TerraLex Cross-Border Guide to Cross-Border Guide to ESG and Sustainable Finance

Section 227 of the Companies Act, 2017 requires the board of directors of every listed company to prepare a directors’ report on the state of affairs of the company and to provide a fair review of its business, including the impact of the company’s business on the environment and the corporate social responsibility activities undertaken during the year. The directors’ report must also contain information regarding the composition of the board, including independent directors, non-executive directors and female directors. The report must be annexed to the company’s annual financial statements, submitted to the Securities and Exchange Commission of Pakistan (“SECP”) and made available on the company’s website.

In December 2024, the SECP issued an order under the Companies Act, 2017 requiring listed companies and Public Interest Companies falling within the prescribed criteria to adopt the International Sustainability Standards Board’s Sustainability Disclosure Standards, IFRS S1 and IFRS S2, on a phased basis. The first phase applies to annual reporting periods beginning on or after 1 July 2025, the second phase to annual reporting periods beginning on or after 1 July 2026, and the third phase to annual reporting periods beginning on or after 1 July 2027. The sustainability report containing disclosures made in accordance with these standards must be approved in the same manner as the company’s financial statements and included in its annual report.

Regulation 10 of the Listed Companies (Code of Corporate Governance) Regulations, 2019 requires every listed company, on a “comply or explain” basis, to maintain a complete record of its significant policies, including its anti-harassment policy and policy on environmental, social and governance matters. Listed companies are also encouraged to make these policies available on their websites.

Regulation 10A of the Listed Companies (Code of Corporate Governance) Regulations, 2019 requires the board of every listed company to implement diversity, equity and inclusion policies aimed at promoting gender equality and women’s participation at all levels of the organisation. The board is also required to proactively identify and manage sustainability-related risks and opportunities, including climate-related risks, assess their potential impact and develop appropriate mitigation strategies. An annual report on the integration of sustainability principles into the company’s strategy and operations must be submitted to the board, while the directors’ report must disclose the assessment and management of sustainability-related risks and the measures taken to promote diversity, equity and inclusion.

The Green Bond Guidelines issued by the SECP under section 172 of the Securities Act, 2015 impose additional disclosure obligations on issuers of green bonds. An issuer must make its Green Bond Framework and the relevant external review and verification reports publicly available on its website and disclose the same information in the prospectus relating to the green bonds. An issuer of listed green bonds must also disclose, in its half-yearly and annual reports until maturity, the utilisation and allocation of proceeds, details of any unutilised proceeds, and qualitative or quantitative indicators of the expected environmental and social impact of the financed projects.

The Stewardship Guidelines issued by the SECP under section 40B of the Securities and Exchange Commission of Pakistan Act, 1997 apply to institutional investors, including asset management companies, pension fund managers and life insurers, on a “comply or explain” basis. Institutional investors are required to develop a policy explaining how sustainability considerations, including environmental, social and governance factors, are incorporated into their investment analysis and activities. The policy must be disclosed in the institutional investor’s annual report and made available on its website.

The Companies (Corporate Social Responsibility) General Order, 2009, issued by the Securities and Exchange Commission of Pakistan (“SECP”), encourages public limited companies to make disclosures in their directors’ reports on matters including energy conservation, environmental protection measures, community investment, welfare schemes, consumer protection, expenditure for under-privileged groups, employment of persons with disabilities, occupational safety and health, business ethics and anti-corruption measures, and rural development programmes.

In December 2025, the SECP issued revised ESG Disclosure Guidelines for Listed Companies, superseding the framework originally issued in 2024. The Guidelines provide a standardised voluntary framework for ESG reporting by listed companies, including disclosures relating to climate-related risks and opportunities and activity-level information aligned with the Pakistan Green Taxonomy. These Guidelines provide a methodology for identifying taxonomy-relevant economic activities, assessing their alignment with the environmental objectives of the Pakistan Green Taxonomy and reporting the resulting information. Taxonomy-aligned disclosures under the Guidelines remain voluntary until June 2029. The SECP has indicated that mandatory implementation will thereafter be introduced on a phased basis. These voluntary disclosures should be distinguished from the separate phased mandatory adoption of IFRS S1 and IFRS S2, which applies to companies falling within the prescribed criteria.

