to investors not only because it reflects their values but also because ESG investing can deliver good returns. While opinion on this is divided, recent reports point to ESG investment funds outperforming their non-ESG peers over one, three, five and 10 years.
So far, so sustainable but there is still a long way to go. Among the hot topics facing ESG advocates is the definition of exactly what an ESG investment is. While huge strides have been made by ESG rating agencies to use market data, AI and published information for this purpose, further progress is needed to agree and apply a uniform standard for the recognition of ESG-qualifying investments.
Furthermore, the scope of ESG continues to evolve. In the governance area, the way in which corporations address their tax responsibilities matters to ever-growing numbers of investors. In particular, companies which are perceived to indulge in aggressive tax avoidance find themselves under increasing scrutiny. Some institutional investors and ESG rating agencies are known to downgrade companies with a history of aggressive tax avoidance. Although these businesses may be felt to be out of step at a time when socially conscious investing is at an all-time high and increasing, it is not entirely clear what the financial and reputational impact of this may be.
Two developments mean this may be about to change.
At the September 2020 meeting of the UN General Assembly, a new fair tax advocacy plan was announced. With the support of a number of bodies including the UK Fair Tax Mark, the Independent Commission for the Reform of International Corporate Taxation, UN Principles for Responsible Investment and the Global Reporting Initiative, this increases the likelihood that companies claiming ESG status will find their tax practices are subject to scrutiny. Increasingly, the most egregious tax avoidance is being recognised as something which requires great skill but which is not very smart.
This brings us to the second development, the OECD initiative to ensure that profitable global corporations pay corporate taxes where they operate instead of shifting them to tax havens. Last week, the OECD announced that it has finished work on the technical principles for taxing multinational companies which would raise up to $100bn in additional taxes worldwide without increasing corporate tax rates. While G20 nations have expressed agreement over the principles of these reforms, political compromises will be required if they are to be implemented in practice.
Since the OECD project began, the USA has been reluctant to require its companies to adopt all aspects of the proposals. This schism between perceptions of the global interest and the national interest have already manifested themselves in American opposition to digital services taxes impacted by countries such as the UK. The big question now is whether the next US administration will be prepared to concede on sufficient points to allow the OECD plan to go ahead. If it does not, further trade wars appear inevitable.