Podcast transcript: How to navigate the sustainability tax landscape
41 mins 40 secs approx | 31 January 2023
Susannah Streeter
Hello and welcome to the EY Tax and Law in Focus podcast. I'm Susanna Streeter and in this episode we're focusing on sustainability. Businesses are under pressure to act in a more environmentally responsible way, and now every forward-thinking company should have sustainability as one of its top priorities. But it's not easy to navigate the increasingly confusing landscape of taxes and incentives. The latest EY Green Tax tracker reveals the extent of this complexity with at least 1800 sustainability incentives. The tracker is updating continuously, so don't be surprised if those numbers have gone up yet again, when you listen to this. That's an awful lot for tax professionals to get their heads around, and the pressure is on to get to grips with the issue quickly, particularly following government promises at COP 26, and now at COP 27, to achieve net neutrality with businesses expected to quickly follow suit. There could be even more complexity to come. As government scrambled to replenish coffers wiped out by the pandemic, environmental taxes are increasing in popularity as a targeted source of revenue for governments. It's clear the tax function has the potential to help organizations navigate this global landscape, enabling them to take meaningful action on climate change in a way that makes commercial sense. Tax professionals can if the right approach is taken, help companies secure access to valuable incentives, achieve sustainability goals and build long-term value. But what steps should they take to ensure pledges and promises really are turned into meaningful progress? Well that's what we'll be discussing during today's podcast, and I'm delighted to say I'm joined by a top panel of experts, who will assess the challenges we face and give us their latest insights on the best approaches to take. But before I introduce them, please remember conversations during this podcast should not be relied upon as accounting, legal investment nor other professional advice. Listeners must of course consult their own advisors.
Streeter
So now please welcome Cathy Koch, who is EY's Global Sustainability Tax Leader. Welcome to the programme, Cathy. Where are you joining us from today?
Cathy Koch
I'm joining from Washington, DC today, and I'm very glad to be here.
Streeter
Great to have you with us on the podcast. Also, welcome to Alenka Turnsek, EY's Sustainability Tax Leader for EMIEA. Welcome Alenka. Where are you?
Alenka Turnsek
Hi Susanna. I'm joining you from London and thank you for having me today.
Streeter
So much to talk about Alenka. And finally, Jesper Solgaard, Asia-Pacific Sustainability Tax Leader who stayed up to join us from Sydney in Australia. Thank you very much.
Jesper Solgaard
Thank you, Susanna, I look forward to this conversation. It's gonna be fun.
Streeter
So first of all, Cathy, tell me, let's talk about COP 26, and COP 27. Did those conferences clarify the situation, or make it even more opaque, would you say?
Koch
I think they clarified the situation. I think we know now that we're headed dangerously towards 1.5 degrees and maybe higher. And that was not addressed so directly in COP 27's final agreement. But the fact that it wasn't addressed directly created a bit of an uproar around the conference. I think it's very clear now that we're headed into dangerous territory, and everyone knows, what has to be done, even if it wasn't in the agreement, and the fact is that we have to do a lot in a short period of time.
Streeter
So yes, Cathy, as you say even more reason for incentives really, and increased sustainability practices. So tell me about this vast array of environmental taxes and incentives which are out there. What is the latest update from the EY tracker?
Koch
We've hit 1950 sustainability incentives, up from our last version, which was 1850. That's just in one quarter. That's an amazing proliferation of taxes and incentives. There is now also 3000 environmental taxes and exemptions that businesses have to navigate across the 45 jurisdictions that we follow. These 45 jurisdictions cover about 90% of global GDP. So it really represents the bulk of the economy. There are 82 carbon pricing regimes, some are sub national, others are national. But these are cropping up really every week we see new action. And I'll tell you, to bring this back to the COP for just one minute. Every country makes pledges, we're going to reduce fossil fuels, we're going to reduce emissions, we're going to be net zero at some point. Those policies, they come home and they have to enact or those pledges they come home and they have to enact policies to reach those goals. So we should be seeing another kind of round of policy activity to implement the pledges made it the COP.
