WHO am I? Why are we here? What happens to us when we die? Complex questions which every individual seeks to answer in a lifetime.
According to Colin Mayer’s Prosperity, the purpose of the existence of a corporationis rather simple: “producing profitable solutions to problems of people and planet”. The current socioeconomic business model creates an overabundance of wealth for businessmen, shareholders and CEOs. The scarcity of natural resources necessitates that the role of corporations goes beyond the stakeholder capitalism prevalent in the environment, social and governance (ESG) policy today.
The reasons behind social disorder, energy crises and corporate bank failures are ‘as clear as day’, yet perpetually unseen by a few. The world yearns for real, sustainable and permanent change — a change in the way we conduct business, treat the environment and build a better future for coming generations.
Governance can help the corporation become a source of benefit to society and diminish the likelihood of harm caused to citizens. Orthodox shareholder primacy has been rejected across the Atlantic, but the alternatives to solving issues related to prosperity and consumer welfare need further examination. The citizen has become merely a consumer, with no active participation in the decision-making process. The consumer is deprived due to profit maximisation at each stage of interaction between the individual, state and corporation. Prescriptive mandatory rules and best practices to redefine the corporate purpose of companies in both the Global North and South are required immediately.
The citizen has become merely a consumer.
Do ESG reporting standards and frameworks solve the problem?ESG addresses a company’s performance and risk exposure based on its environmental impact, social responsibility, and how it is governed. The idea is to integrate a broad corporate strategy, addressing stakeholder and regulatory demands. ESG programmes are driven by investor demand, workforce pressure, enterprise management, and competitive advantage. Institutional investors employ ‘sustainability-linked’ loan-lending strategies to gain a better understanding of risks of an investee firm.
According to the UN Principle of Responsible Investment estimates, global sustainable lending activity grew from $6 billion in January 2016 to $322bn in September 2021. However, sustainable investing approaches differ widely by strategy and products, making it difficult to measure ESG performance. The greatest challenge faced by institutional investors is ‘greenwashing’ — funds which have branded themselves as ‘sustainable’ but are not fundamentally different from traditional funds.
The UN Financing for Sustainable Development Report 2023 states: “Growing awareness of misleading practices is creating disillusion, threatening the entire market’s credibility and leading to an increase in regulatory measures to enhance transparency and accountability.”
Realignment of the profit motive and embedding purpose in the corporate legal framework lies at the heart of the issue. How is a buzzword of any use to a shareholder if it carries no instant return or promotes stakeholder interests at the cost of financial capital? The answer is not straightforward. ESG guidelines nudge private actors at the corporate level. Alternatively, SDG goals and the Paris Agreement’s Nationally Determined Contributions prod public actors at the state level. A truly sustainable society is visible through the lens of shareholder governance, but can only be manifested through a paradigm shift towards stakeholder governance.
Pakistan has an ambitious climate change action plan, exhibited recently at the pavilion of COP28 in the UAE. Two things seem quite obvious, first, despite its low greenhouse gas emissions (490 million tons of CO2 equivalent in 2017-18) Pakistan’s frequent exposure to natural hazards and significant dependence on monsoon rain and the glacier-fed Indus Basin make it vulnerable to climate change. Second, public-private partnerships are integral to achieving the transformation of 60 per cent of the country’s energy production through ‘clean and renewable’ resources by 2030. It is an inflection point for the Global South, which can either embrace economic growth in a measured sustainable method or follow the path of the Global North’s industrial expansion, which is irreversible.
Various regulators in the country, such as the Securities and Exchange Commission of Pakistan, the Pakistan Stock Exchange and the State Bank have issued ESG-and sustainability-focused regulations, policies and guidelines. However, time is of the essence; the quick remedy lies in embedding corporate purpose in a company’s constitutional documents — which is variable on a self-regulatory basis but loosely monitored by the SECP.
The writer is a lawyer based in Islamabad.
Published in Dawn, January 16th, 2024
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