Converging Business Sustainability With Climate Resilience

To protect their market shares, Pakistani businesses need to rethink their approach to climate change and ESG compliance, argues Faraz Khan.

Mohibullah, a crane driver from Balochistan, was the talk of the town when he courageously saved a family on the brink of drowning in a flash flood. While the nation rushed to laud him for his heroic act, many questioned the efficacy of the local disaster management authority.

Those floods were not a once-in-a-decade event. In fact, every year in August, the skies unleash their massive ferocity, leaving the government to grapple with its impact. Within days, the tranquil Indus and its adjoining rivers and dams turn into raging torrents, and fertile fields turn into flooded wetlands. In August 2022, when I was doing a consultancy with the United Nations Development Program, I witnessed the first-hand impact of these recurrent disasters on Balochistan and Sindh, where the relentless downpours disrupted every facet of life, from bustling urban centres to the heartlands of rural Sindh, where people lost their annual crops – leaving them at the mercy of foreign grants and domestic donations.

Whenever I give a talk on Pakistan, I often refer to ‘climate injustice’ – the unequal distribution of the negative impacts of climate change.

Pakistan contributes less than one percent to global greenhouse gas (GHG) emissions, yet it is one of the countries most impacted by climate change – and that is why Pakistan finds itself on the brink of economic collapse, as every year governments are forced to funnel resources into providing relief to climate-impacted communities. Every time a calamity strikes, Pakistan starts looking for grants and aid for short-term relief rather than working on attracting climate-focused foreign direct investments aimed at securing a sustainable future.

This dependence on international grants is preventing Pakistan from making the long-term investments needed to build climate resilience.

In light of these challenges, there is a critical need to rethink our approach to sustainability and environmental, social, and governance (ESG). It is also something that the private sector needs to look at as a necessity and not a luxury. Business in Pakistan is often disconnected from the broader issues of socio-environmental challenges, as the focus has always been to maintain a specific bottom line, no matter what the cost to society and the environment.

In absolute terms, Pakistan ranks among the largest 20 GHG emitters in the world, with carbon dioxide in the energy sector and methane in agriculture taking the lead. This represents a significant challenge considering Pakistan’s commitment to reducing its overall emissions by 50% in nationally determined contributions by 2030. Whenever a calamity strikes, businesses are at the forefront of the impact, which often comes in the form of supply chain disruptions, increased operational costs due to extreme weather events and shifts in consumer demand towards more sustainable products and services.

Rethinking our approach will not come at the cost of profits. It presents an opportunity for businesses to innovate and thrive in a rapidly changing environment. For instance, Kroll’s ESG and Global Investor Returns Study found that ESG leaders globally earned an average annual return of 12.9%, almost 50% higher than the 8.6% earned by laggard companies. In the US, ESG leaders saw a 20.3% average annual return, which was about 50% stronger than the 13.9% return of laggard companies.

Rethinking the approach, or, in other words, embracing the intersection of ESG and climate change, will transform the role of the private sector from being part of the problem to becoming the key player in the solution. However, unless the private sector is given access to green finance, the process of rethinking will remain a distant dream.

In Pakistan, ESG regulations are almost non-existent. The Securities and Exchange Commission of Pakistan (SECP) “stride towards promoting responsible business practices and environmental stewardship with the issuance of ESG Voluntary Disclosure Guidelines for listed companies” came with a “voluntary nature”, and companies were only “encouraged to adopt the guidelines” caveat. Similarly, the State Bank of Pakistan issued Green Banking Guidelines in 2017 to “reduce vulnerability of banks from risks arising from the environment.” However, these guidelines are still “far from being followed in letter and spirit.”

Green finance too (financial investments flowing into sustainable development projects and initiatives that promote environmental sustainability) is shrouded in ambiguity, primarily due to the lack of robust regulatory frameworks, limited awareness among investors and insufficient integration of ESG criteria in the financial decision-making processes. One of the most talked-about green financing tools are green bonds. Worldwide, green bonds amounted to $620 billion in 2023.

Looking towards the region, in June 2017, Tadau Energy Sendirian Berhad issued Malaysia’s first green Sukuk (Islamic bond) worth $58.4 million to finance a 50 MW solar project in Sabah. In 2018, Indonesia, the world’s most populous Islamic nation, issued the first sovereign green Sukuk worth $1.25 billion at a 3.75% yield, driven by strong demand after Indonesia’s 2017 upgrade by Standard & Poor’s, along with a $1.75 billion non-green Sukuk at 4.4%. The funds raised are dedicated to green projects, with Indonesia ensuring that no financing goes to fossil fuels or peat burning.

While Indonesia and Malaysia have made significant progress, the government of Pakistan, according to Finance Minister Muhammad Aurangzeb, is still “working on issuing domestic green Sukuk bonds by December 2024 to finance sustainable development projects.” The recent announcement regarding issuing Panda bonds worth over $300 million to Chinese investors is a step in the right direction, but its success will depend on strategically aligning the financial objectives with China’s regulatory requirements, market conditions and investor appetite.

To ensure the success of the Panda bonds, it is crucial to establish transparent communication with Chinese investors, provide clear and robust financial disclosures, and align the bonds with China’s sustainable development goals.

If Pakistan has to scale the issue of these bonds, it must create a conducive and robust regulatory framework with clear guidelines for green bonds, sustainability-linked loans, and other green financing tools aimed at promoting ESG integration.

Faraz Khan MBE is CEO & Partner, Spectreco and Founder, SEED Ventures. He can be reached at [email protected]

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