The separation of profit and planet has always been by design. The world’s financial ecosystem for so long has been based on “single materiality” — the impact of the changing world on a company’s profits and losses, not the reverse. But around two decades ago, a buzzword - Environmental, Social, and Governance (ESG) came through that acted as a guide for the corporate sector’s obligation to the environment and the polity, which emphasised on ‘double materiality’ - i.e we now also care about what the corporations’ impact on earth is like. The ESG standards have now become a litmus test for investors, private equities and corporations at large. These standards, encompassed in various frameworks and regulations, not only assert risk assessment, but also emphasise accountability, stakeholder engagement, and unrelenting adherence to legal and ethical norms.
As the fifth populous country globally, Pakistan has undergone scrutiny on ESG considerations through the World Bank’s independent ESG index. Unfortunately, the performance on these indicators is woefully inadequate. The ESG score, derived from this index, provides insights into a country’s standing in terms of environmental responsibility, good governance, and safeguarding human rights. The index ranked Pakistan at 161, emphasising the need for a more cohesive ESG infrastructure to improve its overall risk profile.
Arguably, there is great economic opportunity for Pakistan in integrating and promoting ESG within its corporate and investment frameworks, considering how these regulations are reshaping private markets and fueling financial innovation worldwide. A recent Reuters survey has recorded an approximate of $650 billion worth of channelling into ESG-focused funds worldwide in 2021. At the international level, the use of ESG considerations is especially important for Pakistan as it will aid the development of carbon markets and offsets in the country.
But that said, cognisant of this reality, the scope of ESG decisions in Pakistan will need to be informed by more holistic approaches to understanding the potential risks and opportunities. Yes, existing research indicates that there is a link between good ESG scores and financial valuation, drawing in a consumer base that is becoming increasingly concerned about sustainability, and subsequently the producers who understand that risk reduction is as important as cost reduction now. We have seen in the case of India where SEBI's recent ESG reporting mandate is making waves for the business community.
But the Global South business landscape involves having to account for cultural biases and historical context. We already know that decades of vigorous development and aid programs under the banner of the “white man’s burden” did not fall through. Handouts failed to alleviate long-term socio-economic disparities. Taking over from the failed development initiatives, what can be done to make ESG initiatives better, and more reliable in a country like Pakistan?
The ball can get rolling if we start by straightening out the ego versus altruism paradox. Ensure that the money is going where you want it to. The ESG frameworks being the brainchild of the wealthier countries, focus heavily on accounting methods and market-driven approaches. This perpetuates a cycle where certain groups benefit more than others, similar to a process of colonisation where wealth and resources are captured. This means when a body is set up in Pakistan to adhere to environmental, social or governance standards - accountability needs to be a top priority.
Next, it's crucial to recognize the unequal distribution of power that stems from colonial history. Simply relying on financial measures is not enough. We need to also look at signs of all stakeholders’ well-being and dignity. This requires ESG investors in Pakistan to make the extra effort to build direct relationships with beneficiaries, and avoid outsourcing impact activities through middle men who may be exerting power over the beneficiaries.
As seen in proposals during COP27 and even COP28 - corporations now have a key role in fixing the inequalities between Global North and Global South, prominently human security issues like climate change. Rather than giving in to the cynicism around ESG, we can improve the toolbox.