Sustainability reporting used to be simple. A company could plant trees, fund a school, publish glossy photos in its annual report, and call it corporate social responsibility (CSR). Investors rarely asked how a flood might affect cash flows, what a carbon price could do to revenues, or whether climate change could make company assets less valuable.
Today, expectations are very different. Companies are asked to measure emissions, identify climate risks, run scenarios, set targets, and explain what this means for their financial prospects. In Pakistan, this shift is taking shape with the adoption of IFRS S1 and S2.
From CSR to ESG
CSR was an early expression of corporate responsibility. It focused on what companies did for society, employees, communities, and the environment. But CSR was voluntary and rarely asked the harder question: how environmental and social issues affect the company itself?
That gap led to the rise of environmental, social, and governance (ESG) considerations. Although the ideas had existed for decades, yet the term ESG gained prominence through the 2004 UN report Who Cares Wins, which argued that these issues should be incorporated into investment decisions. From then on, investors realized that financial statements alone did not tell the whole story. They needed to know whether today’s profits were resilient to tomorrow’s risks.
To see why ESG matters, consider two cement companies. Both are profitable today. But ESG analysis might reveal that one has higher emissions, inefficient energy use, poor worker safety, or weak governance. These weaknesses could translate into carbon costs, penalties, accidents, or operational disruption. Financial analysis tells us if the company is profitable now; ESG asks whether it will remain profitable if carbon becomes expensive, water becomes scarce, or regulation tighter.
Suppose the same cement company emits 2 million tonnes of CO2 annually and faces a future carbon price of $20 per tonne. That represents a gross exposure of $40 million a year. Suddenly, emissions are not just an environmental issue. They are a financial one. This makes management ask: should it invest in alternative fuels, renewable energy, clinker substitution, or new technology? And what would those investments mean for costs, margins, and competitiveness?
From ESG to IFRS S1 and S2
Over time, ESG reporting grew broad and inconsistent. Companies used different indicators and methodologies, making comparisons difficult. Investors wanted disclosures that were standardized, comparable, and linked to financial prospects. This is why IFRS S1 and S2 evolved.
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IFRS S1 sets the baseline for sustainability disclosures across all material risks and opportunities.
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IFRS S2 focuses specifically on climate-related risks and opportunities, building on concepts like emissions, scenarios, and transition risks.
Together, they transform sustainability reporting from ESG indicators into framework tied directly to financial performance.
Why climate first?
Because climate reporting already has methodologies, Pakistan’s Securities and Exchange Commission (SECP) chose to begin with IFRS S2. Companies can start with climate disclosures before expanding to broader sustainability risks under IFRS S1. This phased approach makes the transition more manageable while addressing the most urgent and financially material sustainability issue: climate change.
At a recent climate finance master-class, I found corporate managers voicing familiar concerns. Scope 3 emissions were difficult to calculate. Scenario analysis required data they did not have. Linking climate risks to financial performance seemed even harder. And now regulators wanted all of this disclosed.
The frustration was understandable. But it raised a question: what if nobody asked them to report any of this? Would a textile exporter not want to know whether water scarcity or extreme heat could disrupt production? Would a bank not want to know whether the businesses it lends to are exposed to floods or a carbon economy? Would a cement producer not want to understand what rising carbon costs could mean for margins ten years from now?
Seen this way, IFRS S2 looks less like a reporting burden and more like a set of questions companies should have been asking themselves anyway.
Implementation challenges
Yet, this doesn’t make implementation convenient. SECP’s own consultations highlighted capacity constraints, data limitations, and implementation challenges. Scope 3 emissions and climate scenario analysis were among the areas identified as particularly difficult.
For a textile manufacturer, measuring electricity consumption is one thing. Asking what happens to its factories, cotton supply, water availability, and export markets under different climate scenarios is quite another. This requires finance, risk, strategy, operations, and senior management to work together.
The transition will take time, and readiness will differ across Pakistani companies. But perhaps that is precisely the point. The impact of IFRS S2 will be measured when management starts asking better questions: Where are we vulnerable? How much could those risks cost us? What should we invest in today to protect the business tomorrow?
When companies reach that point, climate reporting will move from compliance to business acumen.
(The writer is development and climate finance consultant at Resources Future - she can be reached on [email protected])
Copyright Business Recorder, 2026
The author is an Environmental economist and climate change specialist at Resources Future
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