Sustainability! It’s no longer just a “nice-to-have” – and definitely not just a conversation for the sustainability team or C-suits. The same we see for the role of Sustainability in Tax on the global platform.
Environmental, Social, and Governance (ESG) priorities are now shaping tax strategy, reporting obligations, and even day-to-day compliance.
From carbon taxes to green investment incentives, every tax decision today comes with a new layer of complexity – What’s the environmental or social impact?
But here’s where most tax functions hit the wall.
Organizations may have sustainability goals in place. But can their tax teams map incentives for ESG initiatives? Can it track emissions-related liabilities? Or flag when international rules—like the EU’s Carbon Border Adjustment Mechanism—start to apply?
For many, the answer is still “not yet.”
The big question?
How can tax teams move beyond “box-ticking” and truly embed sustainability into their DNA? That’s the real challenge—translating ESG commitments into tangible tax actions. And it’s why the tax function needs more than awareness. It needs a proactive lens on sustainability that’s built into planning, compliance, and reporting workflows.
But where does tax fit into this grand vision?
Well, if you think about it, none of the SDGs can be achieved without money—and that’s where a country’s taxes kick in. Tax is how governments fund public services, infrastructure, and social programs. Want better education, healthcare, green transport, or digital infrastructure? All of that needs tax revenue. But it doesn’t stop there. Taxes can also nudge behavior—for example, offering tax breaks for clean energy adoption or putting a carbon tax on polluters.
And it goes deeper. Studies have shown that taxes—like corporate taxes, income taxes, and taxes on goods and services—can directly influence the progress of SDGs. Especially in OECD countries, smarter tax design is being looked at as a tool to not just raise revenue but also to promote fairness, green practices, and social welfare. And with digitization and globalization reshaping economies, there’s a fresh urgency to align tax systems with the broader sustainability in tax agenda.
For example, tax teams already maintain granular data on energy-intensive capital assets, supply chain spends, and carbon-linked levies such as excise duties or pollution taxes. When integrated into ESG reporting systems via APIs or custom connectors, this data can help surface real-time emissions proxies and identify vendors with non-compliant practices—especially in industries like manufacturing, logistics, or oil & gas.
Advanced ESG-tax dashboards powered by data analytics platforms now allow for auto-tagging of expense line items against sustainability-linked taxonomies, enabling CFOs to track “green tax exposure” or net-zero-aligned tax planning in real-time.
So yes, it’s not just about funding—it’s about shaping economies to be more inclusive, resilient, and forward-looking. And as we’ll explore further, the real power lies in how global tax influencers are rethinking frameworks to make all this happen.
Turning Tax Strategy into a Sustainability Lever — Not Just a Compliance Exercise
Historically, what we’ve commonly witnessed is tax departments being laser-focused on minimizing liabilities and ensuring compliance. That has made complete sense as well. Compliance isn’t something we can just work with. It has to be performed wholly – what we commonly say for this is “Compliance is non-negotiable with no scope of little less or little more”!
Traditional tax functions operated as back-end enforcers — validating transactions, reducing exposure, and ensuring compliance.
But that mindset is definitely evolving, thanks to the emerging need for sustainable solutions. Today, a forward-looking ESG compliance and tax policy strategist is expected to actively support the company’s ESG agenda. Tax teams are being asked to co-design sustainability in tax roadmaps — identifying incentives, advising on net-zero financing, and aligning structures with ESG targets.
Let’s See What’s Changing!
Organizations are meeting requirements like climate-related financial risks, tax incentives tied to green investment, and even how their tax positions support or hinder national sustainability goals. How they are doing this? One way is by using Gen-AI powered document parsers and RPA bots to auto-extract carbon-related tax entries (like CBAM-linked import duties or differential GST on green goods) directly from customs records and e-invoices. Organizations like CleanCarbon.ai and KPMG are a good example of such initiatives.
In practice, tax teams are increasingly deploying large language models and machine learning tools to automate data extraction from invoices, customs filings, and tax returns, ensuring faster reconciliation of tax entries. These AI tools reduce manual effort, increase accuracy, and help identify discrepancies in carbon tax payments or green subsidy claims, supporting more robust compliance and reporting.
In more advanced setups, finance and environment related LLMs along with Retrieval-Augmented Generation (RAG) are being used to draft ESG tax sections of annual reports by summarizing prior tax payments, tax incentives claimed for sustainability-linked investments or changes in effective tax rate due to green subsidies—validated by human reviewers before filing.
This is not back-office work. It’s architectural.
So, what exactly should tax directors be thinking about right now?
1. Start with the Tax Impact of Your ESG Moves
Connect ESG & Sustainable Tax Strategy with Tax Opportunity
Most ESG conversations kick off with net-zero targets and green goals. But for tax teams, the real starting point is this – What are the tax implications of our sustainability agenda?
Every ESG-driven decision—be it shifting to green suppliers, launching a low-emission product, or restructuring for ethical sourcing—has tax consequences. From credits and grants to new reporting obligations, the tax lens can reveal value or risk you might otherwise miss.
