Green bonds for greening NepalThey finance climate and environmental projects and support sustainable development.
In recent years, Nepal has witnessed massive pollution, leading to the poorest air quality index. The rapid addition of structures without caring for the environment is worsening biodiversity losses. Extensive use of fossil fuel, zero emphasis on climate-resilient infrastructure, unplanned and unmanaged cities, and poor initiative for renewable energy and clean transportation management are warming the temperature. As a result, the long-lasted slogan of Nepal “Hariyo ban, Nepal ko Dhan” may soon become outdated, and we may experience even higher temperatures and biodiversity losses.
However, some initiatives can help Nepal reverse the negative consequences of climate change. There are some innovative financing tools, such as green, social, sustainable and sustainability-linked bonds that can be used to finance environmental projects to fight climate change. Nepal can start with green bonds and continue exploring other sustainable financing tools to support the environment.
Green bonds (GBs) can help achieve the Sustainable Development Goals (SDGs) of the United Nations. GBs can also be pivotal in supporting the global net zero target. Two parallel arguments are famous about how to accomplish the global net zero target: i) reducing overall consumption so that the emission decreases via low production, low transportation, and minimal use of fossil fuels; and ii) financing environmental friendly projects such as climate-resilient infrastructures, renewable energy, clean transportation, water cleaning and pollution control. GB is an innovation in financial tools that aims to support sustainable development by financing climatic and environmental projects. It is also an innovation to existing bonds, where investors buy the security, and the issuer pays periodic interest and principal at the end of maturity.
The design of GBs mandates that the proceeds received from the issuance of GB be invested in environment friendly projects. Importantly, SDGs 6, 7, 9, 11, 13, and 15 are boosted through GB issuance. For instance, GBs support renewable energy projects that generate positive environmental externality and help institutions implement renewable energy solutions. This renewable energy solution pushes nations towards accomplishing climatic action (SDG 13) and facilitates affordable and clean energy (SDG 7). An example of how GBs can help achieve SDG and net zero can be witnessed from three consecutive GBs issued by Apple Inc. worth $4.7 billion and the proceeds invested in green technology.
Historically, the European Investment Bank (EIB) was the first to issue the climate-linked “climate awareness bond.” The first GB was issued in 2007, and the proceeds were used to finance renewable energy and energy efficiency projects. Likewise, the World Bank issued the first labelled GB, which turned out to be an epochal event that fundamentally changed how investors can invest in projects that directly benefit the environment. Since their first issuance, GBs have hit $2 trillion by 2022, and it expects to achieve a single-year target of $5 trillion in 2025 alone.
Issuer and investors
Any institutions that aim to support the environment can issue GBs following the green bond principles (GBP). As of 2022, there are 82 countries where GBs are issued by various issuers, such as governments, supranational corporations, banks and other entities. Among the variety of issuers, financial firms are the most active issuers, and corporations are leading GB issuance, weighing around two-thirds of the total issued amount. A recent study highlights the investor’s preference for GBs issued by corporations and sovereigns regarding choices and preferences. Similarly, individuals and institutions can buy the GBs in the primary and secondary markets. Some institutional investors, such as pension funds and impact investors, may invest in GBs as part of their requirements to meet the environmental, social, and governance (ESG) scores. In contrast, others may invest as a part of their portfolio.
Issuing GBs in Nepal
The government of Nepal, local municipalities, banks and financial institutions, and other non-financial institutions can issue GB to support environment friendly projects. However, some control mechanism is required to ensure that all the proceeds are used for the pre-defined purpose following the Green Bond Principles developed by the International Capital Market Association (ICMA). Furthermore, institutions must publish a prospectus stating the clear objective of issuing a GB and reporting post-issuance. Specifically, it requires the following four: i) the use of proceeds for environment friendly projects; ii) the process for project evaluation and selection; iii) transparent management of proceeds that can be tracked and verified; and iv) annual reporting of the use of proceeds. Likewise, Nepal can refer to and adopt the Climate Bond Initiative (CBI) standards and the World Bank’s GB process implementation guidelines for consistency and transparency.
Nepal can begin issuing GBs in the following areas: i) climate-resilient infrastructure financing; ii) clean hydropower project financing; iii) waste management and pollution control; iv) clean transportation; and 5) cleaning the water. For instance, Kathmandu Metropolitan City can issue a “waste management green bond,” the government of Nepal can issue a “Bagmati cleaning and water purification green bond,” Kathmandu University can issue a “green hydropower financing green bond”, banks such as Nepal Infrastructure Bank can issue “climate resilient infrastructure financing green bonds” and so on. The required emphasis on GBs and government-led initiatives not only helps corporations take their share of responsibility towards the environment but also helps Nepal achieve the net zero target by 2045.
GBs are a financial tool to hoist capital for environmental projects and initiatives that promote sustainable development. Nepal can benefit from this innovative financing tool to accomplish the SDGs and the global net zero goal. Nepal can issue GBs as a major source to fill the financial gap of Rs585 billion to achieve the SDGs by 2030. The government’s lead role can be an example for all stakeholders for its acceptance and growth. Nepal Rastra Bank’s Environmental and Social Risk Management (ESRM) guidelines hint at a supportive environment for green financing. Furthermore, the alignment of GB issuance with a specific SDG makes it more attractive and sends an issuer’s credible signal to potential investors. Overall, GBs offer amicable environmental benefits and support the global net-zero goal, helping Nepal level it clean and green through its 100 percent use of proceeds requirements in green and sustainable projects.