A Background Policy Paper on Green Financing in Nepal

13 Feb 2024
Executive Summary

Despite the impacts of COVID-19 on human health and economy, green finance is gaining increasing momentum around the world, including in the Asia & Pacific region, as a strategy to move countries towards a low-carbon economy cost effectively. In this context, Nepal has a unique opportunity to capitalize on this wave of green finance by resolving the barriers, innovating financial tools and technology and establishing effective partnerships globally, regionally and locally moving forward.

In Nepal, the current development of green finance is largely regulatory driven. At the same time, several Banks and Financial Institutions (BFIs) are also raising ambition by partnering with international institutions and developing green finance instruments. Other than a myriad of national level policies, frameworks and guidelines––such as Nepal’s Nationally Determined Contribution (NDC) to the Paris Agreement––the “Guidelines on Environmental and Social Risk Management for Banks and Financial Institutions (ESRM)” adopted by Nepal Rastra Bank (NRB) in 2018 and the subsequent directives for implementation have been the guiding force behind Nepal’s regulatory driven approach to green finance. According to the Sustainable Banking Network,1 Nepal’s progress is largely regulatory driven and has evolved into the “Implementation Stage” towards a sustainable financial system. As next steps, Nepal is gearing towards the adoption of a national green finance roadmap and the issuance of its first green bond.

A International Finance Corporation (IFC) study from 2017 estimates a total climate-smart investment opportunity of USD 46 billion in Nepal from 2018 to 2030 which can be unlocked through green finance.2 This is in the backdrop of an investment gap which has been estimated between 10-15 percent of GDP annually over the next decade.3 Given the potential of attracting new finance to fill the investment needs estimated, and the importance of such financing to be green, there is an immediate need to realize the progress already made in green financing while assessing existing challenges and gaps before developing strategies, priorities and action plans for the way forward.

Doing so requires an identification and implementation of green finance strategies while acknowledging that the context and national circumstances differ considerably for each country. This is particularly important in Nepal given the baseline portfolio of the country in terms of energy usage is largely green to begin with, which is rather unique when compared to other countries in the region. Nonetheless, the CO VID-19 pandemic provides an opportunity to adopt a green recovery path, with green finance at its core, in transitioning Nepal towards a green and circular economy.

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