Sri Lanka, leading in “green lending”
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Pollution from garbage.
The Third Global Conference of the UNDP’s Biodiversity Finance Initiative (BIOFIN) was held in Kanchipuram District in Tamil Nadu, India in March 2018. One of the members of the Sri Lankan team, who received a special invitation to attend the meeting was Dr. Shan Fernando, Chief Manager, Research and Development division of the Commercial Bank.
At a panel discussion on ‘Green Financing’, Shan unveiled Sri Lanka’s early moves by many commercial banks to promote ‘green lending’ practices, providing examples from his own bank. Sri Lanka’s early move towards green lending fascinated the global audience, particularly because there were not many developing countries at the time, which were involved in ‘green lending’ practices.
By 2016, both state-owned banks and private commercial banks were involved in grafting sustainability elements into their credit financing on the one hand and shifting their own internal banking business into greener and cleaner operations on the other hand. Subsequently, a couple of Sri Lankan banks also won global awards for their green lending practices in banking business.
As early as 2015, the Sri Lanka Banks’ Association (SLBA) had already launched the “Sri Lanka Sustainable Banking Initiative” with a collaborative agreement among the banks to incorporate minimal environmental and social standards voluntarily into their operations. Along with this move, 18 commercial banks of the country joined the SLBA’s Sustainable Banking Initiative. At the time, sustainability considerations in businesses were not limited to the banking sector alone as the Colombo Stock Exchange also joined the UN Sustainable Initiative the same year.
Sustainable central banking
With the growing international recognition of ‘sustainability elements’ in business and finance, the Central Bank of Sri Lanka (CB) joined as a member of the Sustainable Banking Network (SBN) of the International Finance Corporation (IFC) in 2016. The CB spelled out its commitment to promote sustainable finance in Sri Lanka in its Monetary Policy Roadmap 2017. Accordingly, the CB expected to help banks and non-bank financial institutions to manage environmental and social risks in their lending practices and to support businesses that are greener, cleaner, climate friendly and socially inclusive in order to promote sustainable finance in Sri Lanka.
While Sri Lanka was becoming a pioneer in green lending projects, the world was also seen moving in the same direction. For instance, in 2017 the Bank of England and seven other central banks and supervisory institutions founded the Network for Greening the Financial System (NGFS). The objective of the NGFS was to ‘contribute to the development of environment and climate risk management in the financial sector, and to mobilise mainstream finance to support the transition toward a sustainable economy’.
Moreover, the European Central Bank (ECB), following the Paris Agreement in 2015, started focusing on the new concept of ‘green central banking’. The ECB recognised that it has a main role to play supporting the ‘climate agenda’ of the European Union, which is to achieve a ‘net zero’ economy that is, balancing greenhouse gas emission and its removal from the atmosphere.
Accordingly, the ECB commenced acting upon its mandate of the secondary objective of supporting the policies of the European Union (EU) without prejudice to its primary objective of price stability. One of these mandated EU policies included ‘a high level of protection and improvement of the quality of the environment’. In its Monetary Policy Strategic Review 2020-2021, the ECB introduced a climate action plan and incorporated considerations of climate change and climate change-related risks into its policy framework.
Prioritised green lending
Coincidently ‘green lending’ was among the top of finance solutions, screened and prioritised under the UNDP’s Biodiversity Finance Initiative (BIOFIN) in Sri Lanka. At a time that it has been receiving due consideration in the domestic financial sector and global recognition, it was selected as one of the key areas to extend technical and financial assistance to implement as a pilot project in Sri Lanka.
Green lending was consistent with the BIOFIN approaches in order to manage natural resources by reducing the fiscal burden of the government. These innovative approaches were four-fold; avoiding future environmental expenditure due to economic activity through current investments in biodiversity; delivering better outcomes through improved effectiveness, efficiency and synergies in economic activity; re-aligning current spending either to reduce negative impacts on biodiversity or to improve positive outcomes; mobilising finance from new sources beyond the government budget.
Accordingly, the UNDP under its BIOFIN programme extended technical and financial assistance to implement ‘green lending’ in Sri Lanka. Along with this initiative, the CB launched the “Roadmap for Sustainable Finance in Sri Lanka” in April 2019 and “Sri Lanka Green Finance Taxonomy” in May 2022.
The former provides directives for lending practices to adhere to sustainable elements including low carbon emission, climate change mitigation and adaptation, and greening business activities. The Green Finance Taxonomy listed out activities with international benchmarks to focus on climate change mitigation and adaptation, pollution prevention and control, and ecological conservation and resource efficiency.
Why green finance?
With the launch of the CB’s Sustainable Roadmap and Green Finance Taxonomy, Sri Lanka’s efforts for sustainable financing initiatives were strengthened and streamlined. The question is, why would any business activity choose ‘green finance’ when an investor borrows funds from a bank?
Sustainable financing is no more an expenditure but a ‘business case’ in itself. It prepares businesses to reach global markets which have become concerned with broader ESG practices – environmental, social and governance elements in doing business. If the business is aimed at exporting to global markets to catering to international demand, ESG practices have become part of the core business itself.
Of course, the above does not apply to businesses focusing on local markets in a protected policy environment. That is why many of the “small businesses” supplying to the local markets have become the bigger polluters in Sri Lanka and elsewhere. Even the agricultural produce supplying to the local markets may contain excessive agrochemicals and, perhaps, poisonous substances, creating ESG issues.
Researchers have confirmed that the countries with small-scale agriculture use more agrochemicals than those with large-scale agriculture practices. However, as businesses grow and become public companies listed on the stock exchange, they must adhere to such ESG standards in order to remain competitive in the domestic market as well as in the global markets.
Why should banks comply with green financing practices? When the global financing is moving in the direction of sustainable financing, the lending institutions cannot overlook it. It is the newest part of the core-business of financial institutions too which enhances their competitiveness. Accordingly, the financial institutions can improve their international rating and reputation, while opening up opportunities to tap new global funding sources.
There is no “planet B”
There is a typical question that I have sometimes encountered in discussion forums: The Western countries have acquired their economic advancement without any concerns over ESG requirements and causing all such damages. Isn’t it an ‘external constraint’ that we impose such elements over our own development effort today?
Well, a short answer could be that ‘then, so be it and see the consequences’. Even though the claim may be true, but it was a different world that existed 100 years ago while scientific knowledge on ‘sustainability’ aspect was limited.
Today, it is an entirely a ‘new world’ where there is market demand for sustainability and where there is a body of scientific knowledge over where the world is heading without due consideration over sustainability elements.
As an economy closely integrated to the rest of the world and influenced by the rest of the world, a small country may remain competitive and progressive with global movements. On the other hand, Sri Lanka’s sustainability concern in business should not be due to its global pressure, but due to our own requirement.
(The writer is a former Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk and follow on Twitter @SirimalAshoka).
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