Did ESG Play A Role In Sri Lanka's Economic Destruction?

Published on: 01 August 2022
by Zara Ali
sri lanka and esg

Following the devastation caused by a supposedly climate-friendly ban on artificial fertilisers, many have resorted to using "ESG”, "Green Terrorist, and other fascinating terms to describe the recent developments in Sri Lanka. But did ESG-friendly policies really lead to the government's breakdown and the departure of the country's President?

Well, the answer is NO. ESG (environmental, social, and governance) principles did not bring down a national government, despite widespread speculation that chemical fertiliser bans were to blame.

Political Nepotism: The Beginning of the End

Following decades of budgetary and economic incompetence, Sri Lanka's government collapsed due to a rise in autocratic rule by the state. Although President Rajapaksa was elected via a democratic process, Rajapakse's brother, who was also the former President, was appointed Prime Minister immediately after the election, cementing the family's grip on power.

After that, the President proposed constitutional amendments that would have increased the authority of the presidency at the expense of the fundamental checks and balances that come with a robust legislative and judicial system. This resulted in an already agitated and resentful populace, fed up with suppression, ready to take action.

Debt, Terrorism, Rushed Policies, and Pandemic: Leading to Collapse

The World Bank and Cornell University have identified three critical factors that contributed to Sri Lanka's economic collapse:

  • A foreign exchange crisis;

  • A huge foreign debt load;

  • The outrageousness of the too-rapid adoption of a ban on chemical fertilisers, among others.

Sri Lanka's foreign exchange difficulty arises from persistent terrorist challenges, requiring swift actions. After a terrorist assault in 2019, the country's tourist industry, a major source of revenue, was destroyed. Travel and tourism were further harmed by the COVID outbreak, while the government used its foreign exchange reserves to satisfy its international debt commitments.

Embracing ESG ‘Politically’

Now, let's get to the core of the matter: the government's feigned embracing of environmental, social, and governance principles (ESG).

There was no complete adoption of ESG principles. Regulations governing rural labourers' wages and working conditions, and government agencies tasked with upholding these rules and safeguarding workers' rights would have been put in place if there had been such a law. That never occurred. 

According to a report in the New York Times, President Mahinda Rajapaksa outlawed the use of chemical fertilisers to the extent that only naturally grown produce was allowed to enter the country's markets. Any policy announced without sufficient planning and support will possess an element of surprise. History also demonstrates that such a jolt to a big part of an already unstable economy with inherent structural difficulties will almost surely have an exceptionally terrible impact. Undoubtedly, this was the scenario in Sri Lanka. 

It's important to remember that the fundamental causes of the Sri Lankan crisis, notably excessive external debt and dwindling foreign exchange reserves, have nothing to do with ESG principles. 

In a nutshell, the answer to the question about ESG's role in the economic downfall of Sri Lanka is "No, ESG did not bring Sri Lanka's government to its knees." The poor implementation of ESG principles and short-sighted policies made people question the role of ESG in Sri Lanka's ongoing crisis. Still, the truth is that a democratically elected government wanting aristocratic control hauled a once-growing economy through the dark alleys of economic meltdown. 

We hope Sri Lanka will recover from its condition and again emerge as a growing economy. Embracing ESG is the right way for every nation to ensure a greener future. However, implementing it without planning for the shock value would certainly yield ruined economies and social unrest.

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