Streeter
Okay, well, let me bring in Alenka on that point. So what do you think Alenka, after COP 26 and COP 27. Do you see evidence that businesses really are picking up the baton and making strides to benefit from the incentives now available? And if not, why not?
Turnsek
So Susanna if I answer from the EMEIA perspective. So yes, we are seeing companies increasingly asking for more support from an incentives perspective to accelerate their activities in environmental space. We've seen that even before COP 26. So in EMEIA, the origins are in the EU Green Deal, which made financing one of the three big pillars in the transition strategy. And it pledged over 1 trillion euros over 10 years when it was introduced in 2019. So we see a great mixture in Europe, and that perhaps differ from the other parts of the world, in the type of financing available. So we see everything from traditional tax incentives, R&D incentives, capital allowances and the like. And then we also see non-fiscal incentives in the forms of grants, loans and fundings. And the combination of those really address everything from a planning perspective with environments, improving and bettering the company's activities, all the way down to what we're probably going to see more and more is the investment in adaptation activities. So yes, I'd say it is absolutely increasing for various reasons, as long as it's got environmentally a creative objective in Europe, then the funding is available.
Streeter
What about in the US then, you've talked about EMEIA, what's the situation like in the United States?
Turnsek
So in the US there's probably a couple of things. Earlier this year, there was a landmark US federal law introduced, the Inflation Reduction Act that is focused on, obviously, curbing the inflation on health care. But the big part of that bill was to invest into the energy, into renewable energy and to accelerate the transformation or transition towards new energies. And included in that bill was a 400 billion financing package that was really overall aiming or if it fully gets implemented to invest in into the renewable energy. So substantial reduction in GHG emissions up to 40% by 2030, as compared to 105. And they've talked about the US. So not only is this package is quite as I said, a landmark packages being available. It comes through slightly different instrument, so a tax instrument that goes through tax credits, and the type of energies that it covers is everything from energy storage, biogas, solar, wind, carbon capture, sequestration, hydrogen, even nuclear. So it's really substantive. And we are expecting both in EMEIA and the in US for the incentive and investment funding being available for the incentive and investment to continue to increase.
Streeter
So as you say, pretty comprehensive. Let me turn to Jesper now, Jesper Asia is known for having a lot of incentives. But just how complex is the horizon in front of us, and just how much does this vast array of incentives differ from elsewhere in the world?
Solgaard
Yeah, I think it's fair to say that sustainability in general, we are a little behind in Asia-Pac, and therefore, the incentives that come with that. Having said that, we are seeing lots of new incentives popping up. But also a lot of the existing incentives can actually be used for sustainability initiatives that companies are taking on. So yeah, you need to spend some time on understanding the incentives, obviously, and unfortunately in Asia, every country will have different types of incentives and different ways that they've structured them. But not only at a country level, but even at a local level, it can be down to the territory or the city or the state that you're in.
Streeter
Yeah and similar, there's so many opportunities out there, and do you think as well, that businesses are also waking up to the costs of climate inaction, if they don't keep pace with sustainability drives?
Solgaard
Yeah, I mean, I think for the last 12/18 months, more and more companies are obviously waking up to the fact that there's a stakeholder expectation. So, customers, it might impact your revenue if you don't take the right initiatives in this space, but also even in institutional investors, they might not give you access to funding if you're not showing progress in the sustainability space. So yeah, I think most companies have woken up to it and are trying to find ways to actually maximize, not just on the environmental front, but also from a business point of view and see how they can maximize both at the same time.
Streeter
And Cathy, what other trends are you seeing from policymakers on a nation-by-nation basis?
