Sustainable Finance

Sanjiv Poudel

With the adoption of the Sustainable Development Goals (SDGs) and Paris Climate Agreement, green or sustainable finance has received considerable attention in global economics. Nepal’s banking sector, too, is not exception.  The Nepal Rastra Bank has issued Environmental and Social Risk Management (ESRM) guideline in May 2018. The guideline requires Banks and Financial Institutions (BFIs) to integrate environmental and social risk management into their overall credit risk management process. Though some banks have designated officials for screening credit proposals to ensure the compliance of ESRM guideline, the majority of banks have still failed to effectively implement the idea of sustainable finance. 

Those banks, which have taken foreign loans from multilateral institutions, primarily from International Finance Corporation, have given some priority to sustainable finance as per the terms agreed at the time of taking foreign loans. The finance sector can play a crucial role in achieving the country’s climate goals through only agreeing to lend to or invest in those businesses which manage their environmental and social risks. Further, BFIs are in a unique position to promote sustainable social and economic development by taking environmental, social and governance matters into account. 

Every lending decision should be governed by the principle that the company, which considers environmental, social and governance factors while making investment decisions, has long-term value, making it prepared for the transition towards an environmentally sustainable economy. BFIs need to have a qualified and independent team of Environmental, Social and Governance (ESG) officers and managers for appraising every credit proposal in terms of its socially and environmentally sustainability and compliance with ESRM guideline issued by the central bank. 

Such ESG officers should also act as the role of inspectors for on-site inspection of factories, industries and other projects to which they have extended loans regularly and fill out Environmental and Social Due Diligence (ESDD) checklist over the compliance of relevant government approvals/permits, management of solid waste and hazardous materials, provision of water and air treatment plant, measures to control noise pollution; and over social concerns like employee safety, community health and safety, child labour, gender violence and discrimination etc. by respective business unit. 

Outcomes of such ESDD checklist needs to reported to credit approving authority in the bank as well for developing corrective action plan and covenants. Similarly, in the case of large infrastructure projects like hydropower, transmission line, tunnel road and cable car, the consortium of banks should appoint an independent expert to ensure the compliance of terms and conditions agreed at the time of taking approval of Environmental Impact Assessment (EIA)/Initial Environment Examination (IEE) in due course of construction and operation of projects. As the financial supervisory authority, the central bank should also develop its expertise and effective mechanism for monitoring the enforcement of sustainable finance in BFIs. The NRB should also provide policy incentives via its monetary policy to promote sustainable and green financing like interest rate discounts, differentiated capital adequacy and loan loss provisioning requirements, refinancing facility, etc. 

There should be a provision to conduct environmental and social audit every year by industries from independent party and disclose the observation in their annual report, based on which lenders can assess the project’s sustainability in terms of long term value creation. Similarly, the central bank should also encourage BFIs to issue green bonds to invest in green activities and low carbon emission projects. It’s the responsibility of everyone to make the earth a livable planet for our future generations as well.