Pakistan ranks the eighth most vulnerable nation on the Global Climate Risk Index 2021 and is among the top three for global air pollution levels. This vulnerability is compounded by factors such as El Niño, which disrupts agriculture and water resources, highlighting the critical need for comprehensive climate risk management.

The country is expected to encounter a food shortage of 70 million tonnes by 2025 and has already seen a 23 per cent decrease in cotton productivity due to flooding in 2022. These are not distant threats but current realities. Additionally, the agricultural sector, a vital component of the national supply chain, could shrink by up to 40pc by 2050 due to climate impacts.

Furthermore, the anticipated disappearance of 7,000 glaciers within the next 70 years poses a significant risk to water supplies, underscoring the urgency of strategic climate risk management.

A ‘Climate Change Readiness’ study conducted by GIZ, a German development agency, and the Pakistan Business Council on the private sector’s readiness to tackle climate challenges revealed that although awareness of climate risks is increasing, many companies are still in the early stages of integrating these risks into their strategic and operational frameworks.

The study shows that there is a strategic gap between recognising climate risks and implementing robust management strategies to mitigate and adapt to these risks effectively.

Specifically, 70pc of companies still exhibit fragmented internal processes that hinder the effective management of climate initiatives. This gap underscores the need for a more integrated approach in strategic and operational frameworks.

Seriously considering climate risk management and reporting policies could help Pakistani businesses reduce vulnerabilities and turn challenges into opportunities

Alongside these challenges, the updated International Financial Reporting Standard for Sustainability-related Disclosures (IFRS S2) now mandates companies to report climate-related risks in their financial statements and outline risk management and mitigation strategies.

For Pakistani companies, this offers a significant opportunity to map both physical and transitional climate risks — where physical risks include direct damage from natural disasters, affecting assets, supply chains, and business continuity, while transitional risks involve adjustments in a low-carbon economy, where changes in policy, market preferences, and technological advancements can disrupt existing business models — for their organisation, enhancing their ability to manage vulnerabilities and mitigate risks effectively.

According to the report, only 30pc of companies have developed comprehensive strategies to manage these risks, leaving a large proportion struggling with partial or fragmented approaches, which could jeopardise their long-term sustainability.

Moreover, 36pc of companies have identified low-quality agricultural output due to extreme weather as the top climate-related challenge affecting supply chains. This issue, along with altered production conditions and reduced flow of goods during droughts and floods, points to the intricate ways climate risks intertwine with operational and financial performance.

The global economic landscape further influences Pakistani businesses. International climate policies, evolving market demands, and shifting investor priorities toward sustainability prompt a need for alignment with global green initiatives.

As international supply chains decarbonise, Pakistani exporters must upgrade their operations to comply with these green mandates and remain competitive. This involves significant investment in sustainable technologies and processes essential for maintaining market access and capital inflow.

Global consumer preferences are shifting towards sustainable products, pushing companies to innovate. Pakistani businesses can leverage this trend by developing products that align with new consumer standards, potentially opening up new domestic and international markets.

The report recommends that Pakistani businesses conduct thorough risk assessments and integrate climate considerations into their business strategies and operational planning. This approach is crucial because it directly impacts a company’s financial health.

According to the Intergovernmental Panel on Climate Change’s 6th Assessment Report, rising temperatures are expected to increase both the intensity and duration of climate-related events, significantly heightening operational and credit risks. Businesses must identify climate risks that affect them in the short term and medium to long term to protect their future.

Recognising these risks allows companies to develop and implement strategies that reduce vulnerabilities. This strategic foresight enables them to turn potential challenges into opportunities for innovation and market leadership in an increasingly environmentally conscious global economy.

The call to action for robust climate risk management and reporting is clear. As environmental challenges intensify, so does the importance of proactive and strategic responses. Pakistani businesses have a critical role in adapting to climate risks and leading by example in the transition to a sustainable and resilient future.

The time to act is now, with comprehensive strategies that ensure they are compliant with global standards like IFRS S2 and at the forefront of sustainable business practices.

The writer is the Sustainability Research Manager at Pakistan Business Council, Centre of Excellence in Responsible Business

Published in Dawn, The Business and Finance Weekly, June 3rd, 2024