• Lack of public awareness on purpose and benefits of green finance concept a key challenge
• Lack of awareness also a barrier for entrepreneurs to design and model projects/operations 
• The money is available; Sri Lanka needs to know where to look and how to access it cleverly
• SL urgently needs timely conclusion of debt restructuring and hopefully a sovereign re-rating

Green finance can certainly play a role in Sri Lanka’s economic recovery as it can unlock new sources of external financing – especially for Sri Lankan financial institutions like banks and non-bank finance companies – given that the pool of investors for this type of finance is growing, said Centre for a Smart Future Co-Founder/Director Anushka Wijesinha and Biodiversity Sri Lanka Green Finance Specialist Errol Abeyratne, in an interview with The Sunday Morning.

However, they emphasised that a timely conclusion of the debt restructuring and the country’s sovereign re-rating would be vital to enable local financial institutions to raise money overseas, while the lack of public awareness on the green finance concept was a challenge that needed addressing, which would in turn enable entrepreneurs to design and model projects/operations that would be more beneficial to the environment.

In the course of the interview, they also spoke on green financing options, guidelines and frameworks, greenwashing, climate change, and fund availability. 

Following are excerpts:

Could you briefly explain what green financing entails?

EA: What green finance entails is simply a financial structure, such as a loan, designed to achieve environmental outcomes. There are many different formal definitions that exist for green finance, but I particularly like the one by the International Finance Corporation: “A form of financing that enables borrowers to use the proceeds to exclusively fund projects that make a substantial contribution to an environmental objective.”

Can green financing help Sri Lanka’s recovery amid the ongoing economic and environmental challenges? 

AW: Green finance can certainly play a role in Sri Lanka’s economic recovery. We can unlock new sources of external financing, especially for Sri Lankan financial institutions like banks and non-bank finance companies, as the pool of investors for this type of finance is growing. Of course, the country’s sovereign re-rating will be a vital prerequisite to all of this, but we know that this market is growing and capital is available, so Sri Lanka certainly has a post-debt workout opportunity here.

Getting estimates on the global green finance market is a little tricky, because they tend to be clubbed under ‘sustainable finance’ or ‘ESG finance’. According to the ING Bank, global sustainable finance product issuance topped $ 720 billion in the first half of 2023, of which the majority – and indeed the fastest-growing segment – was green bonds.

To what extent does green finance really differ from other forms of finance that banks engage in? 

AW: In traditional banking, when a bank makes a loan, it considers certain factors about the client to determine the loan’s financial impact to its bottom line, what the funds are for, the repayment capacity, the borrower’s financial standing, tenor, pricing, and overall risks. Environmental considerations would not be a key factor considered, except if environmental clearances are needed by the borrower’s project.

Under green financing, however, it goes much beyond. Typically, such loans are tagged with use-of-proceeds clauses, often governed by the Green Loan Principles and the Green Bond Principles (GBP) of the International Capital Market Association. These specify that 100% of the proceeds should be used only for green eligible activities. Other global standards, frameworks, or best practices have been published by the Sustainable Banking and Finance Network (SBFN) and the Equator Principles Financial Institutions (EPFIs), which are based on membership and aim to improve standardisation, adoption, and technical capacity among industry players.

What are the key challenges in growing green finance in Sri Lanka? 

EA: A key challenge is the lack of public awareness on the purpose and benefits of the green finance concept, which is a barrier for the banks and financial institutions to attract the required capital. This lack of awareness is also a barrier for entrepreneurs to design and model their projects/operations that would be more beneficial to the environment and, in the long run, ensure resource efficiency.  

AW: Of course, the larger challenge hanging over all of this is the need for a timely conclusion of the debt restructuring, which will hopefully lead to a sovereign re-rating. Without that it is challenging for our financial institutions to raise money overseas, even though the capital is available.

Do you see active interest in green financing in the local financial services industry and, if yes, what has this translated into in terms of approach and implementation? 

EA: Yes, there has been much progress over the last two years with many institutions developing various lending schemes supporting the renewable energy sector and some banks initiating deposit schemes. However, these efforts are far behind the levels we need to make a significant impact on the economy.

On the demand side, there isn’t much evidence of borrowers seeking funding along the lines of green finance. Once again I would attribute this to a lack of awareness of the overall benefits, rather than because they don’t think they are attractive to the bottom line.

What are the main green financing options? Of these, which are available – or should be available – in Sri Lanka? 

EA: On the lending side, currently all financial institutions are focusing on financing renewable energy, which is a key factor in achieving environmentally-sustainable goals. Financial institutions are restricted from extending this to other sectors such as waste management, etc. due to the higher funding cost and traditional ways of lending based on collateral. Nevertheless, due to some foreign funding received from donor agencies, the banks have been able to extend loans at marginally lower rates than the normal lending rate.

