G7 leaders met for the first in-person Summit in Cornwall from June 11 to 13, 2021. The leaders issued a hefty 25-page Communique making commitments ranging from health, climate change and the environment to trade, the economy and infrastructure. Leaders indicated that they wanted to build a “strong, sustainable, balanced, inclusive and resilient” economy that also addressed long term shifts to address environmental, climate, technological and demographic changes under shared principles of openness, sustainability, inclusion, innovation and competition. The G7 Summits flagship initiative was the announcement of the Build Back Better for the World (B3W) infrastructure framework to counter China’s Belt and Roads Initiative by helping developing countries build sustainable economies and infrastructure projects while addressing the impact of climate change and focus on clean and green growth.  Additional initiatives were made that companies in the mid- and medium-sized enterprise (MMEs) sector should be aware of.

Minimum Corporate Tax Rate: A level-playing field impacts shifting profits

G7 leaders endorsed the commitment made by G7 Finance Ministers on 5 June to agree a global minimum tax rate to create a fairer tax system. While this will create a more-level playing field and took many years to agree, this will impact shifting profits for companies operating in multiple countries.

The leaders highlight that they hope this initiative will “help raise more tax revenue to support investment and it will crack down on tax avoidance.”¹ The commitment involves two key changes:

1. Introduction of a global minimum tax rate of at least 15%
2. Giving countries the right to tax at least 20% of profit above 10% margin of the world’s most profitable companies when they operate in those countries

Further work will be carried out through the G20 and the OECD inclusive framework, with the expectation that agreement will be reached at the meeting of G20 Finance Ministers and Central Bank Governors in July 2021.

While on the one hand, this will simplify the tax rate allocation of companies operating in multiple jurisdictions, this may also have an impact on profitability. This is likely to happen as countries crack down on base erosion profit shifting, a practice where companies shift profit to lower tax jurisdictions to pay less taxes. What is important is that companies know exactly what they are offering and making in each jurisdiction to be able to plan ahead.

Climate Change and Green Finance Initiatives requires stronger ESG reporting

The G7 committed to a green transition for the global economy which will require more regular and stronger ESG reporting.

The objectives of the move to a green economy are to:

• cut emissions
• increase adaptation action worldwide
• halt and reverse biodiversity loss
• create new high quality jobs and increases prosperity and wellbeing for all promoting diversity

This includes an ambitious commitment to net zero by 2015 and to a commitment to protecting and conserving 30% of land and oceans. To work towards this target, the G7 pledged to advance numerous actions in different sectors such as:

• Energy – aligning financing with net zero by 2050; minimizing government support for carbon-intensive fossil fuel energy; leading a technology-driven transition to Net Zero following the International Energy Agency roadmap; scaling up policies and technologies to “transition away from unabated coal capacity;” ending financial support for thermal coal power generation by 2021 and eliminating inefficient fossil fuel subsidies by 2025; and supporting the work by Climate Investment Funds (CIFs) and donors committing $2billion to Accelerate the Coal Transition and Integrating Renewable Energy programs to mobilize up to $10 billion in co-financing to support the deployment of renewable energy in developing and emerging markets.
• Transport – committing to decarbonised mobility and scaling up zero emission vehicle technologies (buses, trains, shipping, aviation) by supporting the roll out of necessary infrastructure and offering more sustainable forms of transit such as shared mobility, public transport, cycling; and committing to accelerate the transition away from the sale of diesel and petrol cars.
• Industrial and innovation – decarbonizing iron and steel, cement, chemicals and petrochemicals to reach net zero; launching the G7 Industrial Decarbonisation Agenda; taking action on public procurement, and promoting standards and industrial efforts to define and trigger demand for green products and enhance energy and resource efficiency; working to accelerate progress on electrification and batteries, hydrogen, carbon capture, usage and storage, zero emission aviation and shipping, and nuclear power.
• Property development and building – welcoming the Super-Efficient Equipment and Appliance Deployment (SEAD) goal of doubling efficiency of lighting, cooling, refrigeration and motor systems sold globally by 2030 to support the deployment of renewable heating and cooling and reducing energy demands.
• Agriculture, forestry and land use – committing to ensure policies “encourage sustainable production, the protection, conservation, and regeneration of ecosystems, and the sequestration of carbon.

To support the transition to a green economy, the G7 made several announcements such as:

• The G7 will look to mobilise $100 billion between public and private sector to increase climate finance and promote funding that benefits climate and nature
• The G7 will establish the required market infrastructure to allow for private finance to support and incentivise the transition to net zero.
• The G7 will increase financing for nature-based solutions through to 2025.
• The G7 will continue to support the transition to sustainable management and use of natural resources.

To that end, the G7 indicated that they looked forward to the creation of the Tasforce on Nature-related Financial Disclosures and indicated that in time, they would require corporations to carry out climate change, deforestation and environmental risk and impact assessments.

For companies operating in the MME sector, this means that where possible, firms should look to take steps to move away from a reliance on fossil fuels and carbon.  It appears that funds will be made available to promote green mobility, renewable energy as well as steps taken to promote conservation of forests and biodiversity.  Firms who are able to use technology to get a view of their carbon footprints, publish ESG data and consider sustainability statements will not only be supporting the ethos of profit with purpose but will be ahead of the curve. There has also been a shift towards investments in products such as green bonds and into firms who are able to show impact and who have EESG footprints. By having a full view of costs associated with energy, transport, fuel, and land purchases, companies can start to understand the impact on the world and start looking at cost projections and options available to transition to a green economy. This year’s G7 Summit not only signalled a change in policy-makers thinking in how countries can make a difference to but also how the global economy needs to evolve to save our planet.

Author: Denisse Rudich   CCO of Elementary^b

¹http://www.g7.utoronto.ca/summit/2021cornwall/210613-communique.html