Climate Risk on the Balance Sheet

In September 2024, two days of relentless rain broke 50-year precipitation records and triggered floods and landslides across Nepal. Farmland went under water, hydropower plants were damaged, and highways collapsed. The economic loss from that single event was estimated at Rs 46.7 billion, about 1% of GDP.

For many, it was another climate disaster in a vulnerable country. For commercial banks, however, it was something more. It was a reminder that climate risk is no longer an environmental abstraction. It is a balance-sheet risk.

Climate volatility is increasingly threatening the assets that back bank loans. Banks are exposed not only to physical destruction but also to repayment delays, eroding collateral values, and systemic instability.

These risks are at the center of a new industry-wide report, Assessing Climate Transition Maturity of Nepali Commercial Banks 2025. The study, which reviewed 20 Class ‘A’ commercial banks, states awareness is rising, compliance is expanding, but most institutions are still learning how to turn climate commitment into strategy. The findings come at a time when risks are accelerating and regulation is pushing more credit into climate-sensitive sectors.

Nepal is increasingly exposed to climate-related shocks, from record-breaking floods to glacial lake outburst floods. At the same time, the regulator is directing banks to increase lending to climate-sensitive sectors such as hydropower and agriculture. The convergence of physical climate risks, regulatory directives, and global capital shifts is forcing the sector to confront a defining question: Is Nepal’s banking system ready for a low-carbon, climate-resilient future?

A Sector in Early Transition

The report used a five-tier maturity scale, ranging from “novice” to “transformative” to examine how deeply climate considerations are embedded across four critical pillars: governance, strategy, risk management, and metrics and targets. The results paint a picture of a sector that has begun its transition, but remains early in institutional integration.

The average maturity score is 2.3. This places the commercial banking sector between the novice and discovery stages. In practical terms, this means while climate awareness is growing, systems and processes remain largely compliance-driven and fragmented rather than strategically embedded.

According to the report, a majority of banks, 65%, fall within the discovery phase. This means they are addressing climate considerations, but mostly in an ad hoc or evolving manner. Another 25% remain at the novice level where formal structures and clear ownership of climate risks are still limited. Only 10% of banks have progressed to the developing stage, where climate risks and opportunities are being formally integrated into business and risk frameworks.

Among the four pillars, governance emerges as the strongest-performing area, driven largely by regulatory compliance, while metrics and targets remain the weakest link. Climate-specific measurement is minimal, with few banks tracking financed emissions or setting measurable transition targets aligned with national or global commitments.

From Voluntary Awareness to Mandatory Integration

The evolution of sustainable finance in Nepal did not begin with floods. It began with policy. After joining the Sustainable Banking and Finance
Network in 2014, Nepal Rastra Bank (NRB) gradually embedded sustainability into supervision. In 2018, it introduced the Environmental and Social Risk Management (ESRM) Guideline, making environmental and social due diligence mandatory for banks by 2020. In 2022, climate risk was formally incorporated. In 2024, the Nepal Green Finance Taxonomy was introduced to align domestic finance with the country’s net-zero ambitions.

More recently, NRB required commercial banks to allocate at least 10% of their credit portfolios to the energy sector by mid-July 2027 and 15% to agriculture by mid-July 2028. Both sectors are highly vulnerable to climate variability.

The message is clear; climate risk has now become a supervisory concern.

Anil Sharma, CEO of the Nepal Bankers’ Association, says the shift from voluntary to mandatory rules was decisive. “The concept of green financing in Nepal first emerged in 2018, but it was the shift to a mandatory framework after 2020 that truly catalyzed the industry. Five years later, remarkable progress has been seen as commercial banks have moved beyond basic compliance to treat sustainability as a core strategic priority,” Shah said. “This seriousness is mirrored by the central bank, which has been proactive in aligning the domestic financial system with global environmental standards.”

However, regulatory momentum does not automatically translate into institutional maturity. Banks are being pushed to allocate more credit to sectors that are both essential for growth and increasingly exposed to climate shocks before fully developing the tools to measure and manage those risks.

Progress, But Mostly Procedural Governance structures for overseeing climate-related issues are now in place across Nepal’s commercial banking sector, but they remain largely compliance-driven rather than strategically anchored. The primary catalyst has been NRB’s ESRM directive, which requires banks to appoint an environmental and social risk officer. All commercial banks have fulfilled this requirement.

