As Nepal graduates from least developed country status to a lower middle-income country this year, the moment can be viewed not only as an accomplishment but also as a subject of concern. With graduation, Nepal faces a paradox. While concessional financing and grants for climate change solutions are going to dwindle, climate risks will continue to intensify. Floods, landslides, droughts and glacial lake outburst floods associated with climate change are becoming more common. Although Nepal does not contribute much to the global carbon pool, it unduly pays high adaptation costs. It is estimated that if climate change is left unabated, it may lead to a considerable reduction in national income by the middle of this century.

Moreover, Nepal must meet an estimated financing gap of nearly $18 billion to achieve its Sustainable Development Goals by 2030. The financial resources required cannot be fully met by either public or private financing. The question is not what kind of climate financing Nepal needs, but rather how climate risk is financed, shared and governed.

From aid to investment

Climate adaptation in Nepal has long been guided by grant-driven approaches. Vulnerability was often seen as a humanitarian problem and addressed by external funding projects by public organisations and development partners. This approach has delivered significant early gains, especially in community capacity-building and resilience. However, it has also created structural constraints. Adaptation investments remain small, fragmented and depend on donor priorities rather than long-term economic planning. After graduating from the LDC, when concessional funds become scarce, this model will asphyxiate.

Climate adaptation projects are long-term projects with uncertain income streams and returns and are more social than financial. One cannot expect the market to absorb these risks without policy efforts. Nepal needs to shift from dependence on aid and assistance to a risk-sharing framework that sees adaptation to climate change as an economic necessity and public good. In this context, blended finance emerges as the pillar of the development lexicon and governance instrument.

Challenges and constraints

Blended finance uses public or philanthropic capital to mitigate risks and mobilise private investment. It utilises public money to pay the initial loss, stabilise investment or subsidise early-stage risk, shaping conditions for the involvement of capital. It is more about risk management than just pulling money.

In Nepal’s context, blended finance is seen as a means to finance public goods and projects with long gestation and uncertain returns, which also benefit from risk protection with aid from development partners. It allows the successful advancement of projects in the context of climate change adaptation, which may not be otherwise financially viable.

Nepal’s private sector is hampered by a range of financial, regulatory and institutional roadblocks to the feasibility and viability of blended finance and climate adaptation projects. Financial difficulties, such as high interest rates, lack of access to long-term funding and a high initial investment threshold, fail to attract private investors. When a loan programme is purely collateral-motivated, it slows down investment and does not help the adoption of investment schemes, especially as they depend on uncertain and imminent financial flows. The absence of clear models for blended finance means banks cannot assess if it is an attractive investment.

The institutional and regulatory limitations make this sector even more challenging. A rigid regulatory environment stifles financial innovation, and no sandbox option is available to test new financial products. Thus, the current reliance on traditional structures does not entice private sector investors or development finance institutions.

Administrative complications, combined with administrative complexities around the insurance regulations, add to the burden. They undermine institutions and limit their ability to deliver projects. This leaves investors at risk with a lack of a viable policy framework and ambiguity in regulations and modifications. Transparency in policy frameworks rather than one-sided fiscal incentives is the way forward. It’s not that there are no opportunities; we lack financial architecture to support successful pilots.

Policy imperative

The post-LDC Nepal must implement blended finance by following some policy guidelines. While there is a need to increase awareness of the existing legal framework, a distinct policy framework for instruments, protection, incentives and exit strategies should be introduced to boost the confidence of investors and the interests of the public. Otherwise, the potential of blended finance risks becoming another ad hoc, donor-led initiative.

Second, the regulatory sandboxes should be applied to the country’s financial and insurance markets. It could facilitate the development and testing of innovative instruments, such as climate risk insurance, outcome-based financing and domestic currency green bond instruments before they are expanded.

Third, there is a need to enhance institutional capacity. The establishment of dedicated blended finance units at the Ministry of Finance, Nepal Rastra Bank and key ministries could facilitate developing Nepal’s capacity to manage complex financing. Fourth, Nepal can develop a national climate investment facility to facilitate the mobilisation of global climate funds, domestic public resources and private capital. Such an entity would also serve as an anchor for Nepal to issue sovereign green and sustainability-linked bonds.

Nepal’s LDC graduation must not trigger a fear of the end of climate aid, but instead instil hope for the beginning of a more strategic partnership for climate financing. The next decade will prove whether, in Nepal, narratives of vulnerability will give way to investment opportunities in resilience—from fragmented projects to scalable solutions and from aid to shared responsibilities. Choices made now will determine whether climate adaptation funding continues to be underfunded or becomes a means to secure a sustainable economic base for Nepal. While the window is narrow, the opportunity is real.

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