Environmental Integration in Sri Lanka’s Financial Sector: CSF’s New Research Study

Environmental Integration in Sri Lanka’s Financial Sector: CSF’s New Research Study

Aerial view of paddy fields and greenery in Sri Lanka

Global focus on corporate environmental integration has been increasing as countries and companies move towards achieving the global target of achieving net-zero carbon emissions by 2050. It is now well recognised that climate risks affect businesses and their long-term profitability irrespective of whether their products and services are directly related to the environment. Within this, the concept of ‘environmental integration’, explores to the extent of organizations’ consideration of the environment in their financial and non-financial business decisions. As a component of increased attention to addressing climate change, assessing environmental considerations via voluntary and mandatory disclosures has been a significant focus of regulators worldwide.

At CSF, we believe that environmental integration must be prioritized by Financial Institutions (FIs), given the power of finance in determining, supporting and reinforcing economic growth that puts nature at the core. Access to information regarding the environmental impact of FIs and their lending practices would thereby be pivotal in identifying sectors requiring thorough reform amidst the global green transition. 

Global push for disclosure

The aspects of environment-related disclosures that have garnered increased focus relate to how the environment has been considered in a business’ internal governance, risk management, and financial planning. In addition, emphasis has been placed on improving Environmental, Social and Governance (ESG) frameworks overall and conducting climate scenario analysis using appropriate metrics to increase the resilience of lending portfolios of FIs. Comprehensive environmental disclosure provides information that allows companies to reframe their planning and decision-making processes with climate-related risks and opportunities taken into account. Disclosure further provides investors insight into how climate change affects financial returns and space to redesign business models that prioritize sustainable investments and resilient products and solutions. The Task Force on Climate Related Financial Disclosure (TCFD), is an example of disclosure requirements that have been incorporated into regulatory frameworks across Europe, Singapore, Canada, Japan, and South Africa. TCFD is just one of several best practice environmental disclosure standards, which also include the United Nations Sustainable Development Goals (UNSDG) standards, and the Sustainable Accounting Standards Board (SASB). Further to the TCFD, there is also now the Taskforce on Nature-related Financial Disclosures (TNFD), which provides disclosure recommendations and guidance for companies to report and act on evolving nature-related dependencies, impacts, risks and opportunities. 

Why is this a focus for Sri Lanka?

According to the Asian Development Bank, Sri Lanka could face an annual GDP loss of 1.2% by 2050 due to climate change. The aftermath of the 2021 economic crisis provides Sri Lankan business an opportunity to attract environmentally-conscious investors looking to tap into innovative sources of ESG linked finance and credit lines. Considering the current global interest in Sri Lanka’s debt sustainability, it is vital that national commitments towards global climate targets – such as the path to net zero outlined by the Central Bank – are not overlooked.  Environmental factors are a growing consideration for potential global investors, and Sri Lanka’s financial sector must adapt to increased standards which now consider factors beyond financial checkboxes such as liquidity requirements and integrate climate change into investment decisions. Comprehensive analysis on long-term risks and opportunities involving the climate may signal transparency, as well as regulatory awareness and compliance – which in turn improve investor confidence in rebuilding Sri Lanka’s economy post-default. 

CSF’s New Research

Acknowledging the imperative need for a streamlined environmental integration process for the Sri Lankan financial sector, CSF has developed a framework to assess if, and to what extent CSE listed companies in the financial sector consider the environment in decision-making processes. The framework is built on the foundation of the Sustainable Finance Roadmap published by the Central Bank, which outlines a set of climate related targets to be achieved by 2030. The study is being carried out in two phases, with Phase 1 being a comprehensive desk review of CSE-listed financial services organizations’ disclosures in annual report publications using our analytical framework, and Phase 2 being a qualitative study based on key informant interviews where there will be further exploration of Key Management Personnel (KMP) knowledge and awareness of their firm’s environmental integration commitments and practices.

CSF aims to utilize the findings to rank the firms in our sample to compare how, on average, Sri Lanka’s financial sector compares to other South Asian countries, and the global financial sector, in environmental integration. CSF expects various disparities in the understanding and execution of environment integration and related decision-making across organisations, and aims to provide feedback on how to streamline standards and disclosure-adoption. Primarily, the study aims to ‘hold up a mirror’ to Sri Lanka’s listed financial services firms on the extent of environmental integration at present, and possible pathways for the future, and use this as an entry point to explore nature-positive financial practices and tapping into green finance.

Watch this space for more updates as our research progresses.