ANALYSIS · ESG · 8 min read
The Half of the Economy That ESG Rules Don’t Reach
Mandatory sustainability disclosure has arrived for Sri Lanka’s listed companies. But listed companies are a small slice of the economy. The businesses that make up more than half of GDP report their environmental and social impact — if at all — through an entirely different, voluntary system. The result is two parallel ESG worlds that cannot be added together.
By the ESGNexus Editorial Team · July 2026 · Estimated reading time: 8 minutes
KEY TAKEAWAYS
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Sri Lanka has spent the past two years building a robust sustainability disclosure regime. SLFRS S1 and S2 — the localised versions of the global ISSB standards — now require the country’s listed companies to report their sustainability risks and impacts under a common, investor-facing standard. It is a genuine step forward. But it has a rarely stated boundary: it applies only to companies listed on the Colombo Stock Exchange. Everyone else — that is, most of the economy — is outside of it.
The Boundary Nobody Names
Consider the arithmetic. The Colombo Stock Exchange lists fewer than 300 companies. The Asian Development Bank estimates that small and medium-sized enterprises account for around 75% of all enterprises in Sri Lanka, provide about 45% of employment, and contribute roughly 52% of gross domestic product. Add large privately held firms — which are also unlisted and equally outside the mandatory regime — and the picture is stark: the disclosure rules that Sri Lanka is rightly proud of apply to a minority of economic activity, while the majority reports its environmental and social footprint without any obligation at all.
Source: Asian Development Bank, ‘Catalyzing SME Venture Capital in Sri Lanka’ — adb.org; Colombo Stock Exchange, cse.lk
This is not an argument that SLFRS is flawed. A disclosure standard must start somewhere, and starting with listed companies — where investor demand and enforcement capacity are concentrated — is sensible. The point is subtler and more consequential: because the standard stops at the listing boundary, the country has no comparable, aggregated picture of the environmental and social impact of the half of its economy that lies on the other side of that line. We can increasingly tell you the carbon footprint of a listed conglomerate. We cannot tell you, in any comparable way, the aggregate footprint of the tens of thousands of small enterprises that together do more.
It Is Not a Void — It Is a Parallel System
It would be easy, and wrong, to say that unlisted businesses simply do nothing. They are not a blank space. Over the past several years, a real voluntary infrastructure has grown around SME sustainability — most visibly in tourism. The Sri Lanka Tourism Development Authority, with technical and financial support from the United Nations Development Programme, launched a National Sustainable Tourism Certification scheme based on the Global Sustainable Tourism Council’s criteria. Reportedly the first government-led scheme of its kind, it began with a pilot for hotels in 2019 and has since certified over 100 small and medium tourism enterprises, with related programmes (Green Destinations’ Good Travel Seal, Travelife) certifying hundreds more. In May 2026, a dedicated Sustainable Tourism Association of Sri Lanka was launched.
Source: UNDP Sri Lanka, ‘National Sustainable Tourism Certification Scheme’ press releases, 2019 and 2024 — undp.org; GSTC, ‘SLTDA Awards Hotels through the NSTC,’ 2019 — gstc.org
This is meaningful work and deserves credit rather than dismissal. But it is a fundamentally different instrument from mandatory disclosure, and the difference matters. Certification is voluntary: a business opts in. It is a badge of effort and practice, awarded against a set of criteria, rather than a standardised, quantified, comparable dataset of a company’s emissions, water use, or social metrics. Two certified hotels both hold the same badge; that badge does not tell you which has the larger footprint, by how much, or whether either is improving year on year. Certification signals commitment. Disclosure produces comparable data. They are not substitutes.
| “Certification tells you a business is trying. Disclosure tells you what its impact actually is. A country needs both — and Sri Lanka currently mandates neither for most of its economy.” — ESGNexus |
The result is two parallel ESG universes that do not connect. On one side, a few hundred listed companies produce standardised, increasingly assured, investor-facing disclosures under SLFRS. On the other hand, a large and growing number of unlisted businesses whose sustainability information — where it exists — takes the form of voluntary certifications that cannot be aggregated into a national picture or compared like-for-like. There is no bridge between the two systems, and no mechanism to roll the second into anything resembling the first.
Tourism: The Same Industry, Two Disclosure Worlds
Nowhere is this split clearer than in tourism — which is not a coincidental example but the heart of the SME economy. Roughly three-quarters of Sri Lanka’s SMEs operate in tourism, with hotels and homestays accounting for about a third and spas and Ayurvedic providers for another sizeable share. It is also the sector where the two disclosure worlds sit side by side most visibly.
