In a landmark move to combat climate change, Nepal Rastra Bank (NRB) has introduced the Nepal Green Finance Taxonomy—a guiding framework that helps banks and financial institutions (BFIs) channel investments into sustainable and eco-friendly projects. This taxonomy is the first step by Nepal’s central bank to drive green finance, ensuring that the country’s economic growth is aligned with environmental sustainability.

With the Green Finance Taxonomy, NRB is taking concrete action to support the transition to a green economy, helping Nepal meet its ambitious goal of net-zero carbon emissions by 2045. Let’s dive into how this works and why it matters.

What is the Nepal Green Finance Taxonomy?

The Green Finance Taxonomy is a comprehensive framework that helps banks identify and invest in genuinely green and sustainable projects. This prevents greenwashing, where businesses falsely market themselves as eco-friendly, and ensures investments support environmental goals like reducing carbon emissions and protecting natural resources.

This taxonomy is a crucial part of Nepal’s broader plan to transition to a low-carbon, climate-resilient economy. With clear guidelines, it helps BFIs finance projects in areas such as renewable energy, sustainable agriculture, and pollution control.

Four Key Pillars of Green Investment

The taxonomy focuses on four main environmental objectives:

1. Climate Change Adaptation: Helping communities and industries prepare for climate risks like floods or extreme weather.
2. Climate Change Mitigation: Promoting renewable energy, energy efficiency, and low-emission technologies.
3. Natural Resource Conservation: Ensuring the protection of forests, water, and biodiversity.
4. Pollution Prevention and Control: Reducing air, water, and land pollution to improve public health.

A critical aspect of this taxonomy is the Do No Significant Harm (DNSH) principle. This ensures that any investment benefiting one environmental goal doesn’t harm another. For instance, a project cutting carbon emissions must not pollute water sources or damage ecosystems​.

Why Does This Matter?

Nepal is on a rapid growth trajectory, but with increasing demands for energy and infrastructure, the country risks putting unsustainable pressure on its environment. By 2030, Nepal is expected to need about $77 billion to meet its climate adaptation, mitigation, and sustainable development goals​. The Nepal Green Finance Taxonomy is the central bank’s first structured effort to ensure financial resources flow into projects that support these goals.

Banks and financial institutions play a critical role here. By directing investments towards green projects, BFIs help fund renewable energy, eco-friendly construction, and climate-resilient infrastructure. These investments don’t just boost the economy; they ensure that growth happens in a sustainable way that protects the environment and future generations​.

The Role of Banks: Shaping the Future of Green Finance

Banks and financial institutions are at the heart of this green transformation. With the Nepal Green Finance Taxonomy, they can identify which projects are ready for investment. The taxonomy uses a traffic light system to classify investments:

• Green (High Priority): These projects fully align with sustainability goals and are ready for funding—like solar energy plants or afforestation projects.
• Amber (Transitional): Projects that need improvements but are on the path to becoming sustainable.
• Red (Non-Compliant): These projects are not aligned with green goals and should generally be avoided​.

This system makes it easier for BFIs to prioritize investments in projects that make a genuine difference in the country’s fight against climate change.

Challenges Ahead for Green Finance

Shifting towards green finance comes with its challenges. Many financial institutions may still lack the expertise to fully assess green projects, and some businesses may be hesitant to take on green investments without clear guarantees of returns.

However, the potential benefits far outweigh the risks. By focusing on green finance, Nepal can create new jobs, attract foreign investment, and drive innovation in areas like clean energy and sustainable infrastructure​.

Nepal’s Green Future: A Call to Action for the Private Sector

The success of the Green Finance Taxonomy depends largely on how quickly the private sector embraces this new way of investing. Will businesses and financial institutions recognize the long-term benefits of sustainable investments? Or will they continue to favor traditional, less sustainable practices?

The Nepal Green Finance Taxonomy is the blueprint for the future, offering clear guidance for the country’s transition to a green, resilient, and inclusive economy. By supporting this initiative, BFIs can play a vital role in securing a greener, more prosperous future for Nepal.