Sri Lanka faces growing climate threats amid low stakeholder literacy and financial readiness

Sri Lanka should prioritise and provide greater incentives for climate risk adaptation projects over mitigation, given its high vulnerability to climate impacts such as rising sea levels, floods, and droughts  

Though Sri Lanka has developed robust climate policies and has access to technical expertise and institutional frameworks, a significant gap remains in the availability of practical skills and capacities required to address climate change and mobilise adequate funding effectively. The slow progress of the green bond market exemplifies this challenge; despite the Colombo Stock Exchange expressing ambitions to promote sustainable finance, market activity remains limited. Many corporates and financial institutions still approach climate finance with a cautious, self-paced attitude, lacking the urgency and technical capability to structure and issue green financial instruments

Sri Lanka’s climate crisis has intensified rapidly, far surpassing the current levels of stakeholder awareness and capacity to finance essential mitigation and adaptation efforts. As the country faces escalating risks from extreme weather, rising temperatures, and greenhouse emission levels a critical question arises: Are we ready to bridge this widening gap and take decisive action before it’s too late? The climate crisis is no longer a distant threat. Its impacts are here, and they are happening now affecting people around the world on a daily basis. The need to raise ambition for climate action is more urgent than ever. The projected economic losses that can be avoided by 2100 by realising a 1.5°C warming scenario are estimated to be five times greater than the climate finance needed by 2050 to achieve it.

The Central Bank of Sri Lanka (CBSL) launched its Sustainable Finance Roadmap 2.0 on 5 April. Governor Dr. Nandalal Weerasinghe emphasised that “extreme weather events are no longer anomalies they are the new normal. Sustainable finance is not optional; it is a global imperative and a national necessity.” Sri Lanka estimates that it must mobilise $ 10.85 billion by 2030. Mobilising these resources remains a formidable challenge, given the country’s constrained fiscal space, external debt obligations, and ongoing commitments under the IMF-supported program. We still have five more years to meet our targets. Bridging this gap will necessitate a strategic shift toward more innovative and diversified financing solutions.

Although Sri Lanka has developed a range of acts, plans, and strategies, the critical question is whether we possess a clear, actionable plan and a cohesive strategy to effectively mobilise the required resources and deliver on our climate commitments. In the absence of a well-coordinated, results-driven approach, one that integrates fiscal planning, leverages private sector participation, and strengthens international cooperation, there is a significant risk that the country will fall short of its climate and development objectives at a time when decisive and unified action is imperative. A notable example, as highlighted in recent newspapers, is the continued struggle of authorities to resolve the ownership and institutional responsibility of the Vehicular Emission Trust Fund (VETRF). If we are still entangled in such basic governance issues, how can we realistically expect to move beyond fragmented, inconsistent approaches and make real progress on our climate agenda?

The danger and gravity of the climate risk impacts are shown in the following information.

• Climate refugees: By 2050, an estimated 200 million people may be displaced due to climate-related events. (UNHCR)
• Economic costs: Climate disasters cost the global economy $ 210 billion in 2022 alone. (Munich Re, 2023)
• Rising inequality: Low-income countries, which contribute just 1% of global emissions, bear 80% of climate disaster costs. (World Bank)

While Sri Lanka has established key frameworks such as the Sustainable Finance Taxonomy, Nationally Determined Contributions (NDCs), and the National Adaptation Plan (NAP) to align with the Paris Agreement, a comprehensive and well-structured funding plan to effectively implement these commitments remains inadequate. Although institutions like the Sri Lanka Climate Finance Fund (SLCF) and the Climate Change Secretariat under the Ministry of Environment provide a foundational structure, the financial resources currently available both domestic and international are insufficient to fully achieve the targets outlined in the NDC. 

Existing allocations are largely skewed towards mitigation efforts, particularly renewable energy investments, while critical adaptation priorities, which are central to Sri Lanka’s climate resilience, receive limited funding. To bridge this gap, the country must adopt a practical and implementable climate finance strategy that ensures balanced resource allocation, mobilises private sector investment, leverages international climate funds, and explores innovative domestic financing instruments such as green bonds, environmental levies, and blended finance mechanisms.

Investor confidence in Sri Lanka’s renewable energy sector, especially solar and hydropower, has been eroded by policy inconsistency, delays in Power Purchase Agreements (PPAs), weak feed-in tariffs, and unclear net metering rules. These issues are worsened by bureaucratic inefficiencies and the influence of vested interests, often referred to as the so-called energy “mafia,” which collectively create a climate of uncertainty and resistance to reform. Without transparent, stable, and investor-friendly policies, private capital will continue to shy away from jeopardising the country’s climate targets and clean energy transition. Urgent reforms are needed to restore trust, attract investment, and build a credible path toward sustainable development.

Approaches to mobilising climate finance

To address the growing threats of climate change, Sri Lanka must secure reliable and sustained investment in both mitigation and adaptation efforts. This article outlines strategic proposals, based on my own research and insights, along with relevant international best practices, to guide the effective mobilisation of climate finance in Sri Lanka. These recommendations are intended to support policymakers, financial institutions, and key stakeholders in advancing a more resilient and climate-ready future.

