ESG compliance: driving better production, employment, and trade
A survey by the Pakistan Institute of Corporate Governance (PICG) on ESG reporting in Pakistan, covering public (58.06%) and private (33.87%) listed companies across various sectors, including manufacturing, revealed that while 90.8% of respondents were aware of the ESG framework, only 46.28% had ESG guidelines or policies in place. Most admitted that their companies neither prepare nor issue ESG or sustainability reports, and those that do rarely make them accessible to clients.
ESG (Environmental, Social, and Governance) is a framework for assessing a company’s sustainability and ethical impact, covering its environmental stewardship, social responsibility, and governance practices.
With regulations like the EU’s CSDDD and the German Supply Chain Act, businesses in the EU and their suppliers face stricter environmental and social standards.
For Pakistan’s textile sector – which is the backbone of its economy and exports - this shift presents both challenges and opportunities.
Fragmentation in the value chain, declining cotton production, and reliance on imports have led to job and income losses for women cotton pickers and farmers - Pakistan’s most vulnerable communities. This is a direct blow to environmental and social responsibility.
If ESG compliance had been taken seriously, such losses could have been prevented or mitigated to a much greater extent.
Compliance and market access:
The EU, UK, and US - Pakistan’s primary export destinations are placing increasing emphasis on traceability to ensure sustainable sourcing.
50% of Pakistan’s total exports and 75% of its textile exports are directed to these three markets. A lack of compliance with ESG standards will immediately impact 75% of our textile exports, with the remaining 25% becoming increasingly vulnerable as global compliance expectations intensify. Over time, similar challenges will extend to exports beyond these key markets as traceability standards continue to evolve worldwide.
Fragmentation of value chain and need for integration:
Pakistan is one of the three economies globally, alongside China and India, that has a complete textile value chain. However, 80% of the value chain is fragmented, meaning there are some vertically integrated players and many standalone SMEs. A primary challenge lies in aligning our supply chains with due diligence expectations of international buyers.
This fragmentation has led to fiscal challenges such as tax evasion, underreporting, and under-invoicing, while also highlighting the urgent need for ESG compliance due to the lack of records on human rights and environmental due diligence.
Therefore, it is crucial for Pakistan to establish a system that integrates the value chain. With growing emphasis on traceability, transparency, and accountability, non-compliance is no longer an option; failure to meet these evolving standards risks exclusion from major export markets.
Beyond ESG compliance, traceability is also increasingly crucial as trade patterns in Pakistan’s textile industry evolve. Despite Pakistan’s history as a cotton producer, cotton imports are now on the rise. The combined cotton and cotton yarn import bill is projected to reach $2.8 billion in the current fiscal year due to declining domestic cotton production and the EFS anomaly - where local cotton yarn is taxed at 18% sales tax, while imported yarn remains duty-free.
With cotton primarily sourced from the USA and Brazil, Western buyers may struggle to verify the origin of imported cotton yarn used in Pakistan’s textile exports. Therefore, ensuring integration is essential to ensure transparency and prevent potential restrictions on Pakistan’s textile exports to Western markets.
The bigger picture must not overshadow social impact:
Beyond meeting buyers’ demands, ESG reporting carries a crucial social dimension.
As Pakistan’s cotton fields dwindle, so does the lifeline of its most vulnerable communities - once thriving but now struggling to survive.
Cotton picking in Pakistan is predominantly carried out by female workers, whose livelihoods depend on the income they earn from the fields. It is considered a cash job, as pickers receive wages at the end of each workday. These women typically work 6 to 8 hours per day during the 2.5-month cotton-picking season, which involves multiple harvests. In 2015-16, when cotton production was at its peak, a study revealed that approximately 0.1 million women cotton pickers were employed across 1.6 million cotton-growing farms in Pakistan during the harvesting season (Bakhsh et al., 2016). Yet, their income loss remains overlooked.
Similarly, farmers who have relied on cotton cultivation for decades now face severe income losses due to agricultural uncertainty. The impact extends further down the value chain - disruptions in the spinning sector have left millions of workers jobless.
While policymakers focus on the bigger picture, they often disregard the human cost and the deep-rooted socioeconomic consequences of this decline.
