ESG adoption on the rise

A combination of standard measurements, demand from investors and adequate benchmarks for transparent reporting can ensure that corporations comply with environmental, social and governance (ESG) practices and avoid greenwashing.

‘Climate change has a significant impact on regulatory governance in organisations,’ Sajjeed Aslam, regional lead in public affairs of the Asia Pacific region at ACCA, told a virtual session on rethinking regulatory governance, recently held by ACCA Pakistan.

Build the ESG case

It is important to build each business’s case for sufficient adoption within the regulatory framework, said Sadia Khan, commissioner at the Securities and Exchange Commission of Pakistan (SECP), who discussed SECP's ESG roadmap. 'Adoption of sound ESG policies has to be seen from both a demand and supply side. The corporate sector and its stakeholders need to understand the business case for adoption and realise that it is in their own long term interest to ensure sustainability. Moreover, institutional investors need to proactively engage and monitor their investee companies so ESG becomes pertinent to board discussions and policy formulation.

From a regulatory perspective, we do not want this to become a box ticking exercise to satisfy regulatory requirements instead of implementation in letter and spirit. For that reason, there is no point in stipulating mandatory reporting without developing standards that can actually measure whether companies are actually investing in projects that impact the environment,' she said.

Raising awareness

Assad Hameed Khan, head of ACCA Pakistan, agreed. ‘Knowledge and awareness related to ESG are increasing in the country,’ he said. In this, ACCA is playing a key role, with research, policy conversations and programmes with partner organisations and syllabus content. ‘ACCA is a dynamic qualification simply because of the periodicity with which we review our content to ensure that it’s not just for today but future-ready,' he added.

Evidence is now growing to demonstrate ESG as a value creator in terms of growth, innovation and reduced costs. 'The last 36 months saw a series of Covid-19 lockdowns and destruction created through unprecedented floods,' Assad Hameed Khan said. 'If we can create viable opportunities to mitigate risks, we could create awareness and advocacy that leads to adaptation and organisational implementation.'

Embed in operations

Adapting and implementing ESG includes four stages: governance, strategising, managing risks and creating measurable metrics and targets to track progress. ‘ESG needs to be implemented into a level where it’s embedded in the day-to-day operations of the organisation, so that it is bite-sized and trackable both in progress and impact,’ Assad Hameed Khan said.

Although contributing less than 1% to greenhouse gas emissions, Pakistan is at the rough end of climate change. The country needs to demand climate finance from the United Nations, said Dr Shamshad Akhtar, chairperson of the Pakistan Stock Exchange.

‘Public policy is imperative to fast-track decarbonisation through a range of climate mitigation and adaptation programmes,’ she said, adding that the ‘best bet is to adopt carbon pricing, renewable policies and a regulatory framework that pushes the envelope for companies.’

Towards net zero

The Net Zero Pakistan programme, launched by the Pakistan Environment Trust, has committed to carbon neutrality by 2050. Despite resource and technology constraints, some companies are already forging alliances to reduce gaps and policy-based barriers while sharing knowledge about best practices towards net-zero emissions.

In Pakistan, 27% of companies are reporting on carbon targets, but ‘companies require world-class technical expertise to set and implement science-based targets’, Dr Akhtar said. This means that richer companies can move fast if they are committed, but those that are at the lower end of profitability will find it difficult.

The private sector is the ‘principal player’ that has to be ‘galvanised and decarbonised’, Dr Akhtar explained, adding that it will ‘enhance the corporate value proposition and improve competitiveness in the long run.’ Textile companies, for example, have worked together to understand common challenges in measuring greenhouse gas emissions and assessing activities that affect both their business and the environment, with the Pakistan Environment Trust promoting organic cotton farming to ensure a resilient, low-carbon supply for the industry.

At the same time, ‘It’s essential to have ESG data that is transparent and easy to comprehend,’ Dr Akhtar said. Talking about standardised measures that need to be applied, she noted that ‘a consolidation, rationalisation and harmonisation of all standards’ would be ideal.

Investment strategy

According to a 2022 Harvard Law School study, 28% of global investors indicated that ESG is central to their investment decision-making. Mohammad Shoaib, CFA, CEO of Al Meezan Investments, said that there’s an increasing global trend in how mutual fund companies are integrating ESG into their investment strategy.

Shoaib discussed both ESG's internal factors, including social elements such as gender diversity, fair treatment of employees, good policies and governance, and external factors such as dealing with investors. ‘Mutual funds don’t differentiate between small and big investors, while social factors are the heart of the mutual fund industry,' he said.

‘When you integrate ESG, it’s important to ensure that it’s not just lip service or greenwashing, and you have a clear direction and criteria to show investors.'