Sri Lanka is beginning to rebuild its economy, after experiencing a polycrisis followed by its first sovereign default in 2022.
Even as the debt restructuring is nearly complete and the economy takes baby-steps towards debt sustainability, we cannot afford to be complacent. In addition to the continued macro vulnerability of the economy (debt-to-GDP remains high, the fiscal footing is still weak, and the growth model is unbalanced), global research has also shown that the chances of default are also correlated with climate risks. This additional dimension of vulnerability that contributes to macroeconomic stress must become a focus area for private sector and policymakers alike.
Climate impacts, environmental issues, and macro risks
The Intergovernmental Panel on Climate Change (IPCC) reports that tropical countries and those in the Southern Hemisphere subtropics will likely face the greatest economic impacts from climate change. Climate hazards, which result from climate change driven by human activity, will undoubtedly impact our industries and disrupt markets in the near future.
As climate change is a risk multiplier, it is imperative for businesses to enhance their capacity in risk management and resilience.
For instance, climate hazards such as droughts or flooding lead to impacts of concern such as crop failure, which can subsequently lead to food insecurity, unemployment, market disruption and more.
Chatham House’s landmark study ‘Climate change risk assessment 2021’ outlines such cascading climate risks in detail. It is also becoming well established that the depletion of natural capital and ecosystem services would impact productive capacities of an economy, which in turn affects growth, job creation, poverty and inequality, government fiscal performance, and eventually, debt sustainability.
By 2050, over 90% of Sri Lanka’s population (19 million people) will live in areas forecasted to become climate hotspots, and consequently, the economy is projected to experience a 3.86% reduction in GDP. Sri Lanka faces a shoreline retreat of 200,000 to 300,000 m² annually, with 40% of the population living within 2 km of the coast. Waste management has reached a crisis stage, with 260 active open-air dumpsites in Sri Lanka, and land-based pollution spilling over to account for 90% of marine pollution.
Rising heat levels due to climate change would lead to a rise in cooling requirement by at least 10% by the 2040s, putting a high strain on energy generation. To build resilience, the country requires substantial investments – $36.5 billion by 2030 and $54.2 billion by 2050.
Corporate sector actions need more depth and focus
Amid this stark reality, there is a growing sense that many Sri Lankan corporates are taking only cursory efforts in addressing environmental challenges and contributing to nature-based solutions. They focus too heavily on headline Envionmental, Social, Goverence (ESG) reporting efforts rather than meaningful and sustained impact and undertake ad-hoc environmental CSR projects that are not science-based.
Sri Lanka has seen a rise in ESG initiatives in recent years – from special conferences and workshops discussing ESG, to consulting firms setting up dedicated teams to offer ESG advisory services. While the ‘S’ and ‘G’ have had steady attention among our private sector, as a result of improved efforts around employee and community welfare and enhanced governance requirements stipulated by regulators, the ‘E’ still receives insufficient attention. Clubbing ‘S’ and ‘G’ with environmental considerations risks losing focus on this agenda. We need concerted and dedicated efforts on the environment, beyond generic ESG frameworks.
There is growing concern that the prevailing generic ESG narratives have encouraged greenwashing – where companies overstate sustainability efforts through marketing and outreach while continuing business-as-usual, exacerbated by a lack of accountability over sustainability claims.
There are several examples of this seen in Sri Lanka too, where companies alter colours in their logos to reflect a new commitment to sustainability or claim to be ‘net zero’ entirely through carbon offsets.
Cheering such initiatives while continuing business-as-usual approaches that exacerbate environmental pressures cannot continue. Instead, corporate actors need to fully integrate environmental considerations into their strategy and operations.
This includes corporates in the financial services sector. Recent research by CSF in 2023-24 showed that only eight Sri Lankan financial institutions (FIs) (of the 56 reviewed) had adopted an internal policy or strategy focused on the environment. Only five FIs systematically assess environmental impacts and risks in granting loans, and only 4 reported that they quantify/measure environmental and/or climate risks in their portfolio.
Another research by CSF on environmental disclosure practices by stock market-listed corporates revealed a high tendency of companies to engage in compliance-driven reporting rather than adopting meaningful sustainability practices, which require a deeper integration of sustainability into business operations.
Re-focussing on what really matters
Sri Lanka’s main export sectors are intrinsically linked to nature and are influenced by climate change – including tea, rubber, coconut, spices, or processed food and beverage exports.
In an increasingly environmentally-conscious global market, raising forex earnings and attracting foreign direct investments are more likely if Sri Lanka positions itself as a sourcing location that minimises environmental degradation, and a tourism destination that is charting a nature-positive path.
The international capital available for climate and nature-aligned investments is also growing. Climate finance now tops USD 1.3 trillion annually and is expected to see more private financing, not only multilateral and aid financing. The Green Climate Fund, which committed USD 2.3 billion in 2024 and has total pledges for USD 12.8 billion, now has a Sri Lankan bank as a direct access entity.
Sri Lanka’s private sector can tap into green funds, climate funds and biodiversity funds – all of which now have a large private sector presence globally and no longer just appeal to development organisations like in the past. With macroeconomic stabilisation achieved and a sovereign re-rating well under way, we must now put environmental concerns at the heart of our economic recovery, and natural capital at the centre of our economic growth model. The corporate sector has a decisive role to play in this transformation.
The writer is Co-founder/Director at the Centre for a Smart Future (CSF). CSF is an interdisciplinary policy think tank focussing on an inclusive and sustainable economic recovery for Sri Lanka. Visit csf-asia.org/knowledge-insights for more.
