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CAN CLIMATE CHANGE PAKISTAN’S ECONOMY?
“In our village, ancestral wisdom guided us to manage extreme weather across generations,” says Muhammad Kareem, a 55-year-old resident of Shikarpur, which was severely hit by the August 2022 floods that wreaked havoc across Pakistan.
“But now,” he continues, “we are grappling with uncertainty about how to deal with yearly floods. My home has been destroyed, cattle drowned and yearly crops lost.”
Kareem is not alone in his plight. There are thousands of stories like this across Pakistan. Climate-induced disasters, in both their quantum and frequency, have gone beyond conventional ancestral wisdom and communities are suffering, because the disasters are becoming greater than the indigenous wisdom and solutions.
In the aftermath of the August 2022 floods, the unveiling of the ‘Post Disaster Needs Assessment’ report in October 2022 illuminated the profound economic toll exacted by this catastrophic event and its intricate link to human-induced climate change.
The floods, attributed to a 1.2 degree Celsius rise in global temperatures and exacerbated by factors such as melting Himalayan glaciers and land-use changes, inflicted staggering damages, estimated at Rs3.2 trillion (USD 14.9 billion), with recovery needs soaring to Rs3.5 trillion (USD 16.3 billion).
As the demand for sustainable development and climate resilience becomes increasingly urgent, Pakistan finds itself at a crucial crossroads — adapt, or suffer the consequences. However, an adoption of effective policies could help Pakistan not only mitigate the impacts of climate change but also attract investment and expand the country’s trade horizons
Sectors such as housing, agriculture, and transport and communications bore the brunt of the devastation, with respective damages reaching Rs1.2 trillion (USD 5.6 billion), Rs800 billion (USD 3.7 billion) and Rs701 billion (USD 3.3 billion). The framework for attributing these losses to climate change suggests that roughly half of Pakistan’s losses can be linked to long term climate change, underscoring the need for a nuanced approach to allocating responsibility.
While international pledges of relief, such as America’s USD 50 million and Canada’s USD 5 million, offer some assistance, they pale in comparison to the magnitude of the attributable losses. This disparity underscores the importance for re-evaluating global arrangements, to ensure that countries historically responsible for climate change bear a commensurate share of the costs.
The historical analysis of cumulative carbon dioxide emissions further elucidates the disproportionate burden faced by countries like Pakistan which, despite contributing relatively little to emissions, endure significant climate-related damages.
As climate-related tragedies become more frequent and severe, the call for climate justice grows louder, demanding equitable distribution of responsibility and resources to mitigate the impacts of climate change and to build resilient societies.
PAKISTAN’S EFFORTS SO FAR
Against this backdrop, it is imperative to acknowledge Pakistan’s efforts to build a strong legal and regulatory infrastructure to tackle climate change, despite contributing less than one percent to global greenhouse gas emissions. This legal infrastructure comprises a multifaceted framework, encompassing acts of parliament, policy frameworks and subordinate legislation.
Noteworthy legislative acts include the Pakistan Climate Change Act of 2017, which established the Pakistan Climate Change Council and calls for the conservation of resources impacted by climate variations. Similarly, the enactment of the Global Change Impact Studies Centre Act in 2013 led to the establishment of the Global Change Impact Studies Centre, tasked with evaluating climate change ramifications and fostering public awareness.
Moreover, the Pakistan Environment Protection Act of 1997 underscores the country’s commitment to environmental revitalisation and pollution management, facilitating the establishment of provincial sustainable development funds and the Pakistan Environment Protection Authority.
Policy frameworks, such as the National Climate Change Policy (NCCP) and the Framework for Implementation of Climate Change Policy (2014-2030), delineate objectives aimed at mitigating climate-related challenges, with a particular focus on sectors vulnerable to climate vagaries, such as agriculture and forestry. Various regulatory measures complement the implementation of laws and policy frameworks, encompassing pollution levies, regulations governing wildlife trade and restrictions on plastic usage.
However, the on-ground impact of these acts and measures in the daily lives of communities and citizens is not evident yet, and only the next disaster will demonstrate the true efficacy of these policies.
Pakistan’s judiciary has also played a pivotal role in shaping climate change jurisprudence. Landmark cases, such as Shehla Zia v Wapda (1994) and Asghar Leghari v Federation of Pakistan (2018) have expanded constitutional interpretations to encompass the right to a healthy environment and mandated the enforcement of climate change policies, thereby establishing mechanisms, such as the Climate Change Commission.
Additionally, judicial interventions, such as those in the Lahore Canal Bank Road suo motu case (2011), underscore the judiciary’s commitment to mitigating environmental degradation during infrastructure projects.
