In September, the 2024 UN Summit of the Future will stress the urgent need for international collaboration if we want to achieve the UN’s Sustainable Development Goals (SDGs). Tax policy – traditionally not a priority within international law – is becoming an increasingly important tool that encourages sustainable investment. This shift could be key to boosting investment in sustainable industries through a multilateral treaty that offers tax breaks. This would expand the benefits typically associated with bilateral agreements to a global scale.

An international framework

An international framework that encourages sustainable investment through tax breaks could also significantly enhance economic benefits. States may experience an increase in foreign investment due to reduced tax barriers, which in turn would increase access to foreign technology and human capital and benefit local economies. Businesses would be able to expand more freely into new markets, leveraging universal tax incentives. Furthermore, an international framework to tackle tax evasion would support environmental goals by reinforcing our shared responsibility to address the global climate crisis and preventing a 'race to the bottom' in tax rates.

Risks

However, the implementation of tax incentives carries risks – particularly for developing states. Investors may favour states that do not implement tax disincentives, leaving early adopters of an international tax policy to bear unfair costs. The OECD-G20 Base Erosion and Profit (BEPS) Shifting project has highlighted these risks, demonstrating how inconsistency in adopting tax breaks can actually exacerbate inequalities. Developing states are especially vulnerable to this, hence the need for uniform adoption of tax policies and a focus on equitable development.

Using disincentives to drive progress

On the other hand, disincentives such as stringent legislation and market-based regulations that penalise businesses deviating from the SDGs can also drive progress. One effective example is divestment – which involves reducing an asset for financial, ethical or political gains – such as California's climate change legislation that mandates public pension funds to divest from thermal coal companies. Social licence and complicity justifications have led entities such as Australia's ANZ Bank to deny loans for projects that would be detrimental to the environment. However, excessive, fragmented regulations across different countries can be confusing to foreign investors and have a negative impact on sustainability efforts. A more uniform legal framework is therefore essential to effective, sustainable investment.

Solution: finding the right balance

The solution is clear: governments could boost foreign investment and strengthen local economies by offering tax benefits to businesses that adopt socially responsible, environmentally friendly policies. However, if that framework is not universally applied, issues such as tax fraud and inconsistent adoption of tax policies may undermine these efforts. Regulating and divesting from polluting industries could also steer investors towards greener solutions. Finding the right balance between the incentives and disincentives is therefore key to achieving the SDGs through investment. That balance requires a multi-stakeholder approach, with partnerships between the private sector, states, civil society and international bodies in order to reduce barriers and enhance sustainable investment. Moving forward, global collaboration is essential if we want to prevent fragmented regulations and ensure that all efforts are aligned with our common agenda: the SDGs.

Photo Narain Jashanmal / The Blowup via Unsplash