Daily Times

Why the need of ESG?

Just like the famous saying goes, “When the why is clear, the how is easy,” understanding the basic philosophy behind a business ideology paves the way toward an effective and efficient adoption process. However, for a business philosophy to become part of the existing business ideology, clarification on ‘Why’ it needs to be adopted is essential. Same is the case with implementing the ESG strategy.

Organizations need to be clear regarding the business case for ESG in order to reap the full spectrum of its benefits. Information about ESG management and performance is important to bridge the information gaps existing between organizations and other stakeholders. ESG as a concept is used universally by investors to assess corporate behaviour and to evaluate the future financial performance of the company by measuring its sustainability. In other words, ESG has brought a holistic approach to measuring the organization’s performance by encompassing all stakeholders and society as a whole. The business case for the ESG strategy can be observed across various horizons including economic returns, overcoming environmental & social trade barriers, fostering a green economic transformation, positive environmental outcomes, social legitimacy, stakeholder satisfaction, and combating the onset and adverse effects of climate change.

Research conducted by the International Finance Corporation (IFC) observed that companies with better E&S performance outperform clients with worse E&S performance on various performance indicators such as return on equity and return on assets. On the other hand, bad ESG performance resulted in below-average financial performance by the surveyed companies. Various studies have proved the relationship between investing in ESG-compliant organizations and improved financial returns and credit risk ratings. ESG adoption by organizations is becoming synonymous with value creation in terms of growth, innovation, and reduced costs. According to Reuters, US$ 649 billion was channeled into ESG-focused funds worldwide in the year 2021. According to Bloomberg Intelligence, global ESG investment assets under management might surpass US $50 trillion by the year 2025.

The ‘Why’ behind adopting ESG strategies spans a broader area than just the economic returns. With each passing day, this business ideology is transforming from a public relations strategy into an operational necessity. Today, ESG is one of the critical factors in the success of businesses as the world is undergoing a major shift in priorities. According to the United Nations estimates, US$ 5 trillion to US$ 7 trillion is needed each year to achieve the United Nations – Sustainable Development Goals (UN-SDGs) 2030. This requires financial institutions to include ESG factors in their investment decisions. Another important driving force behind ESG adoption is stakeholder pressure, expectation, and satisfaction. Today, customers are becoming more aware when assessing a company’s ESG credentials, and generally more sensitive as to how organizations are contributing towards the betterment of society. Mostly in the case of international clients, organizations are expected to adopt ESG reporting in order to align the ESG goals of all value chain partners.

Information about ESG management and performance is important to bridge the information gaps.

One of the most important reasons for ESG adoption and implementation across all economic sectors is the emergence of environmental & social trade barriers in the global market. Due to a deal between the European Parliament and the Council of the European Union, all businesses based in the European Union (EU) countries will be required to report on the imported products that are “carbon emission-intensive”.

In addition, the new regime requires that all carbon emissions be “financially offset” from the year 2026 onwards. Renewable energy has emerged as a new trade barrier for Pakistan’s export industries. The Carbon Border Adjustment Mechanism (CBAM) will impose carbon fees on all imports into the EU from non-members. Under the CBAM, importers into the EU of carbon-intensive goods (mainly cement, electricity, fertilizers, iron and steel, aluminum, and hydrogen) will be required to pay a charge for the carbon emissions embedded in those products. This charge will be gradually phased in from 2026 to 2034. This means a completely changed business landscape for the stakeholders. As the planet’s climate changes, the world is adapting by creating a new green generation of businesses based on the ESG ideology.

According to the Climate Risk Country Profile for Pakistan by the World Bank and Asian Development Bank, extreme climate events are anticipated to become more frequent and severe, heightening the risk of disasters, especially for marginalized and economically disadvantaged communities. Projections indicate a rise in the occurrence of flooding, potentially affecting approximately 05 million individuals through extreme river floods by 2035-2044, and an annual increase of around 1 million people exposed to coastal flooding by 2070-2100.

The adoption and effective implementation of ESG initiatives by the industrial sectors can serve as climate change mitigation practices, paving the way for the nation’s environmental & social sustainable growth. In addition, to combating and mitigating the adverse effects of climate change, the development of green industries can expand Pakistan’s global business market and increase foreign reserves. Pakistan can earn carbon credits through plantation, reforestation, various green covers, solar and wind power, controlling methane emissions from livestock and paddy fields, and such other activities that control Greenhouse Gas emissions. Pakistan has successfully completed a carbon credit earning project and the government of Sindh has already earned carbon credits for the mangrove forests. They received the first tranche of US$ 14.75 million in the year 2022, which may rise to US$ 24-25 million in the next five years and this increase will continue for the 60-year pledge period. For Pakistan, ESG is not just a business strategy rather it can serve as a gateway to numerous economically, environmentally, and socially sustainable opportunities. Countless reasons and compelling arguments exist for the adoption of this dynamic and holistic business model. The need is to understand how it can be effectively adopted and efficiently implemented in Pakistan.

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The writer has a PhD in Green Banking and works as a Chief Manager Green Banking Office at Bank AL Habib Limited, Pakistan. He can be contacted at aasimalibukhari@yahoo.com