akistan is facing one of the most dangerous impacts of climate change. Air Quality Index in several cities has reached hazardous levels. The provincial government has decided to close schools in the Punjab. Monsoon rains have wrought havoc in Sindh and southern Punjab in recent years resulting in thousands of deaths and damage to infrastructure. The economic toll of these disasters has been staggering. The statistics are stark: $20 billion in damage since 1950. The 2022 floods alone resulted in $12.5 billion in losses and affected over 33 million people. There were over 1,700 deaths. These floods also degraded more than 7 million hectares of arable land resulting in a 25-30 percent reduction in crop output.

Pakistan’s unique geographical landscape includes the highest concentration of glaciers outside the polar region. This compounds the impacts of climate change. These glaciers are melting at an alarming rate, posing risks to freshwater resources and threatening hydropower generation. Summers in Pakistan are getting hotter each year and bringing more intense heat waves, especially in industrial clusters.

Pakistan’s journey towards achieving net-zero emissions is both a critical need and an enormous challenge driven by the country’s escalating vulnerability to climate impacts. One of the least talked about solutions in Pakistan’s policy circles is to leverage the enormous power of capital markets to support the decarbonisation journey.

The international green bond markets provide a pathway to attract international capital. Known for their stringent transparency and reporting standards and a diverse suite of green, social, and sustainability bonds, these markets enable issuers to access a global network of sustainability-focused investors. For Pakistan, this presents an opportunity to secure funding for green projects in renewable energy, water management and climate-resilient infrastructure and to achieve its updated nationally determined contributions (NDCs). As a starting point, Pakistan can focus on issuing sustainability-linked and transition bonds that tie financial outcomes to specific environmental targets.

This is not unprecedented. However, the true potential of the idea has not been realised so far. The Water and Power Development Authority issued Pakistan’s first green bond—a $500 million Eurobond listed on the London Stock Exchange. The bond was designed to fund hydropower projects and reduce fossil fuel dependency. The bond was oversubscribed six-fold. This success underlines the demand for credible and bankable green projects.

The role of Pakistan Stock Exchange and the Securities and Exchange Commission of Pakistan should not be underestimated. International capital cannot be expected without establishing a local framework that encourages sustainable investment. The PSX and the SECP have made great strides towards establishing such a framework. However, the SECP’s ESG regulatory roadmap and the PSX’s ESG Primer are in need of significant improvements.

The regulatory roadmap and ESG reporting won’t materialise in the absence of a comprehensive green policy framework and standardised ESG data tools. This is where international support can play its role. The PSX can align itself with international stock exchanges’ ESG guidelines and incorporate frameworks like the Global Reporting Initiative and the Task Force on Climate-related financial disclosures to enhance transparency, accountability, and credibility of its listed companies, thus making Pakistan’s capital market more attractive to international investors.

With the corporate world embracing ESG, PSX cannot afford to lag behind. The establishment of an ESG index at the PSX is the need of the hour. This will enable investors to benchmark the sustainability performance of listed companies. This index will not only make the companies with strong ESG practices visible but also encourage other companies to integrate sustainable practices into their operations. The SECP can mandate ESG reporting requirements, gradually transitioning from voluntary to mandatory disclosures to ensure that more companies adhere to global standards.

To achieve these objectives, capacity-building initiatives, particularly in ESG data management and reporting shall be essential. The PSX and the SECP must work closely with the international exchanges and draw on best practices to enhance ESG reporting and compliance to foster a sustainable capital market that aligns with Pakistan’s climate goals.

Pakistan cannot benefit from green finance until it explores and taps the potential of carbon markets. The country has mangroves and forested areas, offering significant opportunities for generating carbon credits. The Delta Blue Carbon project in Sindh issued millions of carbon credits and illustrated the potential for monetising carbon sequestration efforts. However, scalability and replicability of such projects is limited due to the absence of a comprehensive regulatory framework.

The regulatory framework must include emissions accounting standards, monitoring and verification protocols to build investor confidence and ensure the integrity of Pakistan’s carbon market. Moreover, Pakistan must enhance the technical capacity of institutions like the Ministry of Climate Change to effectively oversee and manage carbon projects.

Another promising financial instrument is sustainability-linked bonds, a borrowing instrument where financial and structural characteristics are based on whether the issuer achieves sustainability or ESG metrics within a stipulated timeframe. These bonds offer lower interest rates to issuers that successfully demonstrate sustainability or ESG principles. These bonds experienced an 83 percent increase in aligned volume, reaching $21.4 billion in 2023 compared to $11.7 billion in 2022. Unlike green bonds, which fund specific projects, sustainability-linked bonds allow funds to be used for general corporate purposes, provided that the companies meet predefined environmental targets. This flexibility makes them particularly attractive to emerging market issuers who may need to address a broad range of sustainability challenges.

For Pakistan, issuing sustainability-linked bonds could provide a new avenue for attracting investment while promoting corporate accountability in meeting climate goals. Successful issuance of such bonds requires adherence to rigorous verification and reporting standards to ensure that companies pursue their stated sustainability targets.

International partnerships have a significant role to play here. For instance, engagement with the Glasgow Financial Alliance for Net Zero and other global initiatives can enable the PSX to access resources and knowledge-sharing platforms that are essential for developing a local green finance ecosystem.

Moreover, PSX can leverage advanced sustainable finance data and analytics capabilities, integrate local market intelligence, and utilise FTSE Russell’s expertise to launch green indices. In doing so, the PSX shall ensure robust disclosures and transition plans and engage with global partnerships such as Transition Pathway Initiative, UN Sustainable Stock Exchange to ensure impactful and mutually beneficial collaboration. The PSX can also optimise market access and visibility through tailored segmentation and listing options.

Robust regulatory support and policy alignment are equally important for sustaining long-term progress in a decarbonisation journey. Pakistan has developed policy frameworks like National Climate Change Policy and the Alternative and Renewable Energy Policy but there are significant gaps in enforcement, sector-specific ESG metrics and integration with existing regulations. Strengthening these enforcement mechanisms and incorporating industry-specific ESG metrics can enhance the credibility of Pakistan’s ESG disclosures. Integrating ESG guidelines with existing corporate governance frameworks can streamline compliance and reduce regulatory overlaps.

The journey to net-zero emissions is complex. It requires a multi-faceted approach that combines domestic reform with international collaboration. The role of capital markets in supporting Pakistan’s climate goals cannot be overstated. Only through a collective and coordinated effort can Pakistan achieve its net-zero targets, building resilience against climate impacts while fostering a sustainable and inclusive economy.

The writer is the CEO and partner at Spectreco. He is also the founder and director of Seed Ventures. He can be reached at Faraz@spectreco.com