Home
Legal Eagle

Green financing in Nepal

A A- A+

What is green financing?

Green financing refers to products and services that aim to support environmentally sustainable projects. Green financing can come in the form of loans, bonds or equity investments and can be provided by a range of financial institutions including commercial banks, development banks and impact investors.

Current situation of green finance in Nepal

Nepal is currently developing its green finance system and is in the process of implementing it. The current development of green finance in Nepal is largely regulatory driven. In 2018, Nepal released a Guideline on Environmental and Social Risk Management (ESRM) for banks and financial institutions and in 2020 included the ESRM guidelines in the Unified Directives issued by Nepal Rastra Bank (NRB). The ESRM guidelines have been the guiding force behind Nepal’s regulatory driven development of green finance.

How Nepal has attempted to develop its green finance system

While there are some initiatives to advance green finance in Nepal, the development of market-driven green finance is still in a nascent stage. Due to lack of effective examination and assessment procedures as well as a definition of ‘green’, it is challenging to track the flow of market drivers. A few banking and financial institutions (BFIs) have some green finance instruments however, they are yet to develop unified strategies across the investment value chain in green finance. Amongst other developments, NRB has issued guidelines for BFIs to encourage investments in renewable energy and energy efficiency projects. The guidelines require banks to allocate a certain percentage of their loan portfolio to green projects and provide incentives such as concessional interest rates for such investments. Similarly, the Alternative Energy Promotion Centre (AEPC) and Department of Electricity Development (DoED) have been promoting renewable energy projects in Nepal. AEPC offers a range of financial incentives and subsidies for renewable energy projects, while DoED has established a feed-in tariff system (energy producers are paid a premium rate for the electricity they generate and feed into the grid) for small hydro and solar projects. However, the uptake of green finance products and services in Nepal is still limited and there is lack of awareness among stakeholders about the potential benefits of green investments. There is a need for more robust policies, regulations, and standards to provide guidance and support to financial institutions and investors. Moreover, providing financial incentives such as tax credits, subsidies and other financial benefits will encourage investment in green projects.

The way forward for Nepal

Having green finance instruments is an essential component of a green finance system as it provides the necessary financial infrastructure to support the transition to a more sustainable economy. There are numerous tools that Nepal could utilise. Globally, the most popular green financial product has been green bonds, primarily due to their positive returns as well as the positive effect on the environment. A green bond is a type of fixed-income instrument that is specifically designed to raise money for new or existing climate and environmental projects. Green bonds are fundamentally the same as conventional bonds with the main difference being the underlying project that is financed. Green bonds are issued exclusively to finance projects that positively impact the environment. This type of financing could work well in Nepal; however, Nepal would first need to further develop its bond market. This can be done by building the appropriate market infrastructure (i.e., trading platforms, clearing systems, and settlement systems), broadening the issuer base, accommodating knowledge-sharing programmes, sustaining appropriate regulatory oversight, etc. Green loans and guarantees are a good alternative to green bonds. Green loans are loans provided by financial institutions for green projects, such as renewable energy projects. Green loans are already in practice in Nepal with such mostly coming from multilateral and bilateral development banks that provide financing based on a common understanding of the definition of ‘green’. Green loans typically have lower interest rates, longer repayment periods, and more flexible terms than traditional loans. In Nepal, green loans could be a viable option for renewable projects, especially for smaller projects that may have difficulty accessing traditional financing. Green guarantees on the other hand are a form of risk mitigation tool that can be used to support green projects. For renewable energy projects, green guarantees can be used to provide a financial backstop in the event of a project failure or underperformance. Green guarantees can help reduce the perceived risk of investing in renewable projects and encourage more investment in the sector. Another alternative could be establishing funds that are directed towards investing in green projects, for example, green funds or carbon funds. Green funds are investment funds that focus on financing environmentally sustainable projects, including renewable energy projects. These funds may invest directly in renewable energy projects or in companies that develop renewable energy infrastructure. In Nepal, green funds could be useful for financing renewable energy projects, particularly for larger-scale projects that may require significant capital investment. Carbon funds, conversely, focus specifically on financing projects that reduce greenhouse gas emissions and generate carbon credits. Carbon credits are tradeable certificates that represent a reduction in greenhouse gas emissions and can be sold on international carbon markets. In Nepal, carbon funds could be a useful tool for financing renewable energy projects that generate carbon credits.

Conclusion

To succeed in its goal of achieving carbon neutrality by 2045, Nepal needs to harness its vast potential for renewable energy. Green finance can help Nepal leverage its potential for renewable energy by providing the necessary funding and support to overcome the barriers to the development and deployment of renewable energy technologies and help transition towards a more sustainable and low-carbon future. Building a robust enabling green finance system will require a joint effort from different stakeholders, including government agencies, financial institutions, investors, and civil society. READ ALSO: