CB issues fresh guidelines to LFCs on sustainable financial activities

• Aimed at facilitating sustainable finance while providing with governance and risk management framework for ESG 

The Central Bank last week issued a fresh set of guidelines to the country’s Licensed Finance Companies (LFCs) on sustainable finance activities as part of the broader transition towards embracing and delivering on ever increasing Environmental, Social and Governance (ESG) demands from businesses by their stakeholders.  
The calls to do more from governments and enterprises towards containing climate change and on broader ESG requirements grew louder in the last couple of years due to the high frequency of climate related disasters, which scientists linked to increasing global warming, and also due to the demands for more inclusivity from businesses in dealing with employees and matters concerning the broader society.  

At the recently concluded United Nations Climate Summit in Egypt titled COP27, governments from more than 190 countries struck a deal to set up a fund that would pay for climate related damages in the countries deemed vulnerable for climate change, handing a victory for the poor nations who have for years been calling for the move. 

The push for more rigorous governance from businesses has further amplified with the recent collapse of FTX, the world’s second largest cryptocurrency exchange in the United States, causing its investors to lose billions of dollars in funds invested with the firm.  
In the guidelines issued to the LFCs, the Central Bank aims to support building a sustainable economy via redirecting financing into these areas while also providing them with a governance and risk management framework, with the objective of facilitating the sustainable finance initiatives in line with the roadmap. 

The Central Bank in 2019 published a roadmap for sustainable development providing a broader direction for financial regulators and financial institutions in managing ESG related risks in an attempt to achieving Sustainable Development Goals set by the United Nations and the need to transit Sri Lanka towards a greener, inclusive and balanced economy. 
Further, the Central Bank in May this year published what it referred to as Sri Lanka Green Finance Taxonomy, setting up a classification and measurement system for sustainable financial activities.

The said programme also identified a number of priority sectors when providing finance which include but not limited to forestry and logging, agriculture, manufacturing, electrical power generation, water supply, sewerage and plant management.  

While the LFCs are encouraged to develop sustainable savings products and loan products, they are also encouraged to support green and socially inclusive projects and issue guidance and operational tools. 
On the governance front, the Board of Directors is encouraged to effectively oversee sustainable finance activities while the companies are also requested to develop finance policy approved by the Boards. 

The Chief Executives and the key responsible persons are also required to review such policies, tools, matrices, operational procedures and controls and update at least annually while ensuring the availability of adequate resources and skills required to implement and manage sustainable finance activities. 
While companies are required to identify and evaluate risks associated with ESG, the management was also asked to incorporate such risks in the companies’ overall risk management framework and incorporate ESG risk management as part of overall corporate decision making. 

Further, companies are also required to disclose in their annual reports of their sustainable finance policies and ESG related risks along with the total and annual amounts of sustainable funds raised and allocated to such activities. 
Companies are also required to disclose the environmental and social impact generated from business activities using internationally-recognised reporting frameworks, such as Global Reporting Initiative and recommendations of the the Task Force on Climate-related Financial Disclosures.