Companies in Pakistan also make voluntary sustainability disclosures outside these regulatory frameworks, commonly through standalone sustainability reports, integrated annual reports or dedicated sections of their websites. The extent and sophistication of such reporting vary across companies. The Global Reporting Initiative framework remains one of the frameworks used by companies in Pakistan for voluntary sustainability reporting.

The Global Reporting Initiative framework has historically been widely used by companies in Pakistan for voluntary sustainability reporting.

For companies falling within the phased mandatory regime introduced by the Securities and Exchange Commission of Pakistan (“SECP”), IFRS S1 and IFRS S2 now constitute the principal regulatory sustainability disclosure standards. The first phase applies to annual reporting periods beginning on or after 1 July 2025, the second phase to annual reporting periods beginning on or after 1 July 2026, and the third phase to annual reporting periods beginning on or after 1 July 2027.

In addition, the revised ESG Disclosure Guidelines for Listed Companies issued by the SECP in December 2025 provide a standardised voluntary disclosure framework linked to the Pakistan Green Taxonomy. The Pakistan Green Taxonomy provides a classification framework for identifying environmentally sustainable economic activities and investments, with the current framework focusing principally on activities contributing substantially to climate-change mitigation or adaptation, subject to applicable “do no significant harm” criteria and minimum social safeguards.

For sustainable-finance products, the** Green Bond Guidelines** require green bonds to be issued by reference to internationally recognised standards, including the International Capital Market Association’s Green Bond Principles.

Financial institutions are also subject to sector-specific environmental, social and climate-related risk-management frameworks issued by the State Bank of Pakistan, including the Environmental and Social Risk Management framework, the Regulatory Framework for Effective Management of Climate-related Financial Risks and the Guidelines on Climate Stress Testing.

Environment and Community

Section 204 of the Companies Act, 2017 requires directors, among other duties, to act in the best interests of the community and for the protection of the environment. The Listed Companies (Code of Corporate Governance) Regulations, 2019 also require significant matters concerning the implementation of environmental, social and governance, and health and safety practices of a listed company to be placed before the board of directors or its relevant committee for consideration and decision.

A number of federal and provincial statutes also impose environmental, social and governance obligations requiring affirmative action. For example, environmental protection laws generally require the proponent of a project to carry out the applicable environmental assessment, submit it to the relevant environmental protection agency and obtain the required approval before commencing the project. Provincial mining laws similarly require holders of mineral titles to take measures to prevent environmental damage and, where adverse environmental impacts cannot be avoided, to minimise those impacts.

Diversity and Inclusion

Section 459 of the Companies Act, 2017 requires every public interest company employing one hundred or more persons to maintain a two per cent quota for the employment of persons with disabilities. For this purpose, public interest companies include listed companies, public sector companies, banks, non-banking finance companies, central depositories and clearing houses.

Section 216 of the Companies Act, 2017, read with Regulation 7 of the Listed Companies (Code of Corporate Governance) Regulations, 2019, requires every listed company to have at least one female director on its board. At least one-third of the directors of a listed company must also be independent directors. Regulation 10A further requires the board of a listed company to implement diversity, equity and inclusion policies aimed at promoting gender equality and women’s participation at all levels of the organisation. The board must also proactively identify and manage sustainability-related risks and opportunities, including climate-related risks, assess their potential impact and develop appropriate mitigation strategies.

The Securities and Exchange Commission of Pakistan has also issued non-binding measures encouraging listed companies, non-banking finance companies and insurance companies to increase women’s participation in the workforce and improve gender diversity. These measures include adopting gender-diversity policies, conducting gender pay-gap analyses, setting and periodically reviewing diversity targets, incorporating diversity objectives into senior management performance indicators and maintaining gender-disaggregated employment data.

