Nepal has committed to achieving net zero greenhouse gas emissions by 2045, five years earlier than the global target. It is estimated that Nepal would need to invest $25 billion to meet the target. The banking sector plays a vital role in the sustainable finance ecosystem.

Nepal remains one of the most climate-vulnerable parts of the world. Rising temperatures, environmental degradation and natural catastrophes continue to pose significant risks to the sustainability, liveability and economic stability of the country. Given their potential for exposure to both the physical and transition risks of climate change, banks must lead by example by ensuring that their business and operational practices address environmental impact.

In this context, Krishana Prasain of the Post caught up with Upendra Prasad Poudel, chairman of Nabil Bank, to discuss sustainable businesses, providing financial services to underserved communities, and managing financial risks related to climate change and other sustainability challenges. Excerpts:

What is sustainable financing? How does it impact the environment, society and governance?

Sustainable financing means investing in the sectors that bring a positive impact on the environment and society. The sustainable bank not only plays the role of a major economic driver but also enables its investors and stakeholders to invest in the sustainability of the wider economy.

Under the 2015 Paris Agreement, countries agreed to cut greenhouse gas emissions with a view to 'holding the increase in the global average temperature to well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels'. Following this, respective countries and businesses, including banking institutions, have set their targets to achieve net zero.

To achieve net zero, banks would need to make huge investments during the transition phase. So, banks need to channel their investment differently in a responsible way. The banks need to finance activities observing global warming and supporting decarbonisation, such as financing low carbon, renewable energies, activities that lower fossil fuel use, and financing agriculture and afforestation. There are many challenges and a huge investment is required.

The contribution of the private sector to GDP is more than 80 percent. Banks make 70-80 percent of investments in the private sector. So, banks' investment needs to be diverted in such areas, which helps in bringing a positive impact on the environment.

For instance, while investing in renewable energy, its overall impacts need to be carefully observed such as hydrological impacts, landslides or floods and also impacts on the livelihood of locals. It needs to be developed responsibly, observing the health and safety of people including culture and cultural heritage. Financing that aligns with the Sustainable Development Goals (SDGs) of the United Nations needs to be observed.

The investment from the banking system needs to boost the productive sector or the real economy that generates goods and services. Investment in the productive sector will help generate jobs and rev up the economy.

How are Nepali banks adopting sustainable banking?

The central bank has issued directions to scale up investment in productive sectors such as agriculture, renewable energy, and small and medium entrepreneurship. A provision has been made for commercial banks to invest at least 15 percent of their total credit in the agriculture sector by mid-July 2023 and at least 10 percent of their total loan in the energy sector by mid-July 2024. So, at one level, we have already started sustainable financing. There is a need to increase the investment portion. We have invested in many hydropower projects, a sustainable financing area, and have become self-sufficient in renewable energy.

Banks are doing sustainable financing just to follow the central bank’s directives. But as a responsible corporate citizen of the banking system, we need to transform our thoughts for sustainable financing. Financing in the sectors that bring raw materials and have less value addition like palm oil, sunflower or betel nuts or many other things will lead the economy nowhere. It’s a challenging time; the banking sector needs to seriously realise these things. If we had not invested in such businesses, there would not be a huge liquidity crisis. Initially, banks may think that sustainable financing can limit their scope of activities. Yarns and textiles are being produced in the country and there have been huge investments in the tourism sector.

For instance, Nabil Bank introduced products that finance energy-efficient buildings and also lowered the interest rate on electric vehicles. The bank is also launching various products that finance the productive sector. This will help the economy grow sustainably. We are financing the agricultural sector and expanding branches to villages to encourage local entrepreneurship. Sustainability is a key feature of today's banking and corporate culture.

Why is sustainable financing important for the country’s economic development?

The central bank has prepared a draft of green taxonomy, a framework for defining what can be called environmentally sustainable investments.

It mentions financing projects that address global warming. The production of goods and services is the key requirement for economic growth. Sustainable financing generates goods and services which helps the country to substitute imports. Nepal’s economy is import-driven. To divert the investment that encourages imports, banks need to act wisely. Banks should focus on investment areas by recognising the sectors that contribute to the real economy or the productive sector. This way, it will eventually help economic development in the long term.

Overall, how can climate change be viewed as both a potential threat and an opportunity for the banking sector?

To achieve the net zero target by 2050 as per the commitment, around $2.7 trillion in investment is needed globally. For this, most of the investment comes from the banking system. When we go to a low-carbon regime, it is a huge opportunity for the banking sector to grow. It will also ensure national development. Not only this, it will make the planet we live in safe.

Climate change presents a range of risks and impacts that are expected to negatively impact our economy. These include property loss and damage, infrastructure and service costs and risks to financial stability.

In Nepal, for instance, frequent occurrences of landslides and floods are damaging crops and human life every year. Dry weather and unseasonal rains are impacting our agricultural production.

Nepal’s agricultural sectors will likely face some of the most significant challenges from climate change. Banks, investors and the government should develop and implement approaches to manage climate risks and incorporate environmental, social and governance issues into business and investment decisions. This practice is known as sustainable finance and works towards a more sustainable future economy. The health of Nepal’s economy is strongly linked to the environment.

Nepali banks are more profit-oriented. Are they happy with sustainable finance to help address the climate change impacts?

It’s true. The Nepali banks are more focused on making profits and working in the interest of stakeholders. Our existing business model does not support sustainability. The banking industry is working on a single bottom line—which is profit. The time has come for other bottom lines. We should be working with the triple bottom line. First is prosperity and profit running, which we (Nabil Bank) are practising currently.

Second is the environmental bottom line for planet safety, and the third is activities that have positive social impacts. For instance, I will not encourage investment in the tobacco industry or casino as it hurts society. There is a need for a transformation in our mindset.

How do you see the Nepali banking system's future?

If we want economic growth, we need to gradually finance the sectors responsibly in the real economy. That is investing in climate-friendly projects. European countries have already moved in this direction. Globally, not only banks, but other institutions have also moved to achieve net zero by 2050. Our prime minister has already committed to net zero by 2045. The prosperity that is limited within a small circle of people is not going to drive economic growth. When the middle-class or lower-middle-class people become prosperous, it will increase consumption and raise the needs, sustaining the economy. That’s why our (banks’) focus should be on financing for the future and the country’s economic blueprint should outline a path for a sustainable environment.

(The interview has been condensed and edited for clarity.)