Green Finance for Sustainable Economic Development

Green Finance for Sustainable Economic Development 

  

Introduction

Green Finance refers to the range of innovative financial instruments as well as mechanisms/initiatives that promote green investments. This means more capital flows to sustainable sectors like renewable energy, clean transportation, sustainable water management, etc and less to the unsustainable sectors like mining, coal industry, etc. It is to increase financial flows from banks and financial institutions (public, private and not-for-profit sectors) to sustainable development priorities that have positive and durable environmental externalities. 

A crucial essential about green finance is to generate environmental benefits as part of a strategy to attain inclusive, resilient and sustainable development. The underlying concept is that sustainable financing will lead to sustainable economic growth with better managed environmental and social risks, while also ensuring a better rate of return on the projects. As such green finance covers a wide range of financial product offerings including banking, investment and insurance products such as green bonds, green investment funds, climate risk insurance, etc. Hereby sustainability we mean maintaining a balance between various factors and forces in action, i.e striking a balance between the need and wants of the individuals (being shaped by the cultural, political and economic factors), while also considering their impacts on the environment. 

Fig: Sustainability Pyramid

Global Practices

Green finance has been talk of the town after the declaration of the United Nations Sustainable Development Goals 2015 and the Paris Climate Agreement 2016, which garnered global understanding to the fact that green finance is vital for sustainable economic development .

Since then the practice ensuring that sustainable ventures will get the desired financing and institutions that create hazardous environmental repercussions get the least priority (if not financing at all) has been prevalent. Such practices have been implemented by regional economic blocks, individual countries, investors groups, etc. For eg, regional economic unions like European Union (EU) have made it necessary for companies to reveal their environmental and social policies. Investors have also formed a union based on their common interest in green finance.  For eg, the investor community has come together almost two decades ago adhering to a set of principles known as United Nations Principles for Responsible Investment that covers the environmental, social and governance aspects in their investment policies and practices. Such community at present has 2000 signatories with 81 trillion dollars of the worth of assets and investment.

Similarly countries across the world have formed and implemented a framework that requires the banks to consider environmental and social risks while processing investment projects. However, implementing green financing is not possible through the involvement of a single party/agent. 

Who is responsible?

It is not only the responsibility of the government to ensure that sustainable development measures are adopted. Practical solutions to green finance demands proactive participation of three important stakeholders: Government, Business Enterprises and Citizens.

On the government side, the onus is on the government to develop a regulatory framework and institutional set up that promotes green financing. Similarly from the business side, they must be generous to contribute financial resources to back-up the efforts of the government as the development of eco-friendly infrastructure requires a huge amount of investment from both the government and the private sector. Such investment should be dedicated to the sector of clean energy, transportation, manufacturing, etc which have a direct impact to reduce carbon and other emissions. Similarly, the business community should also encourage research and development initiatives to promote eco-friendly projects, ensure optimum forward and backward linkages with the common interest entities. 

To ensure the longevity of the efforts of the government and the business, citizens should also play a part in their share. This includes awareness and willingness of the citizens to support environment-friendly projects and products from such projects, willingness to pay for such products, desire to work for such firms, and so on. On top of all, the role of global organizations like the United Nations, The World Bank, the European Union, etc is also important as these set the international best practices. 

Nepal's approach to Green Financing

Nepal's concern for sustainable economic development practices dates back to 1950. Before 1950 Nepal revealed its environmental concerns through species conservation and forest use, in 1950-1980 through natural resources conservation and utilization, since 1980’s through policies, and 1985 (from Seventh National Plan) onwards with a focus on Environmental Impact Assessment(EIA), EIA guidelines and in the 1990s through laws. 

Government of Nepal has also accorded due importance to sustainable economic development via formulation of Policies (National Agricultural Policy 2004, Industrial Policy 2011, Climate Change Policy 2011), strategies (Poverty Reduction Strategy 2003, Sustainable Development Agenda, 2000) and programs (National Adaptation Plan of Action 2010), to ensure sustainable economic development. Nepal is a party to the United Nations Framework Convention on Climate Change(UNFCCC), has ratified the Paris Agreement and has also adopted the Sustainable Development Goals. All these initiatives illustrate that we are concerned about environment-friendly development approaches and continuing with this tendency the country has given pivotal importance to green finance.

One of the important stakeholders of green finance are the central bank of the country. As guardians of financial stability, central banks have serious concerns for sustainable development. Effective implementation of green finance initiatives will ensure financial and microeconomic stability mitigating possible risk of high inflation or that of business continuity emanating from climate change or other environmental risks. Hence increase in investment in sustainable and eco-friendly projects has been a topmost priority of the central banks throughout the globe.

Nepal joined the global bandwagon of green finance movement after Nepal Rastra Bank(NRB) became a member of Sustainable Banking Network (SBN), which is a network of central bank and banking associations from emerging markets that was set up in 2012 to foster green and sustainable finance.  NRB has duly recognized sustainability as a central tenet of economic growth. It has demonstrated a strong commitment to environmental sustainability and has integrated principles of sustainable development in its policies and programs. The Unified Directives 2019 issued by the bank  has made it mandatory for licensed banks and financial institutions(BFIs) to undergo Environmental Impact Analysis before disbursing the loan. Similarly, it has also issued Guidelines on Environmental & Social Risk Management for Banks and Financial Institutions 2018. The guidelines aims to establish the Environmental and Social Risk Management Framework as the standard process for evaluation and integration of environmental and social issues in the functioning of banks and financial institutions and requires BFIs to develop and implement an Environmental and Social Management System (ESMS) consistent with local environmental, social laws and regulation, and overtime with recognized international standards such as IFC’s Performance Standards on Environmental and Social Sustainability. The guidelines focus on assessing air emissions and air quality, water use and conservation, wastewater and water quality, solid wastes, labor and working conditions, biodiversity and ecosystem services, culture, and natural heritages, etc.

As a result of these practices, BFIs have started to lend more to the sustainable sectors like electric vehicles, while enforcing stringent lending to hazardous coal based industries, crushers, industries based on fossil fuels, etc. For a country like Nepal, which is all set up to produce surplus clean electricity (more than demand) in the upcoming years, these measures will not only protect our lush natural resources but will also save us a huge amount of currency that goes in importing of fuels. 

Conclusion  

Green finance is certain to gain momentum in the future with most of the countries worldwide focusing on measures to curb pollution and greenhouse effects, and with regulators having placed stringent requirements regarding compliance and disclosure. The need of the time is to revamp existing measures making it more suitable to the local context. While doing so reference of the global best practices should also be taken. Such measures should be able to garner coordination across stakeholders to ensure that green finance efforts are implemented sustainably and comply with international best practices. Incentivizing public financial investments, more awareness across the stakeholders, etc can furthermore promote green financing. Similarly, stakeholders should also be proactive enough to implement the policies and strategies in place. 

All these initiatives will ensure the effectiveness of green finance for ensuring sustainable economic development. For a country like Nepal with robust tourism potential(lush-green resources, varied biodiversity, cultural and historical heritage, etc), implementation of green finance and other practices of sustainable economic development is a must. 

Published in Upahar(Magazine of Economics and Management), Souvenir of Rastriya Banijya Bank Limited, 2076

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