26 August, 2024
Towards Green Finance Regime in Nepal
Green financing is the increase level of financial flows from public, private and non-profit sectors to sustainable development priorities, the key part being, the management of environment.3 Green financing could be promoted through changes in countries’ regulatory frameworks, harmonising public financial incentives, increases in green financing from different sectors and alignment of public sector financing decisionmaking with the environmental dimension of the sustainable development goals. It can also be boosted through investment in clean and green technologies, financing for sustainable natural resource-based green economies and climate smart blue economy, an increase use of green bonds, and so on.4 Green financing includes an array of loans, debt mechanisms, and investments that are used to encourage the development of green projects or minimise the impact on the climate caused by regular projects, or a combination of both.5 Green financing is to play a crucial role in addressing the risks that climate change can bring to businesses and allow businesses to transition towards a lowcarbon economy. One of the commitments from the Paris Agreement is to ‘make finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient developments’. There are other initiatives, led by investors that promote green finance and influence policymaking surrounding green finance, to make this sector a significant driver for achieving the aims of the Paris Agreement.6
Green finance was first implemented through means of green bonds. The Green Bond Principles (GBP) are a set of voluntary guidelines set out by the International Capital Markets Association (ICMA).The latest version of the GBP was published in June 2017 following consultations with the ICMA members and other observers.7
International Practice: United Kingdom
UK launched the Green Finance strategy on 2 July 2019. The Green Finance Strategy has three core elements8:
Greening Finance: It ensures current and future financial risks and opportunities from climate and environmental factors that are integrated into mainstream financial decision making, and that markets for green financial products are robust in nature.
Financing Green: It accelerates finance to support the delivery of UK’s carbon targets and clean growth, resilience and environmental ambitions, as well as international objectives. Capturing the Opportunity: It ensures that UK’s financial services capture the domestic and international commercial opportunities arising from the ‘greening of finance’, such as climate related data and analytics, and from ‘financing green’, such as new green financial products and services.
In September 2021, the UK government launched the United Kingdom’s first green “gilt” (i.e., giltedged security or UK government bond), a 12 year bond which raised £10 billion.
This was followed in October by the issuance of 32 year green gilt of £6 billion.9
The key design features of the green gilt are as follows:
The specific categories of expenditure that can be financed with green gilt proceeds are published in ‘use of proceeds framework’ document. They include areas such as clean transportation, energy efficiency, and climate change adaption including flood defences.
The proceeds can be used to fund green expenditures within a four-year window, which includes both new expenditure as well as expenditure that occurred in the year prior to issuance. At least 50 percent of the proceeds will be allocated to new projects.
The expenditure will be overseen by a new InterGovernmental Green Bond Board, chaired by HM Treasury with participation from government departments benefitting from the proceeds.
As part of the pre-issuance assurance process, the UK government sourced two independent second-party opinion reports. A report by Vigeo Eiris (VE) found that the framework is consistent with the Green Bond Principles developed by the International Capital Market Associated (ICMA). A report by the carbon trust found that the intended use of proceeds is consistent with targets set by the committee on climate change. This assurance process was felt to be particularly helpful given the forward-looking nature of some of the intended expenditures.
Alongside the green gilt programme, the UK government is offering a green retail savings product, which offers households a three-year fixed rate savings product whose proceeds will be earmarked for green spending projects.
India
Under the rules of Securities Board of India, investment opportunities for green bonds include funds for wind, solar, sustainable water management, clean transportation, climate change adaptation, sustainable waste management, energy efficiency, land use and biodiversity preservation.10
Masala Bond in India
International Financial corporation (IFC), a member of the World Bank Group, issued Masala bonds in India in 2014 worth INR 16 billion (approximately $250 million), attracting first time investors from Europe to the offshore rupee markets.
Masala bonds are bonds issued outside of India by Indian organisations or entities in Indian currency rather than the local currency. They are categorised as debt instruments that help to raise money in Indian Rupees from foreign investors. These bonds can be issued by both government and private entities and any investor outside India can subscribe to these bonds.
Some of the features of masala bond are as follows:
The issuer of a Masala Bond is unaffected by a decline in rupees exchange rates as Masala Bonds are issued directly in Indian rupees, the exchange rate risks fall on the shoulders of the investors.
Bonds issued up to the rupee equivalent of USD 50 million are said to have a three-year maturity period, whereas bonds issued for more than USD 50 million should mature in 5 years, citing the RBI.
To further streamline the regime, Securities Exchange Board of India (SEBI) released a circular on 4 August 2016 clarifying that such foreign investment in Masala Bonds will not be treated as investments by Foreign Portfolio Investors (FPIs) and it will be governed by the regulations issued by RBI and will not come under the purview of the SEBI (Foreign Portfolio Investors) Regulations, 2014, as amended.
RBI mandates that the proceeds raised from these bonds cannot be used in activities prohibited by Foreign Direct Investment guidelines i.e., purchase of land, investing in capital markets, and usage of proceeds for equity investment domestically.
