Lisa Chen
Volume 75, Issue 5, 1245-1286
ESG is a framework used to assess the sustainability of a company and to measure financial risk arising from potential environmental, social, and governance issues. Investors and consumers typically rely on ESG ratings generated by third-party ratings agencies to evaluate a company’s ESG quality. Critics of ESG assert that ESG ratings are misleading because neither the rating agencies nor the ESG disclosures used to generate ratings are regulated. Despite these criticisms, demand for ESG-related products has grown four-fold in the last decade, reflecting the change in societal expectations regarding corporate behavior.
Given this demand, U.S. companies have rushed to adopt ESG policies. Most of these policies, however, overlook a critical component of ESG: responsible tax practice. Furthermore, to the extent that ESG rating providers include tax in their metrics, they fail to consider responsible tax practices beyond mere tax transparency. Responsible tax practices are essential to ESG for both measuring a company’s sustainability impact and assessing a company’s financial risk, and any ESG policy or ESG rating that fails to meaningfully consider tax is incomplete. This Article analyzes the existing proposals for ESG standards and proffers suggestions to remedy the deficiency in the current ESG framework through ESG tax standards for U.S. companies.