Tax incentives and other incentives for private sector investment in climate projects

• Governments should develop a robust fiscal policy framework that includes tax incentives for corporations and private investors who allocate capital toward climate-related projects. These may include:
• Tax deductions for investments in renewable energy, green infrastructure, or climate-smart agriculture.
• Accelerated depreciation for climate technologies. Accelerated depreciation is a tax incentive that allows businesses to deduct the cost of eligible assets more quickly than under the traditional straight-line depreciation method. When applied to climate technologies, it provides financial relief in the early years after investment, improving project cash flows and reducing the payback period.
• Tax credits or rebates for corporate participation in carbon markets or energy efficiency programs.
• Co-financing: Provision of co-financing covering up to 50% of the total investment cost, or alternatively, a discount on electricity bills equivalent to 20% of the annual energy savings, aimed at incentivising investments in energy-efficient technologies

Such incentives can significantly reduce the perceived financial risks and encourage the private sector to participate more actively in climate solutions.

Strategic engagement with large-scale philanthropic capital

Philanthropic foundations are increasingly playing a transformative role in funding climate action. Bloomberg Philanthropies, Ballmer Group, The Bill& Melinda Gates Foundation, Rockefeller Foundation, etc. According to the Climate Policy Initiative (CPI), the private sector manages an estimated $ 210 trillion in assets globally. Yet, only $ 625 billion, or 0.3% is directed toward climate action. This highlights a massive untapped opportunity to mobilise private finance for climate solutions. Governments should:

• Establish formal dialogue mechanisms with major global and regional philanthropic entities.
• Develop co-financing frameworks where public and philanthropic funds are jointly deployed.
• Highlight priority climate sectors where philanthropic support can create catalytic impacts, such as community adaptation, coastal resilience, and clean tech innovation.
• Sri Lanka’s government should proactively explore strategic partnerships with global philanthropic institutions like the Bill & Melinda Gates Foundation, especially in light of their recent announcement to invest $ 200 billion in South Africa over the next 20 years for health and wellbeing.

Develop and deploy climate finance instruments and products

Develop and deploy climate finance instruments and products, including thematic bonds, blended finance structures, debt-for-nature and debt-for-climate swaps, results-based climate finance (RBCF), Bilateral and Multilateral debt swaps, International guarantees, and Debt buy-backs.

The use of innovative financial instruments such as green bonds, sustainability-linked bonds, and climate resilience bonds can provide long-term, low-cost capital for climate infrastructure. In addition, blended finance the strategic use of public or philanthropic funds to de-risk private investments should be promoted. The Multilateral Investment Guarantee Agency (MIGA), for example, provides guarantees covering country and contract risks to encourage investment in developing countries. Sri Lanka must urgently establish transparent, stable, and investor-friendly policies not only to attract traditional private investment but also to raise catalytic capital that can de-risk projects, crowd in further funding, and accelerate the country’s clean energy transition.

Strengthening climate data infrastructure and corporate disclosure standards, effective tracking and monitoring system

Reliable and transparent climate-related data is foundational to mobilising climate finance. Establish a centralised climate data repository that supports project developers, investors, and regulators. Mandatory corporate climate-related financial disclosures are aligned with global frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD) or the International Sustainability Standards Board (ISSB). Promote ESG (Environmental, Social, and Governance) reporting requirements for publicly listed companies and financial institutions. These actions will improve market confidence, reduce information asymmetry, and foster accountability in climate-related investments.

Apart from these, a centralised and independent authority should be established to systematically track, monitor, and verify climate-related projects and associated funding flows. This entity would play a critical role in enhancing transparency, ensuring accountability, and standardising certification processes across diverse climate initiatives. Maintaining a registry of projects, overseeing the deployment and effectiveness of climate finance, and implementing rigorous, science-based certification standards, would mitigate the risks of greenwashing and fragmented reporting. This would certainly support informed decision-making, build stakeholder trust, and strengthen the overall integrity and impact of global climate action.

Implement a one-off “windfall tax”, carbon tax, emission trading systems (ETS), and removal of fossil fuel subsidies

In extraordinary economic conditions such as during energy crises or geopolitical disruptions, some corporates record supernormal or windfall profits. Introducing a temporary windfall tax on such profits, such tax proceeds directly into a national climate fund, earmarked for climate adaptation, disaster risk reduction, or vulnerable communities. This measure ensures that corporates benefiting from crisis-induced profits contribute fairly to public climate resilience.

Industries should be categorised based on their carbon emission intensity, with differentiated carbon tax rates applied according to their environmental impact higher rates for more carbon-intensive sectors and lower rates for cleaner industries.

Alongside this, implementing an emissions trading system (ETS), also known as a cap and trade system will encourage cost-effective reduction of emissions by allowing companies to buy and sell carbon allowances, promoting both economic efficiency and investment in greener technologies.