APTMA’s recent initiatives have laid the foundation for ESG compliance in Pakistan:
APTMA is committed to assisting the industry meet ESG requirements. Member mills are adopting international labor standards, investing in sustainable production, and enhancing worker protections. Despite regulatory challenges, significant progress has been made.
- DNA-based testing lab at NTU Faisalabad (approved by EDF):
With extensive technical expertise, APTMA developed and submitted a proposal for a DNA-based cotton testing lab at NTU Faisalabad, now approved. This lab will verify cotton origins for compliance with regulations like UFPLA. Funding through the Export Development Fund is proposed to ensure sustainability.
- Frequent engagement with key stakeholders to strengthen the value chain:
APTMA has engaged with the FBR to integrate traceability into export and import regulations and collaborated with the Ministry of National Food Security & Research, leading to the formation of a committee on cotton traceability. It is also working with the Ministry of Commerce to align trade policies with traceability requirements. Additionally, APTMA has partnered with Better Cotton Pakistan, Cotton Connect, WWF Pakistan, Organic Cotton Accelerators, and CABI to adopt global best practices in Pakistan’s cotton industry.
- Addressing challenges in the ginning industry:
Value chain fragmentation and high tax rates have made many ginners reluctant to adopt transparency over business control concerns. APTMA has been urging the government to designate the National Compliance Center (NCC) as an independent traceability body to address industry concerns while ensuring supply chain transparency.
These initiatives lay the foundation for stronger ESG practices in Pakistan’s value chain. However, full-scale compliance requires deeper collaboration between industry, government, and regulators.
Paving the path to ESG integration in Pakistan’s value chain:
As a developing economy, Pakistan lacks financial capacity as well as awareness across the value chain regarding such compliance. Therefore, the Pakistani industry needs streamlined policy support, financial incentives for compliance initiatives, and capacity-building programmes to keep its textile sector competitive in a rapidly evolving global trade environment.
How can this happen?
i. Make compliance practices such as ESG, mandatory in Pakistan to meet increasing demand from the West. Without making this mandatory, compliance cannot be extended along the value chain.
ii. Designate the NCC as the single national regulator for compliance practices.
iii. Develop a centralized digital traceability system to track raw materials, production processes, and labor conditions.
iv. Make traceability a mandatory requirement for all suppliers and sub-contractors to prevent green-washing, exceed minimum standards, enhance ESG reporting, and position Pakistan for access to new and better markets.
v. Introduce incentives for firms that comply with ESG requirements. India, in its recent budget, has introduced Production-Linked Incentives (PLIs), offering financial benefits to textile manufacturers meeting sustainability benchmarks.
vi. Create ESG-linked financing schemes to support compliance investments (e.g., green bonds, concessional loans), ensuring SMEs in the value chain can adopt sustainable practices.
vii. Encourage banks to offer lower interest rates for firms adopting ESG-compliant technologies.
viii. Learn from international best practices. In Germany, the KfW Development Bank provides low-interest loans for businesses implementing ESG-friendly practices, such as energy-efficient production. Similarly in China, the Green Finance System encourages banks to issue ESG-linked loans with lower interest rates for sustainable businesses. And Bangladesh offers export subsidies to garment manufacturers complying with green factory standards (LEED-certified factories).
ix. Cut redundant PSDP programmes and focus on export competitiveness through compliance.
x. Launch awareness programmes and training to educate SMEs on ESG compliance.
xi. Encourage cluster-based compliance models where SMEs collectively adopt ESG standards.
xii. Establish internal reporting systems within firms to ensure the submission of annual ESG/Sustainability performance reports to the National Compliance Center.
xiii. The government must frequently engage with industry to identify areas where support is most needed.
Though Pakistan has several ESG-related ISO certifications, significant gaps in compliance remain, which are discussed above. Prioritizing social equity and worker protection is not just about meeting ESG requirements - it is about securing the livelihoods of millions while reinforcing Pakistan’s reputation as a reliable and sustainable supplier in global markets.
By strategically aligning with international best practices, Pakistan’s textile sector can go beyond mere compliance, positioning itself as a leader in responsible manufacturing and gaining a competitive edge in the region. In the long run, ESG compliance will drive better production, create employment opportunities, and enhance trade, ensuring sustainable growth for the economy.
Copyright Business Recorder, 2025
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