Governance is also the strongest-performing pillar in the maturity matrix. Climate matters are increasingly discussed within credit committees and risk management frameworks. On average, banks scored 2.24, placing most at discovery stage. Thirteen banks were at this level, five at the novice stage, and only two at the developing stage. However, in most institutions, climate responsibility is housed within risk management rather than embedded at the board level. Oversight is often procedural, linked to compliance and transaction-level assessments. Credit committees tend to engage more actively, particularly when reviewing high-risk sectors, while board-level deliberations on climate strategy remain limited and largely reactive.

Still, senior bankers insist that climate governance is gaining seriousness. Devendra Raman Khanal, CEO of Rastriya Banijya Bank, says climate risk is becoming a boardroom concern. “Banks are demonstrating serious commitment through continuous learning and strategic implementation. The engagement shows Nepali banks are dedicated to integrating environmental resilience into the financial landscape, ensuring long-term stability amidst evolving global climate challenges,” he said.

Khanal adds that banks are integrating climate risk into their core frameworks in line with the latest guidelines, including the Green Finance Taxonomy 2024. “We recognize that safeguarding our environment is a debt we owe to future generations. Our commitment goes beyond compliance; we are dedicated to building a resilient, sustainable financial future for Nepal,” he added.

A handful of leading banks have begun to move beyond compliance baselines. They have formed dedicated ESG committees or green finance units. But at a sector-wide level, climate governance is still evolving.

The assessment underscores the need for a stronger “tone from the top.” Boards must assume clear ownership of climate strategy, with defined responsibilities, regular oversight, and climate competence built into senior leadership. Without that, climate transition risks remaining an operational checklist, fulfilled in form but not in substance.

Strategy Is the Weakest Pillar

If governance reflects cautious progress, strategy reveals the largest gap. The average score for climate strategy stands at 1.85, with 60% of banks at novice stage. Only 20 percent have a climate strategy in place or under development. Most institutions address climate issues at the transaction level, particularly where required by ESRM guidelines. Portfolio-wide assessments are rare and engagement with the Nepal Green Finance Taxonomy is still limited.

This is a critical gap. NRB’s lending mandates require banks to direct 25% of credit toward energy and agriculture. Both sectors are deeply vulnerable to climate shocks. Agriculture faces rainfall variability and drought risks, while hydropower is exposed to glacial retreat, erratic flows, and extreme weather events. The World Bank estimates climate impacts could reduce cumulative GDP by up to 7%. This shows the exposure is not marginal, it is systemic.

Banks are increasingly lending to vulnerable sectors without fully developed climate risk methodologies. At the same time, early adopters are trying to move beyond risk mitigation toward opportunity.

At Global IME Bank, green lending has scaled significantly. “Our portfolio in the green sector now exceeds Rs 100 billion. To support this mission, we have developed a diverse suite of specialized products, including green home loans, green SME financing, and green auto loans,” Suman Pokharel, Deputy CEO of Global IME Bank, said. Given Nepal’s extreme vulnerability to climate change, this transition is not merely a strategic choice but a national necessity. There is significant global interest in our trajectory, and we are committed to meeting international expectations by embedding sustainability into the heart of our operations.”

Green mortgages, EV loans, and SME climate financing products are emerging across the sector. Yet uptake remains mixed, and most banks acknowledge that green strategy is still under development. The ambition is visible. Execution remains a work in progress.

The Growth Dilemma

Banks face a delicate balance. They must integrate climate safeguards without slowing economic growth. Khanal says overly strict green criteria could constrain growth. “While we are firmly committed to the central bank’s new climate-related guidelines and recognize our duty to protect the environment for future generations, we cannot ignore the immediate economic realities of an underdeveloped nation,” he said. “Integrating climate risk is a sensitive and necessary evolution, yet it carries the inherent risk of stifling growth in sectors that are still the backbone of our economy.”

A senior banker says as a country with negligible global emissions, Nepal’s primary mission remains the urgent development of basic infrastructure like roads, electricity, and industrial capacity. “Prioritizing complex green criteria before establishing a strong economic foundation is not valid for Nepal which is developing slowly,” the banker said, requesting anonymity. “However, banks are serious about these guidelines, despite the unfairness, because climate change in the Himalayas is an existential threat to their collateral.”

The banker further adds that the approach, therefore, should not be about limiting growth to save the planet, but climate-proofing growth to save investments.