The Banking on Equality Policy issued by the central bank, the State Bank of Pakistan (“SBP”) seeks to improve gender diversity within financial institutions and reduce the gender gap in financial inclusion. Among other requirements, financial institutions are required to adopt gender-mainstreaming policies addressing the recruitment, retention, promotion and professional development of women and to take measures to increase women’s representation in senior management and the wider workforce. The Policy also introduced a target of increasing women’s representation in the financial-sector workforce to 20% and requires financial institutions to undertake measures aimed at improving women’s access to financial products and services.

Climate-related Financial Risks

In December 2025, the SBP issued the Regulatory Framework for Effective Management of Climate-related Financial Risks for banks, development finance institutions and microfinance banks. The Framework requires regulated financial institutions to identify climate-risk drivers and integrate climate-related financial risks into their governance arrangements, business strategies and risk-management frameworks.

Regulated institutions are required to achieve full compliance with the Framework by 30 June 2029 and to submit board-approved, time-bound implementation plans and targets to the SBP by 30 September 2026. These plans must address matters including governance arrangements, relevant policies and procedures, integration of climate-related risks into existing risk-management and stress-testing frameworks, and capacity building for boards, senior management and staff.

The SBP also issued Guidelines on Climate Stress Testing in December 2025. Banks, development finance institutions and microfinance banks are required to conduct climate stress tests in addition to existing stress-testing exercises. The first climate stress-testing exercise may be conducted by the end of the third quarter of 2026 using end-December 2025 data. Relevant domestic systemically important banks must also incorporate climate-related risks into their annual macro stress-testing exercises and reflect the results in their internal capital adequacy assessment processes.

No. The ESG rules mainly apply to companies incorporated and registered in Pakistan.

The revised ESG Disclosure Guidelines for Listed Companies issued by the Securities and Exchange Commission of Pakistan in December 2025 require ESG disclosures to be accurate, transparent and sufficiently comprehensive to enable meaningful assessment of a company’s sustainability-related performance and risks.

More generally, section 10 of the Competition Act, 2010 prohibits deceptive marketing practices. These include the dissemination of false or misleading information to consumers, including information that lacks a reasonable basis and relates to matters such as the method or place of production, suitability for use, properties, character or quality of goods. The Deceptive Marketing Practices Guidelines issued by the Competition Commission of Pakistan under section 10 of the Competition Act, 2010 further clarify that environmental claims may be false or misleading where they are not supported by the characteristics or composition of the relevant product. For example, marketing diesel as having environmentally beneficial properties or reduced emissions may constitute deceptive marketing where the claimed “green” additives are absent or the product does not in fact produce the represented environmental benefit.

In the financial-products context, the ESG Mutual Funds Framework issued by the SECP in July 2026 introduces additional product-specific safeguards. ESG mutual funds are subject to investment, governance, disclosure and independent-assurance requirements intended to enhance transparency and reduce the risk of greenwashing. ESG-related representations made in connection with regulated ESG mutual funds must therefore also be considered in light of that framework.

No. There is no general legal requirement in Pakistan requiring companies to impose specific environmental, social and governance rights or obligations on their suppliers. Companies may, however, incorporate environmental, social and governance requirements into their supply-chain arrangements voluntarily or pursuant to contractual obligations, including obligations arising from international supply-chain initiatives. For example, companies participating in the Pakistan Accord on Health and Safety in the Textile and Garment Industry may be required, in accordance with the terms of the Accord, to ensure that relevant agents, intermediaries and supplier factories comply with applicable health and safety standards and other requirements under the Accord.

Section 204 of the Companies Act, 2017 requires directors to discharge their duties with due and reasonable care, skill and diligence and to act in good faith in the best interests of the company, having regard to the interests of its employees and shareholders, the community and the protection of the environment. Accordingly, the fact that an environmental, social or governance initiative results in a financial loss would not, by itself, necessarily give rise to liability on the part of the company or its directors. Any claim by shareholders or investors would depend on the circumstances, including whether the relevant directors acted in accordance with their statutory duties and whether the requirements of the applicable cause of action can be established.