Foreign missions must be strategically empowered to play a more proactive role in climate finance mobilisation

Diplomatic missions abroad can serve as powerful conduits for international climate finance. Set Key Performance Indicators (KPIs) for embassies and consulates, focused on mobilising sustainable finance and philanthropic capital. Equip foreign missions with technical expertise and deal facilitation tools to engage with international investors, development banks, and climate-focused philanthropies. Integrate climate finance objectives into broader trade and economic diplomacy agendas. This approach can help diversify funding sources and strengthen climate partnerships globally.

Mandatory green finance targets for banks, financial institutions and corporates

Financial institutions have an important duty to align their portfolios with climate goals. Without proactive climate-aligned financing, they risk stranded assets and may face substantial provisioning. Asset valuations particularly for climate-exposed properties will increasingly reflect environmental risks, with uncertain resale values over the next 5–10 years. Therefore, Financial Institutions should accelerate the mobilisation of climate finance and channel it toward bankable, sustainable, future-ready investments.

In addition to the measures outlined in the Sustainable Finance Roadmap, future policies should mandate that commercial banks and non-banking financial institutions (NBFIs) raise a defined portion of their Tier 2 capital through green financial instruments, such as green bonds or green debentures. This would not only strengthen capital adequacy but also align capital-raising activities with sustainable development goals.

The Colombo Stock Exchange (CSE) and financial regulators should actively promote the issuance of green stocks and bonds by reducing regulatory fees, simplifying listing procedures, and offering targeted incentives such as capital gains tax exemptions on green securities. A designated portion such as 30% to 40% of capital raised should be allocated to foreign investors.

Effective Public Financing Management (PFM) and Private Investment Management (PIM) focus on climate risk

Governments must institutionalise Climate Sensitive Budgeting (CSB) to align fiscal policies with environmental priorities. Furthermore, a mandated share of corporate tax revenues should directly support a transparent and accountable Climate Fund to ensure consistent financing for national adaptation and mitigation strategies. A portion of compulsory corporate tax should be allocated to a dedicated Climate Fund.

Sri Lanka should prioritise and provide greater incentives for climate risk adaptation projects over mitigation, given its high vulnerability to climate impacts such as rising sea levels, floods, and droughts. While mitigation remains important globally, for Sri Lanka, adaptation offers more immediate and localised benefits protecting lives, livelihoods, and infrastructure. Redirecting public finance, concessional loans, and corporate tax incentives toward climate-resilient agriculture, coastal protection, water management, and health systems will build long-term resilience. By aligning national planning with these priorities, Sri Lanka can attract targeted international support and position itself as a leader in climate adaptation within the Global South.

Attract and motivate foreign remittances towards investing green infrastructure and green banking products

Foreign remittances play a vital role in economies like Sri Lanka, which recorded $ 3 billion last five months which is a notable and positive sign. The impacts of climate change are most severely experienced at the community level especially among families and dependents in rural areas with limited capacity to adapt. To build climate resilience, banks, and the private sector should create market-based mechanisms that enable remittance senders and their families to invest directly in climate-resilient infrastructure such as prefabricated resilient housing, water storage tanks, and sanitation facilities. These investments should be supported with low-interest financing to improve accessibility. Additionally, support for environmentally sustainable agriculture should be promoted to protect the environment while strengthening rural livelihoods.

Send a strong message to all stakeholders and expedite stakeholder engagement

Though Sri Lanka has developed robust climate policies and has access to technical expertise and institutional frameworks, a significant gap remains in the availability of practical skills and capacities required to address climate change and mobilise adequate funding effectively. The slow progress of the green bond market exemplifies this challenge; despite the Colombo Stock Exchange (CSE) expressing ambitions to promote sustainable finance, market activity remains limited. Many corporates and financial institutions still approach climate finance with a cautious, self-paced attitude, lacking the urgency and technical capability to structure and issue green financial instruments. To overcome this, targeted capacity-building initiatives are essential particularly for financial sector professionals, regulators, and project developers to enhance understanding of climate finance tools, improve project bankability, and accelerate access to domestic and international funding sources.

Commence awareness at school level

Integrating climate change education including climate finance, sustainability, and green economy concepts into the national school curriculum is essential. Awareness of key Sustainable Development Goals, especially SDG 13 (Climate Action), remains low among students and the general public. Introducing these topics early will help develop a generation that is knowledgeable, skilled, and prepared to take meaningful climate action and foster strong partnerships for sustainable development. This foundation is crucial for building a more climate-resilient and sustainability-focused society.

Conclusion

Sri Lanka is at a critical juncture. The climate threat is real and growing, while our readiness remains insufficient. The country has laid the groundwork with strong policies and institutional frameworks, but implementation requires robust finance, skilled human resources, and investor confidence. A business as usual approach will no longer suffice. We must act now to scale up climate finance, prioritise adaptation, and provide clear, consistent signals to investors and citizens alike. Only through a holistic, forward-thinking approach can Sri Lanka build the resilience it needs to survive the climate crisis and thrive in a sustainable and inclusive future.

(The writer is a senior financial professional. He can be contacted via email: [email protected].