In September 2024, Nepal faced one of its most devastating climate disasters in recent memory. Torrential floods damaged 15 hydropower plants, resulting in the loss of over 1,000 MW in generation capacity, claiming 228 lives and causing economic damages worth Rs 17 billion ($126 million). This was not an isolated incident; it was a stark reminder of Nepal’s acute vulnerability to climate change.

Adding to the crisis, the Ministry of Health and Population says air pollution causes 42,000 deaths every year. Despite contributing less than 0.1% to global greenhouse gas emissions, Nepal bears a disproportionate share of climate risks. Its fragile topography, high dependency on natural resources and limited adaptive capacity make the country especially susceptible to environmental shocks.

Climate change is no longer a distant threat, it is Nepal’s present reality which demands urgent action. The Himalayan region is warming faster than the global average, with temperatures projected to rise by 1.8°C, surpassing the 1.5°C global threshold. This accelerated warming is resulting in increased glacial melt, floods, droughts and unpredictable weather patterns, endangering lives, livelihoods, infrastructure and economic stability.

In this context, climate finance emerges as a critical tool. It represents the flow of financial resources, public, private, domestic and international, to support mitigation, adaptation, resilience-building and the transition to a low-carbon economy. However, for a developing country like Nepal, mobilizing adequate climate finance is a complex and challenging journey fraught with institutional, structural and strategic challenges.

What is Climate Finance and Why Does It Matter?

Climate finance refers to financial resources allocated to address climate change by supporting three objectives—reducing greenhouse gas emissions (mitigation), enhancing resilience to climate impacts (adaptation) and promoting sustainable development. These funds may come in various forms—grants, concessional loans, equity investments, guarantees or insurance instruments—and originate from bilateral or multilateral institutions, public budgets or private investors.

For Nepal, climate finance is not merely an environmental concern, it is a development imperative. With limited fiscal space and competing priorities in infrastructure, education and healthcare, Nepal relies heavily on external funding to finance its climate actions. The Nationally Determined Contributions (NDC) 3.0 outlines a requirement of $73.74 billion for mitigation actions through 2035, of which $62.91 billion (85%) must come from international sources. Additionally, the National Adaptation Plan (NAP) identifies a need for $47 billion to implement 64 priority adaptation programs by 2050.

Without these investments, Nepal risks reversing decades of development gains, deepening poverty among vulnerable populations and falling short of its commitments under the Paris Agreement and the Sustainable Development Goals (SDGs).

Current Trends in Nepal’s Climate Finance Landscape

Nepal has made progress in aligning its budgeting system with climate objectives. The introduction of climate budget tagging in 2012 has enabled Nepal to categorize and track climate-relevant expenditures. The World Bank said that Nepal’s climate-relevant budget was $5.2 billion in 2022/23 fiscal year. This indicates that astute investors are paying attention to the government's large bet on resilience. However, despite the large fiscal allocation directed towards climate change, the relevance of the climate budget has seen little improvement over time. In F 2023/24, 17.26% of the climate-relevant budget was tagged ‘directly relevant’ while the remaining 83% was tagged ‘relevant’. The directly relevant allocation saw no growth over the years (in percentage terms), despite expectations of a stronger fiscal response to climate change. Instead, it marginally declined over the years which is a concerning trend that raises questions over the adequacy of budget funding in attaining the climate goals the country has set out to achieve.

Major Sources of Climate Finance in Nepal

Nepal accesses climate finance through a mix of multilateral, bilateral, public and private channels. Multilateral sources such as the Green Climate Fund (GCF), the Global Environment Facility (GEF) and the Adaptation Fund play a significant role in financing large-scale adaptation and mitigation projects. However, access to these funds remains constrained due to complex application procedures, stringent compliance requirements and limited national capacity. Bilateral partners, including the United Kingdom, Germany and Japan, have been supporting a wide range of initiatives in renewable energy, forestry and disaster risk management programs. The government has incorporated climate-sensitive budgeting into national planning, with increasing allocations across key ministries. However, actual fund utilization remains a challenge. Meanwhile, the private sector is gradually emerging as a partner in green investments, especially in renewable energy, although its potential is far from fully realized. New models such as blended finance, which combines public, philanthropic capital with private capital through concessional loan, first loss capital and guarantees, are being explored to reduce risk and improve project bankability.

Nepal is currently receiving climate funds from the Adaptation Fund (AF), Global Environmental Facility (GEF), and Green Climate Fund (GCF), which all serve as climate financing mechanisms under UNFCCC. However, the World Bank (WB) and the Asian Development Bank (ADB) are considered to be the two largest donors of Nepal’s climate finance projects (OPM, 2022). In the fiscal year 2021/22, donor contributions to climate-related projects in Nepal totaled Rs 124.71 billion (equivalent to $1.0479 billion). The three largest sources of climate finance were Multilateral Development Banks (MDBs), led by the WB, which provided about one-third of all funding. The ADB followed with 29%, while the European Investment Bank (EIB) contributed 11%. The majority of these funds came in the form of concessional loans, which offer favorable terms such as low interest rates or extended repayment periods.

Challenges in Mobilizing and Utilizing Climate Finance

The mobilization and effective use of climate finance in Nepal face several institutional and systemic hurdles. A major challenge is the fragmentation of responsibilities across government agencies, which often results in poor coordination and duplicated efforts. This is compounded by the lack of a well-prepared pipeline of bankable projects, which limits Nepal’s ability to access international funds. The accreditation of only a few national institutions further restricts direct funding opportunities. Moreover, the engagement of the private sector remains low due to an absence of incentives and risk mitigation mechanisms. Local governments, which are crucial for executing climate adaptation initiatives, lack the capacity and resources to develop, implement and monitor climate-resilient projects. Data gaps and the absence of a centralized system to track climate finance flows and measure outcomes further weaken transparency and accountability, undermining both domestic and international confidence.