There is presently no reported case law in Pakistan specifically addressing the liability of a company or its directors where a bona fide environmental, social or governance initiative causes financial loss to the company or its shareholders.

Derivative actions by shareholders are not expressly provided for under the Companies Act, 2017. However, the concept has received judicial recognition in Pakistan, and the courts have recognised that a shareholder may, in appropriate circumstances, institute proceedings on behalf of the company. Where a derivative action succeeds, any relief or damages awarded ordinarily accrue to the company rather than directly to the shareholder bringing the action.

Section 204 of the Companies Act, 2017 requires directors to discharge their duties with due and reasonable care, skill and diligence and to act in good faith in the best interests of the company, having regard to the interests of its employees and shareholders, the community and the protection of the environment.

Where non-compliance with applicable environmental, social or governance requirements causes loss to the company or its shareholders, potential liability will depend on the circumstances, including whether the directors have breached their statutory duties and whether the requirements of the applicable cause of action are satisfied. The mere occurrence of a loss following non-compliance will not, by itself, necessarily establish liability.

Derivative actions by shareholders are not expressly provided for under the Companies Act, 2017. However, the concept has received judicial recognition in Pakistan, and the courts have recognised that a shareholder may, in appropriate circumstances, institute proceedings on behalf of the company. Where a derivative action succeeds, any relief or damages awarded ordinarily accrue to the company rather than directly to the shareholder bringing the action.

A shareholder seeking compensation for loss suffered personally would need to establish an independent basis for a direct claim, rather than relying solely on loss suffered by the company.

There are presently no general ESG-specific liability provisions in Pakistan under which customers, creditors or other affected persons may automatically recover losses resulting from non-compliance with environmental, social or governance requirements. Depending on the circumstances, however, remedies may be available under existing securities, competition, companies, contract and other laws.

The Securities Act, 2015 provides remedies in relation to false or misleading disclosures concerning securities. Where a prospectus contains an incorrect, untrue or misleading statement, an issuer, offeror or other person responsible for the prospectus may, subject to the applicable statutory requirements, be liable to compensate a person who acquired securities in reliance on the prospectus and suffered loss as a result. The Securities Act, 2015 also imposes liability in certain circumstances where a person knowingly and in bad faith makes a false or misleading statement in a document filed under the Act. These provisions may therefore be relevant where inaccurate or misleading environmental, social or governance disclosures are made in securities documentation.

Section 10 of the Competition Act, 2010 prohibits deceptive marketing practices and may apply to false or misleading environmental or sustainability claims. Where the statutory requirements are satisfied, the Competition Commission of Pakistan may restrain the relevant conduct, require corrective measures and impose penalties. A contravention of the Competition Act, 2010 may attract a penalty of up to PKR 75 million or an amount not exceeding 10% of the annual turnover of the relevant undertaking.

The Companies Act, 2017 provides certain remedies for creditors where the affairs of a company are conducted fraudulently, oppressively towards creditors or in a manner unfairly prejudicial to the public interest. The High Court may make appropriate orders to address the matters complained of and regulate the future conduct of the company’s affairs. In addition, where, in the course of winding-up proceedings, it is established that the business of a company has been carried on with intent to defraud creditors or other persons, or for a fraudulent purpose, the High Court may, in the circumstances prescribed by the Companies Act, 2017, impose personal liability on directors or officers responsible for the fraudulent conduct.

Depending on the circumstances, a person who suffers injury or damage as a result of a company’s conduct may seek relief under principles of tort law where the requirements of the relevant cause of action, including duty, breach, causation and loss, are established. Such principles may potentially apply to harm arising from conduct that also constitutes non-compliance with environmental, social or governance obligations.

Where a company has undertaken contractual obligations relating to environmental, social or governance matters and fails to perform those obligations, the counterparty may pursue remedies for breach of contract in accordance with the Contract Act, 1872. The claimant must establish the breach and satisfy the applicable requirements for recovery of the loss claimed.

