Few countries are as exposed to the dangers of climate change as Pakistan, which over the past 20 years has consistently been ranked among the 10 most vulnerable nations in the annual Global Climate Risk Index. That vulnerability has raised the stakes for organisations across the country to adopt environmental, social and governance (ESG) practices.
‘ESG standards are very significant as they serve as a guideline for various business risks,’ says Hasan Danyial, CEO at human resources consultancy HRI and a director of facility management services provider CTC. ‘These business risks are prevalent in South-East Asia.’
‘ESG improves corporate reputation, attracts investors and minimises risks’
The right standards
ESG criteria allow investors to screen potential investments by considering how an organisation protects the nature world; its relationships with employees, suppliers, customers and the communities where it operates; and the quality of its governance. More widespread ESG practices are key for Pakistan to attract long-term domestic and international capital and investment.
Muhammad Munaaf, a regulatory compliance officer at the National Clearing Company of Pakistan, says many Pakistan small and medium-sized enterprises (SMEs) may not be fully aware of the benefits of ESG and are hesitant about embracing it. The reasons may vary – limited resources, unclear regulations, a perception that ESG is irrelevant to their business or more suited to corporates or sectors with significant environmental impact. While many high-turnover businesses are poorly equipped to address ESG challenges, small and medium practices (SMPs) can help them by replicating internationally established models.
‘If there is more awareness, demand from customers and supportive regulations, SMEs might be more willing to adopt ESG practices in the future,’ Munaaf points out. ‘ESG offers multiple advantages, including improving corporate reputation, attracting investors, minimising risks, and uncovering new business prospects.’
In 2021 the Pakistan Stock Exchange (PSX) and the Pakistan Institute of Corporate Governance (PICG) set up a taskforce to promote and adopt ESG standards. Arjumand Minani, one of its members, says the aim is to bring ESG into the mainstream by stressing its effectiveness as a long-term institutional investment with high returns, and by launching a realistic framework backed by regulations and tools to encourage the voluntary adoption of ESG standards and guidelines.
Practitioners play a key role in promoting transparency and responsible business practices
The taskforce, with support from Big Four firm KPMG, authored Pakistan’s first voluntary ESG adoption guidelines, which include awareness, capacity development and facilitation.
Munaaf says that while Pakistan does not have comprehensive ESG-specific regulations for businesses, the existing corporate governance codes, environmental regulations, labour laws and financial reporting standards – many of which are SMP areas of expertise – indirectly influence ESG adoption.
‘Despite the absence of specific ESG regulations, there is growing awareness of sustainability and responsible practices among businesses in Pakistan, leading many to voluntarily incorporate ESG principles as part of their corporate social responsibility [CSR] efforts and to meet investor expectations,’ he adds.
Greater adoption will take time, though, even as new rules are implemented in Pakistan. Listed entities are starting to adopt the corporate social responsibility guidelines of the Security and Exchange Company of Pakistan (SECP). The PSX recently joined the Sustainable Stock Exchange Initiative, which requires listed companies to have an ESG policy in place and disclose the implementation of ESG initiatives. Many companies are moving towards adopting these practices.
‘Businesses and practitioners in Pakistan are gradually showing increased awareness of ESG factors,’ Munaaf says. ‘Some larger companies voluntarily publish sustainability reports and disclose non-financial information related to ESG performance. Investor and stakeholder pressure, as well as industry-specific initiatives, encourage businesses to consider ESG principles. CSR efforts also overlap with ESG considerations. Professional training and development is being undertaken to better support businesses in adopting sustainable practices.’
‘Practitioners also develop the processes and controls for ESG information production and verification’
Accounting practitioners play a key role in promoting transparency and responsible business practices while helping organisations adopt ESG standards by sharing their expertise and knowhow. Munaaf says accountants can assist by reporting and disclosing ESG practices, collecting and analysing data related to sustainability and risk management, ensuring compliance with international reporting frameworks and helping businesses set ESG goals.
Danyial agrees that accountants have a big part to play. ‘We have seen their role expanding in preparing and issuing ESG information. The practitioner’s role is not limited to just the auditor’s report any more, but includes identifying the metrics for reporting, and developing the processes and controls which in turn will be used to produce and verify the information.’
Complying with ESG standards and reporting on ESG practices can highlight an organisation’s dedication to addressing climate risks. Danyial is very positive about the ESG efforts of SMEs in Pakistan, often supported by the accounting and finance expertise of SMPs. With last year’s floods alone bringing a US$15bn economic hit for Pakistan as well as a high death toll, it couldn’t be clearer how important it is for the country that accountancy firms are successful in helping SMEs make the ESG drive as much a part of their businesses as the profit motive.