MEETING GLOBAL GREEN GOALS

Sustainable banking is showing the way – Kiran Dhanapala

Sustainable banking is a key trend in sustainable finance. It’s needed to achieve the UN’s Sustainable Development Goals (SDGs), is increasingly important for the revival of economies post-COVID and in the current recessionary economic climate. In Sri Lanka, the Ceylon Chamber of Commerce Economic Forum 2022 dedicated a session to sustainable finance.

The Central Bank of Sri Lanka is developing regulatory frameworks for sustainable finance and banking, starting with its 2019 Roadmap for Sustainable Finance. It details actions required of various financial services actors including banks in the short, medium and long terms, and includes climate risk assessment.

It has published a green taxonomy, which is a categorisation tool to enable a cleaner and greener transition. The Ministry of Finance is leading the development of a green bond framework; and with further support and capacity building, these initiatives will bolster a greener economic recovery in Sri Lanka.

Meanwhile, the UNDP has also developed SDG investment maps for Sri Lanka and other countries. They identify opportunities for investment with social impact and focus on the funding – including private capital – required to achieve the SDGs.

Sri Lanka has identified 15 SDGs, of which there are three priorities across five sectors: renewable resources and alternative energy; food and beverage; infrastructure; consumer goods; and healthcare.

The Central Bank has also identified priority sectors for investment: agriculture; forestry and logging; manufacturing; electric power generation, transmission and distribution; transportation and storage; water supply; sewerage and waste management; construction; sustainable tourism and recreation; and others such as financial services, ICT and sustainable women’s empowerment initiatives.

Sustainable banking requires rigorous systems to assess the environmental and social risks of lending – in addition, to monitoring bank portfolios. The banking sector is still integrating environmental and social risk management into all its risk and credit activities.

Board level discussions, understanding, capacity building and integration of these issues into the Central Bank’s strategy are needed. While the shift is underway with some leading private banks, there’s still much progress required – especially in assessing the strategic importance of sustainable banking.

SDG advocate and Vice-Chair of UN Global Compact Paul Polman takes a dim view of the recent COP27 climate talks, noting it was “a missed opportunity.” He recommends three immediate actions that business leaders can take…

Firstly, advocate for needed reforms in the global financial architecture to finance the greening of our economies. Secondly, senior business executives can do more to lead vital partnerships for change.

And thirdly, involve youth – be it on boards, panels, leadership positions and where decisions are taken. Business can empower youth and leverage their purposeful skills, given their disenchantment with politics.

The Global Banking Annual Review 2022 focusses on sustainable finance and banking to provide opportunities for growth and profitability globally. Sustainable finance has grown significantly in the past five years.

Despite challenges such as economic uncertainty, greenwashing, inflation and pace of transition to low carbon economies, there are shifts.

The report estimates revenue potential of a minimum of US$ 100 billion annually by 2030 with additional revenue from equity capital markets, advisory services, transaction banking, sales and trading including carbon markets.

Early leadership by Europe has been overtaken by North America. While financing clean energy was the pioneering phase, sustainable financing is broadening and deepening to other sectors too.

The report suggests that sustainable finance is entering its next phase and moving from its initial investment focus on renewable energy to financing capital required for a low emissions future (electrification, energy transmission and distribution infrastructure, emission reductions in high emitting sectors such as cement, and natural climate solutions).

Banks will have the opportunity to build short-term resilience and lay the foundation for long-term growth. This includes exceptional risk management practices, transitioning to more future proof platforms, and taking on new trends such as environmental, social and governance (ESG) investment.

The next era will address national net zero plans and innovative green financing that includes emerging technologies, which will grow during a low carbon transition. Banks will need to develop new products, platforms and possibly separate financing entities across sectors.

An example is the collaboration by Rabobank and UNEP to create the AGRI3 Fund to mobilise US$ 1 billion investment for credit enhancement and technical assistance to disseminate low emissions agriculture.