Proceedings Report - Green SME Financing in Nepal

Green

Financing in

Background

Nepali SME landscape has seen much activity in the past five years with investors like Business Oxygen, Nepal’s first climate-focused PE fund, providing financing thereby opening up new sources of finance for SMEs. The SME world will also witness opportunities that are emerging from the discussions held at COP26. With this background, Nepal Economic Forum (NEF) conducted a neftalk titled "Green SME Financing in Nepal: Exploring Challenges and Opportunities post COP26" to understand the current state of green financing for SMEs in Nepal. The neftalk aimed to delve deeper into the hurdles and challenges faced by Nepal in the green investment landscape as well as to identify green SME financing opportunities and provide possible solutions that can serve as a way forward. The session began with a presentation on climate financing followed by a panel discussion.

Anupa Rimal Lamichhane, Regional Manager – Asia Pacific, Green Climate Fund

Anupa Rimal Lamichhane started with an explanation of how the Green Climate Fund (GCF) works with accredited entities and funded climate projects having strong backing from climate science. She suggested the integration of green credit lines into local institutions via development banks and national partners to increase access to green funds for MSMEs in Nepal.

Anupa encouraged the government agencies to prioritize the types of projects the country requires and identify partners who can fund the projects. She stressed the need to build the capacity of the entire value chain, to make them capable enough to implement the priority projects. She emphasized the need to create an enabling environment with the right policies to increase the involvement of the private sector in taking on different types of projects. As per Anupa, country ownership is the main essence of the green climate fund, and the government needed to be at the forefront of taking the responsibility of organizing multi-stakeholder engagements within the country to select priority projects. Likewise, she believed that the private sector needed to come forward to discuss their contributions with the government as well. She clarified that the GCF played a catalytic role in derisking climate investments, anchoring investors in equity projects, and mobilizing finance at a scale by putting the required investment upfront. She claimed that the GCF had funds available to help develop climate projects at their initial stages, along with resources for a project preparation facility worth USD 1.5 million. She concluded her remarks by emphasizing the need to look at economic recovery alongside climate considerations.

Chandni Singh, Private Sector Development Advisor, British Embassy Nepal

Chandni Singh expressed the British Embassy’s eagerness to help the Government of Nepal meet its COP26 targets by supporting green recovery and growth. She highlighted how the Embassy has been working with the Investment Board of Nepal to develop a pipeline to bring in international investments for Infrastructure and PPP projects. She stated that the Embassy had also been collaborating with local financial institutions to raise green bonds. In regards to SMEs, Chandni referred to a closed project that supported local financial institutions in developing targeted financial products for SMEs to ensure they had access to finance. She further discussed plans for creating an enterprise development program for SMEs to help them develop social and environmental risk assessment and safeguard measures. Emphasizing green financing opportunities in agro processing and tourism sectors, she highlighted how the agro processing sector could work with value chains to transform them into green value chains, establishing resilient agricultural practices. She believed that Nepal’s tourism, which was already based on natural wealth could provide further opportunities for SMEs around and inside national parks and forest areas with the rise in forest coverage. Moreover, she mentioned how the lack of capacity building and access to finance were major constraints for SMEs in Nepal, and she believed that FDIs at different stages of SME growth would help with capacity building. Chandni emphasized the need for varied approaches from regulators to assess the possibility of lowering Nepal’s FDI threshold and the need for different financial instruments to support SMEs in Nepal.

Peter Mousley,

Lead Private Sector Specialist, World Bank Nepal

Stating how climate finance was quite a new agenda in the region, Peter Mousley mentioned that the World Bank was focused on making the best use of financial technology solutions to support capital markets, organizations, and regulatory reforms in Nepal. Peter believed that the low availability of data was a key gap in the emerging climate finance landscape and that solving this would help companies identify the threats to their balance sheets. He mentioned how the World Bank was helping regulators generate regulations to safeguard the market against credit risks, financial risks, and operational risks arising from climate change-induced physical disasters, and transitional risks like inconsistency in the value system around climate products. Peter highlighted the importance of ensuring capacity building together with legal and regulatory reforms to help financial institutions be more responsive and adjust to climate change. Regarding pipelines of projects for a green economy, Peter stressed the importance of the gestation period and the tendency of investors to wait for evidence of growth. Similarly, the robustness of pipelines also affected their investment decisions. He praised the government’s efforts to develop a project bank and strengthen the Environmental and Social Risk Management (ESRM) requirements for projects which the government could finance, but stressed the fact that all the ministries and stakeholders needed to be in line. Peter expressed how the Securities Board of Nepal (SEBON), Nepal’s capital market regulator was moving in the right direction to ensure regulations requiring companies to provide greater disclosure on climate. Lastly, Peter was positive regarding ESRM guidelines being more detailed in terms of climate issues but he pointed out how the process would vary by country, regulators, and the nature of the market.

Siddhant Raj Pandey,

Chairman/CEO, Business Oxygen Private Limited

Siddhant Raj Pandey began his remarks by stating that there were huge opportunities in the climate financing space starting with solar to pivot from fossil fuels towards electrification. Citing how India allowed a 20% rebate on the use of bio pellets instead of coal, he encouraged the Government of Nepal to draft similar policies. He stressed that the government could provide VAT concessions on biogas and subsidies for industries that buy bio pellets to displace carbon. Siddhant believed that bio pellets and other zero carbon-emitting investments should be given the same treatment as the hydropower industry, including tax holidays. He agreed that the Government of Nepal had been active in dealing with carbon neutralization. He admired how the government building the transmission lines and the private sector building the powerhouses was one of the biggest examples of Public-Private Partnership projects in Nepal and highlighted the need to filter such initiations into other areas of climate-smart approaches.

According to Siddhant, one of the biggest constraints in Nepal’s climate financing was the lack of harmonization of rules and regulations, and the lack of integration among ministries, which in many cases contradicted one another, leaving investors in limbo. To meet the COP26 target of achieving net zero emissions by 2045, Siddhant stressed that the government must reform FDI processes and bring down the unrealistic NPR 50 million threshold limit to bring down climate smart approaches to the SME level, considering 20% of the GDP is SME driven. To make climate financing deep rooted, the government needs to facilitate tax privileges, income tax, tax holidays for climate smart approaches.

Sujeev Shakya, Chair, Nepal Economic Forum

Sujeev Shakya, the moderator of the session centered the discussion around how the green financing discourse could be taken into the SME sector. He referred to the Green, Resilient, and Inclusive Development (GRID) strategic action plan launched on the 23rd September, which aims to support the post-pandemic economic recovery and create new sustainable jobs in clean energy, agriculture, tourism etc. and ensure a sustainable, resilient, and more inclusive development while helping Nepal obtain zero carbon status, the green investment event that took place on 9thSeptember at ICIMOD, and the different investment perspectives coming in from the investment board in regards to discussions around green financing and what it meant for SMEs. Sujeev delved into the possibilities of DFIs working with the government and private funds to remove constraints and policy issues to bring in more green financing opportunities.

Sujeev believed that Nepal should leverage having Nepalis in green climate finance offices while focusing on prioritization, capacity building, and learning from other countries. He claimed that Nepal was not so far behind advanced or developing countries on climate financing. He emphasized that getting the right policy paradigms working, fulfilling what was required in the regulatory side, and bringing multi-stakeholders together would take us ahead.

Green SME Financing in Nepal

Key Highlights

Identification of the key priority areas for projects would be required to bring investments into Nepal.

Focus on building the capacity of the entire value chain to create a green and climate-resilient value chain.

Nepal should fully leverage its learnings from other countries to remove policy constraints and increase its green financing opportunities.