Sustainable Finance: Shaping Sri Lanka’s Economic Future beyond Profit

Sri Lanka stands at a critical economic crossroads. As the country rebuilds after multiple economic, social, and environmental shocks, a fundamental question confronts policymakers, financial institutions, and future professionals alike: Can growth be achieved without compromising environmental integrity and social equity? The answer increasingly lies in sustainable finance.

Moving Beyond Traditional Finance

For decades, traditional finance focused narrowly on shortterm profitability. While this approach delivered growth, it also contributed to environmental degradation, climate vulnerability, social inequality, and governance failures. Today, these issues are no longer external to the economy they are systemic risks.
Sustainable finance represents a paradigm shift. It refers to financial activities that integrate Environmental, Social, and Governance (ESG) considerations into lending, investment, and risk management decisions. In simple terms, it asks not only how much profit is generated, but at what cost and for how long.
Every loan approved by a bank, every investment decision made by a fund manager, shapes the future economy polluted or clean, unequal or inclusive. Sustainable finance ensures that capital flows support longterm economic resilience rather than shortterm gains.

Sri Lanka’s Sustainable Finance Journey

From an economic perspective, sustainable finance directly addresses market failures. Pollution and carbon emissions are classic examples of negative externalities, where private decisions impose social costs. Clean air, climate stability, and biodiversity are public goods that markets tend to underprovide. Information asymmetry further complicates investment decisions when ESG risks are not transparently disclosed.
Sustainable finance internalizes these costs by aligning financial incentives with social welfare. Government intervention through regulations, taxonomies, and disclosure requirements becomes essential. In Sri Lanka, the Central Bank has taken a leading role in this transformation.
Sri Lanka’s Sustainable Finance Journey
Sri Lanka has made notable progress in institutionalizing sustainable finance. The Central Bank of Sri Lanka’s Sustainable Finance Roadmap (2019 and 2.0) has guided banks and financial institutions in managing ESG risks and scaling green finance. The Sri Lanka Green Finance Taxonomy (2022) clarified what qualifies as environmentally sustainable economic activity, reducing greenwashing and improving investor confidence.
More recently, the GSS+ Bond Framework (2025) introduced by the Colombo Stock Exchange expanded the market for Green, Social, Sustainability, and SustainabilityLinked bonds. Institutions such as DFCC Bank, Commercial Bank of Ceylon, and Bank of Ceylon have issued landmark green and sustainability bonds, signaling growing market maturity.

Linking Finance to Livelihoods

Sustainable finance is not an abstract global concept it directly affects livelihoods. When aligned with the Sustainable Livelihoods Framework (SLF), finance strengthens household resilience by enhancing financial, human, physical, natural, and social capital.
Crop insurance protects farmers from climate shocks. Green loans finance solar panels, reducing energy costs and foreign exchange pressure. Microfinance and SME lending support stable income generation, particularly in rural areas. In this way, sustainable finance reduces vulnerability while promoting inclusive growth.

The Role of ESG in Business and Banking

Environmental responsibility, social inclusion, and strong governance are no longer optional. Firms with strong ESG practices are better equipped to manage regulatory risks, attract investment, and withstand climaterelated shocks. For banks, ESG integration improves credit risk assessment and longterm portfolio stability.
Sri Lankan banks are increasingly embedding ESG into credit policies, developing green loan products, and supporting climatesmart agriculture, sustainable tourism, and SME development.

Preparing the Next Generation

Perhaps the most critical role of sustainable finance lies in shaping future decisionmakers. For students of economics, finance, and public policy, understanding sustainable finance is no longer a niche specialization it is a core competency.
Sustainable finance connects economics with ethics, growth with responsibility, and today’s decisions with tomorrow’s outcomes. As Sri Lanka charts its recovery path, sustainable finance offers not just a funding mechanism, but a vision for a more resilient, inclusive, and futureready economy.
The choices made today by banks, regulators, businesses, and graduates will determine whether Sri Lanka’s development is merely faster or truly sustainable.

Policy Recommendations for Advancing Sustainable Finance in Sri Lanka

To fully realize the potential of sustainable finance, Sri Lanka must move beyond frameworks and pilot initiatives toward systematic implementation. Several policy priorities deserve urgent attention.
First, strengthening regulatory integration is essential. Environmental, social, and climaterelated risks should be formally embedded into financial supervision and prudential regulation. Banks and financial institutions must be encouraged and where necessary required to incorporate climate and ESG risks into credit appraisal, stress testing, and capital adequacy assessments. This will improve financial stability while discouraging unsustainable investment.
Second, incentivizing green and social investments is critical. Targeted fiscal incentives, such as tax concessions, interest subsidies, or partial credit guarantees for green projects, can accelerate private sector participation. Priority should be given to renewable energy, climateresilient agriculture, sustainable tourism, and rural SMEs, where economic, social, and environmental returns are closely aligned.
Third, expanding access to sustainable finance in rural and vulnerable communities must be a central objective. Smallholder farmers, microentrepreneurs, and informal sector workers are often the most exposed to climate and economic shocks, yet face the greatest barriers to finance. Strengthening green microfinance, agricultural insurance, and blended finance mechanisms can enhance livelihood resilience while supporting inclusive growth.
Fourth, improving ESG disclosure and data transparency is indispensable. Reliable, standardized ESG reporting reduces information asymmetry, enhances investor confidence, and limits greenwashing. Developing a simplified ESG reporting framework for SMEs aligned with the national Green Finance Taxonomy would broaden participation without imposing excessive compliance costs.
Finally, investing in human capital and financial literacy is a longterm necessity. Sustainable finance cannot succeed without skilled professionals who understand the intersection of economics, finance, environmental science, and public policy. Integrating sustainable finance into university curricula, professional training, and public sector capacitybuilding programs will ensure that future decisionmakers are equipped to manage emerging risks and opportunities.
Sustainable finance is not merely a financial innovation; it is a policy imperative. The decisions taken today by regulators, banks, businesses, and educators will determine whether Sri Lanka’s growth path is resilient or fragile, inclusive or unequal. Sustainable finance offers a framework through which economic recovery can be transformed into longterm prosperity. The challenge now lies not in understanding its importance, but in implementing it with urgency and commitment.

By Prof. Shirantha Heenkenda
BA (Hons), PGD (Statistics), MSSc, MPP (GRIPS–Tokyo), PhD (Nagoya, Japan)