Address by Mr. A. A. Thassim, CBSL Director of Supervision

Introduction

Let me take this opportunity to thank Sri Lanka Banks Association for inviting the Central Bank to address this distinguished gathering, and on behalf of the Central Bank of Sri Lanka, I commend the initiative by the Sri Lanka Banks Association to take forward the Sri Lankan Sustainable Finance Initiative (SL-SBI).

Looking at Sustainability from Banking Dimensions

Sustainability in banking is just like in any other field and can be divided into three broad categories.

• Economic Dimension
  The first category i.e. the Economic Dimension is the most important aspect of a bank’s sustainability program and involves managing the impact that its products, services and customer relationships have on the financial sector.
• The Social Dimension
  The second category is the Social Dimension. A bank needs to manage the impact of its activities on society in two ways: first, by removing, or at least mitigating, any negative impacts it may have; second, by taking positive steps to help communities through its employment practices, fundraising, volunteering and charitable giving.
• The Environmental Dimension
  The third category is the Environmental Dimension or the environment footprint. Here banks should look to minimize any negative impact their activities may have on the environment and, if possible, ensure their activities have no negative impact at all. In some cases, they will try to reverse any damage that has already been caused.

We are aware that banks are already looking to improve the environmental footprint of their own operations by reducing carbon emissions while cutting down costs. Accordingly, all banks are encouraged to move towards sustainable operational initiatives such as,

• Green buildings in the branch network
• Digital filing systems
• Green procurement policies
• Green pledges and engaging in green CSR activities.

Going forward as a nation, we should look to both increase in supply and increase in the demand for sustainable financing.

When increasing supply of sustainable finance, we should look to increase sustainable financing at each stage of the entire supply chain in the priority economic sectors, encourage innovation in developing environmentally friendly products, and to improve the quality and provision of access to information.

On the other hand, when looking at increasing demand for sustainable financing products; regular, structured and targeted outreach campaigns and socialisation programs is required to increase public understanding on sustainable finance.

Regulatory Measures Taken by CBSL

In line with the international movement to promote sustainable financing, the Central Bank has also joined the Sustainable Banking Network (SBN) of the International Finance Corporation (IFC). The Sustainable Banking Network (SBN) is a unique community of financial sector regulatory agencies and banking associations from emerging markets committed to advancing sustainable finance in line with international good practice.

Consequently, as a member of the SBN, the Central Bank of Sri Lanka would focus on sustainable banking practices to help banks to effectively manage environmental and social risks in the projects and promote sustainable banking.

Accordingly, the Central Bank conducted a joint workshop with IFC on Sustainable Finance from 28 February to 01 March 2017 with the participation of all key stakeholders and under the patronage of His Excellency the President Maithripala Sirisena as the chief guest. As an outcome of this meeting it was decided to develop roadmap for implementing a sustainable finance framework for Sri Lanka.

Therefore, the Central Bank has already appointed a steering committee headed by Deputy Governor, Dr. P Nandalal Weerasinghe to facilitate developing a Road Map to initiate a Sustainable financing framework for the Sri Lankan financial sector with the consultation of relevant stakeholders. The Committee also consists of 11 other senior Central Bank officials representing relevant Departments of the Central Bank.

Going forward, banks could also look at the feasibility of incorporating scenarios that estimate the potential impact on financial stability from supplying credit to environmentally unsustainable or sustainable activities over time into banks Pillar 2 Supervisory Review stress tests under the Basel framework.

International Practices

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,. To further elaborate;
   The Bangladesh Bank has a Sustainable Finance Department dedicated for this function and as such has issued guidelines on Environmental & Social Risk Management (ESRM) for Banks and Financial Institutions in Bangladesh.
   Indonesia has developed a road map for sustainable finance with a detailed work plan as a part of the long term development plan of Indonesia for 2005 – 2025.
2. Secondly, voluntary, industry-led initiatives have been implemented in countries such as Colombia, Ecuador, Kenya, Mexico, Mongolia, South Africa and Turkey.
   For example the Mongolian Bankers Association has prepared Sustainable Finance Principle Guidelines to address issues related to sustainability in country’s economic development agenda and to avoid, minimize or to mitigate negative environment and social impacts.
   However in Sri Lanka, we are in a unique position where both approaches are harmonised, with 18 banks already adopting 11 voluntary principles, under the leadership of the SLBA and Central Bank collaborating with SBN to develop a sustainability road map.

Regulatory Tool kit available for sustainability finance

There are numerous tools available to regulators for the purpose of developing a sustainable finance framework. Some of the tools available 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

Sri Lanka has yet to adopt any of the above mentioned tools for the purpose of promoting sustainable finance, however we are now in the process of evaluating the need to introduce such tools for promoting this endeavour.

Common barriers going forward

1. Embedding sustainable banking in banks’ core business
2. 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.
3. 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.
4. 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.
5. 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.

To overcome these barriers, going forward our banking sector should look for fruitful collaboration with the international community which is essential while sharing knowledge and building partnerships. This process includes engaging in joint research, development of sustainable finance tool kits, continuous capacity building, peer-to-peer learning, funding aids from foreign counterparties, harmonization of international good practices and develop common resource pool.

Therefore, this initiative by the SLBA is a vital stepping stone towards developing an environmentally, socially and economically sound banking sector in Sri Lanka. So, all banks are encouraged to come together to make this worthy initiative a success.

In conclusion I wish this forum all success and hope you will have fruitful deliberations today in pursuing an effort of national and global importance. Thank you once again for inviting Central Bank to express its thoughts on sustainable banking.

Mr. A A M Thassim,
Director, Bank Supervision, Central Bank of Sri Lanka