Banks play a critical role in a country’s development as financiers and facilitators of economic activities, and the impact of their contribution greatly hinges on the quality of the decisions they make. Whilst economic viability is important, we also need to be cognisant of the impact of their decision making on our stock of human, social and environmental capital, which are critical to our economic wellbeing both now and in the future.
Today, a growing number of financial institutions worldwide are adopting policies, systems, and lending practices that reduce the environmental and social impact of doing business. Accordingly, various countries have adopted unique routes in response to each country’s local context and priorities, which can be broadly categorised into two main approaches.
1) Firstly, financial or banking regulators have taken the lead through policy-based initiatives to sustainable finance in countries such as Bangladesh, Brazil, China, Indonesia, Morocco, Nigeria, Peru and Vietnam; and
2) Secondly, voluntary, industry-led initiatives have been implemented in countries such as Colombia, Ecuador, Kenya, Mexico, Mongolia, South Africa and Turkey.
Whilst Sri Lanka has yet to adopt any regulatory tools for the purpose of promoting sustainable finance, the Sri Lankan Central Bank is in the process of evaluating the need to introduce such tools for promoting this endeavour and has since developed a sustainability road map.
Some of the tools available to a regulator in developing a sustainable finance framework are:
- Introduction of ceilings on credit extension to certain carbon-intensive or polluting activities
- Preferential risk weights under Basel III for sustainable friendly business activities
- Green Finance Guidelines and Frameworks
- Climate-related stress testing
- Disclosure requirements on climate-related financial risks
- Subsidized loan rates for priority sectors
- Credit floors, and credit ceilings
- Green Differentiated Reserve Requirements
(from the Speech given by Mr. A A M Thassim, Director, Bank Supervision, Central Bank of Sri Lanka at the Kick Off Meeting, August 2017)
As such, Sri Lanka is in a unique position where both [voluntary and regulatory]
approaches are being pursued, with 18 banks already adopting 11 voluntary
principles, under the leadership of the SLBA and the Central Bank collaborating with
Sustainable Banking Network (SBN) to develop a sustainability road map.
In this context, the SL-SBI aims to play its part by providing a platform for:
- Dialogue on the role and responsibility of the Sri Lankan banking sector in
realizing more sustainable economic growth;
- The sector to make decisions about and jointly agree upon minimum
principles and standards that define what is expected of all Sri Lankan banks
in this regard;
- Sri Lankan banks to work together and coordinate efforts to drive changes in
banking practices identified as necessary for the sector to contribute positively
to the sustainable development of Sri Lanka.
By so doing the SL-SBI provides an important space to overcome some of the following challenges that the Director, Bank Supervision, Central Bank of Sri Lanka indicated could be faced when implementing a more sustainable finance agenda across the banking sector. Such as:
- Embedding sustainable banking in banks’ core business
- Creating business drivers for sustainable banking: This would involve more careful due diligence and stricter selection of clients and projects to finance. There can be perceptions that green lending could potentially raise costs. Accordingly, banks may need to address motivation barriers, technical barriers, financial barriers, and, last but not least, client awareness barriers.
- Promoting information flow to enable sustainable banking: It is possible that lack of information on sustainable finance from both loan origination side and the risk management side may hinder banks. Accordingly, information systems and information flows must be improved.
- Capacity Building: Lack of expertise and capacity will be a barrier faced by all including the regulator. Specifically, new green products and technologies will also evolve quickly and expertise is needed to assess their viability. Therefore, capacity building efforts and technical guidance is paramount for successful implementation of the Sustainable Finance Initiative.
- Stakeholder collaboration and awareness raising: Extensive multi-stakeholder consultation has been an effective strategy in a number of countries before launching national policies, guidelines or roadmaps on sustainable finance.
Through participation in the SL-SBI individual Banks, their employees, and the sector will benefit from;
- Guidance on Sustainable Banking for the Sri Lankan banking sector, what it entails and “how to do it” as agreed to by a peer group.
- Demystification of good international practices with respect to sustainable banking practices
- Better understand the business case of good E&S risk management in the credit decision making processes.
- Access to latest thoughts and discussions on sustainable finance.
- Sharing of experiences.
- Improved risk management.
- Improved client relationships.
- New perspectives and ideas on products and services that can contribute to sustainable growth and development of Sri Lanka.