Landscape of Green Finance in Nepal
As the world grapples with the pressing issues of environmental degradation and social inequality, green financing has emerged as a critical component of a new economic development paradigm. Green finance is a structured financial practice designed to ensure improved environmental outcomes, prioritising social inclusion, resource efficiency and reduced carbon emissions. The primary objective of an integrated green finance strategy is to facilitate the transition of the green economy towards low-carbon, sustainable and inclusive pathways, focusing on the development of infrastructure and resources that support lower carbon emissions, increased energy and resource efficiency, and the preservation of biodiversity and ecosystem services. Adopting green finance approach, nations can promote sustainable economic growth, mitigate the adverse effects of climate change, and foster a more equitable society, ultimately creating a more resilient, inclusive and environmentally conscious economy that benefits present and future generations alike.
In the global context, the evolution of green finance has been significant since its inception in the 1960s and 1970s, driven by the environmental movement. The 1990s marked a turning point with the establishment of the Clean Development Mechanism, which facilitated carbon markets and investments in emission-reducing projects, between the developing and developed nations. The early 2000s saw the issuance of the first green bonds by the European Investment Bank and World Bank, designed to fund projects with environmental benefits. China emerged as a leader in green finance, developing one of the world’s largest markets for green investments and renewable energy. The Paris Agreement of 2016 reinforced the importance of green finance in global climate action.
Since 2010, Nepal has taken the lead in combating climate change and building a robust framework for climate finance. The National Adaptation Programme of Action (NAPA), which anticipated over $350 million in finance needed to achieve critical climate adaptation goals, marked the beginning of the trip. One of the most important lessons from NAPA was the recognition that 80% of climate money should go to the most vulnerable areas. This awareness led to the creation of Local Adaptation Plans for Action (LAPA). The growth of green finance in Nepal has been significantly accelerated by the publication of the ‘Guidelines on Environmental and Social Risk Management (ESRM)’ by Nepal Rastra Bank (NRB) in 2018.
Nepal has made great progress in the field of green financing, especially with the approval of the Green, Resilient and Inclusive Development (GRID) plan in September 2021. With a commitment of over $7.4 billion, the government and 16 development partners are funding this initiative, which seeks to promote long-term green growth, climate action and economic recovery post the Covid 19 pandemic. Nepal has also implemented the Climate Change Financing Framework (CCFF), which tackles major policy issues by guaranteeing that 80% of budgets connected to climate change are distributed locally, as part of its commitment to sustainable development. This programme improves public financial management and incorporates external climate fund into national systems, strengthening the nation’s readiness to manage climate financing. Furthermore, the Green Climate Fund (GCF) Handbook guides on GCF engagement processes. Also, there are regulations such as the government’s farm and livestock insurance programme and the central bank’s allocation of a specific budget for investment portfolios to green finance, such as 10% investments in the energy industry and 50% funding for fossil fuel-powered automobiles.
According to the International Finance Corporation (IFC), investments in renewable energy, green buildings, clean transportation and climate-smart infrastructure may total up to $46.1 billion by 2030, which would help close a 15% GDP gap. Nepal is ranked third in South Asia’s green finance landscape, behind Bangladesh and India, with Rs 104 billion set aside for direct and Rs 523 billion for indirect climate-related costs for the Fiscal Year 2023–2024 (Green financing involves direct expenses, such as equipment, labour and materials, and indirect expenses, which include overhead or supporting services). However, challenges remain, such as ambiguous definitions of ‘green’, a shortfall of long-term funding, a scarcity of bankable projects, and a lack of incentives and restrictions from the government.
Nepal has tremendous opportunity to transition to a sustainable economy by leveraging green investment opportunities. To achieve this, an integrated green financing system, which would promote environmentally friendly economic growth, diversify bank portfolios, and encourage private sector participation in renewable energy and other sustainable industries is required. Key steps to achieve this goal include setting up a Green Finance Authority to oversee and coordinate green finance initiatives, introducing tax incentives to encourage investments in renewable energy and sustainable infrastructure, launching a Green Entrepreneurship Programme to support startups and small businesses in the green sector, creating a Green Bond Market to raise capital for environmentally-friendly projects, developing a Climate Risk Management Framework to help businesses and investors assess and mitigate climate-related risks, and establishing a Green Finance Training Institute to build capacity and expertise in green finance. By implementing these innovative strategies, Nepal can unlock its green finance potential, drive sustainable economic growth, reduce its reliance on traditional fossil fuels, decrease greenhouse gas emissions, and promote sustainable development, ultimately helping the country achieve its Sustainable Development Goals (SDGs) and have a sustained future.
