Sustainable Finance Activities of Licensed Banks

22 Jtne2022
CENTRAL BANK OF SRI LANKA
BANK SI'PERVISION DEPARTMENT
BANKING ACT DIRECTIONS No.05 of2022 SUSTAINABLE FINANCE ACTIVITIES OF LICENSED BANKS The Central Bank of Sri Lanka (CBSL), having considered the importance trf committing to achieving the Sustainable Development Goals of United Nations and the need to transit towards a green, inclusive, and balanced economy in Sri Lanka, published the Road Map for Sustainable Finance in Sri Lanka in 2019. The Road Map provides a broader direction to financial regulators and financial institutions to effectively manage environmental, social and govemance (ESG) risks associated with projects they finance and promote assistance to businesses that are greener, climate-friendly, and socially inclusive. The Road Map, required to establish a classification and measurement system for sustainable activities, i.e., a taxonomy, for Green Finance activities in Sri Lanka with the support of all stakeholders. The Sri Lanka Green Finance Taxonomy was published by CBSL on 06 May 2022. Considering the national importance ofpromoting sustainable financing initiatives and the need for providing a govemance and risk management framework for licensed banks in respect of sustainable finance activities, the Monetary Board hereby issues the following Directions on Sustainable Finance activities in licensed commercial banks and licensed specialised banks, hereinafter referred to as licensed banks, with a view to facilitating a sustainable economy and promoting the sustainable finance practices of licensed banks, in line with Sustainable Finance Road Map of CBSL.

1. Empowerment 1.1 In terms of Section a6(1) of the Banking Act, in order to ensure
   the soundness of the banking system, the Monetary Board is empowered to issue Directions to all licensed commercial banks, regarding the manner in which any aspect of the business of such banks is to be conducted.
   1.2 In terms of Section 76J (l) of the Banking Act, the Monetary
   Board is empowered to give Directions to licensed specialised banks or to any category oflicensed specialised banks, regarding the manner in which any aspect of the business of such banks is to be conducted.

22 June2022
CENTRAL BANK OF SRI LANKA
BANK SUPERVISION DEPARTMENT
BANKING ACT DIRECTIONS No.05 o12022
2. Applicability
3. Sustainable
Finance
Initiatives
4. Identified
Priority
Sectors
3.1
3.2 a1J.J
2.1 These Directions shall be applicable to all licensed banks.
Licensed banks shall identif,z and develop appropriate guidelines to conduct its business activities in a sustainable manner. Licensed banks shall develop innovative financial solutions to support sustainable initiatives. Licensed banks shall consider raising funds via instruments such as green/sustainable bonds and allocate such funding to invest in/fund sustai nable activities. The following sectors/activities are identified as priority sectors to provide sustainable lending facilities by licensed banks:
Identified Sectors Prioritized Sub Sectors Agriculture, forestry and logging Sustainable agriculture, forestry development Manufacturing Energy saving machinery/ equipment Electric power generation, transmission and distribution Renewable energy projects Transportation and storage All forms of sustainable transport and storage Water supply, sewerage and waste management Water supply/management projects, Waste management projects Construction Green construction proj ects Sustainable Tourism an( recreation All sustainable tourism an( recreational activities Other Sectors Gas, steam and air conditioning supply, Financial Services, Information and communications technology, Sustainable Women Empowerment initiatives etc. 4.1

22 Jtne2022
CENTRAL BANK OF SRI LANKA
BANK SUPERVISION DEPARTMENT
BANKING ACT DIRECTIONS No.05 of2022
4.2 Licensed banks shall consider the applicable environmental/climate
adaptation and mitigation aspects, social imfact, regulations, certifications, and relevant external and internal guidelines on sustainable activities granting funding to above priority sectors and reporting above information. Licensed banks shall ensure the compliance with the requirements of the Sri Lanka Green Finance Taxonomy when identifying the above priority sectors and activities. Board of Directors (BOD) and senior management shall ensure effective and efficient overseeing of the Sustainable Finance activities and a BOD approved policy at a minimum shall include the following:
(a) clear roles and responsibilities of BOD and senior management on overseeing of the bank's environmental and social risks and sustainable business activities; (b) identify main risks for the licensed bank on environmental aspects and green and climate financing activities; (c) ensuring that sustainable financing activities and identified environmental risks are addressed in the bank's overall risk management framework; (d) policies and processes to assess, monitor, review and report such risks; (e) parameters and metrics for measuring the progress of sustainable finance initiatives; and (f) appropriate internal controls to be in place. The Chief Executive Officer and relevant Key Management Personnel of licensed banks under the guidance provided by BOD shall ensure:
4.3
5. Governance 5.1
Framework for
Sustainable
Finance
Initiatives
5.2