Similarly, Pakistan’s nascent adherence to environmental, social and governance (ESG) regulations reflects the global shift towards corporate accountability concerning environmental and social welfare. These regulations serve as a barometer for conscientious investors, evaluating factors ranging from energy efficiency to ethical wildlife treatment and employee well-being. Governance standards should underscore principles of transparency and an adherence to legal norms.
Despite facing challenges such as high fuel costs, import dependency and outdated infrastructure, Pakistan has made strides since 2013 to address these issues. With a focus on transitioning towards renewable energy, particularly wind and solar power, Pakistan aims to diversify its energy sources and reduce carbon emissions. Furthermore, Pakistan’s commitment to reducing emissions by 50 percent by 2030 underscores the significance of strategic policy interventions in achieving sustainability goals and mitigating carbon emissions.
NAVIGATING ROADBLOCKS
However, Pakistan’s performance in adhering to ESG principles, as evidenced by global indices such as the World Bank’s ESG data portal, remains deficient, with the country ranked 161 globally when it comes to adopting and following ESG principles. This underscores the urgency for Pakistan to realign its practices with ESG principles for enhanced risk management.
Initiatives such as guidelines from the Securities and Exchange Commission of Pakistan (SECP) and the State Bank of Pakistan’s (SBP’s) Environmental and Social Risk Management implementation manual aim to instil sustainable practices within the financial sector.
Furthermore, Green Banking guidelines advocate for integrating environmental considerations into banking operations, aligning with international endeavours towards a low-carbon economy. As Pakistan confronts these challenges, nurturing a culture of ESG implementation becomes imperative, not only to bolster corporate resilience but also to promote societal welfare and environmental preservation, thereby contributing to a sustainable future.
Pakistan’s renewable energy endeavours also mark a significant shift towards the quest for a sustainable energy landscape. A 2021 study examined the impact of export diversification, fiscal decentralisation and environmental innovation on carbon neutrality in 37 OECD (Organisation for Economic Cooperation and Development) economies from 1970 to 2019. It discovered that export diversification and fiscal decentralisation increased carbon emissions, whereas renewable energy usage and environmental innovation improved environmental conditions.
Despite facing challenges such as high fuel costs, import dependency and outdated infrastructure, Pakistan has made strides since 2013 to address these issues. With a focus on transitioning towards renewable energy, particularly wind and solar power, Pakistan aims to diversify its energy sources and reduce carbon emissions. Furthermore, Pakistan’s commitment to reducing emissions by 50 percent by 2030 underscores the significance of strategic policy interventions in achieving sustainability goals and mitigating carbon emissions.
In the context of the aforementioned study, the International Monetary Fund (IMF) study also underscores the vital role of green innovation in reducing emissions and stimulating economic growth, particularly in emerging markets like Pakistan. Despite advancements, recent setbacks attributed to technological maturity and fluctuations in oil prices warrant careful consideration.
Not just renewable energy, Pakistan’s textile and fashion industry is also aligning itself with the emerging regulations and government policies, notably the Textile and Apparel Policy 2020-2025, underscoring Pakistan’s commitment to sustainable development. This industry, contributing 60 percent to Pakistan’s total exports and 8.5 percent to its GDP, faces challenges, such as precarious working conditions, human rights violations and environmental issues, including greenhouse gas emissions and hazardous waste disposal.
While challenges persist in enhancing supply chain transparency and environmental compliance in Pakistan, prioritising sustainability can unlock growth opportunities, spur innovation and enhance the country’s competitiveness in global markets, while contributing to long term environmental and social welfare.
Pakistan’s strategic pivot towards climate innovation positions the nation at a pivotal juncture, offering a platform for attracting FDI and expanding trade horizons. Central to this strategic shift are institutional frameworks such as the National Climate Change Policy and Green Banking guidelines, which underscore Pakistan’s commitment to sustainable development.
HOW CAN PAKISTAN ATTRACT CLIMATE FINANCING?
According to an evaluation study by the Asian Development Bank (ADB) on climate change, Pakistan has received the least amount of climate financing from the ADB over the past 10 years. The UAE’s commitment to leveraging USD 270 billion in green finance by 2030, with plans to support energy transition in countries like Pakistan, offers a potential avenue for addressing Pakistan’s climate adaptation needs, which range between USD 7 billion and USD 14 billion annually, according to the ADB report.
Achieving Pakistan’s climate goals, including its nationally determined contributions under the Paris Agreement, remains contingent on bridging the gap between the required funds and the current flow of climate finance to the country.
