Green finance isn’t a foreign concept for Nepal or its banking industry. Nepal’s financial sector's investment has been by default in the hydropower sector for years. However, these investments lacked clear definitions and parameters. With Nepal Rastra Bank’s (NRB) recent introduction of a comprehensive green finance taxonomy, that is about to change. The Nepali banking sector is expected to undergo substantive and sustainable changes, redefining investment standards.

This new taxonomy marks an important step towards instituting clear provisions on green investments. It serves as a structured system to classify sustainable economic activities, offering local and international investors the market clarity they need to make informed, sustainable decisions.

As Governor Maha Prasad Adhikari noted, “The adoption of a dedicated green finance taxonomy is crucial given the pivotal role of private and public finance in tackling climate change.” This is an important step toward creating a well-defined green finance landscape in Nepal. It helps reduce ambiguity and strengthens Nepal’s position on the global map of sustainable finance.

The core of a green finance taxonomy is clarity. By defining what “green” means in Nepal, NRB’s taxonomy guides banks and investors on where to direct their funds. Without this clarity, “greenwashing”—where investments falsely claim to be eco-friendly—can occur. This new framework reduces that risk by setting clear standards, giving investors confidence that their money supports genuinely sustainable projects.

The taxonomy also prioritises green finance for micro, small and medium-sized enterprises and focuses on gender. NRB’s structure closely follows international best practices, aiming to make sustainable finance accessible, transparent and essential to Nepal’s economy. It brings multiple benefits such as reducing environmental risks, strengthening the energy sector and supporting the financial sector’s shift to a green economy.

Benefits for banks

The green taxonomy is a significant enabler for Nepali banks. It provides a clear and structured system of classifying green projects, making it easier to create financial products that support environmental goals. This shift helps banks direct funds more effectively into green sectors. Previously, banks invested in green areas without a standard framework; now, they have official guidelines to align with sustainable and Environmental, Social and Governance (ESG) standards.

Moreover, this taxonomy is designed to support projects on various scales, focusing on micro, small and medium enterprises (MSMEs) and smaller-scale adaptation projects. This is especially relevant for Nepal, where small businesses form a substantial portion of the economy and often face challenges accessing finance for sustainable projects. By enabling banks to tailor green finance products for MSMEs, the taxonomy opens up new pathways for these businesses to contribute to Nepal’s green transition.

More FDI

Nepal’s clear green finance framework isn’t just a boost for its banks; it’s a signal to the world that the country is open and committed to sustainable foreign investment. Global investors increasingly prioritise sustainability and seek out countries with strong green finance policies. NRB's new taxonomy signals to the international community that Nepal is serious about transparency and environmental responsibility, showing an appealing climate for foreign direct investment (FDI).

As green finance standards continue to tighten worldwide, NRB’s taxonomy places Nepal on par with international benchmarks. This allows for global investors to back up Nepali projects. By aligning with global expectations, Nepal becomes a destination for the kind of FDI that promotes both economic growth and environmental care.

NRB’s leadership in developing the green taxonomy has been impressive. The bank has taken thoughtful steps to ensure the taxonomy is comprehensive, inclusive and tailored specifically to Nepal’s needs. Working with central banks across the region for peer review has further strengthened its credibility among foreign investors.

This taxonomy will open the door to financial products that support clean energy, sustainable farming, waste management and more. These financial tools are essential for managing climate risks and building resilience for a country like Nepal, where environmental challenges are closely linked to economic growth.

Perhaps the most impactful aspect of NRB’s green taxonomy is its forward-looking approach. This isn’t just about guiding today’s investments into sustainable projects; it’s about setting a strong foundation for a resilient green economy in the future. The taxonomy encourages banks to consider both climate mitigation and adaptation, ensuring that Nepal’s financial system can support a sustainable future in a world facing increasing environmental challenges.

But successful implementation of the green taxonomy is not without challenges. Currently, the banking sector lacks the capacity to evaluate green projects. In addition, the regulatory framework must evolve to dissuade greenwashing. Ensuring sustained coordination between government agencies, development partners and the private sector to realise the true intent of this policy is a must. In a market like Nepal's, there is a need for a concessional and blended finance mechanism to reduce the cost of borrowing and the risk for financial institutions.

Establishing clear standards enables local and international investors to fund projects that align with Nepal’s environmental and economic priorities. With this move, NRB has shown true leadership on the climate front, setting a regional precedent in sustainable finance.