In the face of growing environmental challenges and social inequality, the way we measure economic success has come under increasing scrutiny. A compelling critique of traditional economic measurement is presented in Doughnut Economics, written by English economist Kate Raworth.
In this book, Raworth challenges the long-held reliance on GDP growth as the primary indicator of progress. For decades, economic success has been measured by the rise and fall of GDP numbers. However, Raworth asks a bold and necessary question: Is growth alone sufficient to measure human welfare? Does it truly capture the full scope of what constitutes progress?
She argues that GDP growth, by itself, fails to capture the complexities of human well-being and the health of our planet. Instead, she proposes a new model—one that places social justice and environmental sustainability at its core. She visualizes a doughnut: in the center, the inner ring represents the essential needs of every person—things like food, shelter, education, and healthcare. No one should fall below this ring. But there’s also an outer ring of the doughnut— which is the ecological limits of our planet. We cannot afford to overshoot these boundaries without risking irreversible damage to Earth’s ecosystems.
So, how do we strike that balance? How do we build an economy where everyone thrives within those boundaries of the Doughnut? That’s the challenge Raworth sets before us. Similarly, it’s overwhelmingly challenging for under-resourced country like ours to achieve this sort of balanced growth.

Current Scenario
Today, Nepal stands at a critical juncture in its development path. Over the past decades, we have made significant strides in reducing poverty, increasing access to education, electricity, and drinking water, and improving health outcomes. The country’s GDP growth rate averaged 4.3 percent in the last decade, despite cascading earthquakes, trade embargoes, health emergencies like COVID-19, and the influence of international geopolitical mess. However, this development has come along with environmental costs. The landslides and floods led by the haphazard construction of roads, loss of biodiversity, melting glaciers, and extreme pollution levels in urban areas are some of the pressing environmental challenges that we are dealing with.
Moreover, Nepal is particularly vulnerable to the impacts of climate change. While Nepal contributes only 0.027 percent of global GHG emissions, it is the 9th most vulnerable economy to extreme weather based on the Global Climate Risk Index (CRI). United Nations Office for Disaster Risk Reduction (UNDRR) estimates the economic cost of climate change at around 2 percent of GDP for Nepal.
The rise in temperature in the Himalayan region is nearly 0.6 degrees Celsius per decade, which is higher than the global average. Glaciers are melting at an alarming rate, leading to glacial lake outburst floods (GLOFs) and threatening both lives and infrastructure. Agriculture, which accounts for about 25 percent of Nepal’s GDP and employs two-thirds of the population, is being severely affected by erratic weather patterns, further increasing the risks of food insecurity.

Government Initiatives
The Government of Nepal has acknowledged the above mentioned threats posed by the ongoing environmental crisis and as a response established specific adaptation and mitigation targets, in our Nationally Determined Contributions (NDCs), National Adaptation Plans (NAPs), and Long-Term Strategy (LTS).
The enactment of ‘The Environment Protection Act, 2019 has been a milestone for the Government of Nepal that imitated the environmental dimensions while planning and managing the projects. Further, the Government of Nepal implemented the National Climate Change Policy (2019) which aims to mitigate the effects of climate change and ensure resilience by integrating climate concerns into development strategies. Further, in 2021, Government of Nepal and Development Partners have endorsed the ‘Kathmandu Declaration’ joining hands to develop strategic plan for Green, Resilient and Inclusive Development – GRID.
In addition, Nepal became a party to the Paris Agreement in 2016 and has committed to be ‘Carbon Neutral’ by 2045 in the COP-26 conference held in 2021 at Glasgow. Nepal announced a series of commitments to remain cumulatively ‘net zero carbon from 2022 to 2045 and to become carbon negative after that, to halt deforestation and increase forest coverage to 45 percent by 2030, and to protect all vulnerable communities from climate change by 2030’.
Further, the Government of Nepal has focused on hydropower development, aiming to reduce dependency on fossil fuels and carbon emissions. A target of installing 2100 MW of solar power by 2030 has been set to meet domestic energy needs. Also, Nepal has been assessing international climate finance through mechanisms like the Green Climate Fund (GCF) and the Climate Investment Fund (CIF).

Actions taken by Nepal Rastra Bank
Nepal Rastra Bank (NRB) also recognizes that financial institutions must play a pivotal role in supporting sustainable development while mitigating environmental risks. In line with this, we have taken several important steps:

