In a proactive move signaling increasing concern among asset managers, firms are quietly reassessing their portfolios to mitigate potential financial risks associated with companies paying minimal taxes. Federated Hermes Inc., Robeco Institutional Asset Management, Van Lanschot Kempen NV, and Natixis Investment Managers unit Mirova are among those scrutinizing stocks based on their tax history, with some companies even facing exclusion from investment portfolios.
Tax payments constituting less than 15% of profits have raised alarm bells, prompting investment managers to review company accounts rigorously. This trend underscores a growing apprehension among investors about the financial implications of companies with conspicuously low tax bills.
Eszter Vitorino, lead expert for environmental, social, and governance advisory at Van Lanschot Kempen, emphasized the significance of tax-related risks amid governments’ efforts to replenish revenues post-pandemic emergency spending. Vitorino highlighted the integration of tax-related risks into the firm’s scoring tool used for company evaluation.
Joanne Beatty, director at EOS, the stewardship arm of Federated Hermes, stressed the importance of addressing aggressive corporate tax planning to mitigate potential consequences such as lost earnings and reputational damage. She noted a surge in shareholder action on the issue, reflecting its clear governance risk.
According to Bloomberg Intelligence, there has been a correlation between tax-factor performance and certain industries like energy, with high-effective-tax-rate (ETR) stocks outperforming low-tax-rate stocks since mid-2017.
The rise in shareholder resolutions targeting tax risks underscores the urgency of the matter. Exxon Mobil Corp., Chevron Corp., and ConocoPhillips are among the companies facing shareholder proposals. These resolutions reflect investors’ growing concerns about tax-related practices and their potential impact on company performance and shareholder value.
Responding to inquiries from Bloomberg, Exxon emphasized its compliance with applicable tax laws globally, while Chevron reiterated its commitment to conducting business legally and responsibly. ConocoPhillips affirmed its adherence to tax requirements in all jurisdictions of operation.
Federated Hermes’ EOS, currently engaging with 30 companies over tax history concerns, spans various sectors in Europe and the U.S. The Organisation for Economic Cooperation and Development estimates that gaps in tax systems cost governments billions annually, emphasizing the urgency of addressing tax-related risks.
As the world moves towards a minimum global corporate tax rate of 15%, asset managers like Mirova US are taking proactive measures to purge portfolios of tax risks. Mirova’s chief investment officer, Jens Peers, highlighted potential impacts on company margins and the necessity of adjusting investment strategies accordingly.
Monitoring newsflow around disputes with tax authorities has become crucial for asset managers like Robeco, as these disputes can directly impact a company’s profitability.
For some asset managers, such as Mirova, tax-related concerns have influenced investment decisions. Mirova has opted not to hold shares of Google parent Alphabet Inc. or Facebook owner Meta Platforms Inc., citing tax payment considerations.
Louise Dudley, portfolio manager at Federated Hermes, emphasized the importance of considering tax-related risks alongside other governance factors and valuation metrics when evaluating companies. The OECD framework is expected to have a significant impact on companies adopting low-cost tax approaches.
In conclusion, the proactive stance taken by asset managers underscores the increasing scrutiny of tax-related risks in investment decision-making. As governments worldwide seek to address tax loopholes, investors are increasingly factoring in tax compliance and transparency when assessing companies for inclusion in their portfolios.
Source ( Accounting Today News).