The Constitution of the Islamic Republic of Pakistan, 1973 confers constitutional jurisdiction on the superior courts for the enforcement of fundamental rights. This jurisdiction has been invoked in proceedings concerning environmental degradation, climate change, public health and other matters affecting fundamental rights and the public interest. Constitutional proceedings may therefore provide a further avenue for addressing certain environmental or social harms, although the availability and nature of relief will depend on the circumstances of the particular case.

For ESG-labelled collective investment schemes, the ESG Mutual Funds Framework issued by the Securities and Exchange Commission of Pakistan in July 2026 provides an additional regulatory layer governing ESG investment criteria, governance, disclosure and independent assurance. The Framework requires ESG mutual funds to maintain at least 50% of their net assets in ESG-aligned investments and introduces safeguards intended to reduce greenwashing and enhance transparency and accountability. The ESG Mutual Funds Framework does not, however, appear by itself to establish a separate general private right of action for investors. Any claim for compensation would therefore need to be considered under the applicable securities, contractual or other legal framework.

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Pakistan has developed a more comprehensive sustainable-finance regulatory framework, although the nature and legal effect of the relevant instruments vary by sector.

In 2025, the Government of Pakistan introduced the Pakistan Green Taxonomy, which provides a classification framework for identifying environmentally sustainable economic activities and investments. The 2025 edition focuses principally on activities that make a substantial contribution to climate-change mitigation or adaptation, subject to applicable “do no significant harm” criteria and minimum social safeguards. Although the Pakistan Green Taxonomy does not, by itself, create or impose legal rights or obligations, it is increasingly being incorporated into Pakistan’s regulatory and sustainable-finance framework.

In December 2025, the State Bank of Pakistan (“SBP”) circulated the Pakistan Green Taxonomy for implementation by regulated financial institutions and identified it as a reference framework for classifying green projects and guiding the allocation of finance towards environmentally sustainable activities.

The SBP also issued the Regulatory Framework for Effective Management of Climate-related Financial Risks in December 2025. The Framework requires banks, development finance institutions and microfinance banks to integrate climate-related financial risks into their governance arrangements, business strategies and risk-management frameworks. Full compliance is required by 30 June 2029, with board-approved implementation plans and targets to be submitted to the SBP by 30 September 2026.

In July 2026, the Securities and Exchange Commission of Pakistan (“SECP”) issued the** ESG Mutual Funds Framework**, establishing a regulatory regime for ESG-aligned collective investment schemes. Among other requirements, ESG mutual funds must maintain at least 50% of their net assets in ESG-aligned investments and comply with applicable governance, disclosure and independent-assurance requirements. Equity-based ESG funds may invest in companies meeting the prescribed ESG criteria, including companies aligned with the ESG Disclosure Guidelines and, where applicable, the PSX Sustainability Index framework. Debt-based ESG funds may invest in green, social and sustainability-linked instruments aligned with the Pakistan Green Taxonomy and Pakistan’s Sustainable Financing Framework.

The Green Bond Guidelines issued by the SECP also form part of Pakistan’s sustainable-finance framework. They require green bonds to be issued in accordance with internationally recognised standards, including the International Capital Market Association’s Green Bond Principles, and contemplate the mapping of eligible projects to the United Nations Sustainable Development Goals.

The Stewardship Guidelines issued by the SECP apply to institutional investors, including asset management companies, pension fund managers and life insurers, on a “comply or explain” basis. They require institutional investors to develop and disclose policies explaining how sustainability considerations, including ESG factors, are incorporated into their investment analysis and activities. The Guidelines do not, however, prescribe a single mandatory sustainable-investment methodology or framework applicable to all institutional investors.

The Environmental and Social Risk Management Implementation Manual for Financial Institutions, issued by the SBP with support from the International Finance Corporation, requires banks and development finance institutions to apply the IFC Performance Standards on Environmental and Social Sustainability to financing transactions exceeding specified thresholds. The Manual also recognises internationally accepted environmental, social and management standards, including ISO 14001 and SA8000, as indicators of good practice.