Koch
There are pledges made across the globe to reduce greenhouse gas emissions. Going into COP 27 we had 130+ countries who have pledged net zero, that covers 80% of worldwide greenhouse gas emissions. After this COP, which of course just ended, we'll see those pledge numbers go way up, haven't yet tabulated all that. And again, they'll come back and they'll say, okay, now we've made this pledge, how do we get there? What's the path? And then they'll develop policies. One of the policies that I see around the globe is more reporting requirements. In fact, the US put out a new reporting requirement for government contractors announced during the COP, this is a requirement to report scope three emissions, these are big responsibilities that a business has to take on in order to keep operating with the US government, and then we do see the US Securities and Exchange Commission has a proposal out for environmental climate reporting that will probably be voted on early in 2023. And around the globe, we see similar policies being implemented, we now see mandatory reporting coming on board in the EU, Japan, UK, India, Korea, Canada is proposed. I suspect we'll see them, you know, hopefully they'll converge, so it's easy for businesses across countries to comply with all the requirements at once. But I suspect this is not a trend that's going to go away, and it's a very powerful trend. If companies have to report on their progress, they're going to make more progress.
Streeter
And let me bring in Alenka. I mean, to what extent do you think the fact that governments are scrambling to raise funds to help with recovery from the pandemic, and help also deal with the impact of inflation, part of the story here? Do you think that's also moving the dial?
Turnsek
Oh, yes, certainly. I think in the UK, we've had a budget announcement fairly recently and yeah, the taxes have increased on all fronts, really, to help governments fill their coffers again, and deal with the current macroeconomic circumstances, that was mainly traditional taxes, I should probably add to that. However, we are also seeing the environmental taxes emerging, perhaps not so much in a combination when dealing with common macroeconomic circumstances. But it is to address the pledges that Cathy has mentioned before, that companies are making around GHG emissions. So that's primarily the carbon taxes side, but also to deal with pollution really, which is another of a triple crisis that we currently have, and that is coming through the taxes on the resources, and we are going to see more and more as some of this triple crisis is emerging. And by that I mean carbon biodiversity. And then the third one is pollution. So we are going to see more of increases in taxes.
Streeter
Jesper, what's your take on this?
Solgaard
I think it's very evident that tax authorities are stepping up, spending more energy on collecting taxes. But at the same time, as we've talked about earlier, in terms of incentive, there are so many incentives out there. And companies just have to get on to it, because yes, there will be more scrutiny on taxes and there'll be more behavioral taxes to be paid and to deal with. But it comes with the positive side, which is the minimal incentives out there as well.
Streeter
Cathy, to what extent is a reputational issue really at stake here? Do you think the pressure now be on companies to measure climate-related progress in real ways is ramping up right now?
Koch
Oh, it definitely is ramping up and it's an interesting, to me, phenomenon, because this is not just coming from governments and going, you know, down onto business onto individuals. But this is actually a full circle stakeholder demand, employees are asking their employers, where's our sustainability report? What are we saying? Prospective employees ask us that, investors look at sustainability reports. And we actually are working with a lot of clients, we help them, we look at their reports, we tell them how they rank relative to others in their industry, it really means a lot. And you know, again, from employees, to investors, to stakeholders to customers, the pressure is on.
Streeter
Yeah it's a really key point you make there the pressure coming from employees as well, and they're really scrutinising the detail. So Jesper, let's look at these incentives, drill down into them. What are the main drivers or ideas behind them?
Solgaard
I think Cathy has mentioned a couple of times that countries out there are doing pledges about going to net zero at a certain date, and one of those is obviously to put in place some incentives to accelerate that transformation, basically. So it's really to drive companies to move faster, be more innovative, drive a faster road to net zero.
Streeter
And what about the taxes? How have they evolved and what kinds of new taxes are being introduced? I mean, it was really interesting to hear how New Zealand is even considering taxing methane gas produced by farm animals.
