Time to invest in ESG

The global community is working to transform the world by implementing sustainable development goals (SDGs) to protect fundamental rights of the people, promote equality, social justice, eliminate poverty; ensure access to clean water, quality education, affordable and renewable energy.

For the country the objectives are economic growth, peace and strong institutions while mitigating negative effects of climate change and helping the world to achieve the dream of collective prosperity.

Where performance of a few countries in implementing the SDGs is excellent; many others are still struggling to achieve the desired results. Implementation of this process has created new avenues for investment.

The United Nations Secretary-General’s Roadmap for Financing the 2030 Agenda for Sustainable Development, issued in July 2019, highlights increasing trends of investments in sustainable development with evidence that such investment makes economic sense. According to an estimate SDGs could open up US$ 12 trillion of market opportunities creating 380 million new jobs. It further highlights that actions resisting climate change may result in savings of about US$ 26 trillion by 2030.

SDGs are increasingly incorporated into public budgets and development cooperation, and many countries have taken steps to ‘green’ their financial systems. Issuance of green bonds has increased tremendously—from US$ 2.6 billion in 2012 to US$ 167.6 billion in 2018. Innovative SDG-related financial instruments are unlocking new sources of finance, and the digitalization of finance is demonstrating its potential to improve mobilization and utilization of funds for SDGs.

These transformation measures have introduced new trends in businesses and now their performance is assessed in relation to non-financial aspects such as environmental, social, and governance (ESG) factors to analyze growth opportunities and identify material risks associated with them. With ESG at the center, now corporations are increasingly making disclosures in their annual report or in a dedicated sustainability report to display their commitment, progress, and performance on this front.

It is worthwhile to mention that the ESG initiative was a product of a milestone report, Who Cares Wins, 2004-08 by International Finance Corporation (IFC) Advisory Services in Environmental and Social Sustainability. Through this publication, financial institutions on invitation by then Secretary-General of United Nations, Kofi Annan, took a joint initiative. Twenty financial institutions from nine different countries participated in developing this report, and these institutions in total had assets of over US$ 6 trillion under their management.

The initiative was undertaken to develop guidelines and recommendations for better integration of environmental, social, and corporate governance issues. The institutions that endorsed this publication were convinced that as the modern business had entered a globalized, interconnected, and competitive arena, there was a greater need to improve the way environmental, social, and corporate governance issues could be managed.

In the current era, companies around the world are adopting ESG as a basic requirement for their growth. Their ability to manage ESG-related issues provides insights into overall risk levels and management quality. The corporate sector that performs better on this front can increase shareholder value through timely risk management, anticipating regulatory action or accessing new markets, and contributing to the sustainable development of societies.

These issues can have a positive impact on corporate reputation and brand value overall. Further, this framework acts as a tool to check the sustainability of business as it directly impacts its capital market outlook as some investors use ESG criteria to evaluate companies and help determine their investment plans.

Pakistan is currently facing a series of crises including environmental, political, and economic challenges. The country having fifth largest population in the world, has an informal economy size almost 35% of its GDP.

However, the government seems clueless in addressing even basic issues to put the country on a sustainability path. Pakistan’s ranking on the implementation of sustainable development goals is 159 out of 193 with an overall score of 59.34.

The score assigned to us on various factors such as social justice, strong institutions, and the environment is very poor. The government also seems least interested in engaging the corporate sector to play its role in implementing SGDs.

In recent years, investment in ESG is increasing, and as per Bloomberg ESG assets may hit $53 trillion by 2025. Valerio Baselli in an article, Which Countries Lead on ESG?, published in Morningstar observes: “Netherlands is the world’s most sustainable stock market.

Meanwhile, France has overtaken Sweden and Finland for second place in the rankings. This is primarily due to big companies like luxury goods firm LVMH and electrical equipment supplier Schneider Electric, both classified as ESG outperformers. Finland ranks third thanks to companies such as Nokia, a leader within the global technology hardware industry“.

The ‘Morningstar’s Sustainability Atlas’ in its report highlights that Pakistan has nearly 60% of its market cap in energy, utilities, and basic-material stocks. It consequently has the world’s highest ‘Portfolio Carbon Risk Score’. Pakistan should realize the importance of ESG initiatives and should step up apparatus to implement the ESG framework. The country should also implement ESG goals in all the operations and services being offered.

The government should design policies and regulations for monitoring and implementation of ESG goals by both the public and private sectors. These goals can never be achieved unless Pakistan improves its legal and regulatory framework, including environmental laws, labour, security and exchange, retirement, water, and other corporate regulatory laws.

The government should also announce incentives for the corporate sector and streamline reporting in the likes of Europe and America that have designed their framework by introducing various rules and monitoring bodies. The government should also rationalize the tax system for promotion of ESG initiatives, address the concern of companies related to taxation, and provide them incentives in the form of funding and other facilities to accelerate growth.

It is important to note that the ESG goals include cutting down gas emissions, investing in sustainable energy, addressing pollution, and energy efficiency, increasing workplace diversity, establishing human rights in the organizations, improving supply chain, diversity in the board, shareholders’ rights, and implementing corporate ethics. The fulfillment of these goals will not only promote the sustainable investing, but going to improve the value of the corporate sector as well.

The United Nations’ Principles for Responsible Investment (PRI) are world’s leading protagonist of responsible investment that work to understand investment implications of environmental, social, and governance (ESG) factors.

Being the fifth populous country, Pakistan has an extended responsibility to streamline its affairs and in the upcoming federal and provincial budgets must introduce a regulatory framework for the implementation of SDGs goals by offering various incentives to encourage socially responsible investments.

(Huzaima Bukhari & Dr Ikramul Haq, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’)

Copyright Business Recorder, 2023