ESG (Environmental, Social, and Governance), ESG pillars and tax avoidance of Australian firms

Ati Yazdian

doi:10.60867/00000165

This study examines the relationship between Environmental, Social, and Governance (ESG) score and corporate tax avoidance among non-financial firms listed on the Australian Securities Exchange (ASX). Despite increasing regulatory attention and investor reliance on ESG metrics as indicators of responsible corporate behaviour, evidence regarding the relationship between ESG score and firms’ tax practices remains inconclusive. Limited research has examined whether the individual ESG pillars exert distinct, time-dependent effects on corporate tax avoidance in the Australian institutional context. Addressing this gap, the study explores both the contemporaneous and lagged effects of overall ESG score and its Environmental (E), Social (S), and Governance (G) dimensions on corporate tax behaviour. Drawing upon stakeholder theory, legitimacy theory, agency theory, and resource dependence theory, the study employs a Generalised Method of Moments (GMM) approach using 1,484 firm-year observations from ASX-listed non-financial firms over the period 2014-2023. Corporate tax avoidance is measured using the GAAP Effective Tax Rate (GAAP-ETR), with lower rates indicating greater tax avoidance. The dynamic modelling framework addresses potential endogeneity, reverse causality, and unobserved firm heterogeneity. The findings reveal that the relationship between ESG performance and corporate tax avoidance is multidimensional and time-dependent. The overall ESG score is negatively associated with GAAP-ETR, suggesting that firms with stronger ESG tend to report lower effective tax rates and therefore engage in greater tax avoidance. A similar negative relationship is observed for the E pillar, indicating that environmentally responsible firms may simultaneously pursue tax-efficient strategies. The S pillar shows a negative but statistically insignificant contemporaneous association with GAAP-ETR, suggesting no meaningful immediate effect on tax avoidance. However, the lagged analysis reveals a negative and statistically significant relationship, indicating that stronger social performance may be associated with higher tax avoidance over time. The G pillar is negatively and significantly associated with GAAP-ETR in both contemporaneous and lagged specifications, suggesting that stronger governance performance may facilitate structured tax-planning strategies rather than necessarily constraining tax avoidance. Overall, the robustness analyses using one-period- lagged ESG measures confirm the persistence of the ESG and E pillar findings, while highlighting delayed effects for the S pillar and consistent negative effects for the G pillar. This study contributes to the ESG and taxation literature by providing Australian evidence on both aggregate and disaggregated ESG measures within a dynamic panel framework. The findings challenge the common assumption that stronger ESG necessarily constrains corporate tax avoidance. Instead, they suggest that sustainability performance and tax-efficient behaviour may coexist, particularly for firms with stronger ESG, E and G scores. For investors, the results indicate that high ESG ratings should not automatically be interpreted as evidence of responsible tax conduct, particularly when evaluating firms over longer investment horizons. For regulators and policymakers, the findings highlight the need to more explicitly incorporate tax transparency and responsible tax practices into ESG disclosure frameworks and sustainability reporting standards. More broadly, the study demonstrates that ESG is a multidimensional and time-dependent construct whose individual components influence corporate tax behaviour differently, underscoring the need for a more nuanced assessment of corporate responsibility beyond aggregate ESG scores. The study identifies several avenues for future research, including the use of alternative tax avoidance proxies, comparative cross-country analyses, industry-specific investigations, and a deeper examination of the mechanisms by which individual ESG dimensions influence tax behaviour. Overall, the study advances understanding of the complex relationship between ESG and corporate tax avoidance and contributes to ongoing debates regarding corporate accountability, sustainability evaluation, and responsible governance practices in Australia.

ESG (Environmental, Social, and Governance), ESG pillars and tax avoidance of Australian firms

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