Where Are the Opportunities?

Nepal’s renewable energy sector is a prime opportunity for climate mitigation finance, with co-benefits that support adaptation goals. While traditionally viewed as a tool for decarbonization, renewable energy also enhances community resilience by reducing reliance on imported fossil fuels and improving energy access in remote, vulnerable regions.

Hydropower, with an estimated 43,000 MW of feasible capacity, remains the backbone of Nepal’s energy strategy. However, diversification is gaining traction. The solar market is expanding, and several companies, such as Pashupati Renewables and Pure Energy, are pursuing IPOs to fund their clean energy projects.

Green infrastructure, climate-smart agriculture, and resilient urban development offer further investment prospects. The government's investment in transmission and distribution, Rs 38.32 billion in 2023/24 alone, highlights the growing focus on energy infrastructure that supports climate goals.

Nepal also holds untapped potential in carbon markets. With over 40% forest cover and a globally recognized community forest model, Nepal is well-positioned to engage in REDD+ initiatives and leverage Article 6 mechanisms under the Paris Agreement. REDD+ is a framework under the UNFCCC that aims to reduce emissions from deforestation and forest degradation while promoting sustainable forest management and conservation. Article 6 of the Paris Agreement facilitates international cooperation through carbon markets and other mechanisms to achieve national climate targets. By generating high-quality carbon credits, REDD+ projects can contribute directly to Article 6 implementation, aligning forest conservation with climate mitigation and sustainable development objectives.

How Can Investors Engage?

Development finance institutions (DFIs), private equity firms and impact investors have multiple entry points in Nepal’s evolving green economy. DFIs can take the lead by offering concessional finance and risk guarantees that de-risk early-stage investments in clean energy, resilient infrastructure, and sustainable agriculture. The recent approval and issuance of green bonds by institutions like NIFRA and NMB Bank demonstrate growing investor interest and regulatory readiness. These instruments offer transparency, traceability, and assurance that capital will be directed toward climate-relevant outcomes. Investors can also engage through public-private partnerships and strategic co-investments with Nepali firms that have proven operational capacity but require financial support to scale. Supporting green SMEs through local financial intermediaries is another pathway that not only fosters innovation but also distributes the benefits of climate finance across broader sections of society.

Aligning Policy and Practice for Greater Impact

To truly transform the climate finance landscape, Nepal must align its policies with practical mechanisms that facilitate fund flow, implementation and oversight. Developing a comprehensive national climate finance strategy is crucial to map funding needs, align with international mechanisms, and guide domestic action. This strategy should be supported by the creation of a national project preparation facility or climate finance project bank that can generate a pipeline of viable projects to attract investment. To unlock private capital, the government must provide clear and stable regulatory frameworks, fiscal incentives, and risk-sharing mechanisms. At the same time, subnational governments should be empowered through capacity-building initiatives and access to earmarked funds. Equally important is the establishment of a robust Monitoring, Reporting and Verification (MRV) system that allows for real-time tracking of financial flows and project outcomes. Such systems are essential not only for transparency but also for attracting long-term investors and ensuring alignment with global standards.

The Role of DFIs, Private Capital and IPPs

DFIs are uniquely positioned to drive the expansion of climate finance in Nepal by addressing market failures and catalyzing private investment. Through concessional lending, DFIs can lower the cost of capital and absorb initial risks that deter private investors. They also play a strategic advisory role by helping governments integrate climate objectives into national development strategies, which enhances policy coherence and project alignment. Moreover, DFIs support innovation in financial markets by developing and piloting new instruments such as climate insurance, catastrophe bonds and performance-based grants. In Nepal’s context, DFIs can bridge the financing and knowledge gaps by partnering with local banks, capacity-building institutions, and government agencies. Their involvement lends credibility to projects and opens the door for syndicated investments, thus expanding the scope and impact of climate action.

Additionally, to accelerate Nepal's low-carbon transition, private sector engagement must be further strengthened by expanding investments in renewable energy and clean technologies. PEVC firms could play a more prominent role by funding additional hydropower, solar, and clean transport projects, building on existing initiatives like Team Ventures' support for Upper Sangye Hydro Project and solar energy, Pashupati Renewables, Business Oxygen supporting sustainable energy ventures like Bakas Renewables, Gandaki Urja and Saral Urja Nepal. One to Watch is investing in solar enterprises such as Ghampower and Gham Urja. These investments underscore Nepal’s growing private sector commitment to climate action. With supportive policies and increasing stakeholder expectations, private capital is poised to become a key driver of the country’s low-carbon transition.

Independent Power Producers (IPPs) can further displace fossil fuels by increasing their share of renewable energy generation in Nepal’s grid. By attracting more investment, IPPs could enhance grid stability, create additional green jobs and reduce emissions even faster. Supportive policies, such as tax incentives, streamlined approvals and risk-sharing mechanisms, could unlock greater private capital for climate solutions. With these measures, Nepal’s private sector can become a driving force in achieving both climate resilience and economic growth.

Climate finance in Nepal is both a challenge and an opportunity. The country has made commendable progress in mainstreaming climate action into national planning, experimenting with green financial tools and expanding renewable energy. However, much impact action remains to unlock the scale and speed of finance required to meet its climate and development goals. It is time to convert climate ambition into climate investment and build a greener, safer and more prosperous Nepal.

(Team Ventures is an industry-agnostic alternative investment firm with a diverse portfolio spanning the energy, technology, real estate, manufacturing, financial institutions, agri-infrastructure, and electric vehicles segments.)

(This opinion article was originally publihsed in July 2025 issue of New Business Age Magazine.)