Business Responsibilities, Investment Decisions & Legislations

Business Responsibilities

As businesses progress to the Industrialization age in human history many lethal effects of businesses started affecting the society. Hence, a need for legislation arise to tame haphazard industrialization and reduce hazardous effects on human society. The Corporate Social Responsibility (CSR) framework was introduced. Fulfilling of such responsibilities involves the incurrence of cost. The advance form of a CSR model is the ESG (Environmental, Social and Corporate Governance Management) that are used nowadays by investors while making investment decisions. Investors also belong to the same society. The paradigm shift in investor thinking is a result of the information age and awareness among the investors and the desire to make a good return to the society which is also endorsed by their customers. Today’s investor is smart enough to make investment decisions considering the ESG model and in turn gets an internal peace of mind for himself and for his customers.

The necessity of an ESG model exemplified:

Many countries have already established rules and with different names. However, they do serve the purpose of an ESG model. Such a code may be developed and operated by the apex regulatory authority. There may be lacking of rules, regulations or a code of conduct in some areas to enforce elements of the ESG model. Below, we will take pharma industry as an example and the malpractices been adopted in this service industry like;

  • Doctors & pharma distributors been offered with expensive gifts linked to specific sales of prescribed medicines.
  • Not Valid For Court statement written on every private doctors prescription.
  • A run away from the operated patient responsibility regarding complications developed as a result of negligence of the operator or the hospital.

An effective code of conduct developed for different players in the pharma industry will bound professionals and businessman to a particular behavior and there will be a better system of check & balance.

The paradigm shift in investor thinking is a result of the information age and awareness among the investors and the desire to make a good return to the society which is also endorsed by their customers. Today’s investor is smart enough to make investment decisions considering the ESG model and in turn gets an internal peace of mind for himself and for his customers.

Environmental necessity:

Today, the world is under the threat of climate change as a result of global warming. Current business practices have a negative role in this climate change. The International Audit & Assurance Standard Board (IAASB) has developed an assurance standard called International Standard on Assurance Engagement (ISAE) 3410, Assurance Engagements on Greenhouse Gas Statement. Businesses which emit Greenhouse Gases (GHG) in the form of Carbon Dioxide (CO2) Nitrous Oxide (N2O) Fluorinated Gases prepare their GHG statement required. A positive reasonable assurance report on the business GHG statement will increase the level of confidence investor. The Chlorofluorocarbons i.e., CFCs (fluorinated) gases are also more dangerous than CO2. For a business it may be an indirect emission like the body spray. The CFCs in body spray are slowly depleting the ozone (O3) layer. When the CFCs raise to the stratosphere, the CFCs are broken down by strong ultraviolet radiations which results in release of chlorine atoms which then react with ozone molecules. Here, the use of water based scents as an alternative is the most environment friendly option as it does not contain any CFCs that may deplete the Ozone (O3) layer. Similarly, there is also a promising reward for plantation which in turn decrease the effects of CO2 in atmosphere and convert it to Oxygen gas (O2) that is essential for life.

Social Necessity

There are businesses which make investments on particular politicians or parties for a payback. In countries like the United States of America (USA) such a practice is legalized. In Pakistan this is not allowed in letter but is followed in spirit. The elected government make decisions to payback supernormal profits to such businesses. Hence, ESG investor needs to read between the lines in Pakistan’s environment before their investment decision.

Some organizations are including ethical aspects of being an equal opportunity employer. However, the words of equal opportunity employer are interpreted differently from region to region. In the sub-continent, it will be read with reference to gender, or religion etc. But in Europe it has more extensive meaning. For example, one of the recent fund donation advertisement campaigns in Pakistan elaborates the statement of being an equal opportunity in superfluous detail that makes it controversial and difficult to attract donors from the Muslim society due to ideological differences.

Nowadays countries refrain from interfering in each other’s internal affairs, otherwise, serious consequences may result considering an attack on the sovereignty of a nation and then a chain of imposing bans on imports and exports of products and services is triggered. An ESG sensitive may never invest in a such a business area as it goes against international diplomatic ethics.

Corporate Governance Necessity:

Corporate governance reinforces the ESG model. Many countries around the world have adopted best practices in the industry that have resulted in Corporate Governance (CG) rules. The CG rules usually deals with the bigger corporations having substantial public interests. There are also regulatory bodies set up for overseeing the implementation of CG rules and also amending them in order to cater for changing corporate responsibilities.

Corporate governance practices are set of rules, regulations and procedures that are required to be followed by an entity for sustainability. Such rules are formed and issued by a regulatory body. For instance, the Code of Corporate Governance Rules 2013 applicable to Public Sector Companies (PSCs) are formed and issued by the Securities & Exchange Commission of Pakistan (SECP).

ESG a Qualitative need:

By default, quality has no end and so is the case with ESG. Ethically, actions required to be taken are as per circumstances of the situation. Hence, the E and S factors of the ESG model implements a self-responsibility to bound to high standard of responsibility towards the environment and the society. Hence, it is not possible to encompass all situations and the actions required to be taken in each case. Governance practices too have to be adapted as per changing business environment. The ESG model for every business set up under various regimes will be having different dynamics and the investor has to take informed decision after considering the various aspects.

Green Accounting

This article was first published by Chartered Accountants Ireland at the following URL: https://icap.org.pk/files/per/publications/PA/2022/apr-june/apr-june-2022.pdf