Solgaard
Yeah, I did see that and it is interesting how they're actually going to tax the cows and how they're going to collect the taxes from the cows in the first place. But no jokes aside, obviously, methane is a big issue as well, but yeah, you will see and we have like 3000 different behavioral taxes, and we'll see more of those and obviously, that's one way that governments are trying to impact taxpayers in terms of either businesses or consumers on what they want them to do, or what they don't want them to do. So we did a mapping recently on number of companies and sugar taxes are coming in, in Thailand and Malaysia, for example, and that will impact the type of recipes that people are going to use and the products that we're gonna be either eating or drinking going forward. So we've seen tons of those different taxes coming in, and some of them will be easier to comply with, and some of them will be difficult, and I think that's the real challenge for taxes is that those taxes will be sitting everywhere in the organization and eventually the tax department will need to make sure that the compliance that we're reporting on the right things, but also that we have the data so we can actually be compliant in the first place. Because not all these taxes are going to be based on financials that sit in our normal EIP system, it might be based on, for example, on the plastic tax that is based on the weight of the plastic, you don't have that in your system, so you need to basically make sure you get processes in place. So you have the right data in the right place. So you can be compliant.
Streeter
Yeah and that's a snapshot then from Asia in particular, what kind of changes would you say Alenka, you're seeing in the EMEIA region? Are they similar to what Jesper's been outlining?
Turnsek
Yes, we're seeing very comprehensive taxes and again, it follows the very broad remit of the Green Deal, which focuses on climate resources and leaving no place and no person behind. So if we bucket these taxes, I think the first bucket certainly is everything related to climate change. And you see a number of different instruments coming through that from energy taxes to carbon taxes and emission trading system that are really trying to reduce the per-activity emissions. We're also seeing new instruments such as the carbon border adjustment, which is essentially a trade instrument, while trying to deal with carbon emissions. So that's kind of your first big bucket. The second bucket which is around use of resources and reducing pollution and introducing circular economy deals, particularly we see now plastic to start with and more broadly packaging. So we have plastic packaging tests coming in in a couple of locations. We have extended producer responsibility, which is essentially a measure to deal with waste that manufacturers put on the market that's being implemented across the EU and also UK, it's far more extensive and more impactful in terms of P&Ls, that's your second category, and we are going to see more and more resource taxes coming through this is just the beginning. The third bucket is really around taxes on food and beverages, around high fat and sugar taxes. And that's a separate category impacting certain industries. We're also seeing other interesting measures around deforestation that again, the US trade element, which is quite interesting, the straight measures fall into the bucket of extraterritorial measures. So not only is it activity within the EU, but it matters where that particular product comes from. So the second one I wanted to relate to is deforestation regulation that's currently being discussed, and the companies will need to certify that the certain high-risk products that come into EU did not cause deforestation, and that has a wide impact. So if you like three to four buckets that we have very comprehensive, and this is just an indication of a trend that's likely to be increasing over time.
Streeter
So lots of buckets to catch all of these incentives in there. So Cathy, what tools can companies harness to really raise awareness right across the tax function about this complexity? I mean, how useful is the EY Green Tax Tracker in terms of trying to get wider green financing?
Koch
Well I think it's very useful, but I spend a lot of my days looking at it. So that may be the reason. But the truth of the matter is, and we do talk to a lot of clients about this, we ask, what do you need, and a lot of what they need is just a resource out there to help them keep track of where the policy space is going, and the Green Tax Tracker, it should not be a tool to say okay, let's get you a bunch of incentives for what you already did. The whole idea of the Green Tax Tracker is to make our clients aware of the opportunities involved in steps they may take to decarbonize their supply chains going forward. Also, what the Green Tax Tracker does is it kind of spells out a map that each country has for what it wants. They make these policies to hit pledges. So the policies actually form, you know, a kind of map into the policymakers plans for addressing climate change in each country. And as well as EY professionals who can talk about things like this, we help companies get ahead of these policies, and then, be part of the policy making progress, get involved, lean in, drive the policy, if you see a set of policies that it is not working, or you don't think it's going to work, it gives an opportunity for a business to get involved, and try to drive policies that may be more effective, may be more beneficial.