As the demand for sustainable development and climate resilience becomes increasingly urgent, Pakistan finds itself at a crucial crossroads. Despite the rising global focus on investments related to climate, Pakistan’s policy circles appear to fall short in establishing a unified and sustainable approach to secure such essential foreign direct investment (FDI).
One glaring obstacle is the fundamental misunderstanding surrounding what constitutes climate FDI and how it diverges from conventional FDI. The World Economic Forum, in an illuminating white paper, aptly defines climate FDI as investments that contribute to a country’s climate-aligned growth objectives. These investments prioritise projects that are zero or low carbon, aim to reduce carbon footprints and bolster resilience against the impacts of climate change.
In light of Pakistan’s vulnerability to climate change, the outlined measures in the white paper offer a strategic blueprint for addressing four key challenges in attracting investment for climate-resilient projects.
First and foremost, aligning the strategies of the Investment Promotion Agency (IPA), notably the Board of Investment, with climate objectives signifies a proactive stance towards mitigating investment risks and enhancing the allure of climate-aligned projects. This alignment acknowledges the unique barriers faced by developing nations like Pakistan, which grapple with elevated risk profiles and financial constraints.
Secondly, the initiative to establish a database of sustainable suppliers, coupled with a robust supplier development programme, underscores a concerted effort to bolster the sustainability credentials of domestic firms. By enhancing the visibility and capacity of local suppliers, Pakistan not only aims to reduce transaction costs for investors but also positions itself as an attractive hub for sustainable investment.
Thirdly, mapping multinational enterprises’ climate commitments to investment opportunities underscores the importance of aligning private sector interests with national climate goals. Leveraging multinational enterprises’ commitment can drive investments towards climate-friendly projects, facilitating the transition to a low-carbon economy while advancing Pakistan’s sustainable development goals.
Lastly, Pakistan’s collaboration with governments and stakeholders to integrate climate FDI provisions into international investment agreements demonstrates a commitment to harmonising investment frameworks with climate imperatives. Advocating for reforms in international investment agreements to incentivise climate-aligned investments addresses regulatory hurdles that may impede the flow of capital towards climate-resilient projects.
For instance, in 2023, Pakistan attracted USD 200 million worth of mitigation and adaptation projects for the Green Climate Fund (GCF) Pakistan financing. Moreover, some public and private sector entities were also endorsed for accreditation to the GCF, which will open new avenues of global funding for Pakistan.
The importance of ESG principles in Pakistan stems from the country’s vulnerability to extreme weather events and climate-related losses, prompting a need for holistic approaches in corporate and investment decisions. Various regulatory measures, such as the SBP’s Green Banking Guidelines and the SECP’s Corporate Social Responsibility Guidelines, underscore the importance of ESG integration in business practices. Recent initiatives, such as the SECP’s ESG roadmap, signify a growing momentum towards ESG adoption, with the Pakistan Stock Exchange also joining sustainable initiatives.
However, Pakistan’s current ESG performance calls for intensified efforts. ESG implementation encompasses diverse aspects, from waste management to renewable energy adoption, aiming for a sustainable future. Robust monitoring, transparent reporting and comprehensive assessments are pivotal in ensuring effective ESG integration, which not only enhances corporate resilience but also fosters societal well-being and environmental conservation, ultimately contributing to a more sustainable and ethical future.
Additionally, uncertainties persist regarding Pakistan’s preferential trade status, further compounded by competitive pressures from regional counterparts such as India, Bangladesh and Vietnam.
While trade patterns indicate the potential for diversification, there is still a great need for regulatory convergence, particularly in addressing potential trade losses exceeding USD 3 billion, impacting sectors such as bed linen and apparel exports, with Germany identified as the most impacted market.
This adds complexity to Pakistan’s balance-of-payment challenges, highlighting the urgency for local industries, especially in sectors such as textiles, to prioritise ESG compliance, to sustain market share and ensure long term viability amidst evolving global trade dynamics.
ECONOMIC OPPORTUNITIES
The escalating demand for sustainable products globally is reshaping consumer preferences and brand competitiveness, with sustainability rapidly becoming a foundational requirement for market success. Trust plays a pivotal role in driving consumer behaviour, especially among younger demographics poised to dominate future purchasing power.
Despite sustainable products commanding a premium, consumers, particularly younger demographics, show a strong willingness to pay more for items aligned with their values, underscoring the importance for businesses to integrate sustainability into their core strategies for long term viability.
This aligns with Pakistan’s need to address ESG considerations in production processes, especially as European regulations tighten, potentially hindering export growth and necessitating a proactive response from local industries to maintain competitiveness and market access.
