Exporter caution: ‘Pakistan’s ESG compliance can affect GSP-Plus status’

Pakistan’s main export destinations – Europe and the U.S in particular – are becoming increasingly concerned over the manner in which goods they import are produced, and if the processes have followed Environmental, Social and Governance (ESGs) best practices or not.

This evolution of Pakistan’s key markets may negatively affect the country’s exports if producers don’t evolve accordingly, said SpectrEco CEO Faraz Khan in an exclusive interview with Business Recorder.

Faraz, a Pakistani entrepreneur who recently received the United Kingdom’s prestigious Order of the British Empire (MBE) award for his innovative approaches for a sustainable future, said the country’s industries and businesses need to “up their game”.

“Our industries and businesses need to up their game to global standards even before our own ESG standards come into place,” said Faraz.

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“Pakistan’s export-oriented industries’ response to the ESG compliance will also affect Pakistan’s GSP Plus status.”

Faraz is currently the CEO of US-based SpectrEco, a technology, data, and advisory firm that simplifies and accelerates sustainability and ESG transitions for companies.

His company focuses on real estate, hospitality and infrastructural development sectors, which contribute 40% of the total carbon emissions in the world.

Faraz said ESG regulation has already been embraced by Europe from January 1.

“So if there is any import oriented business in the E.U., and if they are absorbing Pakistan exports, then those businesses will ask Pakistani exporters to get ESG compliant. They won’t be able to absorb our exports if our exporters don’t follow their ESG compliance standards.”

His partner at SpectrEco, Sajjeed Aslam – who appeared to be more into big data – said countries were now incorporating carbon and other gases’ emissions such as methane, which induces global warming and subsequently climate change abbreviated as CO2e, as a cost and governments are regulating it now.

It means there’s a certain cap on businesses to emit carbon such as in the E.U. for instance. Companies in Germany were now touching their caps or CO2e allowed limits, which will make them opt for imports that have low-carbon credits even if they are a costlier substitute.

“Pakistan’s export is definitely going to get hit by these ESG regulations, especially to the E.U. which already has certain regulations in place,” Aslam said.

He added that most of the developed countries are taking ESG guidelines seriously and CO2e emissions have become one of their biggest concerns.

Explaining it further, Faraz said European companies who don’t comply will be penalized 4% to 10% of turnover.

“Businesses in Europe will strictly want to see ESG compliance to avoid these hefty penalties.”

The duo implied that for exporters such as those from Pakistan, there is no going forward without evolving and complying with ESG standards.

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Pakistan’s GSP plus status resulted in an increase in EU-Pakistan trade from 6.9 billion euros in 2013 to 12.2 billion euros in 2021.

In a recent visit to a trade body, Dr Riina Kionka, Ambassador of EU in Pakistan, said there will be a new EU parliament and EU Commission in June 2024; and, there might be some review or policy changes in rules framework for Pakistan’s GSP plus status.

She said that Pakistan should remain on course on EU’s requirements - environmental standards, human rights, labor rights, and good governance.

“These are principally the four areas where Pakistan’s performance comes under review,” she was quoted as saying by a media statement by the Federation of Pakistan Chambers of Commerce & Industry. The UN’s monitoring report on Pakistan is expected to be released in November 2024.

Adhering to ESG standards has a cost

Faraz is unconvinced that lifting local production to internationally acceptable ESG standards would increase cost and as a consequence make them uncompetitive in the international markets. He thinks inducing ESG practices would keep companies competitive.

“Search for green companies and the name of Bangladesh will pop up. Aren’t they getting orders? They are, and even if it increases cost, Pakistan companies will also continue to get orders just as Bangladesh companies do,” he said.

To give context, Bangladesh’s textile and related products exports have almost touched the $50 billion-mark in 2023.

Faruque Hassan, president of the Bangladesh Garment Manufacturers and Exporters Association, attributed the increase in exports due to ‘the evolving capabilities and commitment to meeting the changing demands of the global market’ as quoted as by Bangladesh’s The Daily Star.

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In contrast, Pakistan textile exports are yet to touch $20 billion.

Faraz said some Pakistan textile players are already complying with ESG standards and some are preparing to do it.

“We are also helping a few textile players move into that direction.

“ESG means that you take care of the people and you take care of the environment. If you see it as a cost then it is wrong — you have to see it as an investment,” he said.

Where does Pakistan stand in compliance?

If response to ESG regulations could be scored against a benchmark, then the countries can be categorised into three types.

“There are three kinds of sovereign jurisdictions in the world. One where ESG regulations have been introduced and are mandatory. Second place is ESG regulations have been introduced but they are voluntary and are transitioning into mandatory,” Faraz said.

“Third, ESG jurisdictions are those where regulations are being prepared. In Pakistan, the Pakistan Stock Exchange is working and they have developed an ESG task force, and we indirectly contributed to the ESG declaration in the country as well.

“Pakistan is at a place where ESG regulations are not in a mandatory or voluntary stage but they are moving fast and hopefully you will see ESG regulations in the next two to three years.”

How does SpectrEco work?

SpectrEco is a technology and data platform that is simplifying journey net zero for businesses and industries across the globe including businesses and industries in Pakistan, said Faraz.

“The real contributors to the carbon emissions around the world are businesses and industries and they want to move towards net zero climate targets as well. But the challenges — one is money and the other is the understanding of how to move forward regulatory regimes and laws that are coming into place.

“We have data scientists that actually started mapping every standard, every regulation, every framework, ranking, ratings, and certifications from across the world.

“Then we started mapping 77 industries of the world, and the correlation between the impact of these regulations on these industries and created a technology platform that is backed up by continuously growing data.

“We are now primarily focusing on three industries – real estate, hospitality and infrastructural development – as well as insurance and financial services to create transition and transformation capabilities.

“When you focus on the biggest contributors, then the impact will be much quicker. So the idea is to simplify the process for these four to five industries and demonstrate that impact and then move to others when time comes.”

Why ESG or net zero

Pakistan, seen as one of the most vulnerable countries to climate change even though it has contributed less than 1% to greenhouse gas emissions, was hit hard by floods in 2022. Faraz said the world needs a coordinated approach to the challenge.

“We have to stop thinking about whether we are emitting more carbon or less. Biggest existing polluters are the US and China. China and India have a perspective that the West have been the biggest polluters during their industrial revolution, and now it is their time to develop.

“But what if the world doesn’t survive in 100 years?

“Floods in Pakistan, wildfires in Australia and droughts in Europe — ultimately, the planet is suffering. We need to sit together and work in a collaborative manner.”

Faraz said even local industries will see an impact from ESG regulations.

“It is already happening in the West that people have become conscious of the product’s genesis and how it is made. This will affect the rate of return on investment and also the price premium of products on these basis.”

He added that if the local industry wants to have access to capital and global FDI, then they would need to comply and become sustainable as per the regulations, standards and framework of the ESGs.