Sustainable Finance and Climate Finance as a Catalyst for Sustainable Development: Analyzing the Global Outlook, Initiatives of Nepal and Role of Professional Accountants

-CA. Amrita Thapa, The author is Member of ICAN and currently serving as Assistant Director at ICAN. She can be reached at: amrita.thapa011@gmail.com

 

Abstract:

The escalating impacts of climate change have increased global efforts to integrate sustainability into economic and financial systems. Sustainable finance and climate finance have emerged as critical instruments for advancing sustainable development by directing capital toward environmentally responsible and socially inclusive activities. This article examines the evolution of global awareness and collective action on sustainability and climate change, highlighting key international frameworks, global financing trends on sustainable finance and instrument of sustainable finance. It further analyses, Nepal’s initiatives and challenges in sustainable finance and climate finance and illustrates the contribution of professional accountants in adopting sustainable practices.

Key Words: Sustainability, Environmental, Social, Governance, Climate Finance, Sustainable Finance, Climate Change, Sustainability Reporting

A. Evolution of Global Awareness and Action on Sustainability, Climate Change and Sustainable Development

The global recognition that environmental degradation and climate change pose serious threats to human development was particularly highlighted at the 1972 UN Conference on the Human Environment in Stockholm, whereby the international community acknowledged the need for a coordinated response. This led to the adoption of the United Nations Framework Convention on Climate Change (UNFCCC) in 1992, providing a comprehensive framework for global cooperation on climate mitigation, adaptation, and finance, and establishing the Conference of the Parties (CoP) as supreme decision-making body of UNFCCC.

The CoP comprise of 196 countries and European Union which meets annually to provide a regular platform for Parties to review the implementation of the UNFCCC, discuss emerging climate challenges, negotiate commitments, and adopt decisions that advance global climate action, including mitigation, adaptation, finance, and technology transfer. The United Nations defines Climate change as long-term shifts in temperatures and weather patterns, primarily driven by human activities such as the burning of fossil fuels, which increase concentrations of greenhouse gases in the atmosphere and alter the Earth’s climate system over decades or longer.

The landmark international treaties under the UNFCCC that has established binding and voluntary commitments, respectively, for countries to reduce greenhouse gas emissions and advance global climate action comprise of:

1. The Kyoto Protocol-1997: First international treaty to establish legally binding targets for reducing greenhouse gas emissions for developed countries. This is also first treaty for commodifying carbon.
2. The Paris Agreement-2015: First universal climate agreement in which all countries, developed and developing, commit to nationally determined contributions (NDCs) to limit global warming to below 2°C above pre-industrial levels, while pursuing efforts to further restrict the temperature rise to 1.5°C, and enhance climate resilience through adaptation and finance. The Agreement sets a long-term objective for global net-zero Greenhouse Gas (GHG) Emissions by 2050 A.D.

Likewise, the concept of sustainable development was first discussed in World Commission on Environment and Development, United Nations in 1987, which defined Sustainable development as development that meets the needs of the present without compromising the ability of future generations to meet their own needs. – (Brundtland Report).

B. Introduction to Sustainable Finance, Climate Finance and Sustainable Development Goals

Sustainable Finance

Sustainable finance generally refers to the process of taking due account of environmental, social and governance (ESG) considerations when making investment decisions in the financial sector, leading to increased longer-term investments in sustainable economic activities and projects. -European Commission (EUR-Lex glossary). ESG considerations comprise the following dimensions:

1. Environmental Consideration: climate change mitigation and adaptation, preserving biodiversity, preventing pollution and promoting the circular economy.
2. Social Consideration: issues of inequality, inclusiveness, labour relations, investment in human capital and communities, and human rights issues.
3. Governance Consideration: management structures, employee relations and executive remuneration, consideration of Environmental and Social issues in decision making process.

Climate Finance

Climate finance refers to local, national, or transnational financing—drawn from public, private, and alternative sources—that seek to support mitigation and adaptation actions that will address climate change. – (UNFCC, 2021). Climate Finance comprises of the following:

1. Climate Mitigation Finance: Financing that supports projects and activities aimed at reducing or avoiding greenhouse gas emissions, such as renewable energy, energy efficiency, and low-carbon infrastructure.
2. Climate Adaptation Finance: Financing that helps communities, ecosystems, and economies adjust to the adverse impacts of climate change, through measures like climate-resilient infrastructure, disaster risk management, and sustainable agriculture.

