The Sustainable Finance Department at the Nepal Bankers’ Association was launched amid an event in Kathmandu on Thursday, September 26.

The department was jointly inaugurated by Nepal Rastra Bank Governor Maha Prasad Adhikari, CEO at FMO Netherlands Michael Jongeneel and Ambassador of Switzerland to Nepal Danielle Meuwly.

The seminar on ‘Integrating Climate Finance & Green Finance Taxonomy in the Banking Industry of Nepal’ was jointly organised by the Nepal Bankers’ Association (NBA) and the Invest for Impact Nepal (IIM).

Bankers, Development Finance Institutions (DFIs), Development Partners (DPs) and other experts in the field, in the programme, stressed the urgency for the Nepali banking industry to practise sustainable finance.

Sustainable finance, according to the Nepal Rastra Bank (NRB), refers to the process of taking into account environmental, social, and governance (ESG) considerations when making investment decisions in the financial sector. It leads to increased longer-term investments in sustainable economic activities and projects.

Nepal, despite having a negligible contribution to global carbon emission, is among the most vulnerable countries to the risks of climate change.

While the Climate Risk Index has ranked Nepal 10th among the most affected countries by climate change from 2000 to 2019, the country’s share in global carbon emission in 2022 was only 0.04 percent.

Nepal is highly vulnerable to climate change impacts, said the World Bank, adding that the country faces losing 2.2 percent of annual GDP due to climate change by 2050, citing recent studies by the Asian Development Bank (ADB).

To mitigate the risks of climate change, Nepal has set some ambitious goals. The country aims to achieve net zero emission by 2045, much earlier than its neighbours China and India – who have pledged to reach climate neutrality by 2060 and 2070, respectively.

Nepal has prioritised scaling up the production of hydroelectricity to achieve this target.

The country’s Second Nationally Determined Contribution (NDC) aims to expand clean energy generation to 15,000 MW by 2030, of which 5-10 percent will be generated from mini and micro-hydro power, solar, wind and bio-energy. And to ensure the supply of 15 percent of the energy demand through clean energy sources.

The installed capacity of electricity increased to 3156.96 MW in the last fiscal year, 2023/24, which ended mid-July, according to the Nepal Rastra Bank data. It consists of 2990.6 MW of hydroelectricity, 106.9 MW of solar power, 6 MW of cogeneration and 53.4 MW of thermal electricity.

Similarly, in the transport sector, the government aims to increase the shares of electric vehicles to 25 percent of all private passenger vehicles, including two-wheelers, and 20 percent of all four-wheeler public passenger vehicles, excluding electric rickshaws and electric-tempos, by 2025. By 2030, the goal is to increase such shares to 90 percent and 60 percent, respectively.

The targets have also been set to install 500,000 improved cookstoves, specifically in rural areas, and install an additional 200,000 household biogas plants and 500 large scale biogas plants by 2025.

Likewise, the government also targets to develop 200 km of the electric rail network to support public commuting and mass transportation of goods, to ensure 25 percent of households use electric stoves as their primary mode of cooking by 2030.

However, the estimated cost of achieving Nepal's NDC conditional mitigation targets is estimated to be $25 billion and that of the unconditional targets to be $3.4 billion.

Additionally, Nepal’s National Adaptation Plan (NAP) has identified a total of 64 priority programmes. The total estimated budget for their implementation until 2050 is $47.4 billion, of which Nepal would contribute $1.5 billion, requiring external support totaling $45.9 billion. The government requires $2.1 billion annually for the delivery of adaptation services through the implementation of NAP for the medium term.

While the speakers in Thursday’s event emphasised Nepal’s hydropower potential for the mitigation of and adaptation to the climate-change risks, they also highlighted the resource gaps in achieving the targeted goals.

Yulanda Chung, who sits on the Board of Trustees at the Climate Bonds Initiative (CBI), said the energy transition was the key to mitigate the climate change risks and Nepal was in a privileged position for it.

“Nepal has an energy mix which many countries can only dream of,” said Chung, also the Former Managing Director at DBS, Singapore and Head of Sustainability at Standard Chartered Bank, UK & Singapore. “The country’s clean energy potential can help attract Foreign Direct Investments in the coming days.”

Highlighting the 3As – Ambition, Action and Accountability – for the transition, Chung added that Nepal has got the ambition and the capacity to transition from fossil fuel based private passenger vehicles to EVs.

President of the NBA Sunil KC, also the CEO of NMB Bank, stressed that apart from the resource gap, lack of level playing field, awareness, local expertise and incentives were the major challenges for implementing sustainable finance in Nepal.

Governor of Nepal Rastra Bank Maha Prasad Adhikari seconded KC on resource gap, adding that the Government of Nepal alone was not capable of bridging the gap.

Adhikakri also highlighted the policies brought by the central bank on green financing.

The Government of Nepal first endorsed the National Climate Change Financing Framework in 2017. Then the NRB brought the guideline on Environment & Social Risk Management (ESRM) for BFIs as well as External Borrowing Regulation in the following year. The ESRM was made mandatory for BFIs in 2020. The guidelines have been revised in 2022.

Earlier this year on January 10, the central bank also made available the draft of the guideline for Nepal Green Finance Taxonomy for financial sectors on its website, asking for feedback, in writing. Adhikakri, on Thursday, said that the guideline would be brought soon.

The speakers stressed that Nepali banking sector can start green financing by implementing the central bank’s policies.

Dipak Kumar De, NBA Executive Committee Member & CEO of Nepal SBI Bank, said that banks would also have to play an advocacy role for promoting sustainable financing in the coming days, adding, “a policy can be made to make banks allocate 50 percent of their investment in CSI to climate change-related projects.”

Chung from CBI stressed the urgency of sustainable finance by drawing parallels between climate change and cyber security.

“While everyone agrees on the need to ensure cyber security in the banking sector, the risks posed by climate change have been undermined so far” she said. “The ‘tragedy of the horizon’ is a false narrative, we need to act now.”

While Governor Adhikari mentioned that sustainable finance, without a doubt, should be a precondition, he argued that it should not be an excuse to achieve the country’s development aspirations. “The climate risks should not be considered a hurdle to development, it can be and should be mitigated.”