Evidence of irreversible environmental problems and increasing inequality
As irreversible environmental problems and increasing inequality become more evident, the private sector is being compelled to think beyond profits and to show corporate responsibility.
A growing number of stakeholders emphasized the need for corporate responsibility and accountability as time progressed. On the one hand, this led to many UN-backed conventions and, more recently, the Sustainable Development Goals.
In contrast, some investors avoided investing in companies with a poor reputation for managing labour and the environment. A demand for sustainability disclosures grew out of the recognition that businesses that prioritize environmental and social aspects outperform those solely focused on finances.
A growing culture of environmental, social, and governmental (ESG)/sustainability reporting emerged in the 1990s. Despite this, disclosures lacked credibility and comparability before they adopted sustainability reporting formats.
Reporting standards used for disclosure are the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), International Integrated Reporting Framework (IIRC), and Task Force for Climate-Related Disclosures (TCFD).
It was up to the company to choose which standard to follow to develop its sustainability report, so there was a great deal of variability and incomparability even among peer companies.
Let’s fast forward to 2023
The year 2023 has been an incremental year for those advocating ESG disclosures and sustainability. In 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 performance.
As a result of this update, IFRS will require listed companies to report on sustainability-related risks and opportunities, as well as relevant disclosures, in 140 jurisdictions, including Pakistan.
Investors are increasingly demanding globally standardised and comparable reporting. By consolidating the SASB, IIRC, and TCFD, the ISSB is moving towards aligning with the GRI.
Global regulators are also pushing companies to disclose their sustainability performance. It is time for policymakers to realize being reactive is no longer the best approach, and companies should be encouraged to incorporate sustainability into their business strategies.
Corporate Sustainability Reporting Directive now requires large companies and companies listed on EU-regulated markets to disclose information on their environmental and social impacts. As a result of the US Securities and Exchange Commission’s (SEC) proposed rules, companies will be required to disclose risks and opportunities associated with climate change by the end of 2023.
Because Pakistan operates under IFRS, local companies will be required to report on sustainability risks, opportunities, and performance.
As part of its policy efforts for 2022, the Securities and Exchange Commission published the ESG Roadmap and held awareness sessions on ESG and sustainability. Moreover, the State Bank of Pakistan has mandated that banks conduct environmental and social due diligence on companies before providing loans.
Is there anything companies can do to ensure they are ready to report?
The recognition that value creation and sustainability are interconnected is a positive step in the right direction. Research reveals that only 50 out of 540 companies listed on PSX reported on sustainability in 2020, and even fewer used standards to develop their sustainability reports.
It is expected that both listed and privately owned companies will move towards sustainability reporting to satisfy their buyers given Pakistan’s export markets’ focus on sustainability disclosures. In spite of this, companies continue to face significant challenges in operationalizing sustainability commitments.
The first step is to integrate sustainability factors into their business strategy by understanding their current and future stakeholders and identifying the issues that will impact the company in the short, medium, and long term — i.e., how sustainability issues affect a company and how the company impacts society and the environment.
In order to identify material issues, companies should refer to a global framework, benchmark with other companies to identify what other companies consider material issues, and engage with stakeholders to understand their concerns.
After engaging companies, investors, and other market participants, SASB’s Materiality Finder has consolidated sustainability risks and opportunities for 77 industries.
Globally and in Pakistan, companies are at varying levels of sustainability maturity. As a result of the new standards and regulatory directions, it is expected that companies will be at par in the coming years.