Many tax teams now integrate sustainability data with procurement workflows, leveraging AI-driven spend classification and vendor compliance analytics to identify green-certified suppliers eligible for input tax credits or preferential tax treatments. Automation helps flag purchases subject to carbon levies or other environmental taxes early in the procurement cycle, enabling more strategic sourcing decisions aligned with ESG goals.
Some tax teams go a step further (Starbucks being a classic example!) —using AI-powered spend classification models to track green CapEx eligibility under Section 35AD or similar regimes, ensuring better alignment between tax planning and sustainability-led investment strategies.
That’s why taxes can’t come in late. It needs to be plugged into ESG decisions from the get-go—working with R&D, supply chain, and finance teams to spot opportunities like green incentives, R&D tax relief, or cross-border tax implications. This will also help them factor in the availability of grants early in the product development process.
Done right, tax can do more than keep you compliant. It can unlock savings, de-risk strategic shifts, and make sure every sustainability in tax initiative is financially and operationally sound.
Start early. Stay close. And making ESG tax-smart from day one is what directors should be looking for.
2. Embed Tax in Sustainability Reporting — Not After the Fact
Transform Tax from Cost Center to ESG Accelerator
Let’s be honest—most sustainability reports still treat tax as an afterthought. But that’s changing and fast.
Regulators and investors aren’t just accepting green claims at face value anymore. They’re asking tougher questions —
Are your green claims backed by real numbers? Do your tax disclosures actually reflect ESG decisions? Is there transparency on incentives or carbon taxes?
This means tax teams can’t just drop data at the end and call it a day. They need to be part of the ESG tax reporting loop from the beginning—mapping tax impacts, documenting benefits, and flagging risks across supply chains, investments, and operations.
Say, your business is claiming a clean energy transition; your tax reporting should show how you’re leveraging green credits or carbon pricing schemes. If you’ve moved production for sustainability reasons, have you considered the transfer pricing, BEPS implications, or intellectual property impacts?
It’s time to start making taxes a visible, verifiable part of your company’s sustainability story. This comes with fundamental changes across your value chain—new supply routes, altered manufacturing processes, or reorganized operations. Each change carries tax consequences, from VAT and customs to transfer pricing and IP ownership. Tax teams must help businesses navigate this increasingly complex ecosystem—especially across multiple jurisdictions where environmental taxes and regulations continue to multiply.
Tax leaders can provide much-needed guidance on a range of strategically important questions, including how to claim and utilize grants, credits, and discretionary incentives to fund sustainability in tax initiatives.
Beyond risks, there are opportunities too. Keeping an eye on emerging trends like green finance instruments, carbon credits, and expanding incentives can deliver value back to the business—but only if tax is involved early.
3. Rethink Tax Governance Through a Sustainability Lens
Build Governance That Holds Up to ESG Scrutiny
Governance is where ESG really comes alive—and tax is no exception.
It’s not just about staying compliant with evolving laws like the EU Green Deal, CBAM, or global minimum tax rules. It’s about building internal processes that anticipate sustainability-related tax risks and opportunities before they hit.
That means putting tax on the ESG agenda—not just in reporting, but in decision-making forums. Do your tax policies align with your climate targets? Are your board-level disclosures reflecting how sustainable tax strategies support long-term value creation?
Leading organizations are now tying tax governance to sustainability KPIs—setting clear guidelines for how tax contributes to net-zero plans, social equity, and ethical sourcing. They’re also stress-testing their operating models for ESG-aligned substances, especially in light of OECD Pillar Two.
Advanced Data analytics solutions now enable continuous monitoring of tax compliance against ESG-linked KPIs. Using AI-powered dashboards and anomaly detection, tax functions can proactively identify risks. What risks? Like misreported environmental taxes or gaps in sustainability disclosures, ensuring governance structures keep pace with evolving regulations and stakeholder expectations.
There is a clear need to engage proactively with policymakers, regulators, and industry peers to shape tax policy in this fast-moving space. Initiatives like reverse audit analysis of environmentally sustainable expenses are a good starting point, potentially leading to tax refunds.
The tax has a unique vantage point—seeing across the entire business rather than isolated silos. This broad perspective allows tax to spot risks and opportunities early, helping ensure the company’s sustainability goals are realistic, measurable, and well-governed.
Because in this new sphere, tax isn’t just a compliance tool. It’s a reputational lever.
Conclusion – Brass Tacks and Green Tracks
One thing’s given – Tax isn’t just a back-office function anymore. And when it comes to ESG, it certainly isn’t someone else’s job. It’s a shared responsibility among governments and the business community.
CSR companies voluntarily accept an ethical responsibility to society (and the environment) captured in the voluntary obligation. This is to go beyond (strict) compliance with the law. If you’re in the C-suite or a tax leader, you’re not just managing numbers. You’re shaping how your company shows up to investors, regulators, rating agencies, and society at large.
Sustainable tax isn’t about being perfect—it’s about aligning your long-term policies with clear values. This ensures tax principles go beyond the minimum accountability, and creating a transparent framework that stakeholders can trust. And this shift starts at the top.
In fact, taxation plays three roles in sustainable development—budgetary, redistributive, and regulatory. And that makes tax a powerful instrument, not just a cost centre. As ESG moves deeper into investor scorecards and public scrutiny, there’s no sidestepping it; underperformance in tax governance can’t be masked by high scores elsewhere.
