Sustainable Finance: A Holistic Approach to Global Development and Risk Management
Romani De Silva, Managing Director, Alliance Finance Company PLC
Romani de Silva, a Fellow of the Institute of Credit Management counts over 30 years of experience in the finance industry in Sri Lanka. An active promoter of development-oriented Sustainable Banking and Finance in Sri Lanka, he serves on the SSCI Council - a Global Council initiated by the European Organization for Sustainable Development.
In a conversation with Prisila, a Correspondent at Asia Business Outlook Magazine, Romani discussed sustainable investing's impact on global finance, global regulatory differences in sustainable finance, and their role in sustainability promotion.
Sustainable investing has a profound impact on the global financial market by reshaping investment practices to consider environmental, social, and governance (ESG) factors alongside financial returns
How does sustainable investing influence the global financial market, and can you provide examples of successful initiatives from different regions?
Arguably, finance is one of the most crucial catalysts for development, whether sustainable or otherwise. For holistic global sustainable development to occur, financial institutions must channel their financing towards businesses and initiatives that are environmentally and socially sustainable. One of the greatest problems in the world today is that the needle has not moved adequately in terms of resolving the sustainability issues at hand. This concern was clearly articulated by Sir David Attenborough during COP 26.
Sustainable investing has a profound impact on the global financial market by reshaping investment practices to consider environmental, social, and governance (ESG) factors alongside financial returns. In Southeast Asia, Singapore's Green Finance Action Plan, launched by the Monetary Authority of Singapore, positions the country as a hub for green finance. The initiative focuses on enhancing the financial sector's resilience to environmental risks and promoting green financial products. In Europe, Norway's Government Pension Fund Global (GPFG) integrates ESG considerations into its strategy, leading to divestment from certain sectors and engagement with companies to improve sustainability practices. The European Union's Sustainable Finance Action Plan, including the Taxonomy Regulation and Sustainable Finance Disclosure Regulation, contributes to reorienting capital flows towards sustainable investments.
These initiatives have tangible impacts, with Singapore attracting funds for sustainable projects, Thailand's Green Bond Standards fostering a growing green bond market, and GPFG influencing global institutional investors. The EU's regulations enhance transparency, aiding investors in sustainable decision-making. While specific data may vary, these initiatives collectively drive a shift towards responsible investing, fostering a more sustainable and resilient global financial market.
How do regulatory frameworks differ globally concerning sustainable finance, and what role do they play in promoting sustainability?
It is clearly evident that the currently existing frameworks and the sustainability guidelines being practiced during the last few decades have been incapable of producing tangible results in terms of environmentally and socially sustainable development where nobody is left behind. However, there is a silver lining that has appeared in this cloud.
In 2018, the European Organization for Sustainable Development built a measurable and certifiable global standard for value-driven banks and financial institutions, which ensures that global financing is directed to where the money is needed the most in terms of solving some of the most pressing environmental and social sustainability issues in the world. This standard is currently recognized as the most holistic sustainability framework through its Sustainability Standards and Certification Initiative (SSCI). SSCI enables socially & environmentally responsible financial institutions to increase interest and non-interest income, decrease cost-to-income ratios and achieve low non-performing loan portfolios. The SSCI community currently comprises of assets exceeding 60 billion Euros. At present, there are more than 16,500 male and 14,000 female employees of SSCI institutions serving approximately 70.5 million customers through 4400 branches and outlets over the globe. Institutions affiliated with SSCI generate ethical and environmentally friendly profits by directing their resources towards fostering an inclusive and thriving society, promoting robust sustainability, addressing climate change, and safeguarding the environment.
Global regulatory frameworks for sustainable finance vary, reflecting diverse economic priorities and environmental challenges. The European Union has been a leader, implementing the EU Sustainable Finance Action Plan, and setting disclosure standards and taxonomy. China emphasizes green finance, integrating sustainability into its banking system. In the United States, regulatory efforts have been more fragmented, with a growing focus on ESG disclosures.
Regulatory frameworks play a crucial role in promoting sustainability by establishing standards, enhancing transparency, and incentivizing responsible financial practices. They guide investors towards environmentally and socially responsible investments, fostering a shift towards sustainable development. Harmonizing global standards can facilitate cross-border investment and ensure a consistent approach to sustainable finance, encouraging a collective effort to address pressing environmental and social issues on a global scale.
How do sustainable finance practices affect risk management in financial institutions, and what global initiatives promote sustainable finance innovations?
Sustainable finance practices in Sri Lanka impact risk management in financial institutions by influencing their exposure to environmental, social, and governance (ESG) risks. Integrating sustainable practices and committing to a standard such as SSCI helps mitigate reputational risks, regulatory uncertainties, and potential financial losses associated with unsustainable activities. Financial institutions are incentivized to assess and disclose ESG risks, leading to more informed decision-making.
"Technology enables the integration of sustainable practices into investment decisions through the implementation of Environmental, Social, and Governance (ESG) criteria"
Can you discuss the role of technology in advancing sustainability in the financial industry?
In Sri Lanka, technology plays a pivotal role in advancing sustainability within the financial industry, aligning with global trends. Digital innovations facilitate the transition towards environmentally conscious practices and responsible financial management. The adoption of financial technology (fintech) solutions allows for streamlined processes, reducing paper usage and operational inefficiencies. Mobile banking and digital payment systems promote financial inclusion while minimizing the environmental impact associated with traditional banking.
Furthermore, technology enables the integration of sustainable practices into investment decisions through the implementation of Environmental, Social, and Governance (ESG) criteria. Automated tools and algorithms aid in assessing the sustainability performance of investments, encouraging environmentally friendly and socially responsible portfolios. Additionally, the use of blockchain technology enhances transparency and accountability in financial transactions, addressing concerns related to ethical and sustainable business practices.
Sri Lanka's financial industry can adapt to global sustainability trends by fostering collaboration with international organizations, participating in knowledge-sharing platforms, and aligning regulatory frameworks with evolving global standards. Embracing innovative technologies not only enhances the efficiency of financial services but also positions Sri Lanka to be in sync with the international drive towards sustainable and responsible finance. In this regard it is important to note that the SSCI standard for value driven financial institutions mandates the development of innovative and highly competitive digital strategies to fulfill these obligations.
What risks and opportunities does the transition to a more sustainable financial system present for investors and financial institutions globally?
The transition to a more sustainable financial system presents both risks and opportunities for investors and financial institutions globally. On the risk side, there are potential financial losses associated with investments in industries facing increased regulatory scrutiny due to environmental and social concerns. Stranded assets, resulting from the shift away from fossil fuels and other unsustainable practices, may lead to the depreciation of certain investments. Additionally, increased disclosure requirements related to sustainability could expose companies to reputational risks, affecting their market value.
However, the transition also offers significant opportunities. Investors can tap into the growing market for sustainable products and services, including renewable energy, green technologies, and eco-friendly initiatives. Financial institutions can develop new financial instruments, such as green bonds and sustainable investment funds, attracting capital from environmentally conscious investors. Moreover, businesses that embrace sustainability may benefit from enhanced brand reputation and access to capital, as investors increasingly prioritize ethical and responsible practices.
In the Sri Lankan context, these dynamics may be influenced by the country's economic structure, regulatory environment, and socio-political factors. Sri Lanka, with its focus on renewable energy and sustainable agriculture, can leverage its natural resources for sustainable investments. However, challenges like infrastructure limitations and regulatory uncertainties may pose risks. Nonetheless, the global demand for sustainable investments could open doors for Sri Lankan businesses, making it imperative for local investors and financial institutions to align with global sustainability standards such as SSCI, to capture opportunities while managing associated risks.