ESG: Adapt or be left behind 

The EU is cracking down on trade partners

It is not the strongest of the species that survives, nor the most intelligent; it is the one most adaptable to change”. (Charles Darwin)

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.

The solution to climate change is becoming clear, i.e., adapt or be left behind. Nations that are reshaping the various economic sectors according to the various environmental and social challenges have a fighting chance against the inevitable consequences of natural environmental degradation. As the planet’s climate changes, the world is adapting by creating a new green generation of businesses based on the ideology of ESG (Environmental, Social, and Governance).

ESG is a framework for sustainability management, ethical practices and conscious consumerism that is gaining widespread popularity in the business world. The roots of this ideology can be traced back to 2004, in which the United Nations Global Compact and the Swiss Federal Department of Foreign Affairs published a report named “Who Cares Wins”, in which the term ESG was coined.

It is defined as “a set of environmental, social, and governance factors considered by companies when managing their operations, and investors when making investments, in respect of the risks, impacts, and opportunities”.

The ‘E’ in ESG stands for Environment and it revolves around the idea that organizations rely on natural resources and physical assets to perform their business operations. Products and business operations may directly or indirectly impact the environment adversely. ESG calls for increased environmental responsibility and accountability as part of daily business operations. Organizations’ connection with various issues such as climate change, carbon management, resource depletion, loss of biodiversity, energy consumption, water conservation, etc. stems out of this ESG component.

Moving towards the ‘S’ in ESG, it can be understood as the organization’s impact on society. The products and services of a company or the operating activities involved in production may benefit society or cause harm.

A few decades ago, ESG was a foreign concept to most investors. Now, ESG strategies are a ubiquitous presence in the investment landscape. The rules of the game are clear, organizations need to truly embrace this dynamic business ideology instead of just using the term for “greenwashing,” “purpose washing,” or “woke washing.”

ESG ideology requires an organization to adopt socially responsible business behaviour through job creation and improved working conditions, providing equal employment opportunity, managing workplace diversity, and creating positive impacts on local communities through products and services and CSR activities.

Under ESG, Governance means that when making decisions and allocating their natural, human, and financial resources, companies should consider how they will create long-term value that will benefit all stakeholders. This is reflected through the organization’s defined purpose, values and culture, the diversity, structure and oversight of the top management, the organization’s risk management strategy and scope, ethical and compliance policy, shareholder’s rights, and disclosure and transparency practices.

A precondition for creating long-term sustainable value is to manage, and address, massive, paradigm-shifting externalities such as environmental and societal impacts. Thus, integrating ESG in the business philosophy ensures that the business endures, with societal support, in a sustainable, environmentally viable way. 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. 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, fostering a green economic transformation, positive environmental outcomes, social legitimacy, and stakeholder satisfaction. ESG adoption by organizations is becoming synonymous with value creation in terms of growth, innovation, and reduced costs.

The most important aspect of understanding this business ideology is that adopting ESG does not mean decreased economic sustainability of the business. True ESG is consistent with a company’s well-considered strategy and advances its business model. This business philosophy proposes environmental and social sustainability, ultimately leading to economic sustainability. The true essence of ESG is the creation of congruence, synergy, and equilibrium within these three dimensions of corporate sustainability.

Based on the new carbon taxes, 0.2% of Pakistan’s total exports to the EU worth US$ 16.83 million could be adversely affected by the implementation of carbon tax by the EU. Under the new regime, the EU importer would bear a cost to importing from higher carbon-emitting countries or businesses, hence carbon emissions will have a direct impact on the demand for Pakistani products.

A few decades ago, ESG was a foreign concept to most investors. Now, ESG strategies are a ubiquitous presence in the investment landscape. The rules of the game are clear, organizations need to truly embrace this dynamic business ideology instead of just using the term for “greenwashing,” “purpose washing,” or “woke washing.”

Syed Asim Ali Bukhari
Syed Asim Ali Bukhari
The writer is pursuing his PhD in Green Banking from the Universiti Sains Malaysia (USM), Penang, Malaysia and can be reached at [email protected]

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