Streeter
I suppose a real opportunity where businesses can show real leadership. So Alenka, let's delve deeper into one of these, the EU Carbon Border Adjustment Mechanism. How does this work? How should it be monitored? And how can businesses get ahead in dealing with it?
Turnsek
It's an interesting one. I alluded earlier to the Carbon Border Adjustment Mechanism or CBAM for short. It is introduced through a trade as an extra territorial measure, and it is focusing on certain products imported in the EU that have a very high carbon intensity or high carbon content. Bear in mind this regulation still being negotiated so we don't have final legislation yet. But at the moment fertilisers, aluminium, cement, iron and steel and energy are included in the scope. There has been some discussion of also including polymer or basic chemicals, probably not in a first wave, but to be considered in the next wave whenever that comes in. And the way this works is when these type of products are being imported in the EU, the charges are levied on the point of importation. What it's looking for is to tax a difference in the costs that have been paid on the carbon release to produce those products. So the difference if the product was produced in the EU versus where the product has been produced in a country of origin. What it's trying to do is, if certain carbon taxes have to be paid in the country of origin for those products, then that tax would be deducted, therefore be levelled out and no additional charges will be due. And through that, I think what it is trying to do is really two things and that's why this instrument is so hotly debated. It's saying consider what sort of energy is being used in a country of origin to reduce the carbon emissions and carbon intensity involved in the production of the product. And secondly, it's indirectly influencing or trying to encourage the countries of origin to introduce the carbon pricing mechanism in whatever form in their countries. And of course, it will influence a little bit in the short to medium term, the supply chains. Some are more vulnerable than others, but that's what it's trying to do. One is a type of energy use, and the other one is potentially some of the restructuring of the supply chains.
Streeter
Let me bring in Jesper, because it does all seem pretty complex, doesn't it? You know, as Alenka is outlining. How do you think technology can really help simplify environmental tax complexity and help companies calculate their tax exposure with sustainability tax transparency?
Solgaard
We've talked a lot about incentives and opportunities for taxpayers, but the tax department is definitely standing in front of a pretty big challenge. Because as there will be more and more focus on being compliant and having good governance in place, there will be an expectation that tax departments on top of all these taxes and all these new regimes that come in, and one element of that is just being aware of them, we've talked about the tracker and how we can be aware of them. The next thing is actually to be able to be compliant. And there's no way that we can do that on an Excel sheet back in headquarters, because these taxes, it's in all countries. Everywhere in your value chain, and you need to be on top of them. So the only way is to start looking at how can I track the data, how can I make sure that I'm compliant, have I filed the right returns, have I done the right disclosures in every market? You can't do that on a manual basis, you've got to get on top of that, and put in place a system where we collect the data, we check the data, we make sure that we can actually report where we need to report, and then we track that the reporting is happening on time on spec, and as a tax director, you need to have some kind of dashboard in the end of it to see exactly what has happened because otherwise, you can't monitor every market.
Streeter
It does seem as though it would be very difficult to do so. Let me move on just to look at what the C-suite is doing in making sustainability strategy decisions. I mean Cathy, are these based on cost or reputation or something else?
Koch
I think that they're based on cost and reputation. But I do think the brand and the reputational responsibilities are foremost, it's just impossible for a company not to talk about their sustainability, report their sustainability activities or sustainability pledges these days. It is part of the brand, and what I think is it represents kind of a responsibility and an opportunity, as it were, perhaps for tax professionals to be in the C-suite, with top execs talking about how all the strategies designed to hit these pledges for any company, they all have tax implications, if I changed my power purchase agreement, if I move a supplier from, even in the US from one state to another, and I'm crossing into a new sub-jurisdiction, these are all tax events, really. And what I think sometimes is that not everyone in the C-suite, not everyone in the sustainability part of the organization is aware of all the financial implications of every change made to address a company's greenhouse gas footprint and sustainability profile.
Streeter
Do you think the true cost of inaction is starting to get nearer and nearer, and actually, there isn't enough realization of that fact?