Moreover, in the quest for economic prosperity, Pakistan stands at a critical juncture, where the importance of sustainable and inclusive growth supersedes the allure of elite-centric policies. With an average annual growth rate of four percent from 2010-2022, juxtaposed against a concerning escalation in the debt to GDP ratio from 55 percent to 76 percent, Pakistan’s economic trajectory appears stymied. This pales in comparison to Bangladesh’s remarkable 6.2 percent growth rate and a relatively modest rise in the debt to GDP ratio from 30 percent to 39 percent during the same timeframe.
The stark contrast underscores the urgency for Pakistan to recalibrate its economic strategies, shifting away from exclusive growth models that disproportionately benefit the affluent few towards a more inclusive approach that fosters sustainability and equitable distribution of resources.
Embracing policies that prioritise investments in education, healthcare and infrastructural development, while curbing rampant corruption and promoting entrepreneurship, could pave the way for Pakistan to unlock its full economic potential and bridge the gap with its regional counterparts.
Amidst China’s increasing emphasis on eco-friendly projects within the Belt and Road Initiative (BRI), Pakistan stands poised to capitalise on the surge in green investments. Highlighting the urgent need for renewable energy, the Green Finance and Development Centre at Shanghai’s Fudan University underscores opportunities for growth and a green transition. With China prioritising smaller, economically viable projects, Pakistan can forge partnerships in scalable solar and wind energy ventures.
As a result of the China Pakistan Economic Corridor (CPEC) initiative, Chinese enterprises have successfully installed 1,440 MW of clean and green energy based on hydro, wind and solar resources in Pakistan. Out of the 1440 MW, 720 MW is hydel, 400 MW is solar and 300 MW is wind energy. During the Third Belt and Road Forum last year, Chinese President Xi Jinping announced the injection of USD 100 billion into the Belt and Road countries, with most of these funds to be utilised for green projects.
Moreover, the push to phase out outdated coal projects offers additional avenues for investment. As emerging economies seek to meet rising energy demands while addressing climate concerns, Pakistan can attract private financing for clean energy initiatives, advancing towards a sustainable future.
The urgency to incentivise businesses embracing green technologies in Pakistan is paramount. As enterprises pivot towards sustainable practices to mitigate environmental harm and capitalise on incentives, renewable energy projects emerge as pivotal contributors.
Governments and international bodies are introducing a spectrum of incentives, from federal measures such as the Inflation Reduction Act, to localised initiatives, to spur adoption. These incentives play a vital role in covering expenses and bolstering the financial feasibility of renewable energy endeavours, thereby becoming indispensable factors for businesses committed to embracing sustainability.
A SUSTAINABLE FUTURE?
Amid Pakistan’s climate-related challenges, notably exemplified by the devastating 2022 floods and the subsequent economic repercussions, a compelling narrative of opportunity amidst adversity emerges. The aftermath of these disasters has catalysed a global reckoning with the realities of climate change, highlighting the urgent need for collaborative action.
Pakistan’s strategic pivot towards climate innovation positions the nation at a pivotal juncture, offering a platform for attracting FDI and expanding trade horizons. Central to this strategic shift are institutional frameworks such as the National Climate Change Policy and Green Banking guidelines, which underscore Pakistan’s commitment to sustainable development.
Despite encountering hurdles in FDI attraction, strategic collaborations with countries like the UAE and active participation in initiatives such as the Belt and Road Initiative spearheaded by China offer promising avenues for financing climate-resilient projects.
This convergence of factors, underscored by a global shift towards incorporating ESG principles, not only underscores Pakistan’s evolving role in the climate arena but also signifies a paradigm shift towards more responsible and resilient economic development. Furthermore, the trajectory of Pakistan’s transition towards a greener and more sustainable future hinges upon the strategic alignment of policy reforms, strategic partnerships and societal engagement.
While the challenges posed by climate change are profound, they also present opportunities for innovation and growth. The alignment of Pakistan’s development agenda with climate imperatives not only addresses immediate environmental concerns but also has the potential to catalyse economic revitalisation.
Key to this transformation is the cultivation of a conducive investment climate that incentivises green investments and promotes ESG integration across sectors. By prioritising sustainability and embracing international standards, Pakistan can potentially position itself as a frontrunner in the global drive towards climate resilience.
This transition, characterised by a symphony of strategic reforms and collaborative efforts, not only charts a course towards a more sustainable future for Pakistan but also underscores its pivotal role in shaping the global discourse on climate change mitigation and adaptation.
The writer is the CEO and a partner at Spectreco, a sustainability technology and advisory institution focusing on systemic and institutional transitions towards climate resilience.
He can be reached at faraz@spectreco.com
Published in Dawn, EOS, April 28th, 2024
Header image: Illustration by Radia Durrani
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