Environment and Social Governance(ESG) investing traces its roots back to the socially responsible investing movements of the 1960s where investors withdraw stocks based on business activities such as tobacco production or ties to the South African apartheid regime. Today, businesses that champion ESG practices and policies stand out economically and have a greater chance of attracting the attention of partners, investors, and the media. In the contemporary landscape, purchasers are no longer seeing to contract with the least expensive vendors that do the least harm, have the clearest on social justice and anti-discrimination, and commit to constant improvement for the environment, and society.
Significantly, ESG has become more well-known since its introduction in 2005 on account of a United Nations initiative. According to the Morning Star, the global sustainable funds attracted inflows of USD 13.7 billion (NPR 1.8 trillion) in the third quarter of 2023 slowing growth as some of the world’s largest economies weighed on most stocks and bonds. The largest market, European sustainable funds, managed to remain resilient by bringing in USD 15.3 billion (NPR 2.03 trillion) in net new money during the same period. Therefore, by the end of September 2023, the assets of the global sustainable fund had dropped to USD 2.74 trillion (NPR 363.81 trillion).
ESG and Investors
In recent years, investors’ interest in ESG issues has grown. Younger generation, in particular, want their investments to reflect ESG issues, according to a study from Stanford University in 2022. Many millennials and Gen Z investors expressed great concern for social and environmental issues. With the aim of businesses improving their environmental practices, younger investors are willing to accept lesser profits and are even prepared to lose 6% to 10% of their investment. A Capital Group asset management research from 2022 states that 89% of investors consider ESG problems while making investing decisions. At the same time, 31% of investors in Europe claim that ESG is essential to their investing approach.
Nepal and ESG
Nepal is in its early stage of ESG. Compared to other countries, Nepal has lower carbon emissions due to the lesser business activities on the environment leading to faster zero carbon emission by 2050 A.D. Nepal has a limited carbon emission which is 0.02% whereas its neighboring country China and India has 29.18% and 7.09% respectively. Additionally, Nepal aims to mobilize USD 28.4 billion (NPR 3.77 trillion) to meet mitigation targets outlined in the Nationally Determined Contributions (NDCs). NDCs are national climate action plans with a short time frame that form the basis for countries to meet the long-term adaptation and mitigation targets listed in the long-term strategy. The UNDP has expressed its willingness to assist Nepal in bridging financial gaps by identifying non-traditional funding sources.
Nepal’s leading financial institution, NMB Bank has established a separate Renewable Energy Department and offers tailored green finance instruments. In a groundbreaking collaboration with International Finance Corporation (IFC), NMB Bank secured a USD 25 million (NPR 3.3 billion) green loan, signaling a significant green investment in Nepal. The loan recognized green loan principles and excluded hydro financing. IFC is expected to help NMB Bank expand its SME portfolio to over USD 1 billion (NPR 132.78 billion) over the next five years. It aims to potentially create up to 50,000 jobs in the process.
Further, contributing to the sustainable landscape, Dolma Impact Fund, the first international private equity supports four renewable energy projects – two in the hydropower sector and two on-grid solar projects. Additionally, Business Oxygen Private Limited (BO2), an integral part of the IFC’s Global SME Ventures has been providing advisory support to help invest in small and medium enterprises (SMEs) by facilitating investments and fostering the development of fundamental financial systems, quality-assurance standards, and corporate governance framework.
According to IFC, a substantial climate-smart investment opportunity of USD 46 billion (NPR 6107.88 billion) in Nepal from 2018 to 2030, is capable of filling a 15% investment gap in the country’s Gross Domestic Product (GDP) by attracting new finance, particularly of green nature. A pivotal moment is underscored in the 2020 policy paper by the Integrated Center for International Mountain Development (ICIMOD), emphasizing the opportunity for Nepal to adopt green recovery packages that focus on investments in green infrastructure and nature-based solutions. Nepal’s appeal to global investors has increased by 79.1%. Green financing minimizes the huge gaps in financing the SDGs and encourages a resilient development mode. Nepal identifies a financial gap of NPR 585 billion (USD 4.4 billion) in achieving the SDGs by 2030, which includes NPR 367 billion (USD 2.76 billion) from the private sector.
From the government side, Nepal Rastra Bank (NRB) implemented various policies to encourage green investing and incorporate environmental considerations by introducing the Environment and Social Risk Management (ESRM) framework for banks and financial Institutions in 2018. Nepal included ESRM in the Unified Directives issued by NRB in 2020.
Challenges
ESG has been taken as daunting due to its newness in Nepal. The United Nations Development Programme (UNDP) in Nepal has stressed the obstacles to the implementation of green financing measures, citing a lack of consensus and understanding of the definition of ‘green’. The specific challenges to green finance include insufficient capacity and awareness, a scarcity of long-term finance, a lack of a pipeline of bankable green projects with limited credit information, and a lack of transparency in climate-related disclosure and data. Green tourism SMEs are becoming conscious of the risks involved in project-based financing in the context of a lending model that largely depends on collateral with BFIs. Despite the existence of a national commitment, tourism green growth strategies, as evidenced by the nationally determined contributions that highlight an urgent need to mobilize both public and private finances – tourism sectors remain overlooked the multilateral and bilateral climate finance required for the green transition. The absence of government regulation and policies further acts as a discouragement to adopt eco-friendly practices, as concerns about an uneven playing field.
Outlook
It is interesting to note that several sectors have the potential to attract investment, including renewable energy, clean transportation, green building, water and waste management, sustainable tourism, climate-smart agriculture, and agriculture and agri-business. To make these investments happen, there is an immediate need to utilize green finance mechanisms, such as green bonds which will help pilot financing for green projects at the municipal level, with the involvement of a diverse range of stakeholders, including banks, private sectors, and development partners. Nepal needs to launch policy reforms across various sectors and utilize green finance tools and instruments to attract domestic and international investors for green projects.
Rejina Maharjan holds a Master's in Business Administration(MBA) from Kathmandu University School of Management. She has a keen interest on Environment and Social Governance (ESG) and Sustaiable Finance. Currently, she is working as a fellow at Nepal Economic Forum (NEF).
