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 Climate Change

Innovation
Published on: July 7, 2021, 7:15 a.m.
Tax, investment and pay in an ESG-focussed world
  • Solar and wind will need to replace fossil fuels. Picture credit: Flickr

By Shailesh Haribhakti. The author is a chartered accountant

During the pandemic, a realisation dawned on the people that we need to focus on our commitment to limit temperature increase to 2 degrees celsius within the next decade.

The 17 SDGs (sustainable development goals) that the world received from the United Nations in 2015 were also dusted out of the shelf and serious implementation efforts began to meet targets by 2030. ESG (Environmental, Social and Governance) came to centre stage as sovereign wealth funds and large agglomerations of resources beamed their attention on meeting announced ESG targets and actions.

Boards brought the sustainability agenda to the top of the 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.

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

This ESG-focussed world after multiple centuries of human effort and destruction of habitats has assets valued in constant US dollars at 400 trillion. Alas, a fourth of these assets are stranded or in need of repair and renewal! While technology has created a veritable revolution, capital light and converging technologies are causing continuous stranding and obsolescence.

As a species, we have emitted 1,900 gigatonnes of carbon causing typhoons, extreme weather events, desertification and other scourges as a result of rising temperatures. It was identified systematically in 2017 that we need to draw down at least 1,050 gigatonnes 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. Green 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.

All capital allocation decisions must henceforth be made with the ESG lens. If the Centre adopts a green budget, this will percolate down to panchayats through states, districts and towns.

Corporates will all 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 an ESG agenda. This is the ESG-focussed world that is rapidly emerging.

The much touted 15 per cent minimum tax announced with fanfare by the G-7 is a bridge at least five years far away. It is focussed on capturing some tax from 57 out of the world’s top 100 corporations which 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. The world needs honest and accountable governments raising no more than 15 per cent 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 that exist today.

Investments need to pivot to meet net zero targets. This may amount to 25 per cent of global GDP for a ten-year run. This may stabilise at 15 per cent of GDP in the long run for maintenance capex. Technology investments must rise from the current low levels to 15-20 per cent.

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.

Pay will be linked to ESG outcomes, will vary with levels and sharpness of skills, and will be determined objectively by NomRem 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!

In such a world, let's contemplate the role of boards:

- insist on rigorous 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 variabalise  all costs

- partner with machine learning and artificial intelligence driven processes. Embrace data led, bench marked 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 of us, including Chambers of Commerce, industry bodies and NGOs will need to align our actions to support this emerging ESG-focussed world.


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