Koch
Jesper talked about this a little earlier, the cost of inaction is huge. You know, when we talk to some businesses and stakeholders in the US and I used to work in the US Senate, and people would say, oh, that's a carbon pricing that's too expensive. This makes this more expensive. But what's really expensive, are the floods, the forest fires, and the climate events that are unpredictable, and hugely expensive. And so I do think there's a realization of that. Look at the heatwave in Europe this summer, they say 15,000 people died during that heatwave, due to this climate event, it's become undeniable that the real cost is in inaction. The problem is, those costs are distributed in a different way than the costs of perhaps policies like carbon pricing. But ultimately, I think we all have to admit that the cost of inaction is much higher.
Streeter
So Alenka, in your view, how then should the tax function keep pace with all of this, and really ensure that professionals aren't just observers, they're also helping lead ESG conversations and action?
Turnsek
So we talked a little bit earlier about just how many different instruments to deal with the environmental externalities that are coming through tax. So we see them in the indirect taxes, we see them through levies, and we see them through to trade instruments. So all of that is really sitting in domain of Head of Tax. Below the line they're actually counted as operating costs. The business is trying to understand the full impact, and trying to understand where the hotspots in value chains are, that will be most impacted, tax has a lot to contribute. That gives the heads of tax a seat at that strategic discussion table. It's not just about planning, companies are beginning to act. We're seeing the changes they're making to their operations in the supply chain, it takes some time, but that is beginning to happen, and tax has a lot to contribute in terms of changing business models, and also supply chains.
Streeter
So Jesper, what is your take on this? I mean, in your experience, are companies that engage the tax department in these conversations, better positioned to manage potential risks and find opportunities and ultimately drive value?
Solgaard
I think we are standing at a time when the tax department has a phenomenal opportunity to elevate tax within the organization. It's super relevant at all levels. It's relevant around reporting relevant around incentives, as we talked about, it's relevant around governance, and it's relevant around compliance and all the changes that Alenka talked about before drive tax issue. So this is the time for the tax department to really step up and be super relevant at the C-suite level and board level.
Streeter
So Cathy, Jesper says they need to be super relevant. So in what way should companies stay current on evolving policy issues? Because of course, things are changing all the time. To what extent is education absolutely key here?
Koch
Well I think it's absolutely key here. The idea that employees are familiar with the sustainability reports of their companies, that's very common, but I'm not sure it's every employee in every company. But I do think there should be a big push from every company, here's what we pledged, and here's how we're going to get there. You know, we should know, for instance, what EY is doing, and we do we get that information, but I think companies should offer education, should offer programs and encourage their employees to do it. And the truth is that younger employees are very interested. We do volunteer programs that involve reforestation, etc. We have tons of people somehow learn about the program and join us and I think that it's probably happening across the globe.
Streeter
It's interesting Cathy, you talk about, you know, maybe sustainability should slip in here. Should it actually be the number one priority, rather than just being the add on?
Koch
Well, I'm not sure it's an add on. The number one priority for a company probably is still the business that they operate in. It has to be, but sustainability should be part and parcel of how they operate.
Solgaard
Isn't that exactly the point, at least when I started working with tax and sustainability, I had this idea that it would be some separate group that we would build on, and after three, four months realized that well, no, I'm using this joke that it's not that different from the internet. We don't have tax people that only do indirect taxes for internet, for example, because it's just become a part of doing business. And I think sustainability is exactly the same, it's just going to be a part of doing business, you won't have a company that just has a business and don't think sustainability because it's part of what they're doing.
Streeter
Alenka just how important do you think developing a collaborative approach is to all this, so sustainability is really integrated right through departments rather than, you know, being worked at in a silo?
