THERE’S a growing sense of unease among asset managers that companies with conspicuously small tax bills pose a financial liability too big to ignore.
Federated Hermes, Robeco Institutional Asset Management, Van Lanschot Kempen and Natixis Investment Managers unit Mirova are among asset managers that have been singling out stocks based on their tax history, a process that in some cases has even led to firms being excluded from portfolios.
Tax payments that equal less than 15 per cent of profits have become a red flag requiring that – at the very least – the companies’ accounts need to be reviewed, according to investment managers.
It’s an issue that’s set to grow in importance as governments seek to replenish revenues after the historic wave of emergency spending caused by the pandemic, said Eszter Vitorino, Van Lanschot Kempen’s lead expert for environmental, social and governance advisory. The Dutch money manager has added tax-related risks to a scoring tool used to determine which companies to exclude.
“Companies are sometimes not aware fully, yet, of the risks they’re running,” Vitorino said in an interview.
Joanne Beatty, director at EOS, which is the stewardship arm of Federated Hermes, said she’s on the lookout for “aggressive corporate tax planning”.
Failure to handle taxes appropriately has a range of potential consequences, including lost earnings and a damaged reputation, Beatty said. It’s a clear governance risk, which is why there’s now an increase in shareholder action on the issue, she said.
The number of shareholder resolutions singling out tax risks at the world’s largest companies doubled to six in 2023 from the prior year. So far in 2024, four such proposals have already been filed, according to the Sustainable Investments Institute. Companies targeted in the shareholder resolutions include Exxon Mobil, Chevron and ConocoPhillips, the data show.
In a statement to Bloomberg, Exxon said it – along with the oil and gas industry in general – is “subject to some of the highest tax rates in the world”. The company’s “worldwide effective income tax rate, as reported in our Form 10-K, was 33 per cent for 2022”, Exxon said. “We comply with the requirements of all applicable laws, including tax laws, wherever we do business.”
A spokesperson for Chevron said the company “values input from its investors towards the goal of enhancing shareholder value”.
“Any shareholder proposal Chevron receives is evaluated through its well-established governance process. Our approach to tax, as referenced on our website, matches our efforts globally to conduct our business legally, responsibly, and with integrity.”
ConocoPhillips said in a statement that it “complies with the tax requirements in every jurisdiction where we operate, including disclosure of tax payment information to tax authorities as required by local laws and regulations”.
Federated Hermes’ EOS, which advises investors holding US$1.4 trillion of assets, is currently in talks with 30 companies due to concerns about their tax histories. Though Beatty declined to name the companies, she said they span the technology, pharmaceutical, automotive and industrial sectors in Europe and the US.
Companies exploiting gaps between countries’ tax systems cost governments somewhere between US$100 billion and US$240 billion of lost annual revenue, according to the Organisation for Economic Co-operation and Development (OECD). That’s a key reason why more than 130 countries signed an OECD-backed agreement in 2021 that seeks to enshrine 15 per cent as the minimum global corporate tax rate.
Jens Peers, chief investment officer at Mirova US, says he’s now in the process of purging the portfolio he oversees of tax risks.
As the world coalesces around a 15 per cent minimum global corporate tax rate, “any companies that are below that level” are going to start seeing “an impact potentially on their margins”, Peers said. “And that’s certainly not priced in today.”
Risks identified by Mirova include fines and sudden spikes in tax bills. “So you start making adjustments in the model,” Peers said.
The OECD framework comprises two pillars. The first aims to ensure a fairer distribution of profits and taxing rights among countries, while the second introduces 15 per cent as a global minimum rate. The US hasn’t adopted pillar two rules, but American companies operating in jurisdictions that have enacted legislation to adopt the second pillar will be affected by the agreement.
Michiel van Esch, head of voting at Robeco, said the asset manager has started monitoring “newsflow around disputes with tax authorities”, because they can have a “direct impact” on a company’s profitability.
Mirova’s Peers said tax-related concerns are part of the reason why the asset manager doesn’t hold shares of Google parent Alphabet or Facebook owner Meta Platforms. Paying taxes is one way to show “what companies are actively doing to almost contribute to that social inequality we have today”, he said.
A spokesperson for Meta declined to comment, and Alphabet didn’t respond to requests for comment.
Louise Dudley, portfolio manager at Federated Hermes who oversees the firm’s US$2.4 billion global equity ESG fund, said some companies are “pushing very much a low-cost approach” from a tax perspective. For these, the OECD framework is going to have a significant impact “and that’s something that’s a bit of a red flag for us”, she said.
“It wouldn’t be a black-and-white decision, but we would look at that alongside other governance factors and other kinds of valuation metrics to see what is the overall risk and upside potential for an individual name,” she said. BLOOMBERG
