The global financial sector is undergoing a seismic transformation as the risks associated with climate change and environmental degradation become increasingly evident. Natural capital-the world’s stock of natural resources, including air, water, soil, and biodiversity-is no longer a secondary concern but a fundamental economic pillar. Countries that fail to recognize the economic value of nature risk long-term financial instability, sectoral collapse, and diminished global competitiveness. Financial institutions worldwide are integrating natural capital considerations into their risk assessments and investment strategies, reflecting a broader shift toward environmental accountability. Norway’s Government Pension Fund Global, managing over $1.6 trillion in assets, has assessed 96% of its portfolio for natural capital risks, while asset managers like BlackRock and JPMorgan Chase are aligning investments with sustainability goals. Regulatory frameworks such as the European Union’s Sustainable Finance Disclosure Regulation and the U.S. Securities and Exchange Commission’s climate disclosure rules are enforcing stricter requirements on financial institutions to evaluate their environmental exposure, making it clear that businesses ignoring sustainability will face financial consequences.
Despite these global advancements, Pakistan’s financial sector remains dangerously disconnected from the reality of natural capital depletion. The country faces severe environmental challenges, including deforestation, land degradation, and water scarcity, all of which threaten long-term economic stability. Agriculture, which contributes nearly 19% to Pakistan’s GDP and employs 38% of the labor force, is heavily reliant on natural resources that are rapidly depleting. Per capita water availability has fallen below 1,000 cubic meters, indicating an imminent water crisis. The unchecked use of groundwater and inefficient irrigation systems further jeopardize agricultural productivity, leading to reduced crop yields, rising food insecurity, and increased import dependence. The forestry sector is also in decline, with Pakistan’s forest cover alarmingly low at less than 5% of its land area, one of the lowest in the world. Deforestation continues at an unsustainable rate of 0.2-0.5% annually, exacerbating desertification, soil erosion, and climate change vulnerabilities. These environmental stressors are already translating into economic costs, undermining productivity across multiple sectors.
The financial consequences of ignoring natural capital are catastrophic. Pakistan ranks among the top 10 countries most impacted by the loss of biodiversity and ecosystem services, with climate change worsening the situation. The devastating 2022 floods, exacerbated by deforestation and mismanagement of natural resources, displaced 33 million people and caused damages exceeding $30 billion. The cumulative costs of climate-induced disasters, environmental degradation, and poor resource management are estimated to reduce Pakistan’s GDP by at least 4% annually. This has direct implications for fiscal stability, as Pakistan continues to rely on international loans and bailouts while failing to integrate sustainability into its financial planning. The industrial sector, particularly water-intensive industries like textile manufacturing, is also at serious risk. Declining water resources, increasing environmental regulations from international buyers, and poor governance of natural capital are all factors that could weaken Pakistan’s export economy, further widening its trade deficit.
Financial institutions worldwide are integrating natural capital considerations into their risk assessments and investment strategies.
To address these challenges, Pakistan’s financial sector must urgently integrate natural capital considerations into its operations. Expanding green finance initiatives is a critical step. The State Bank of Pakistan introduced Green Banking Guidelines in 2017, but their adoption has been sluggish due to weak enforcement and lack of incentives. The issuance of green bonds, sustainable investment funds, and concessional loans for climate-friendly projects must be accelerated. In May 2021, the Pakistan Water and Power Development Authority issued a $500 million green bond to fund hydroelectric projects, but such initiatives remain rare. More financial institutions must be pushed to explore green financing to fund renewable energy, afforestation, and climate resilience projects. The development of a Green Finance Taxonomy, similar to those in China and the European Union, would allow Pakistan to standardize its approach to sustainable investments and attract international investors seeking ESG-compliant opportunities.
Aligning with global Environmental, Social, and Governance (ESG) standards is another urgent requirement. The Pakistan Stock Exchange must make ESG reporting mandatory, requiring businesses to disclose their environmental impact, carbon footprint, and sustainability practices. A failure to do so will result in Pakistani companies being left out of international markets as global financial institutions increasingly refuse to invest in businesses with unsustainable models. A national-level ESG index could assist investors in evaluating which Pakistani companies align with global sustainability standards, creating a competitive advantage for environmentally responsible businesses. To support this transition, the government must introduce tax breaks and incentives for companies that adopt sustainable finance principles, while enforcing strict penalties on industries that continue to exploit natural resources without accountability.