• ESRM Guidelines 2018 (1st Amendment in 2022): NRB introduced Guidelines on Environmental and Social Risk Management (ESRM) for banks and financial institutions. Through it, NRB has directed the BFIs to prepare their ESRM policy and have an arrangement for environmental risk assessment of the loans.
• Nepal Green Finance Taxonomy: Recently, NRB has published a consultative document titled ‘Nepal Green Finance Taxonomy: Guideline for Financial Sectors’. It serves as a framework to classify economic activities and investments that contribute to environmental sustainability and climate resilience in Nepal.
• Strategic Plan 2022-26: NRB has explicitly mentioned that it aims to grab the opportunities created by ‘global initiations for sustainable financing’ in its strategic plan for 2022-26. Accordingly, the central bank has been taking several other initiatives.
• Monetary and Fiscal Incentives: To further incentivize green investments, we have worked with the government to offer concessional loans to projects in clean energy, waste management, and electric vehicles. The aim is to direct capital towards sectors that contribute to both economic growth and environmental sustainability.
• Regulatory Provisions: The other initiatives of the NRB in this regard include directed lending programs to the agriculture and energy sectors. Commercial banks are required to lend 15 percent of their portfolio in agriculture and 10 percent in energy by July 2026. Likewise, provisions for the banks to issue ‘Agriculture Bond’ and ‘Energy Bond’, single obligor limit as well as Loan-to-Value ratio relaxation for green energy are a few other efforts made by NRB. BFIs are required to invest 5% of their loan portfolio into deprived sectors. And BFIs are allowed to include credits for promoting green energy, bio-gas, improvised water-mills, electric rickshaw, solar grid, etc as deprived sector lendings. Further, there is a provision of special refinance facility to hydropower projects with production capacity of less than 10 MW.

Challenges Ahead
Despite these simultaneous efforts by fiscal and monetary authorities, we are facing significant challenges in the sustainable development path. There is a significant and continuous gap between the amount of climate finance Nepal requires and the amount it receives.
Nepal will require USD 25 billion for mitigation and USD 21 billion for adaptation between 2021-2030, according to the NAPs, NDCs, and LTS. However, it is estimated that about 56.5% of funding gaps exist to meet these climate commitment targets (Oxford Policy Management, 2022). Bridging this funding gap remains an overarching challenge for Nepal.
One of the major challenges faced by the NRB is the low level of ownership of climate issues by private sectors and BFIs. It has been found that many financial institutions and businesses are still unfamiliar with the concept of green finance, and there is a need for capacity-building and awareness programs.
While green projects such as renewable energy and electric transport have long-term benefits, the high upfront costs are deterring potential investment, particularly in a country like Nepal with limited financial resources.
Therefore, as a central bank, we have made progress in integrating environmental considerations into lending practices, but more comprehensive regulations and enforcement mechanisms are further required to ensure long-term sustainability.

Way Forwards
To effectively address the growing impacts of climate change, it is essential for Nepal to adopt a holistic approach to sustainable development. As a nation vulnerable to climate risks, particularly in sectors such as agriculture and hydropower, Nepal must take decisive action to build resilience within its economy. This requires not only a shift in the way we approach development but also the integration of environmental considerations into financial systems. Green finance has the potential to drive this transformation, aligning economic growth with climate goals. By enhancing financial sector policies and fostering collaboration between public and private entities, Nepal can chart a sustainable path forward, balancing development needs with environmental protection.

• Strengthening Regulatory Frameworks: Nepal Rastra Bank will continue to strengthen its regulatory framework by introducing more stringent environmental risk management standards for financial institutions. This will include clear guidelines on carbon accounting, pollution control, and waste management.
• Promoting Innovation in Green Finance: We need to encourage innovation in financial products that support climate resilience. This could include green bonds, climate insurance, and disaster risk financing, which would enable businesses to hedge against climate risks.
• Public-Private Partnerships: Sustainable development is not the responsibility of the public sector alone. We must foster partnerships between the government, private sector, and international agencies to fund green projects and ensure that Nepal meets its climate commitments.
• Building Climate-Resilient Infrastructure: Moving forward, our development strategy must prioritize the construction of climate-resilient infrastructure, especially in vulnerable sectors like agriculture and hydropower. This will help us safeguard both the environment and the economy from future climate shocks.
• Capacity Building and Awareness: Finally, we must invest in educating financial institutions and businesses on the importance of green finance. NRB is committed to providing technical assistance and training programs that will help financial stakeholders better understand the value of environmentally responsible investments.

Conclusion
In a Nutshell, climate change is not just an environmental challenge but also a developmental one. As Nepal works towards becoming a middle-income country, we must ensure that our economic growth is sustainable and inclusive. The role of Nepal Rastra Bank is crucial in this endeavor, as we can guide the financial sector in supporting green investments and climate-resilient development. The road ahead is not easy, but with concerted efforts and collaboration between all stakeholders—government, financial institutions, businesses, and international partners—we can build a future where development and environmental sustainability go hand in hand.

References:
Central Bureau of Statistics. (2023). Economic Survey. Government of Nepal.
Eckstein, D., Künzel, V., & Schäfer, L. (2021). Global Climate Risk Index 2021. Germanwatch.

United Nations Office for Disaster Risk Reduction. (2021). Disaster Risk Reduction and Economic Impact in Nepal. UNDRR.

Intergovernmental Panel on Climate Change. (2022). Sixth Assessment Report. IPCC.

Food and Agriculture Organization of the United Nations. (2021). Country Profile: Nepal. FAO.

Ministry of Energy, Water Resources and Irrigation, Nepal. (2021). National Energy Strategy. Government of Nepal.

Nepal Rastra Bank. (2022). Fourth Strategic Plan, 2022-26.

Oxford Policy Management. (2022). Nepal Climate Finance Gap Report. Oxford Policy Management.