Source: UNDP Sri Lanka, NSTCS 2024 (citing ADB SME data) — undp.org
At one end are the large, listed hospitality operators — the hotel arms of the country’s biggest listed groups — now inside the mandatory SLFRS regime, producing standardised sustainability disclosure alongside their financial reporting. At the other end are the thousands of boutique hotels, guesthouses, villas, and homestays that define much of Sri Lanka’s tourism appeal and are, almost all, privately held and unlisted. A handful hold voluntary certifications. The overwhelming majority report nothing in any standardised form — not because they cause no impact, but because nothing requires them to measure it.
Their impact is real and intuitive. A small hotel consumes water, energy, and food; generates waste; and, if sited on a coast or near a wildlife area, can press directly on sensitive ecosystems. Multiply one modest property by many thousands, and the aggregate is not trivial. Yet that aggregate is precisely what no dataset captures. The listed hotel’s footprint is increasingly on record. The far larger tail beside it is not.
Where Mandatory and Voluntary Diverge
| Mandatory disclosure (SLFRS) | Voluntary certification (GSTC / NSTCS) | |
| Applies to | CSE-listed companies | Any business that opts in |
| Nature | Standardised, quantified disclosure | Criteria-based badge of practice |
| Comparable? | Yes — common standard, year on year | Limited — signals effort, not measured impact |
| Can be aggregated? | Toward a national/sector picture | Not readily |
| Covers | A minority of economic activity | A self-selecting subset of the majority |
Note: the two systems are complementary in intent but not interchangeable. Certification schemes such as NSTCS represent genuine progress for SME sustainability; the limitation described here is structural, not a criticism of those schemes.
Why This Is the SMEs’ Problem, Not Just the Country’s
There is a version of this argument that is purely a matter of national statistics, and it would be worthy but easy to ignore. There is a sharper version that speaks directly to the SME owner, and it is the one worth hearing: measurement is quietly becoming a condition of market access.
Global buyers and international travellers increasingly select verifiable sustainability credentials. Sri Lanka’s own apparel sector has already lived this — its access to European and North American buyers is now bound up with demonstrable ethical and environmental performance, not just price. The same pressure is arriving in tourism, where sustainability-conscious travellers and the platforms that route them favour operators who can prove their practices. In that environment, an SME that cannot measure or demonstrate its footprint is not merely environmentally unknown. It is a business at a growing commercial disadvantage against peers who can.
Source: ESGNexus analysis; Joint Apparel Association Forum commentary on sustainability and market access, 2025 — esgnexus.lk
This reframes the question from obligation to self-interest. The reason a boutique hotel or a small manufacturer starts measuring is not that a regulator demands it — none does. It is that the buyers, lenders, and travellers it depends on are beginning to. Voluntary certification is the accessible first step on that ladder, which is exactly why the NSTCS and similar schemes matter. But the direction of travel points beyond badges, towards the day when comparable data becomes the expectation rather than the exception.
What ESGNexus Will Track
The listed-company disclosure story is well underway, and we will continue to follow it. But the larger, harder story is the other half of the economy — the SMEs and unlisted firms that account for most of Sri Lanka’s employment and output, and for most of its unmeasured environmental and social impact. We will track how the voluntary certification ecosystem develops, whether a bridge emerges between it and the mandatory regime, and how sustainability shifts from a compliance question for the few to a competitiveness question for the many. To follow this coverage, subscribe to The ESGNexus Weekly.
Sources & Further Reading
Asian Development Bank — ‘Catalyzing Small and Medium-sized Enterprise Venture Capital in Sri Lanka’ — adb.org
UNDP Sri Lanka — ‘National Sustainable Tourism Certification Scheme awarded to 100 SMEs,’ 2024 — undp.org
UNDP Sri Lanka — ’37 hotels to be recognised for sustainable practices by SLTDA,’ 2019 — undp.org
Global Sustainable Tourism Council — ‘SLTDA Awards Hotels through the NSTC,’ 2019 — gstc.org
Green Destinations — ‘Sri Lanka case studies’ (Good Travel Seal, 200 MSMEs; Sigiriya) — greendestinations.org
SLTDA / USAID — ‘Sustainability Standards and Initiatives Reference Book,’ 2023 — sltda.gov.lk
ESGNexus — ‘Sri Lanka’s Mandatory Sustainability Reporting Is Here,’ June 2026 — esgnexus.lk
ESGNexus — ‘What Is ESG? A Complete Guide for Sri Lankan Businesses,’ July 2026 — esgnexus.lk
| About ESGNexus
ESGNexus is Sri Lanka’s independent platform for ESG, CSR, and sustainability intelligence. We track company-level ESG performance, regulatory developments, and sustainability data across Sri Lanka’s listed companies, large unlisted corporates, and state-owned enterprises. All editorial content is independently produced. Sponsored content is clearly labelled. |