Managing risks and capitalising on opportunities are two requirements to sustain economic business growth. At a corporate level, the ability of a business to understand and communicate non-financial matters and related risks is necessary.

It is crucial as new areas of risk governance emerge such as water scarcity, extreme climate change events, reputational issues arising from social media engagement, the need for good practices in supply chains and the increasing thrust to be inclusive in their approach. This approach has become increasingly important as global conversations centre on environment, Society and governance (ESG).

Globally, there is a growing trend to use highly developed reporting frameworks to improve the comparability of the disclosures. Disclosure frameworks fall into two groups: becoming signatories to adhere to a set of principles or reporting on specific qualitative and quantitative indicators.

The number of signatories of Pakistani companies to the first type of global frameworks has risen in recent years. The most recent has been the seriousness shown pledging to the Business Ambition to 1.5 degrees, which require companies to reduce their emissions by half by 2030. Other frameworks include the United Nation’s Global Compact and UN’s Women Empowerment Principles highlighting companies choosing to disclose progress on inclusive and sustainable development.

A survey in 2019 showed only 17pc companies report using the Global Reporting Initiative standards in Pakistan compared to 73pc in the world

However, in terms of using frameworks to report on specific qualitative and quantitative indicators using globally recognised frameworks such as the Global Reporting Initiative (GRI), the interest is marginal. A survey conducted by the Centre of Excellence in Responsible Business (CERB) and the United Nations Development Programme (UNDP) in 2019 reported only 17 per cent of companies report using the GRI standards in Pakistan whilst globally 73pc of companies report using the GRI Standards.

In Pakistan, various efforts have been undertaken to nudge the private sector towards sustainability disclosure. In 2009, the Securities and Exchange Commission of Pakistan (SECP) issued a Corporate Social Responsibility (CSR) Order applicable to all listed companies. This was followed by the ‘Corporate Social Responsibility Voluntary Guidelines’ in 2013. The guidelines leave it to the company’s discretion to define how and at what level it desired to integrate sustainability in the organisation.

The Code of Corporate Governance Guidelines (2017) puts the onus on the board of directors for the ‘implementation of environmental, social and governance and health and safety business practices including a report on corporate social responsibility activities and status of adoption/compliance or Corporate Social Responsibility (Voluntary) Guidelines 2013 and any other regulatory framework as applicable’ (SECP, 2019). Whilst both of these initiatives create a direction, there remains a gap in guidance on what to disclose.

According to The Sustainable Stock Exchanges Initiative, detailed disclosure guidance on reporting on ESG is available by 63 countries, including most of the Middle East and South Asia. How can Pakistan move in this direction?

The recommendations of a roundtable in 2019 included a need for a standard to channel non–financial reporting in Pakistan. It must take into the developmental needs, including sector-specific needs, have a ‘measure to manage’ approach, and perhaps look towards the principle of ‘comply or explain’ approach to reporting on non-financial issues.

To enable streamlined disclosure, it was cited a consultative approach needs to be used in the development of the standard through working groups with all actors: business heads, institutions, investors and regulatory bodies. The participants also suggested a phased-out approach, to enable companies to build capacity for disclosure.

An important part of the disclosure is a company’s management approach. Ideally, this then leads to the development of ESG strategy.

Materiality has become a critical element in global reporting frameworks geared towards ESG. The European Union, for example, has set an obligation for companies to conduct a double materiality assessment in its recently adopted Corporate Sustainability Reporting Directive. The directive will require companies to report about how sustainability issues affect their business and about their own impact on people and the environment.

When we look at issues such as climate change in terms of double materiality and how companies in Pakistan are creating strategic roadmaps after becoming signatories to the Business Ambition for 1.5 degrees, we see the strong economic and commercial case for ESG. Here the material risk is that failing to keep up with changing physical environment will retard business growth. A long term investor will be interested in how companies view the physical, legal and transitional risks and disclose them rather than leave everything to evolution through market needs.

The writer is a senior research associate at the Pakistan Business Council’s Centre of Excellence in Responsible Business

Published in Dawn, The Business and Finance Weekly, January 7th, 2022

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