22 Jane2022
CENTRAL BANK OF SRI LANKA
BANK SUPERVISION DEPARTMENT
BANKING ACT DIRECTIONS No.05 of2022
6. Risk 6.1
Management
(a) policies, tools, metrics, operational procedures and controls implemented by the bank in respect of sustaiRable finance are reviewed and updated regularly (at least annually) and integrated with other relevant policies and procedures of the bank; (b) adequate resources, skills and expertise are allocated to the management of sustainable finance activities; (c) clear articulation of the roles and responsibilities of business units and functions in managing risks associated with sustainable finance; and (d) BOD is informed in a timely manner on material issues, relating to sustainable financing and business practices. Licensed banks shall identify and evaluate the risks stemming from associated climate, environmental and other green financing activities considering the nature, scale, complexity, and interconnectedness of its operations and assess the magnitude and materiality of such risks. Licensed banks shall incorporate ESG risk management to the entire decision-making processes, including environmental and social policies, risk assessment, environmental and social covenants. A11 material risks, defined in Direction 6.1 above, shall be considered in the Pillar II assessment under Capital requirements for the licensed banks. Licensed banks shall identi$, how risks identified in Direction 6.1 will affect its business model and assess the potential impact on the bank. 6.2 6.3 6.4

22 June2022
CENTRAL BANK OF SRI LANKA
BANK SUPERYISION DEPARTMENT
BANKING ACT DIRECTIONS No.05 of2022 6.5 6.6 7.1 Licensed banks shall implement effective risk management practices and intemal controls to mitigate risks"in Direction 6.1 above. Licensed banks may conduct scenario analysis and stress testing to assess the impact of potential/alternative climate related risks and green fi nancing activities. Licensed banks are expected to build capacity on Sustainable Finance activities going forward providing adequate training to staff members. Licensed banks are expected to develop and provide new innovative sustainable finance solutions to customers. Licensed banks shall develop expertise in environmental stress testing and scenario analysis, whilst obtaining appropriate external expertise on environment and climate related risk aspects. Licensed banks shall disclose the following information related to sustainable finance practices in their annual reports:
(a) Al overview on bank's sustainable finance policies and activities; (b) Identified sustainable finance related risks and associated mitigation measures; and (c) A statement on banks approach towards sustainable finance activities and way forward. Licensed banks are encouraged to disclose environmental and social impact generated from business activities using intemationally recognized reporting frameworks, such as Global Reporting Initiative (GRD and recommendations ofthe Task Force on Climate-related Financial Disclosures (TCFD).
7. Capacify
Building and
Innovation
8. Disclosures and
Reporting
7.2
7.3
8.1
8.2

22 Jtne2022
CBNTRAL BANK OF SRI LANKA
BANK ST]PERVISION DEPARTMENT
BANKING ACT DIRECTIONS No.05 of2022
8.3 Licensed banks shall submit the information required as per Annex
I to the Bank Supervision Department within 30 days from the end ofeach quarter. Dr. P Nandalal Weerasinfhe r ) Chairman of the Monetary Board and Governor of the Central Bank of Sri Lanka

22 June2022
CENTRAL BANK OF SRI LANKA
BANK SI]PER'ISION DEPARTMENT
BANKING ACT DIRECTIONS No.05 of2022
Annex I
Quarterly Statement on Sustainable Financing Activities of Licensed Banks
As at .. .. ....
Name of the Licensed Bank -
Email to Bank Supervision Department, Database - bsddb@obs1.lk, within 30 days from the end of each quarter I Sector Sub Sector (Identify as defined in Sri Lanka Green Finance Taxonomy for applicable facilities) No. of Credit Facilities Value of Outstanding Credit Facilities as at Q... XX No of New Credit F acilities granted during Q....XX Value of the new Credit Facilities granted during Q...XX I Agriculture, Forestry and Logging Sustainable Asriculture Forestrv and Lossins Other Sustainable Activities 2 Manufacturing Energy saving machinerv/eouioment Other Sustainable Manufacturing J Electric power generation, transmission and distribution Renewable energy proiects Other Sustairable Activities 4 Transportation and storage All forms of sustainable Transportation and storage 5 Water supply, sewerage and waste management Water supply/management oroiects Waste management projects Other Sustainable Activities 6 Construction Green construction proj ects Other Sustainable Activities 1 Sustainable tourism and recreation All sustainable tourism and recreation activities 8 Other Sectors Gas, steam and air conditionins supply Financial Services Information and communications technolosy Sustainable Women empowerment initiatives, if not covered under any other a{ea Other Sustainable Lending (Please SpecifV) Total