Tax avoidance, ESG performance, and tax risk: exploring the interplay in the French context

Purpose This paper aims to explore the impact of tax avoidance on tax risk, and the moderating effect of Environmental, Social and Governance (ESG) performance on the relationship between tax avoidance and tax risk. Design/methodology/approach To test the two hypotheses, the authors applied feasible generalized least squares to a data set of French nonfinancial companies listed on the SBF120 index from 2008 to 2021. For robustness, alternative measures of tax avoidance, tax risk and ESG performance were used. Furthermore, the sample was split, and the regressions were run separately for companies with higher and lower ESG performance. Findings The findings of this study suggest that tax avoidance has a negative impact on tax risk. Moreover, the interaction between tax avoidance and ESG performance also leads to a reduction in tax risk. Further analysis shows that this negative impact of tax avoidance on tax risk is only evident for companies with higher ESG performance. As a result, French-listed companies with higher ESG performance are more likely to pursue safer tax avoidance strategies while minimizing riskier ones. Practical implications This study shows that French-listed firms with strong ESG performance are less likely to engage in risky tax avoidance practices. This finding is crucial for investors and creditors to make informed financial decisions. It also highlights the importance for policymakers to introduce additional ESG-related legislation that ensures better management of tax risks and enhances tax transparency within French companies. Social implications By improving their ESG performance, French-listed companies contribute to a more ethical and transparent tax system by promoting responsible tax avoidance and minimizing risky approaches. This promotes fairness and a more equitable society and has the potential to drive a cultural shift in which ethical tax strategies become the norm over time. Originality/value This study has focused on examining the relationship between tax avoidance and tax risk, a topic that has been little explored. In addition, while previous studies have examined the impact of corporate social responsibility on tax avoidance or tax risk, this study is original in that it examines the impact of ESG performance on the risk associated with tax avoidance.