Nepal: Green Financing
In Nepal, there is lack of uniform standards as to what constitutes green financing. There are certain sectors where the NRB directive requires investment as a priority sector such as agriculture, tourism, and renewables. Further, NRB has directed that the banks must issue green bonds as per the recent monetary policy. The monetary envisage to create a draft of the green taxonomy with themes like issuing green bonds, reporting climate risks, identifying capital needs, and others to promote green financing. NRB has directed the banks and financial institutions to carry out Environmental and Social Risk Management while advancing the credits. Guidelines on ‘Environmental and Social Risk Management for Banks and Financial Institutions(ESRM)’ issued by the NRB in 2018 has been the guiding force behind Nepal’s regulatory-driven development of green finance. The Nepal ESRM guideline contains general and sector-specific checklists and sectorwide lists of permits and licenses to support financial institutions assessment of E&S risk. NRB has now directed the BFIs, via Unified Directives, to prepare the policy, and have an arrangement of environment risk assessment while extending loan and to submit the report within 30 days from the closing of every FY.11
Green Bond
Raising bond outside Nepal
In Nepal, provision for issuing the bond is governed by the ‘Provision to Issue Local Currency Bond’, 2013 (“Local Currency Law”). As per this law ‘Bond’ has been defined as the local currency denominated bond to be issued by an international financial institution in the international financial market, with the approval of the Government of Nepal. This law requires international financial institutions desirous of issuing Nepalese Currency Denominated Bond to submit an application to the Nepal Rastra Bank, clearly setting out the purpose of issuing such bond (Section 3). 12 One of the issues with the Local Currency Law is that it does not distinguish between the NPR-linked loan, which is a bond issued in dollars in the overseas market, with the NPR-denominated loan which is the loan that will be issued in NPR and for which the exchange risk will be borne by the investor. Further, the law doesn’t contextualise the possibility for the Nepali corporate entities to raise the bond overseas and instead only provides such a possibility only to financial institutions. This contrasts with the provision of the Foreign Investment and Technology Transfer Act, 2019 which provides for this possibility of raising finance.
The Foreign Investment and Technology Transfer Act, 2019 (2075) (“FITTA”) envisage the public company to issue bond in foreign market with the approval of Government of Nepal and SEBON. Likewise, it envisages company with foreign investment to issue bond in foreign market subject to prevailing law. However, the concerned regulators have not issued procedures or guidelines in relation to the issuance of body by Nepalese corporate body to issue bond in foreign market.
Raising Bond Inside of Nepal
Securities Act, 2007 approves/authorise ‘securities’ to include bonds issued by the Government of Nepal or by a corporate body against the guarantee of the Government of Nepal. Law does regard that issuing the bonds onshore doesn’t specifically provide incentives and benefits for green equity and debt investment. The Securities Issue and Registration Rules, 2073 envisages that foreign financial institutions can raise the proceed by enlisting the debenture with the SEBON
Conclusion
Nepal needs to green its economy for several reasons. The financial system is dominated by banks with most of their assets invested in the brown sectors such as agriculture, construction, and real estate, all with environmental hazards and high climate risk. According to the 2020 Global Climate Vulnerability Index, Nepal is ranked as the 9th most vulnerable country in the world to the climate crisis. Nepal’s banks have limited knowledge of environmental risk calculations making their investments highly risky, for example in infrastructure downstream from expanding glacial lakes.13
Thus, it is necessary to incentivise green financing in Nepal. It would be relevant to provide both a uniform standard and sector-specific guidelines for green financing. This would be relevant for determining policy priority and sustainable sectors of investment in Nepal. Additionally, the law must be in consonant with the international practice regarding raising bonds in the overseas market. Such a law should provide currency, repatriation, and procedural flexibility for raising finance. Further, it would also be necessary to incentivise the green Sectors in the form of additional financial benefits and procedural exemptions, so that the investors re encouraged to invest in these sectors. These would also be consistent with Nepal’s obligations under multilateral framework to promote sustainable financing, reduce carbon emission, and curb the effect of the climate change.
(Authors are associate at Pioneer Law Associates)
References
3 Green Financing | UNEP - UN Environment Programme
4 Green Financing | UNEP - UN Environment Programme
5 What is green finance and why is it important? | World Economic Forum (weforum.org)
6 Shades of Green in Financing: A Discussion on Green Bonds and Green Loans | Insights | DLA Piper Global Law Firm
7 Shades of Green in Financing: A Discussion on Green Bonds and Green Loans | Insights | DLA Piper Global Law Firm
8 UK Government Green Financing - GOV.UK (www. gov.uk)
9 https://www.kcl.ac.uk/news/sovereign-greenbonds-what-role-can-they-play-in-the-transition-to-netzero#:~:text=In%20September%202021%2C%20 the%20UK,gilt%20of%20%C2%A36%20billion.
10 https://www.sebi.gov.in/sebi_data/ meetingfiles/1453349548574-a.pdf
11 https://www.undp.org/sites/g/files/zskgke326/ files/2022-05/UNDP-NP-GF-PolicyPaper-2022_0.pdf
12 Provisions to Issue Local Currency Denominated Bond,2013 13 Turning green policies into greenbacks | Nepali Times
Note: This article is from Nepal Infrastructure Summit 2022 and is by Sameep Khanal, Sujan Shrestha .