In an era where climate change poses existential threats to economies worldwide, the financial sector stands at a critical crossroads. For Sri Lanka, a nation particularly vulnerable to climate impacts, the integration of environmental considerations into financial decision-making is not merely good practice — it’s essential for economic resilience.
Recent research examining Sri Lanka’s financial institutions reveals concerning gaps in environmental integration that demand urgent attention from industry leaders, regulators, and policymakers.
Environmental integration gap
CSF research of 56 listed financial institutions in Sri Lanka —comprising banks, non-banking financial institutions, and insurance companies — has revealed a disconnect between environmental awareness and concrete action. While many institutions acknowledge environmental concerns in their corporate communications (including Chairman and CEO’s messages in Annual Reports), few have translated this recognition into measurable policies, quantifiable targets, or structured risk assessments.
This assessment guided by frameworks from the Sustainable Banking and Finance Network and aligned with Sri Lanka’s own Roadmap for Sustainable Finance, examined three critical pillars: strategic recognition, internal policies, and quantification of metrics and risk assessment. The findings paint a picture of a sector still in the early stages of environmental integration.
Encouragingly, 22 of the 56 financial institutions had leadership (chairperson or CEO) explicitly mentioning environmental considerations in their messages — a mere 39%. Around 12 institutions referenced national strategies such as the Central Bank’s Sustainable Finance Roadmap or Green Taxonomy, and a meager 18 referenced international frameworks.
From recognition to implementation: the internal policy gap
The research reveals a substantial gap between recognising environmental importance and implementing concrete internal policies. Of the 56 financial institutions assessed, only eight have developed internal strategies focused on environmental considerations with short, medium, and long-term objectives. This represents only 14% of the sector, indicating that despite increasing awareness, environmental integration remains largely superficial rather than structurally embedded in institutional operations.
Resource allocation further illustrates this implementation gap. Only 12 institutions have established dedicated environmental teams, such as climate task forces, ESG committees, or sustainability officers with a clear environmental mandate. Similarly, only 12 institutions have taken steps to build staff capacity through environmental training programs or created incentives for environmental integration.
Perhaps most concerning is the complete absence of external accountability mechanisms. Not a single institution among the 56 assessed reported maintaining an external inquiry, complaint, or grievance mechanism for stakeholders regarding their environmental practices. This lack of stakeholder engagement channels reflects a broader failure to incorporate external perspectives and feedback into environmental policies and practices, further isolating financial decision-making from environmental realities.
Measurement deficit: quantification and risk assessment
The third pillar of assessment — quantification of metrics and risk assessment — reveals perhaps the most critical gap in Sri Lanka’s financial sector. While approximately half of the institutions (27 out of 56) report basic environmental metrics such as electricity consumption, water use, paper consumption, greenhouse gas emissions, or carbon footprint, deeper analysis of environmental risks is strikingly absent. At the time of the study in end 2023 and early 2024, only two institutions have developed categorisations of sectors most vulnerable to climate risk, representing less than 4% of the assessed financial institutions. Similarly, only two institutions mention key environmental risk categories such as transition risks (arising from policy changes, technological shifts, and market preferences) or physical risks (from acute events and chronic climate change impacts). This indicates that even as global financial markets increasingly recognise climate risk as financial risk, Sri Lanka’s financial sector largely remains blind to these emerging threats.
Most concerning for a sector whose core function includes credit provision is the finding that only five of the 47 credit-lending institutions (excluding the nine insurance companies) mention specific environmental screening processes in their loan assessment procedures. This means that less than 11% of lending institutions formally consider environmental impacts when making credit decisions — decisions that collectively shape Sri Lanka’s development trajectory.
Without comprehensive environmental risk assessment frameworks, these institutions cannot accurately price climate-related risks in their portfolios. This not only exposes them to potential losses as climate impacts intensify but also prevents them from effectively directing capital toward sustainable economic activities that would enhance national resilience.
The path forward
The financial sector has unique leverage to accelerate Sri Lanka’s transition to a sustainable economy. By directing capital toward environmentally sound investments and accurately pricing climate risks, financial institutions can drive transformation across sectors. However, this potential remains largely untapped.
Financial institutions must move beyond basic environmental reporting to develop sophisticated risk assessment capabilities. This means investing in data, tools, and expertise to identify, measure, and manage both physical and transition risks across their portfolios. It also means integrating environmental criteria into core lending decisions to ensure capital flows toward sustainable activities.
The sector urgently needs capacity building. Environmental risk assessment requires specialised knowledge and tools. Industry Associations, regulators, and international partners should collaborate to develop training programs, standardised methodologies, and knowledge-sharing platforms.
Finally, stakeholder engagement mechanisms must be established to ensure accountability and continuous improvement. Financial institutions should create formal channels for environmental feedback and grievances, and actively incorporate stakeholder perspectives into their environmental strategies.
Our assessment reveals that Sri Lanka’s financial sector stands at an early stage of environmental integration. While frameworks and regulatory guidance exist, implementation remains limited. This represents both a challenge and an opportunity — a challenge to transform awareness into action, and an opportunity to build a financial sector that drives sustainable development.
As Sri Lanka works to recover and rebuild its economy, putting nature and environment at the heart of financial decision-making is not just desirable — it’s essential. Financial institutions that lead this transformation will not only contribute to national resilience but will position themselves advantageously in a global economy increasingly defined by sustainability credentials.
The question is not whether environmental factors will reshape Sri Lanka’s financial landscape, but how quickly institutions will adapt to this reality. Those who move proactively stand to thrive; those who delay risk being left behind. The time for action is now.
This article was written by researchers at the Centre for a Smart Future (CSF). To read the Research Findings that this article is based on, visit csf-asia.org/knowledge-insights.