If a business is to be transformed into a greener operation and improve resource efficiency in an affordable way, it will require some concessions from the financial institutions. Financial institutions will have to find low-cost funding and the most formidable method is green bonds. Of course this is not possible yet, given the status of the economy. But there are other instruments financial institutions can launch in the meantime. 

High net worth investors and philanthropists can be encouraged to invest in instruments that may offer lower returns than normal investment opportunities, but will be specifically allocated for projects that support nature and climate causes. This would be a good impetus for green financing to become more affordable.

Greenwashing is a key concern in relation to green financing. How can this be tackled and standardisation and transparency ensured locally? 

EA: Yes, this is a serious problem. In green financing, there are specific environmental goals to achieve. For instance, financing solar panels of a business that uses fossil fuel for its operations is not really green financing. The reporting might focus on solar installation without addressing the harmful effects of the overall operations of the enterprise. This is greenwashing. The lenders have to properly study the proposals and ensure that the operations of the subject entity will not violate any of the standards/principles governing green finance before classifying such financing as green finance. 

AW: This is an important aspect: credibility in environmental metrics and ensuring real impact. Concerns about ‘greenwashing’ have increased and scepticism around ‘ESG practices’ have heightened, so the credibility of the projects that funds are lent to need to be ensured. I think for this, financial institutions shouldn’t try and do things alone; they should partner with groups that can help strengthen their footing – for instance, organisations like the Environmental Foundation, Blue Resources Trust, and Biodiversity Sri Lanka, which have the technical knowhow to advise on environmental integration as well as collaborate on monitoring the impacts.

How do you view the ‘Roadmap for Sustainable Finance’ and the ‘Green Finance Taxonomy 2022’ developed by the Central Bank and the Central Bank’s stance on green finance? 

AW: These are very useful and important guidelines and frameworks and provide a strong foundation for action. Since these topics are new in Sri Lanka, having regulators and Government institutions provide this sort of leadership and guidance really helps boost the recognition and attention from the industry. It’s also important to acknowledge the industry’s own efforts – for instance, the excellent work being done under the Sustainable Banking Initiative by the Sri Lanka Banks’ Association.

Yet, we must move beyond this now – the framework conditions are in place, but things won’t simply happen automatically. There needs to be a concerted push from all stakeholders to go beyond the frameworks and guidelines to actual implementation. Once we see a few financial institutions successfully raising capital abroad and developing credible lending and deposit products linked to environmental outcomes, then this will set the trend for others.

With Sri Lanka being a highly climate-vulnerable country, you’ve highlighted the importance of the banking sector focusing on finance adaptation and not mitigation finance alone. What should such an approach entail? 

AW: The financial services industry needs to recognise the risks posed by climate change and that the risks permeate to the financial sector. According to the World Bank, climate change will approximately cost Sri Lanka an annual GDP loss of 1.2% by 2050. But it’s quite normal to see most of the financial institutions so far supporting the energy transition by lending mainly to renewable energy projects.

This is common globally, even in advanced countries. However, we are faced with acute climate vulnerabilities and also adverse impacts on nature and biodiversity, so we need the financial sector to provide capital for adaptation too. This would range from lending for regenerative agriculture, nature-positive tourism projects, reef-positive fisheries enterprises, manufacturing that adopts circular business models, and so on. 

Lenders should also look favourably at SME customers who adopt nature-based solutions into their business models. For instance, I recently met a tourism SME owner in Galle whose boutique accommodation is located on the banks of a water body that tends to inundate during the rains, so he is spending part of his income for regenerating the mangroves as a nature-based solution to build resilience and he also creates an interesting experience for tourists by getting them involved in mangrove planting. But sadly he has struggled to get banks to understand his approach and lend to upgrade his property; they still do credit evaluation with a very traditional lens. 

Given the ongoing global tensions and economic challenges, is there money available for green financing and is Sri Lanka an attractive contender for such financing? How can the country better position itself in order to attract such funding? 

EA: Despite the global economic challenges experienced in many parts of the world, there is evidence to show a demand for green bonds. However, currently, Sri Lanka is not well poised to take advantage of the opportunities available due to its ongoing external debt restructuring process. In the meantime, we should make every effort to mobilise resources locally by creating greater awareness of the concept – green deposits, green savings, and investment instruments must be developed.

AW: The good news for Sri Lanka is that – post a debt workout – the money is available; Sri Lanka just needs to know where to look and how to access it cleverly. Pre-Covid, sustainability and green financing accounted for one-third of all money in assets under management, according to Bloomberg, and surely this is likely to be much higher to date. Subsequent to a country sovereign re-rating, funding sources will steadily open up, but competition for these funds will be high.

Most developing countries are now seeing this as a new source of development financing and to bridge the domestic savings-investment gap and are actively soliciting these. Countries in our region like India have moved fast to capitalise on the trend. For Sri Lanka to tap in, our financial institutions will need to adapt with new internal competencies and, on the demand side, the pipeline of projects would also need to grow. Undoubtedly, though, there is plenty of opportunity for the kind of projects that green finance would look for, to be done in Sri Lanka.