Banks must review projects’ climate risks before approving loans

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The Nepal Rastra Bank has asked banks and financial institutions to assess climate risks such as floods, droughts and cyclones for infrastructure and other projects before granting them loans.

In the revised version Environmental and Social Risk Management Guidelines for Banks and Financial Institutions 2022 Unveiled on Sunday, the central bank proposed a climate risk checklist for projects that banks and financial institutions must complete before issuing loans.

Although the previous guidelines 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 risk before funding projects.

Banks face risks related to reduced ability to repay customers, reduced value of collateral and reputational risk due to negative publicity in case the borrower flouts the rules environmental, as directed.

Kiran Pandit, director of the banking and financial institutions regulatory department at the central bank, said the climate change checklist has been inserted into the guidelines in accordance with the Environmental Protection Act 2019.

According to Actthe government is required to carry out studies, on a periodic basis, on the negative impacts caused by climate change on local communities, ecosystems and biodiversity, and to publish the results, as well as to publish the necessary instructions for the mitigation of negative impacts and risks of climate change, through sectoral policies, strategies and action plans of 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 guidelines, banks and financial institutions are required to consider whether a project site is in an area prone to natural disasters such as floods, droughts and cyclones, as these can have long-term negative impacts on operations of the project.

Common examples where climate risks can impact businesses include: droughts affecting farms and flash floods affecting hotels, businesses and other establishments and destroying structures and finished products, etc., according to the instructions.

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

Banks and financial institutions are also required to check whether the client has presented procedures for monitoring, measuring and disclosing greenhouse gases such as carbon dioxide emissions.

“Customers with more than 25,000 metric tons of annual carbon dioxide emissions must report and ideally should have an emissions reduction plan,” the directive states.

Banking institutions were also asked to check whether a customer has opted for renewable energy (rooftop solar) or energy efficiency/cleaner production measures such as the use of energy efficient boilers and lighting to reduce greenhouse gas emissions.

Banks and financial institutions were also asked to verify if the client has a robust disaster management plan to address climate risks and has procedures in place to measure, disclose, set targets and mitigate its emissions. of greenhouse gases.

If the client’s disaster management plan is not robust, banking institutions are required to consider whether there is evidence that the client intends to measure, disclose, set targets and mitigate its greenhouse gas emissions in the near future, in accordance with guidelines.

Nepal is highly vulnerable to the impacts of climate change and recent studies by the Asian Development Bank suggest that Nepal is facing thedaring 2.2 percent of annual gross domestic product to climate change by 2050.

A new report published in early February in the journal npj Climate and Atmospheric Science has revealed that human-induced climate change is melting Mount Everest’s tallest glacier at a rapid rate, which could lead to the complete disappearance of the South Col glacier. . middle of the current century.

The central bank offered guidelines in 2018 to meet conditions set by the World Bank to provide fiscal support to the government, central bank officials said.

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

Development Policy Credit is a type of loan assistance from the World Bank that the government can allocate 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 client should approach their bank with the same valuation report. We only told the banks to review the report well before approving the loans,” Pandit said.

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