New Approach To Environmental Protection

Ajay Karki /Sagar Baral 

As our planet grapples with the increasingly severe consequences of climate change, the urgency to rapidly transition towards achieving sustainable development goals has reached an unprecedented level. Governments worldwide are actively introducing a range of initiatives and policies to champion sustainable development. One noteworthy strategy in this endeavour is the integration of green financing into their economic plans.

Green financing, which entails funding projects with positive environmental outcomes, is gaining significant recognition as an essential instrument in mitigating the detrimental impacts of climate change. At this critical juncture, it is of utmost importance for governments to take resolute and daring actions to confront climate change and realise sustainable development.

Methods of green financing

Green bonds are a specific type of bond that is designed to encourage sustainability and support climate-related or environmental projects. They may come with tax incentives such as tax exemptions and tax credits to enhance their attractiveness to investors. These bonds are issued by governments, municipalities, corporations, or businesses, including banks, to borrow long-term, low-cost capital from various investors, including institutional investors, retail investors, governments, treasuries, and central banks. In return, the issuer pays a predetermined interest rate to the investors during the life of the bond and repays the principal amount at a specified future date. 

Green bonds include funding for renewable energy projects related to solar power, wind power, hydropower, geothermal energy, and bioenergy; improving energy efficiency in various sectors such as industries, transportation, appliances, etc.; adopting sustainable agriculture practices such as organic farming and agroforestry; and funding projects that promote reforestation, afforestation, and forest conservation efforts. Similarly, climate change adaptation projects that address the impacts of climate change, such as climate-resilient infrastructure, flood protection measures, coastal zone management, etc., are funded through green bonds. Funding is also provided for initiatives aimed at reducing carbon emissions and projects that focus on waste management, including waste-to-energy facilities.

Green bonds are different than blue bonds and climate bonds, as all the ‘blue bonds’ and ‘climate bonds’ are ‘green bonds, but not all ‘green bonds’ are ‘blue bonds’ and ‘climate bonds. Blue bonds finance projects that protect the ocean and related ecosystems, which can include sustainable fisheries, the protection of coral reefs and other fragile ecosystems, etc. Whereas climate bonds specifically focus on projects reducing carbon emissions or alleviating the effects of climate change.

Significance 

The inception of green finance can be traced back to the 1990s, when the United Nations Environmental Programme Finance (UNEPF) Initiative was launched, and the establishment of the Clean Development Mechanism led to the development of carbon markets. Additionally, during this period, the Equator Principles and the Principles for Responsible Investment were adopted, marking the first investor network that focused on responsible and green investments. As the concept of green finance began to gain momentum, the European Investment Bank and the World Bank issued the first green bonds in 2007 and 2008, respectively.

Nepal has a track record of prioritising and investing in environmentally friendly initiatives, particularly in the energy sector, where a significant focus has been placed on hydropower initiatives. The "Guidelines on Environmental and Social Risk Management (ESRM) for Banks and Financial Institutions (BFIs) issued by the NRB in 2018 have been instrumental in shaping Nepal’s regulatory approach to green finance.

Along with this, regulators in Nepal have also introduced sector-specific policies. For instance, BFIs are directed by the NRB to assess the environmental impacts of projects with Environmental Impact Assessments (EIAs) for several years. The NRB has directed commercial banks to allocate at least 15 per cent of their total credit to the agriculture sector by 2023 and 15 per cent and 10 per cent of their total credit to small and midsize enterprises (SMEs) and energy, respectively, by 2024.

Nepal has set an ambitious goal to achieve net-zero carbon emissions by 2045. Achieving this target is crucial for the nation to protect its vulnerable ecology, achieve sustainable development, and contribute to global climate action. Global Goal 13, one of the 17 Sustainable Development Goals, also aims at cutting carbon emissions to net zero and strengthening resilience and adaptive capacity to climate-related disasters. To achieve such goals and address various challenges, green bonds offer a viable pathway by mobilising funds for sustainable projects and bolstering the nation’s transition to clean energy.

Additionally, green bonds enhance access to capital markets for green investments. By providing a dedicated platform for sustainable projects, green bonds attract investors who are specifically interested in environmental impact projects. 

This creates a new investor base that can contribute to the growth of sustainable industries and technologies. It also allows issuers to diversify their funding sources and reduce their dependence on traditional financing mechanisms. In 2022, on August 29, a concessional financing agreement of $100 million was signed between the Government of Nepal and the World Bank for Green, Resilient, and Inclusive Development (GRID).

Such bonds build the confidence of investors as they provide transparency and accountability regarding the use of funds. The proceeds from green bond issuances are earmarked for specific green projects, such as renewable energy infrastructure, energy efficiency improvements, sustainable transportation, and climate change adaptation initiatives. This clear allocation of funds helps build investor confidence by ensuring that their investments are supporting tangible, environmentally friendly projects.

Moreover, green bonds can attract a wider range of investors beyond the traditional fixed-income investor base. Investors who are motivated by environmental concerns but may not have previously considered fixed-income investments find green bonds an appealing option. This expanded investor base brings in new sources of capital to fund green projects, increasing the overall investment pool available for sustainable initiatives.

The issuance of green bonds raises awareness about sustainable investing and demonstrates the viability of green projects. By showcasing successful green bond issuances and the positive impact of the funded projects, the private sector is encouraged to explore and develop their own environmentally friendly initiatives. This leads to increased private sector investment in green projects, further contributing to sustainable development.

In today’s time, China has emerged as a prominent global player in the green finance market. According to data from the Climate Bonds Initiative, China issued an impressive $76.25 billion in green bonds, surpassing other nations. Germany was second with $60.77 billion. Looking ahead, China is projected to strengthen its position further by issuing green bonds worth between $90 billion and $100 billion by the end of 2023.

 Conclusion 

Sustainable development hinges on achieving a delicate equilibrium between economic advancement, societal well-being, and environmental conservation. In April 2023, Kathmandu received the disheartening distinction of being labelled the world's most polluted city. This sobering recognition underscores the pressing imperative for swift and effective measures to confront and alleviate the environmental predicaments we face. In this challenging context, elevating the prominence of green bonds emerges as a vital strategy to secure the financial resources required for executing sustainable initiatives.

By prioritising green bonds, Nepal can mobilise essential funding to not only address the urgent issue of air quality but also to foster economic growth, create opportunities, and fortify its capacity to adapt to the impacts of climate change. Embracing and actively issuing such bonds represents a significant stride towards a future that is both greener and more sustainable, promising improved environmental health and overall well-being for the nation.

(Karki is a joint secretary at the Ministry of Forests, and Baral is an advocate.)