Series of sustainable finance tools to enter local financial system

The Central Bank of Sri Lanka (CBSL) on Friday asserted that to promote sustainable finance, in line with the roadmap, it intends to initiate an array of suitable instruments after taking into account market developments and needs.

Sustainable finance tools such as green finance guidelines and frameworks will be considered for implementation in the future, after giving due supervisory considerations, the CBSL said in its 2020 annual report.

“Regulators around the globe have thus far not explicitly taken into account the green or brown nature of the underlying assets when computing their perceived riskiness.

Some central banks and supervisors have further integrated climate-related risks into the supervisory framework by adjusting and communicating their supervisory expectations,” the CBSL said.

The monetary watchdog stated that going forward, banks could 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.

The scenarios could be incorporated into the banks’ Pillar 2 Supervisory Review stress tests under the Basel Capital Framework, it added.

Highlighting the possible challenges that could emerge in this endeavour, the CBSL said the lack of expertise and capacity will be a barrier faced by all stakeholders, including the regulators.

“New green products and technologies will evolve dynamically and expertise and experience will be required to assess viability. Therefore, capacity building efforts and technical guidance are paramount for the successful implementation of the sustainable finance initiative,” the CBSL said.

Furthermore, it pointed out that information asymmetry on sustainable finance, from both loan origination and risk management, may hinder sustainable finance initiatives.

To iron out such issues, the CBSL asserted that information systems and information flows must be improved to cater to the evolving sustainable finance needs.