Mounting evidence of irreversible environmental problems and increasing inequality has established the precedent to compel the private sector to show corporate responsibility and think beyond profits.

As time progressed, stakeholders voiced the need for corporate responsibility and accountability. Globally, on the one hand, this led to many UN-backed conventions — more recently, the UN’s Sustainable Development Goals.

On the other, some investors refrained from investing in companies with a poor reputation in managing labour and the environment. The recognition that businesses prioritising environmental and social aspects outperform those solely focused on finances prompted the demand for sustainability disclosures.

Overall, this led to a growing culture in environmental, social, and governmental (ESG)/sustainability reporting in the 1990s. However, disclosures lacked credibility and comparability but improved when they started following sustainability reporting formats.

Approximately only 50 out of 540 companies listed on the PSX reported on sustainability in 2020, with even fewer companies using standards to develop their sustainability reports

The Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), International Integrated Reporting Framework (IIRC), and Task Force for Climate-Related Disclosures (TCFD) are the predominant sets of reporting standards used for disclosure.

Though, it was up to the company to decide which standard to follow to develop a sustainability report, hence leading to variability and incomparability even amongst peer companies.

Fast forward to 2023

The year 2023 has been incremental for those advocating sustainability and ESG disclosures. At the end of June, the Integrated Sustainability Standards Board (ISSB) released the International Financial Reporting Standards (IFRS) S1 and S2, requiring disclosure of sustainability-related and climate-related risks, opportunities and related performance.

Through this update, the IFRS will require all listed companies to report on sustainability-related risks and opportunities and relevant disclosures in its 140 jurisdictions, including Pakistan.

This direction has come from a growing need for globally standardised and comparable reporting from investors. The ISSB consolidates the SASB, IIRC and TCFD and is now progressing towards aligning with the GRI.

Additionally, global regulators are pushing for companies to disclose performance on sustainability. Policymakers realise being reactive is no longer the right approach, and companies need to be pushed to incorporate sustainability into their business strategies.

The EU’s Corporate Sustainability Reporting Directive now requires all large companies and all companies listed on EU-regulated markets to disclose information on their environmental and social impact. On the other side of the Atlantic, the expected rules from US Securities and Exchange Commission (SEC) will require detailed company disclosure on climate-related risks and opportunities by the end of 2023.

Since Pakistan operates within the IFRS jurisdiction, local companies will be obligated to report on sustainability risks, opportunities and disclose performance.

Furthermore, the Securities and Exchange Commission released the ESG Roadmap in 2022 as part of its policy efforts and organised awareness sessions on ESG and sustainability. Concurrently, the State Bank of Pakistan has made it compulsory for banks to establish mechanisms for conducting environmental and social due diligence on companies prior to providing loans.

What can companies do to be ready to report?

The recognition that sustainability and value creation are interconnected reflects a positive direction. However, research highlights only approximately 50 out of 540 companies listed on the PSX reported on sustainability in 2020, with even fewer companies using standards to develop their sustainability reports.

Nevertheless, with the focus of Pakistan’s export markets on sustainability disclosures, it is expected that both listed and privately owned companies will move towards sustainability reporting to satisfy their buyers. However, companies still face significant challenges in operationalising sustainability commitments.

A starting point is aligning sustainability factors into their business strategy by understanding current and future stakeholder interests and understanding the issues that are material to the company in the short, medium, and long term — ie, how sustainability issues impact a company and how the company impacts the environment and society.

Companies can identify these in a three-step process: refer to a global framework to identify material issues, benchmark with other companies to identify what other companies recognise as material issues, and engage with stakeholders to understand the issues which interest them.

The SASB’s Materiality Finder can be recommended as a framework to identify the material issues, as it has consolidated sustainability risks and opportunities for 77 industries after engaging companies, investors, and other market participants.

In Pakistan as well as globally, companies are at varying levels of maturity when it comes to sustainability. However, through the new standards and regulatory directions, it is expected that companies will be at par in the coming years.

The writer leads the Centre of Excellence in Responsible Business at the Pakistan Business Council

Published in Dawn, The Business and Finance Weekly, July 17th, 2023