Collectively, these instruments reflect Pakistan’s transition from a largely principles-based sustainable-finance framework towards a more structured regime comprising taxonomy-based classification, sector-specific climate-risk management requirements, ESG product regulation, stewardship obligations and environmental and social risk-management standards.

The Green Bond Guidelines issued by the Securities and Exchange Commission of Pakistan (“SECP”) require green bonds to be issued in accordance with internationally recognised standards, including the International Capital Market Association’s Green Bond Principles. Eligible projects are also expected to be mapped to the United Nations Sustainable Development Goals.

The Stewardship Guidelines issued by the SECP apply to institutional investors, including asset management companies, pension fund managers and life insurers, on a “comply or explain” basis. They require institutional investors to develop and disclose policies explaining how sustainability considerations, including ESG factors, are incorporated into their investment analysis and activities. The Guidelines do not, however, prescribe a single sustainable-finance or investment methodology that all institutional investors must follow.

The Environmental and Social Risk Management Implementation Manual for Financial Institutions, issued by the State Bank of Pakistan, requires banks and development finance institutions to apply the IFC Performance Standards on Environmental and Social Sustainability to financing transactions exceeding specified thresholds. The Manual forms part of the broader environmental and social risk-management framework applicable to regulated financial institutions.

In May 2025, the Government of Pakistan adopted a Sustainable Financing Framework to support sovereign green, social and sustainability financing. The Framework is intended to align the Government’s financing activities with Pakistan’s environmental and social commitments and establishes an architecture covering eligible green and social expenditures, exclusions, project evaluation and selection, management of proceeds, allocation and impact reporting, and external review. The Framework principally governs the Government of Pakistan’s sustainable financing activities and does not, by itself, impose generally applicable sustainability obligations on private-sector companies or institutional investors.

Pakistan’s sustainable-finance architecture also includes the Pakistan Green Taxonomy, which provides a national classification framework for identifying environmentally sustainable economic activities and investments. The Taxonomy is intended to promote consistency in the identification and classification of green activities and financing. Although it does not, by itself, create or impose legal rights or obligations, it increasingly serves as a reference point within Pakistan’s broader sustainable-finance framework.

Yes, in certain regulated sectors, although Pakistan does not impose a single uniform environmental, social and governance investment duty on all financial institutions, investment advisers and pension institutions.

The **Green Banking Guidelines **and the Environmental and Social Risk Management framework issued by the State Bank of Pakistan (“SBP”) require regulated financial institutions to identify, assess and manage environmental and social risks in relevant financing activities. These requirements are supplemented by the Regulatory Framework for Effective Management of Climate-related Financial Risks issued in December 2025. The Framework applies to banks, development finance institutions and microfinance banks and requires them to integrate climate-related financial risks into their governance arrangements, business strategies and risk-management frameworks. Full compliance is required by 30 June 2029, with board-approved implementation plans and targets to be submitted to the SBP by 30 September 2026.

The Guidelines on Climate Stress Testing issued by the SBP in December 2025 also require regulated financial institutions to undertake climate stress testing. Relevant domestic systemically important banks must additionally incorporate climate-related risks into their annual macro stress-testing exercises.

For institutional investors regulated by the Securities and Exchange Commission of Pakistan (“SECP”), the Stewardship Guidelines require, on a “comply or explain” basis, the development and disclosure of a policy explaining how sustainability considerations, including environmental, social and governance factors, are incorporated into investment analysis and activities.

In addition, an asset management company offering an ESG mutual fund must comply with the ESG Mutual Funds Framework issued by the SECP in July 2026, including the applicable investment, governance, disclosure and independent-assurance requirements.

In summary, the nature and extent of the applicable obligation depend on the type of regulated entity and the activity concerned.

There are presently no specific tax benefits identified in Pakistan which are offered to financial institutions, investment advisers, pension fund managers or other institutional investors specifically as an incentive to integrate ESG factors into their investment decisions.