Turnsek
Oh it's incredibly important, I think just Cathy and Jesper have already said, I think sustainability is a cross-cutting theme. At some point, we will be fully integrated in how we think about things and what we do, but maybe not quite right now. Because it's new, I think it probably sits a little bit in parallel and together with the mainstream business, but really, in the future, what we're hoping for, is that nothing will be done without sustainability in mind. But of course, in the meantime, collaboration is critical between different departments. I think we'll be helping ourselves and a bit of a crutch to make sure that sustainability is reflected in a corporate structure so there is this separate sustainability officer at a moment in most companies. So that's emerging in roles and responsibilities in the ways that we work, but ultimately, really, we want that to be a part of everything we do in every department.
Streeter
Jesper do we need new roles, then within organizations to ensure there is a much more collaborative approach?
Solgaard
Yeah, it's a good question, and as Alenka just mentioned, having corporate sustainability officers is becoming more and more frequent. But as for tax, there's definitely a new challenge, which is a lot of these issues could potentially be sitting in other places and that there is a risk that the text needs to actually be a little clearer on where the role starts and where it stops. Let's take an example that we've had for many years customs duties, is that a supply chain issue, or is it a tax issue? Well, normally, it's a supply chain issue until there's a problem, then it becomes a tax issue. And I think as a tax director, you want to avoid that sort of uncertainty on where the responsibility lies. Where do I actually play? And that goes for everything we've talked about today, incentives, behavioral taxes, you name it. So there's some work to be done there in terms of how can we maximize our impact, and how can we make sure that we collaborate with all the various stakeholders that we need to work with.
Streeter
Yeah, and how far ahead should companies be planning, Jesper? I mean, we have this 2050 target, but of course, there are so many different milestones along the way, which are very important to ensure that target is hit.
Solgaard
That's the challenge in general is, we seem to be dealing with issues that are really relevant here now, and there are lots of really important things happening for companies, right? So they will be focusing on what is happening here now, it's really important to stop up. If you want to create value, as a tax director, you want to step up and just say, well, where's the strategy taking us? What is it that you're going to be investing in? Cathy talked about can we impact policies, so we get a better outcome, can we get incentives and impact what incentives should be out there so we can get a better return on it. So yeah, the more times we managed to stop up and actually think further out, the bigger return we will get and the more impact we can make as a tax department.
Streeter
And the timelines are very important aren't they Alenka? I mean, just how long does it take for sustainability measures to take effect in the supply chain, for example. I imagine it varies?
Turnsek
Yeah, absolutely it does vary, it depends who we talk about but they're not sure. So if we talk about a change of supply, even that can take a few months, if not years, depending on what's the lock-in with the suppliers but that's probably an example of what could be changed in the shortest possible space. If you then look at the other end of the spectrum, when companies are looking to change the design of a product whether it's do with the materials or with the actual design so can be more reparable, reusable, etc, to be more in line with the new circular economy to make sure they have the right materials available. They've lined up the right suppliers, they've changed all the production lines which can take years, and somewhere in between is the recycling which is quite widely promoted. When we talk about the plastic packaging or plastic more broadly really, or other materials recycled and reused them. That's somewhere in between. It does require a timeline which is more driven by aligning all the multiple stakeholders involved in a collection infrastructure and returning those materials to processing, but also to securing the capital. So it varies depending on what we talk about. If we look at the broadest possible change, which is change of design and everything associated with it, that's years away.
Streeter
Yeah and it does sound Cathy, like a complex process and in your view, just how detailed should supply chain analysis be to ensure companies understand their full operational footprint?
Koch
it has to be quite detailed. We look at scope three emissions, that's emissions down chain, if you're going to have to report them. And as I said before, there is an increasing step to require companies to report scope three emissions across the globe. This has got to be pretty closely scrutinized, and I think that will help drive progress. And again, globally, we need to peak emissions by 2025. That's right around the corner. So it is a complex process. It's also an urgent process. But I do think it's somewhat underway with respect to different reporting regimes that may require a closer look.
Streeter
Let's look at M&A activity. It does seem to be easing off a little given the volatile state of financial markets. But Alenka, do you think sustainability is adequately considered as part of due diligence when companies consider acquisitions, and if not, how does this need to change?
