Until recently, the sustainability impact term ESG (environmental, social and governance) was a relatively unfamiliar concept for Sri Lankans. But the increasing use of the word by most local conglomerates in press releases, annual reports, sustainability reports and websites has turned it into a mainstream corporate label in the country.
The Securities and Exchange Commission of Sri Lanka, the regulatory authority that oversees the Colombo Stock Exchange (CSE), does not yet require ESG reporting for publicly listed companies. However, the CSE revised its listing rules last year, and all listed companies must now display their ESG policy on their websites.
ESG push
The CSE’s ESG push stems from the growing momentum behind sustainable investing. Even local regulators are increasingly focusing on sustainability reporting while many capital market regulators now mandate some form of sustainability reporting. Given its longstanding partnership with the Global Reporting Initiative (GRI), the CSE wants to stay in touch with this trend.
With the economy still in recovery, ESG represents an opportunity for companies
Though it is pretty much still at a preliminary stage, the ESG momentum is expected to build. The CSE has issued a sustainability guide to help companies figure out the potential complexities of sustainability reporting. And its recent introduction of green bond listing and trading is an example of the sustainability opportunities available, with Sri Lankan corporates now able to raise capital exclusively for green projects. These projects include investments in renewable energy, sustainable waste management and clean transportation.
The CSE also envisions introducing blue bonds (for marine projects) and social/sustainability bonds (for affordable housing, healthcare, job creation, climate adaptation etc). It takes the view that establishing dedicated committees and ensuring the availability of skills on boards are essential steps in driving sustainability strategies.
The release of the Sri Lanka green finance taxonomy was a game-changer
Central bank role
In November 2022, Sri Lanka’s central bank told all licensed finance companies to implement its guidelines on sustainable financing activities. Those guidelines promote: the identification of priority sectors for sustainable financing initiatives; the development of sustainable savings, loan and leasing products; support for green and socially inclusive projects; the development of sustainable finance policies; and the identification and management of the ESG-related risks.
The central bank joined the Sustainable Banking and Finance Network, a global initiative backed by the International Finance Corporation, seven years ago, and in 2019 rolled out its roadmap for sustainable finance in Sri Lanka. Its 2022 release of the Sri Lanka green finance taxonomy – which classifies economic activities that qualify as environmentally sustainable – was a game-changer. Roadmap-aligned directives were issued to licensed banks and non-bank financial institutions in 2023 to report on sustainable financing activities. And in 2023, Sri Lanka became the 20th member of the International Platform for Sustainable Finance, a European Union forum for policymakers.
Companies that prioritise ESG practices have a higher chance of attracting large-scale investment capital
How is it going?
The use of GRI standards in sustainability reporting in Sri Lanka has grown over the past eight years, according to a recent survey by SheConsults and Emagewise. However, this growth has been relatively slow, with only 10 additional GRI adopters in that time. This sluggish pace of adoption may be a result of the challenging conditions faced by corporations during the pandemic years and the national economic crisis of 2022. As of September 2023, the total number of sustainability reports by Sri Lankan organisations stands at 92, with 15 exclusively utilising the Integrated Reporting Framework.
Accountants can play a key role in advancing ESG initiatives by providing accurate and transparent reporting on ESG performance. They can also support Sri Lankan companies in integrating ESG considerations into financial planning and risk management processes, aligning sustainability goals with long-term business objectives.
Companies that prioritise ESG practices have a higher chance of attracting large-scale investment capital from sustainability-focused investors. Implementing ESG initiatives can also reduce operational costs and increase efficiency by minimising environmental risks and enhancing workforce productivity.
With the Sri Lankan economy still in recovery following the country’s unprecedented debt default of April 2022, the greater adoption of ESG practices represents an opportunity for local businesses to adapt and thrive.
