Given the interest of global investors in sustainable development, the prospect of Nepal achieving the United Nations Sustainable Development Goals (SDGs) through sustainable projects is not only exciting, but it is also the way to go. The flow of capital through international markets in sustainability-themed investments is at a record high level which can also help Nepal harness resources to enable projects that generate long-term returns.

With the establishment of Nepal Rastra Bank’s Guidelines on Environmental and Social Risk Management in the banking sector, there exists a framework in the country for domestic mobilisation of environmentally and socially responsible investments. This was a timely intervention by the central bank back in May 2018, given our domestic economic structure where banks and financial institutions have a significant role in the supply of loanable funds for productive economic activities. However, the potential to go further and tap international funds is yet to be completely explored; and if the discussion is delayed, this could levy a huge opportunity cost for the country.

The opportunity

The overall indicators have been improving for Nepal on various fronts including macroeconomic parameters, social progress indicators and the World Bank’s Doing Business indicators. Nepal has been consistently growing above 6 percent after 2017 with an annual inflation rate below 5 percent as per the Ministry of Finance’s Economic Survey 2018-19. The Social Progress Index for Nepal also jumped two ranks compared to 2018 (56.07) and 2019 (60.23). Since 2014 (51.58) there has been a jump of more than 8 points indicating a significant improvement in the social dimensions for progress. Juxtaposing political stability, the initiative to conduct a debut sovereign credit rating (budget speech for the fiscal year 2018-19), improvement in social progress indicators and investment prospects for sustainable development signal international investors on Nepal’s readiness for investments and to harness its full potential.

Nepal also has an investment gap that may indicate a domestic demand for international funds. Meeting the United Nations Sustainable Development Goals by 2030 requires an estimated annual average investment equivalent to between 42 percent and 54 percent of the GDP as per the Development Finance Assessment Final Report (Ministry of Finance) and Nepal’s Sustainable Development Goals Status and Roadmap: 2016 to 2030 (National Planning Commission). The estimate on the investment gap for Nepal is about 12 percent of GDP which amounts to more than $3 billion each year assuming a real economic growth of 6.6 percent. The immediate question that arises is what can then be done to get funds to bridge this gap.

The release of international funds towards sustainability-themed initiatives is at a record high level globally. At the start of 2018, global sustainable investments reached $30.7 trillion, a 34 percent increase in two years. Green bond issuances have topped $500 billion, but still accounts for just 0.5 percent of the global bond market; moreover, sustainability-themed bonds are on the rise in global markets. In 2019 itself, sustainability debt issuances reached a record high of $350 billion which is a 30 percent rise from 2018. Even in the corporate world, companies have started to differentiate themselves by signalling capital markets of their awareness and inclination by using SDG-themed corporate debt issuances. There, however, may be different routes taken to tap these funds.

The broad nature of the options available for sustainable finance aimed to support environmentally and socially sustainable economic activities to close the SDG funding gap in emerging markets can be divided into two types of structures—loans and bonds. Loans can consist of examples like green loans, sustainability-linked loans and options for blended finance, whereas bonds would contain options like green bonds, social bonds and sustainability bonds.

Loan instruments and facilities (such as bonding lines, guarantee lines or letters of credit) would generally incentivise the borrower’s achievement of ambitious, predetermined sustainability performance objectives mostly in 'green projects'. However, larger projects could be financed by blended finance options—which is increasingly being discussed at the policy level in Nepal, particularly since the 2019 Investment Summit and after mentioned in the budget speech for the fiscal year 2018-19.

The advantage of blended finance largely hinges on the strategic use of funds (including aid) making projects commercially viable by lowering pricing through structures such as credit guarantees, first loss structures, subordinated equity, partial risk guarantees and grants. Effective blended finance tools also address specific private sector risks and include instruments such as guarantees, insurance, foreign exchange hedging, subordinate debt or equity and grants for technical assistance.

Issuing bonds

The process of issuing bonds might be a little more elaborate, international experience in customising structures to cater to local requirements being very important. The creation of a framework is the starting point of the discovery process to choose between the right type of bond (green, social or sustainability), set up essential governance structures for bond oversight and ensure mechanisms for asset tracking. This is followed by the appointment of a verifier and negotiations for a second party opinion to finalise the contract—the choice of a verifier is based on the structure of the bond, and the inclusion of critical points to cater to the local context requires a combination of international expertise and local market knowledge.

The next step is the issuance process (or roadshows) to pitch to potential investors and achieve conversion. Lastly, impact reporting and post-issuance evaluations are critical for monitoring the effectiveness of the issuance. The prospect of linking country investment needs to the international market through sustainable projects is an opportunity for Nepal. The options to tap these funds are various, however, the broader question would be the preparation of projects under a sustainable framework to address potential risks. With the increase in investor interest in sustainable projects, Nepal could lead the way by leveraging the potential of the country to implement sustainable projects.

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