That shift, from abstract environmental duty to direct asset protection, may prove the strongest driver of integration in a credit system anchored in collateral.

ESRM Compliance, Limited Climate Depth

Most banks have incorporated climate considerations into Environmental and Social Due Diligence processes. However, only a few have developed standalone climate risk methodologies that go beyond compliance requirements. Current assessments rely heavily on ESRM classifications (high, medium, low risk) and do not fully capture location-based physical risks or transition risks.

Portfolio-level scenario analysis is rare. Only one bank reported conducting physical risk stress tests under different climate scenarios. Climate exposure is not systemically tracked within non-performing loans and risk appetite frameworks rarely set limits on climate-sensitive sectors. Transition risk pricing, which incorporates carbon exposure into credit spreads, is virtually absent. Several banks admit that climate risks are not fully reflected in credit pricing due to insufficient data

and modelling capacity. In a country highly vulnerable to extreme weather, these gaps carry material implications. The 2024 floods alone caused losses of Rs 46.7 billion, showing the scale of physical risk facing the economy—and by extension, bank balance sheets. The report has recommended embedding climate risk formally in enterprise risk management, supported by climate dashboards and board oversight.

Metrics and Targets: The Measurement Gap

Measurement is the sector’s weakest area, according to the study. Only 20% of banks currently measure financed emissions, and none have set climate-aligned targets linked to Nepal’s net-zero ambition for 2045. Some institutions, including Nabil Bank, Sanima Bank, NMB Bank, Laxmi Sunrise Bank and NIC Asia Bank, have begun aligning with the Partnership for Carbon Accounting Financials (PCAF) framework. But asset-class coverage varies and Scope 3 emissions remain difficult to calculate because most borrowers do not track or disclose emissions. More sophisticated tools, such as internal carbon pricing, are absent. Executive remuneration is not linked to climate performance. Without measurable benchmarks and performance-linked incentives, transition strategies risk remaining aspirational.

At Global IME Bank, collaboration with the International Finance Corporation (IFC) has helped embed green frameworks into risk assessment. “We have successfully incorporated the IFC’s defined green frameworks into our internal processes, particularly regarding risk assessment. Today, we do not move forward with any investment without a rigorous evaluation of environmental and social risks,” Pokharel said. “This disciplined approach ensures that our ‘green’ label is backed by technical merit and accountability.” Simply put, what banks cannot measure, they cannot fully price.

Structural Challenges

Banks face structural constraints that slow the transition from climate ambition to implementation. The most pressing obstacle is the lack of reliable, granular data—especially location-specific physical risk data needed to assess exposure to floods, droughts, and extreme weather. “Without comprehensive geological and environmental data from the government, financial institutions will struggle to accurately diagnose systemic risks or predict project outcomes,” Sharma said. “Establishing a robust national database is essential for banks to move toward data-driven decision-making.”

Pokharel agrees with Sharma. “The absence of a centralized government database for geological and environmental metrics makes precise risk modeling difficult. The government must prioritize policy clarity and data availability,” he added.

Capacity constraints add to the challenge. Climate modelling and carbon accounting expertise is limited. Client engagement is uneven, with many borrowers lacking systems to track emissions or share climate-related information. Even when risks are identified, enforcing corrective actions can be difficult in competitive markets.

Opportunity Amid Vulnerability

Nepal’s climate financing needs are vast: an estimated $196 billion for mitigation and $47.4 billion for adaptation between 2021 and 2050. For banks, this creates both risk and opportunity. Global climate funds and development finance institutions are expanding concessional flows into low-carbon and resilience projects. Banks that demonstrate credible climate integration may attract cheaper funding, technical assistance, and partnerships.

But capturing that upside requires maturity: governance that moves beyond box-ticking, strategies that connect climate risk to core business, risk models that translate weather volatility into credit decisions, and metrics that anchor ambition.

From Awareness to Discipline

Nepal contributes little to global emissions, yet it is among the world’s most climate-vulnerable nations. For Nepali banks, the challenge is not whether to grow, but how to grow without weakening the collateral base that sustains the financial system. As floods intensify and glacial lakes expand, climate volatility will shape lending decisions. Banks must strengthen their governance, formalize their strategy and make risk modelling beyond subjective assessment. Metrics must anchor ambition.

The next climate shock will not test awareness. It will test whether awareness has become balance-sheet discipline.

(This report was originally published in March 2026 issue of New Business Age magazine.)