Banks have been asked to assess climate risks for projects before approving loans

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Nepal Rastra Bank has instructed banks and financial institutions to assess climate risks such as floods, droughts and hurricanes for infrastructure and other projects before lending for them.

In the revised Environmental and Social Risk Management Guidelines for Banks and Financial Institutions 2022 The central bank, unveiled on Sunday, has created a climate risk checklist for projects that banks and financial institutions must complete before lending.

Although the previous one policys introduced in 2018 mentioned climate-related risks, there was no separate checklist. The central bank said the new checklist will help banks and financial institutions assess risks before funding projects.

According to the guidelines, banks face risks from reduced customer repayment ability, reduced collateral value and reputational risk from adverse publicity if the borrower breaches environmental regulations.

Kiran Pandit, director of the regulation department for banks and financial institutions at the central bank, said the climate change checklist has been included in the guidelines in line with the guidelines Environmental Protection Act 2019.

According to the lawThe government is obliged to conduct regular studies on the adverse impacts of climate change on local communities, ecosystems and biodiversity and to publish the results, as well as issue the necessary instructions to mitigate adverse climate impacts and risks through sectoral policies, strategies and action plans at all levels of government.

“In previous guidelines, we asked banking institutions to consider environmental risks before lending,” he said. “Now we’ve asked them to look at subtle climate risks as well.”

According to the policys, banks and financial institutions must assess whether a project site falls within an area prone to natural disasters such as floods, droughts and hurricanes, which can have long-term negative impacts on project operations.

Some common examples where climate risks can impact businesses include: droughts affecting farms and flash floods affecting hotels, businesses and other facilities, destroying buildings and finished goods, etc., the guidelines say.

It is important for banks and financial institutions to identify these risks and ensure customers have an emergency management system or business continuity plan in place to deal with such a situation, the guidelines say.

Banks and financial institutions must also verify that the customer has provided the procedures for monitoring, measuring and reporting greenhouse gases such as carbon dioxide emissions.

“Customers with more than 25,000 tonnes of carbon dioxide emissions per year are required to report and should ideally have an emissions reduction plan in place,” the policy says.

Banking institutions were also advised to check if a customer has opted for renewable energy (rooftop solar panels) or energy efficiency/cleaner production measures such as using energy efficient boilers and lamps to reduce greenhouse gas emissions.

Banks and financial institutions were also recommended to check that the customer has a robust disaster management plan in place to address climate risks and has procedures in place to measure, disclose, set targets and mitigate their greenhouse gas emissions.

If the customer’s disaster management plan is not robust, banking institutions must assess whether there is evidence that the customer intends to measure, disclose, target and mitigate its greenhouse gas emissions in the near future in accordance with policies.

Nepal is highly vulnerable to the effects of climate change, and recent studies by the Asian Development Bank suggest that Nepal with l2.2 percent of annual gross domestic product on climate change by 2050.

A new report published in the npj Climate and Atmospheric Science journal in early February revealed that human-caused climate change is causing the highest glacier on Mt Everest to melt at a rapid pace, which could result in the South Col Glacier will be completely wiped out in the middle of the current century.

The central bank came up with that policys in 2018 to meet conditions set by the World Bank for providing budget support to the government, central bank officials said.

“One of the World Bank’s conditions for approving ‘development credit’ to the government was that the central bank must implement such policies,” said Narayan Prasad Pokharel, deputy spokesman for the central bank.

The Development Credit is a type of loan assistance from the World Bank that the government can use in its budget to implement its programs.

The new guidelines could complicate the loan application process for borrowers. But Pandit says there is no point in complaining as it is now mandatory under the country’s environmental law for a borrower/client to ensure that a proposed project has undergone an environmental assessment. “The customer must contact their bank with the same assessment report. We just told the banks to review the report before approving loans,” Pandit said.

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