Building a resilient and sustainable financial system

Resilience-building is key to ensure economic stability, a sustainable recovery, and long-term economic growth and transformation

Resilience is the ability to manage shocks and adverse impacts in a way that allows for a quick recovery and long-term adaptation to changing circumstances. It includes the ability to anticipate and prepare for shocks — whether they are related to climate change, disasters, economic factors, or other crises such as the COVID-19 pandemic — as well as to respond to them, absorb their impacts, and rebuild. As a concept, it is closely connected to risk management, which encompasses similar elements across its timeline, including risk awareness, risk prevention and reduction, risk transfer, and risk retention.

Today, resilience-building is more important than ever to ensure economic stability, a sustainable recovery, and long-term economic growth and transformation. Any business, from start-up to large corporation, needs to mainstream elements of resilience and risk management into its plans, operations, and systems. Similarly, sustainability is a key consideration across all sectors, ensuring that resources are used efficiently and footprints remain small in terms of land and water use, carbon emissions, pollution, or waste.

Resilience and sustainability in the financial system

oth resilience and sustainability are not external and additional considerations, but rather cut to the core of any business model and business case. In order to access markets, customers, and investment opportunities, it is pivotal to adhere to high standards of green, climate-smart, ethical, and sustainable production. Furthermore, minimising resource footprints and optimising resource use can significantly reduce costs and allow businesses to remain competitive even in times of resource scarcity and crisis.

In Sri Lanka, priority sectors for economic resilience-building are the ones that are already key contributors to GDP and employment, those that earn foreign exchange, and those that have high potential for sustainable growth. This includes food systems and export agriculture, the apparel industry, tourism, renewable energy, and innovative start-ups and small-scale businesses, among others. If resilience and sustainability are further incorporated into these sectors on a fundamental level, it has the potential to not only help navigate the current risk landscape, but also to harness powerful synergies and co-benefits.

Resilience and sustainability can be enhanced through upgraded infrastructure, improvements to buildings, equipment, and technology, improved communication and awareness, or action plans to address certain hazards (such as heat action plans) and recover from shocks. In terms of the workforce, training and skill development can play a key role, as can updated procedures and practices for production and doing business. In addition, financial instruments such as contingency funds or insurance schemes can act as safety nets to absorb shocks and facilitate a swift recovery.

However, such a transition in any sector requires an enabling environment of policies, laws, and taxation schemes as well as a stable, risk-aware, and transparent financial system. Towards this end, long-term investment in human capacities, technical expertise, and mindset changes will be of vital importance for Sri Lanka. Awareness creation and capacity-building activities on financial literacy should be strengthened throughout the education system, and more specific programs and opportunities provided for youth, women, and vulnerable groups. Digitising, streamlining, and simplifying processes can additionally reduce barriers for engagement and cut down financial transaction costs.

Accessing climate finance for resilience-building

Climate finance can play an important role for achieving climate resilience and building a sustainable financial system. In a general sense, climate finance is funding that goes into measures to address climate change in some way, either through emission reduction (mitigation) or through adaptation and resilience-building. Under the United Nations Framework Convention on Climate Change (UNFCCC) and the Paris Agreement, the principle of “common but differentiated responsibilities and respective capabilities” plays a key role, with developed country parties to the Convention expected to provide financial resources to developing countries such as Sri Lanka for both mitigation and adaptation actions.

Climate finance is a complex topic. What is needed and what can be accessed depends highly on the given context, but there are opportunities for developing countries like Sri Lanka to receive support and funding on the local or national level from public, private, or alternative sources. However, to access climate finance, several key considerations need to be addressed, including human capacities, technical capacities, institutional and regulatory arrangements, and the policy landscape. In addition, an enhanced understanding of financial mechanisms and the institutional capacities needed to access them is crucial.

A resilient and sustainable future

Mainstreaming resilience, risk management, and sustainability into key economic sectors and businesses is not only an essential need, particularly given the current country context in Sri Lanka, it also provides an opportunity to tap into additional sources of funding and chart a path through a world filled with increasingly complex and interconnected risks.

While economic difficulties are a pressing concern, the ongoing climate emergency as well as other global crises — including biodiversity loss, land degradation, supply chain issues, and COVID-19 — cannot be ignored. By enhancing the resilience of the financial system and finding more sustainable ways of doing business, the public and private sector can become more resistant to all these shocks at the same time and enable themselves to absorb impacts, recover, and build back better.

(The writer works as Director – Research and Knowledge Management at SLYCAN Trust, a non-profit think tank based in Sri Lanka. His work focuses on climate change, adaptation, resilience, ecosystem conservation, just transition, human mobility, and a range of related issues. He holds a Master’s degree in Education from the University of Cologne, Germany and is a regular writer to several international and local media outlets.)