COLOMBO (EconomyNext) – Sri Lanka’s banks are considering incorporating environmental safeguards in lending to protect the island’s rich biodiversity, under threat by lax law enforcement and rapid economic growth.
Environmental damage caused by projects done by clients of financial sector institutions can lead to financial risks, Devaka Weerakoon, a conservation biologist whose research focuses on conservation of endangered species, told a group of bankers Friday.
Sri Lanka is a biodiversity ‘hotspot’ with high endemicity, since several plant and animal species are unique or native to the island and considered threatened or endangered, he explained.
These include 28 percent of flowering plants and 98 percent of freshwater crabs, of which 50 of 51 types are found only in Sri Lanka.
Weerakoon, a professor in the Department of Zoology, University of Colombo, said banks can impose conditions forcing borrowers "to do the right thing" in protecting natural eco-systems.
"You can adopt the ‘Triple Bottom Line’ approach in funding," he told the forum, referring to the accounting method that includes financial, social and environmental performance measures.
"You have the power to contribute in a massive way to the conservation effort," Weerakoon said.
"Banks are powerful. Nothing else can counter these people (who harm the environment). Without money they can’t do projects."
Weerakoon said bankers, when assessing lending proposals, should ask whether the proposed developments have fragmentation effect on forests and other habitats.
"Banks can introduce the principle of safeguards in their lending, such as no net loss in biodiversity."
Weerakoon advocated a two-pronged approach, rewarding borrowers who do show concern for environmental and social safeguards in their work and imposing conditions on those who do not that force them to adopt such safeguards.
"For instance, you can support borrowers who are already trying to reduce their carbon footprint," he explained. "If not, you can force them to internalise such safeguards."
He noted that lenders like the Asian Development Bank incorporate the costs of mitigating environmental damage in their lending, while the World Bank does not finance projects in critical habitats.
"You also need implementation mechanisms to see if clients are complying with environmental and social safeguards," Weerakoon said.
This was just like how banks assess borrowers’ ability to pay back loans, or risk assessment.
Weerakoon noted how companies like estate firms are "struggling to hold on to their forests" although their efforts are not helping their bottom line.
Loss of biodiversity means loss of eco-system services such as supply of food which create risks for business.
One was operational risk, where for instance an industry like tourism can suffer from reduction in services caused by degradation of eco-systems.
"Take the Minneriya elephant gathering," Weerakoon said, referring to an annual elephant gathering at an irrigation reservoir in the eastern side of the island that’s become a tourist attraction.
"If elephants disappear we can no longer brand it."
Regulatory risks arise when governments tighten regulations in response to environmental damage, reducing productivity.
Then there’s market risk where people are concerned about what they buy such as consumers rejecting products and services from polluters.
Reputational risk can arise if firms operate in a negative manner.
Weerakoon took the example of the tanning industry saying; "However much they try to observe environmental safeguards they are looked upon as negative. It’s the same with the oil industry. The bad behaviour of a few players can tarnish the entire industry."
All these risks add up to financial risks for banks, he said.