Pakistan has, however, introduced various policy and financing measures intended more broadly to promote green and sustainable finance. These include sustainable-finance regulatory frameworks, green-financing initiatives and mechanisms intended to facilitate financing for environmentally sustainable projects and businesses. Such measures should be distinguished from a tax or other benefit granted specifically to an institutional investor as consideration for incorporating ESG factors into its investment decision-making process.

Pakistan does not have a single economy-wide statute specifically addressing greenwashing. However, general prohibitions against false, deceptive or misleading statements under securities, companies and competition laws may apply to misleading environmental, social and governance or sustainability-related claims.

In addition, the Securities and Exchange Commission of Pakistan introduced product-specific safeguards for the investment-management sector through the ESG Mutual Funds Framework issued in July 2026. The Framework requires ESG mutual funds to maintain at least 50% of their net assets in ESG-aligned investments and imposes governance, disclosure and independent-assurance requirements intended to enhance transparency and reduce the risk of greenwashing.

No publicly reported enforcement action or case law specifically concerning greenwashing in Pakistan’s financial markets has been identified as at August 2026.

The Securities and Exchange Commission of Pakistan (“SECP”) and the Competition Commission of Pakistan do, however, undertake enforcement in relation to misleading disclosures and deceptive marketing generally. Such proceedings should be distinguished from enforcement specifically concerning environmental, social and governance claims or greenwashing.

The SECP introduced specific anti-greenwashing safeguards for ESG mutual funds in July 2026. Given the recent introduction of that framework, no publicly reported enforcement action under those requirements has yet been identified.

Pakistan’s ESG and sustainable-finance framework has developed substantially in recent years and is expected to continue evolving.

The Securities and Exchange Commission of Pakistan (“SECP”) has adopted IFRS S1 and IFRS S2 through a phased mandatory implementation regime and issued revised ESG Disclosure Guidelines for Listed Companies in December 2025. The revised Guidelines are aligned with the Pakistan Green Taxonomy, and taxonomy-aligned disclosures remain voluntary until June 2029, after which mandatory implementation is expected to take place on a phased basis.

The Government of Pakistan introduced the Pakistan Green Taxonomy in 2025 as a national classification framework for environmentally sustainable economic activities and investments. The Taxonomy is expected to evolve over time through the inclusion of additional economic activities, environmental objectives and technical screening criteria, and is likely to play an increasingly important role in Pakistan’s sustainable-finance framework.

In the financial sector, the State Bank of Pakistan issued the Regulatory Framework for Effective Management of Climate-related Financial Risks in December 2025. The Framework is being implemented progressively, with full compliance required by June 2029. Climate stress-testing requirements are also being implemented as part of the broader integration of climate-related financial risks into the financial sector.

The SECP further introduced the ESG Mutual Funds Framework in July 2026, establishing a dedicated regulatory framework for ESG-focused collective investment schemes and introducing specific investment, governance, disclosure and assurance requirements.

Further development of Pakistan’s ESG market infrastructure is also expected. In July 2026, the Pakistan Stock Exchange released for consultation a proposed Sustainability Index intended to provide a benchmark for listed companies based on material and financially relevant environmental, social and governance risks and opportunities. As at August 2026, the Sustainability Index remains under development and should not yet be described as an established market benchmark.

Future developments are therefore likely to focus on the continued implementation of IFRS S1 and IFRS S2, the phased introduction of mandatory taxonomy-aligned disclosures, further development and application of the Pakistan Green Taxonomy, implementation of climate-related financial-risk and stress-testing requirements, and the continued development of ESG-focused investment products and market infrastructure.

ESG considerations are increasingly relevant in cross-border M&A transactions involving Pakistan, particularly in transaction due diligence and in the negotiation of representations, warranties, indemnities and other contractual protections.

The increasing regulatory focus on sustainability reporting, climate-related financial risks and ESG-related investment products is also likely to increase the significance of environmental, social and governance compliance in M&A due diligence, particularly where the target operates in a regulated sector or is subject to sustainability-related reporting or risk-management requirements.

However, no general statutory requirement has been identified in Pakistan that requires environmental, social and governance due diligence to be undertaken as a distinct mandatory element of all M&A transactions.