Turnsek
Perhaps there's two different perspectives on this, and one is around including the ESG aspects of due diligence in the M&A process, and that is kind of relatively new, and it's still developing but nonetheless, it has started and that take up or requests for ESG due diligence to be included in M&A process has increased with that, also, the tax side of ESG due diligence, all of that is on increase. But the more important, and the more transformational part is the EU taxonomy, which is actually a classification system that's trying to ensure that whatever investment there is in the economic activities of a company is actually sustainable from an environmental perspective. And that has already come into place. It's coming in place in stages. But that is the piece where investors are really looking to understand whether their investments are being placed into what is considered environmentally sustainable, so they don't end up with their stranded investments or significant costs they haven't necessarily foreseen or budgeted for.
Streeter
Now Cathy, one of the really big developments to come out of COP 26 was the formation of the International Sustainability Standards board, of course, which will issue new standards so that companies can report on sustainability in a more uniform manner. How should companies get more involved in modeling the impact of policies because it's crucial, isn't it?
Koch
It's crucial to understand the impact of policies on greenhouse gas footprints and on your financial profile. To speak to the ISSB, for one minute, we look forward to somewhat similar standards and similar requirements, these reporting requirements across the globe, which will make it a lot easier to comply will increase compliance, but then let's step back and look at everything on reporting. What is the impact? We do tons of modeling for clients who want to know if I change this supply chain I have three choices, which one is the best for me? Or I need to take a stand on a certain policy that's being considered by a government. How does it impact me relative to the rest of my market, relative to my customers, and we do a lot of modeling and I think clients increasingly need to have informed points of view on the policies and on their own actions in order to optimize in the current environment.
Streeter
So let's take an eye on the future now, what legislation is coming up Jesper, that companies really need to watch out for, what's on your radar right now?
Solgaard
Personally, on my radar, there's a lot of energy spent on behavioral taxes in Asia-Pac because they're popping up everywhere, and we're trying to stay on top of those. But also the Voluntary Carbon Credit systems that are coming up, a lot of countries are looking or have implemented or are looking to implement them, and I find that fascinating, it's going to be really interesting to follow. I read an article the other day that was suggesting that the next trillionaire will come from trading on carbon credits. It's a massive market and it's very complex, it will obviously go all the way from actually getting the credits to eventually selling them. So I'm trying to follow that, there's lots of stuff to be on top of but yeah, that's what I'm spending my time on.
Streeter
All of you, on top of so many developments, but just before we go I would like to offer some quick takeaways now. Can you give, each of you, one nugget of advice that would really help companies stay on top of tax policy and law changes in terms of sustainability. Alenka, let me start with you.
Turnsek
So from my perspective, it's really about working very collaboratively with other departments and other stakeholders internally but also externally.
Streeter
Jesper?
Solgaard
Yeah, get involved in sustainability conversations, figure out where you can actually have the maximum impact because I'm sure you can as a tax department.
Streeter
Cathy?
Koch
And I would say get involved in the policymaking process, step out, be involved with policymakers, no one knows your business like you do. So no one knows how to drive the right behaviors, like you do and policymakers need to hear your voice.
Streeter
So speak up. Well, thank you very much to all three of you for really speaking up during this podcast. I'd like to thank you all for such a fascinating discussion, some really useful insights there on how businesses should prepare for the incoming wave of sustainability tax developments. Thank you so much for your time.
Koch
Thank you, and goodbye.
Turnsek
Thank you, goodbye
Solgaard
Thank you, and goodbye.
Streeter
If you want more information you can visit ey.com, and a quick note from the legal team, the views of third parties set out in this podcast aren't necessarily the views of the global EY organization nor its member firms. Moreover, they should be seen in the context of the time in which they were made. I'm Susanna Streeter, I hope you'll join me again for the next edition of the Tax and Law in Focus podcast brought to you by EY, building a better working world.
