Sri Lanka’s green bonds must demonstrate climate impact measurement: MTI

MTI Consulting CEO Hilmy Cader (left) and MTI Senior Business Analyst Samiddhi Wanigasekara

Sri Lanka is witnessing a significant shift towards sustainable finance with Colombo Stock Exchange (CSE) introducing the listing and trading of green bonds in 2023. 

DFCC Bank led the way among financial institutions to issue the first green bond in the country, aimed at funding renewable energy projects particularly in the solar energy sector. This has been followed by Alliance Finance announcing the plans to issue redeemable green bonds to raise Rs. 1 billion.

The issuance of green bonds by these institutions is an encouraging sign, especially in the context of global and local climate change concerns. As the world grapples with the impacts of climate change, these initiatives are crucial for driving the transition to a low-emission economy. With Sri Lanka’s commitment to achieve net zero carbon status by 2050, the adoption of green finance instruments is a positive step towards mitigating environmental risks and fostering sustainable development.

While green bonds are promising, the current focus remains largely on the aspects of issuance and uptake. It should be noted that the success of Green Bonds depends not only on their issuance but also on their effective deployment towards projects that genuinely contribute to environmental sustainability.

MTI recently completed the Green Finance Taxonomy for the Maldives and was appointed as an Observer Organisation of the Green Climate Fund.

Thus, a critical question arises: Does Sri Lanka have the necessary green finance ecosystem, infrastructure, and impact measurement mechanisms to ensure that the funds raised through Green Bonds are effectively deployed to mitigate climate change? A robust green finance ecosystem is essential to provide clear guidelines, regulatory frameworks, and impact measurement tools to track the environmental benefits of the projects funded by green bonds.

A national green finance taxonomy plays a crucial role in this context. A well-defined taxonomy provides a framework for classifying and evaluating green projects, ensuring that the funds are directed towards genuinely sustainable initiatives to prevent greenwashing. The Central Bank of Sri Lanka (CBSL) launched Sri Lanka’s national green taxonomy in 2022 to classify economic activities that can be considered as ‘Green’. The directions issued by CBSL require financial institutions to follow; Allocation reporting – to ensure alignment of use of proceeds by green financing instruments with the taxonomy and Impact reporting – to assess the impact made by providing finance to a green project

Yet, providing specific and comparable impact reporting guidelines remains unaddressed.

Public accountability is another vital aspect. Linking green bond issuance to measurable impact ensures transparency and accountability. It is essential for financial institutions to regularly report on the environmental outcomes of the projects funded by green bonds. This not only builds trust among investors but also ensures that the funds are making a tangible difference in addressing climate change.

In conclusion, the issuance of green bonds by Sri Lankan financial institutions marks a significant advancement towards sustainable finance. However, to fully realise the potential of these green bonds, it is crucial to establish a robust green finance ecosystem with comprehensive impact measurement mechanisms to achieve a greener and more sustainable future.