Legal and regulatory frameworks must also be strengthened. The Pakistan Environmental Protection Act (PEPA) must be amended to impose higher fines on industries that pollute air and water bodies, contribute to deforestation, or fail to comply with sustainability regulations. Pakistan can learn from international climate litigation cases, such as the landmark RWE lawsuit in Germany, where an energy company was held accountable for contributing to glacial melt. By establishing similar legal precedents, Pakistan can push corporations to integrate natural capital considerations into their financial models, reducing long-term economic risks. The role of environmental courts should be expanded to handle cases related to corporate sustainability violations, and financial penalties should be used to fund climate resilience initiatives.
International financial institutions play a pivotal role in supporting Pakistan’s transition to a nature-positive economy. The World Bank, IMF, and Asian Development Bank have provided billions in funding for Pakistan’s development, but their focus on sustainability must be reinforced. The IMF should incorporate climate financing conditions in future bailout agreements, ensuring that Pakistan commits to nature-based solutions, renewable energy investments, and green infrastructure projects. The World Bank has already allocated a 10-year funding plan of $20 billion to Pakistan, focusing on renewable energy, education, and climate resilience, signaling growing confidence in Pakistan’s potential for sustainable economic transformation. However, misallocation of these funds and lack of oversight could render these efforts ineffective. Proper governance, transparency, and public-private partnerships must be established to maximize the impact of international climate financing.
Pakistan’s youth must be engaged in shaping the country’s financial future. With 64% of the population under 30, young professionals and entrepreneurs have the potential to drive sustainable finance solutions. Universities should integrate environmental finance courses into business and economics programs, ensuring that the next generation of policymakers and financial experts prioritize natural capital. Climate finance startups should be encouraged through government-backed grants, tax exemptions, and incubation programs. Additionally, Pakistan’s diaspora, which sends over $30 billion in remittances annually, should be engaged in financing green initiatives through structured investment opportunities, such as diaspora green bonds for renewable energy and afforestation projects.
Pakistan’s role in global climate governance must also be strengthened. Despite being one of the countries most vulnerable to climate change, Pakistan remains a passive player in international environmental negotiations. Its commitments at COP summits must be backed by concrete domestic policies, including stricter environmental regulations, corporate accountability measures, and improved climate adaptation strategies. The country should aggressively seek funding from the Green Climate Fund, which has allocated $282.7 million for various climate projects in Pakistan. As a member of the Climate Vulnerable Forum, Pakistan has the opportunity to shape international climate policy, but its engagement remains minimal. A stronger diplomatic strategy is needed to ensure that Pakistan secures the financial resources and technological expertise required for a sustainable transition.
The risks of failing to integrate natural capital into Pakistan’s financial framework are escalating. Environmental degradation is not just a crisis-it is a financial emergency that could push Pakistan further into economic distress. Credit rating agencies are increasingly considering environmental sustainability when assessing a country’s economic stability, and Pakistan’s failure to act will likely result in lower credit ratings, higher borrowing costs, and reduced foreign investment. A country that fails to manage its natural resources effectively will inevitably face rising inflation, declining food production, and increasing climate migration, leading to social and economic instability.
Immediate action is required to avert these risks. Financial institutions should incorporate nature-related financial disclosures into corporate reporting. A National Natural Capital Index must be developed to quantify environmental risks associated with businesses, providing investors with transparent sustainability metrics. Government-led incentives should be introduced for businesses adopting green finance principles, ensuring that sustainable investments become a priority rather than an afterthought. Regulatory bodies like the Securities and Exchange Commission of Pakistan and the State Bank of Pakistan must enforce stricter sustainability regulations, implementing stress tests to evaluate financial institutions’ exposure to climate risks.
Pakistan has a small but critical window of opportunity to redefine its financial sector and economy by recognizing natural capital as an economic pillar. The global shift toward sustainability is not a temporary trend but a necessity for economic survival. Countries that fail to integrate environmental considerations into financial policies will suffer prolonged economic stagnation. By embracing green finance, enforcing corporate accountability, and leveraging international climate funding, Pakistan can secure long-term financial stability while safeguarding its natural resources. The time for action is now-before environmental risks evolve into an irreversible financial crisis.
The writer is a financial expert and can be reached at jawadsaleem.1982@ gmail.com. He tweets @JawadSaleem1982