Nepal remains one of the world’s most vulnerable countries to climate change. Its vulnerabilities emerge from a combination of fragile mountainous topography and ecosystems, highly variable monsoon-driven hydrology, unplanned settlements, and a lack of resilient infrastructure. According to the World Bank, approximately 80% of its population is at risk from natural and climate-induced hazards, including extreme heat stress, flooding, and air pollution (World Bank, 2022).
As climate-related shocks intensify, the central bank, the Nepal Rastra Bank (NRB), has taken a series of steps to align the banking sector with the nation’s low-carbon and climate-resilient goals. In June 2025, NRB mandated that commercial banks allocate at least 10% of their lending to the renewable energy sector and 15% to agriculture by 2028. Yet both sectors are among the most vulnerable to climate change impacts, exposing commercial banks to portfolio instability if climate risks are not properly managed.
While climate challenges remain significant, these changes also provide an opportunity for Nepali banks to catalyze the transition of the country towards a low-carbon economy. But to safeguard financial stability and drive the transition to a sustainable economy, the banks must integrate climate considerations into every facet of their governance, risk management, and lending strategies.
Cadmus, through our implementation of the Invest for Impact Nepal (IIN) program funded by British International Investment (BII), FMO, and the Swiss Development Cooperation, is working with the Nepal Bankers Association (NBA) and SLR Consulting, to help the banking sector move toward this transition. Below we outline lessons learned from an assessment undertaken by SLR consulting on behalf of NBA and supported by IIN. This assessment constitutes the first national benchmark on where Nepal is in terms of sustainable finance.
Over the past decade, Nepal has made considerable advances in embedding sustainability into financial regulation. It has progressively enhanced its Environmental and Social Risk Management (ESRM) Guidelines1, most recently in 2022 to include climate-related risks. This is complemented by the 2024 Nepal Green Finance Taxonomy (NGFT), which provides a classification system for identifying green and transition-aligned investments.
The Nepal Bankers’ Association (NBA) has played a central role in operationalizing these frameworks through policy advocacy, training, and peer learning. It recently created the Sustainable Finance Department and the Community of Practice (CoP) for environmental, social, and governance (ESG) integration amongst financial institutions. This has built momentum for shared standards and industry-wide learning—an essential foundation for long-term transformation.
To understand how well Nepali banks are positioned to manage and capitalize on climate risks, SLR Consulting assessed the climate transition maturity of all 20 Class A commercial banks.
Using a maturity model, ranging from Novice to Transformative, the assessment evaluated 20 commercial banks across four pillars aligned with the Task Force on Climate-related Financial Disclosures (TCFD) and IFRS S2 standards, first piloted by BII: i) governance; ii) strategy; iii) risk management; and iv) metrics and targets.
All 20 Class A banks participated, marking the first comprehensive national baseline for climate readiness within Nepal’s banking sector. The assessment highlighted that compared with regional peers, Nepal’s banking sector is in the early implementation phase of climate integration. However, there are early signs of progress from which to build upon.
A solid foundation to build further buy-in. Governance was the strongest pillar. Climate responsibilities are typically housed within ESRM functions under banks’ risk departments often led by ESRM Officers appointed according to NRB’s guidelines. While boards are beginning to receive periodic updates on climate-related issues, oversight remains limited and often reactive.
Encouragingly, several leading banks are moving ahead and have begun integrating climate into strategic planning. Some have established Green and Sustainable Banking Units to design climate-aligned financial products. Others are considering board-level ESG Committees and capacity-building programs to strengthen climate governance expertise.
For the banking sector as a whole to benefit, the industry will need to consider formalizing board oversight of climate issues, documenting clear responsibilities across departments, and embedding climate as a standing agenda item within board and credit committee discussions.
From risk awareness to understanding. Most Nepali banks currently assess climate risk at the transaction level under ESRM, but few have conducted portfolio-wide climate scenario analyses. The study found only 20% have developed or are developing a climate strategy, and engagement with the Nepal Green Finance Taxonomy (NGFT) remains limited.
Accelerating and embedding a climate strategy within banks calls for more structured portfolio assessments to identify both climate risks and opportunities, using the NGFT to guide green lending priorities. Furthermore, by institutionalizing climate scenario analysis, it would help banks to understand potential impacts under different climate change pathways and inform more resilient lending decisions.
Progress driven by regulation. Risk management is currently the second most mature pillar, reflecting the influence of the Central Bank’s ESRM Guidelines. While climate-related risk assessments are triggered for large loans, the methodologies remain inconsistent and heavily reliant on third-party environmental impact assessments. In addition, most banks use the Environmental and Social Risk Rating (ESRR) framework, but this offers limited visibility into climate risk concentrations within portfolios. Few banks have integrated climate into their Enterprise Risk Management (ERM) frameworks or established climate risk appetite statements.
The banking sector could deepen this progress by developing sector-specific climate risk methodologies—especially for high-risk sectors such as agriculture, hydropower, and heavy industry. Progressive banks could take further actions to embed climate considerations throughout the credit lifecycle and potentially introduce climate tagging systems for non-performing loans that would help track risks and strengthen portfolio resilience.
The next frontier. This was the weakest pillar across the assessment. Most Nepali banks rely on generic environmental and social metrics, with only a handful tracking Scope 1 and 2 emissions² and 20% measuring financed (Scope 3) emissions³. None have set public climate targets or linked performance incentives to climate outcomes.
Nonetheless, some early adopters are measuring financed emissions for key asset classes and building internal systems for data collection through E&S champions within their own institutions. Such initiatives demonstrate the potential for scalable frameworks once industry-wide guidance becomes available. Learning from the region, there are opportunities for banks to adopt the Partnership for Carbon Accounting Financials (PCAF) methodology to measure financed emissions and establish climate metrics tailored to their portfolios.
This country benchmark assessment marks another milestone in Nepal’s sustainable finance evolution. It demonstrates how the banking sector has moved from awareness to action but also highlights the distance yet to travel.
The next phase of Nepal’s sustainable finance journey requires not just compliance, but innovation—using climate data and risk analysis to drive lending decisions, develop new products, and influence the broader economy. In this respect, three key areas of opportunity remain to be explored:
By institutionalizing climate governance, adopting robust risk methodologies, and setting measurable targets, Nepali banks can transition from compliance-driven sustainability to strategic climate leadership. In doing so, they will not only protect their balance sheets from the growing volatility of climate change but also unlock a wave of green investment that supports Nepal’s broader economic transformation toward a resilient, low-carbon future.
[1] Environmental and social risk management (ESRM) refers to a framework that assists organisations in identifying, assessing and managing environmental and social risks associated with their operations, supply chains, and investments
[2] Scope 1 and Scope 2 emissions are categories of greenhouse gas emissions, with Scope 1 being direct emissions that occur from sources owned or controlled by the bank whilst Scope 2 emissions are indirect emissions associated with the purchase of energy, such as electricity, steam, heating, or cooling that an organization consumes.
[3] Scope 3 emissions for banks primarily refer to the indirect emissions associated with their financing activities, which often represent over 90% of their total emissions.
