Sustainability Reporting in Sri Lanka
Dhanuja Somathilake
Sustainability reporting is the process of recording and revealing an organisation’s environmental, social, and governance (ESG) effects. Environmental factors include the carbon footprint and greenhouse gas emissions, energy and water use, recycling and waste management, biodiversity conservation, pollution control, and climate change mitigation tactics. Social factors address the organisation’s relationships with employees, customers, communities, and other stakeholders. Corporate leadership, ethics, and accountability are all part of governance elements, including executive remuneration, board composition, risk management, executive compensation, anti-corruption initiatives, shareholder rights, regulatory compliance, and decision-making transparency. Together, these elements ensure a holistic approach to sustainability, and by evaluating and publishing sustainability-related data, companies can demonstrate accountability and transparency, strengthening stakeholder trust.
Sustainability reporting plays a vital role in modern business, enabling companies to track their environmental and social performance, set goals, and improve over time. Businesses that prioritise sustainability reporting benefit in multiple ways. Enhanced brand reputation is a key advantage, as consumers increasingly prefer eco-friendly and socially responsible brands, allowing companies to showcase their commitment to ethical practices and strengthen customer loyalty. Access to funding and investments also improves, as many investors and financial institutions favor businesses with strong ESG performance, increasing their chances of securing loans and investment opportunities. Furthermore, businesses that integrate sustainability into their core strategies gain a competitive advantage, becoming more resilient to economic fluctuations and market shifts, ultimately securing long-term success.
Sri Lanka is significantly shifting corporate transparency from voluntary sustainability reporting to a mandatory framework. The Institute of Chartered Accountants of Sri Lanka is leading this transition by introducing the Sri Lanka Financial Reporting Standards (SLFRS) S1 and S2, set to take effect on January 1, 2025. SLFRS S1 focuses on the general requirements for disclosing sustainability-related financial information, while SLFRS S2 explores climate-specific disclosures. These standards align with global best practices, ensuring businesses disclose their ESG efforts in a structured and transparent manner. To ease the transition, the adoption of SLFRS S1 and S2 will happen in phases. In 2025, the top 100 companies listed on the Colombo Stock Exchange (CSE) must comply. By 2026, all mainboard-listed companies will be included. The compliance scope expands in 2027 to cover all listed entities except those on the Empower Board. In 2028, large companies with an annual turnover exceeding Rs 10 billion will also need to comply, followed by those with turnovers over Rs 5 billion in 2029. Finally, by 2030, even Empower Board-listed companies will be required to adopt these standards, making sustainability reporting a universal requirement across Sri Lanka’s corporate sector.
Sustainability Reporting in SMEs
In Sri Lanka, the economy depends heavily on Small and Medium Enterprises (SMEs), representing over 75 percent of all businesses and contributing around 52 percent to the country’s GDP. These enterprises are crucial in driving employment, innovation, and economic growth. For SMEs, sustainability reporting is just as critical as for larger corporations. It can improve market access, as many multinational companies prefer working with suppliers who follow sustainable practices, helping SMEs enter larger markets and build stronger business relationships. Sustainability reporting can also increase financial opportunities and enhance business resilience by helping SMEs reduce operational risks, adapt to regulatory changes, and remain competitive. Sustainability reporting has gained traction in Sri Lanka, especially among large corporations and publicly listed companies. However, sustainability reporting remains a relatively new concept for SMEs in Sri Lanka. While the initial phases focus on larger corporations, SMEsare crucial in Sri Lanka’s economy. Although not immediately mandated, SMEs are encouraged to adopt sustainability reporting practices voluntarily.
In Sri Lanka, management perceptions significantly impact SMEs’ adoption of sustainability reporting. Managers’ awareness of sustainability issues and their understanding of the benefits and challenges play a significant role in whether they decide to implement sustainability reporting. The decision to adopt such practices is often shaped by a manager’s knowledge and experience and their strategic vision for the company.
Research Highlights
My recent research study was conducted regarding managerial perceptions on sustainability reporting adoption in SMEs. This study adopts a quantitative approach under the positivist philosophy to understand the factors influencing the adoption of sustainability reporting in SMEs in Sri Lanka, focusing on the perceptions of 151 managerial-level employees, especially SME managers and business owners. Structural Equation Modeling with AMOS and path analysis examines the relationships between managerial perceptions and the adoption of sustainability reporting. Recent findings reveal that three main factors shape how managers perceive the adoption of sustainability reporting. These include their level of awareness and knowledge, the benefits they believe it offers, and the challenges they expect to face. The findings show that managers are more likely to implement sustainability reporting when they are aware of the value of sustainability reporting. Those aware of and knowledgeable about its benefits see it as a valuable tool for long-term success. The study also found that businesses are more likely to embrace sustainability reporting if they believe it offers tangible benefits, such as attracting investors, improving customer loyalty, enhancing reputation, reducing costs, and gaining competitive advantages. Further, they found challenges to adopting sustainability reporting, such as financial constraints and resource limitations; however, they are not significant barriers to adoption. Many managers believe these obstacles can be managed with the proper support. This suggests that government incentives, clear regulatory guidelines, and industry-specific assistance could help more SMEs adopt sustainability reporting.
Helping Embrace Sustainability Reporting
For Sri Lankan SMEs, adopting sustainability reporting can bring significant benefits. However, many SMEs find the process challenging. To make sustainability reporting more accessible, businesses should start with simplified frameworks that are easier to manage. Investing in training programs can help SMEs understand the strategic advantages, while digital tools can streamline data collection and reporting. Additionally, promoting sustainability efforts through marketing can attract investors and eco-conscious customers. Government support is also essential, and policymakers should introduce SME-friendly guidelines, offer financial incentives like tax breaks, and create industry-specific support programs. Public-private partnerships can play a key role in knowledge-sharing, helping SMEs navigate the process with guidance from experts. Collaboration is another crucial factor. When SMEs work alongside larger corporations and sustainability professionals, they can build a strong culture of responsible business practices. By taking these steps, Sri Lankan SMEs can break through barriers and create a more sustainable, competitive future that benefits businesses and the country’s broader economic and environmental goals.
Future of Sustainability Reporting Sustainability reporting in Sri Lanka seems to be heading toward a promising future, but significant work remains to be done. As global markets demand greater environmental accountability in response to climate change issues, businesses and industries are urged to adopt more sustainable practices and reduce their environmental impact. Therefore, Sri Lankan SMEs must embrace sustainability reporting to remain competitive. Key players, such as the government, trade groups, and financial institutions, must work together to build an environment that supports SMEs to facilitate this transition. Simplified regulatory frameworks, financial assistance, and technological solutions tailored for SMEs can enhance adoption rates. Additionally, integrating sustainability reporting into the education and training sector can equip future business leaders with the knowledge to drive sustainable practices. Sustainability reporting is no longer an option but necessary for businesses worldwide, including SMEs in Sri Lanka. With increased awareness, financial support, and government backing, Sri Lankan SMEs can integrate sustainability reporting into their business models, ensuring long-term success in an environmentally conscious global market. By embracing sustainability reporting today, SMEs can contribute to a greener and more responsible future while securing their growth and resilience in an evolving business landscape.
By Dhanuja Somathilake
Senior Lecturer,
Department of Accountancy and Finance,
Faculty of Management Studies, Rajarata University of Sri Lanka