Sustainable Development Goals (SDGs)

The Sustainable Development Goals (SDGs) are a universal set of 17 interlinked goals adopted by all United Nations Member States in September 2015 at the UN Sustainable Development Summit in New York, through the resolution “Transforming our World: the 2030 Agenda for Sustainable Development.” The SDGs provide blueprints for peace and prosperity for people and the planet, now and into the future. The SDGs came into effect on 1 January 2016 and are designed to achieve over a 15-year timeline (2016–2030). The SDGs recognize that ending poverty and other deprivations must go hand-in-hand with strategies that improve health and education, reduce inequality, and spur economic growth – all while tackling climate change and working to preserve our oceans and forests.

Linkage between Sustainable Finance, Climate Finance and Sustainable Development Goal

Climate Finance is one of the major actors under Sustainable Finance. An effective and efficient sustainable finance mechanism plays a catalytic role in sustainable development and attainment of SDGs.

C. Global Outlook

International Funding on Sustainable Finance

Global investment in sustainable finance has been steadily increasing, with annual climate and ESG-related flows nearly tripling over the past five years as governments, institutions, and private investors accelerate funding toward low-carbon and climate-resilient projects.

Source:  https://www.oecd.org/content/dam/oecd/en/publications/reports/2024/05/climate-finance-provided-and-mobilised-by-developed-countries-in-2013-2022_8031029a/19150727-en.pdf

International Pronouncement on Sustainability Reporting and Assurance

At the international level, sustainability reporting has evolved through various standards and frameworks, beginning with the Global Reporting Initiative (GRI) Standards introduced in 2000 as the first global ESG disclosure framework. The status of globally recognized sustainability reporting related pronouncements and development till December 2025 comprises of following:

Standards and Pronouncements	Issuing Authority	Effective Date
IFRS Sustainability Disclosure Standards: IFRS S1 – General Requirements for Disclosure of Sustainability-related Financial Information (along with SASB Standards that identify the sustainability-related risks and opportunities most relevant to investor decision-making in 77 industries) IFRS S2 – Climate-related Disclosures	International Sustainability Standards Board (ISSB)	Issued on 26 June 2023. An entity shall apply this Standard for annual reporting periods beginning on or after 1 January 2024.
International Standards on Sustainability Assurance 5000, General Requirements for Sustainability Assurance Engagements (ISSA 5000)	International Auditing and Assurance Standards Board (IAASB)	Issued in November 2024. Effective for assurance engagement on sustainability information reported for periods beginning on or after December 15, 2026 or as at a specific date on or after December 15, 2026
Part 5 of Handbook of International Code of Ethics for Professional Accountants incorporates International Ethics Standards for Sustainability Assurance (including International Independence Standards)	The International Ethics Standards Board for Accountants (IESBA)	Issued on 7 October 2025. Effective for sustainability assurance engagements on sustainability information for periods beginning on or after December 15, 2026, or as at a specific date on or after December 15, 2026
Sustainability Reporting and Climate Change Focus Areas in Public Sector:   IPSASB SRS 1, Climate-related Disclosures Recommended Practice Guideline (RPG) 1, Reporting on the Long-Term Sustainability of an Entity’s Finances RPG 3, Reporting Service Performance Information Climate Change: Relevant IPSASB Guidance	The International Public Sector Accounting Standards Board (IPSASB)	IPSASB SRS 1 issued on December 2025 w.e.f 1st January 2028 RPG 1 issued on 24th July 2013 RPG 3 issued on 31st March 2015 (Latest Amendment to RPG 1 & 3 issued on 9th May 2023) Climate Change Relevant IPSASB Guidance issued on 22nd June 2020

 

International Instrument of Sustainable / Climate Finance

The fund for sustainable finance is provided by:

1. Private Sector: Banks and Financial Institutions, Institutional investors, Assets Management Companies, Corporations, Companies
2. Private Investors: Venture Capitalists, Private Equity Firms, Companies
3. Public Sector: Government Agencies
4. Development Banks and Philanthropy: Multilateral Development Banks, Regional Development Banks, Green Banks, Global Funds, Multilateral Climate Funds

Likewise, the financial instruments related to sustainable/climate finance majorly include the following:

Equity Instruments: Raising equity to finance long-term capital to companies or projects that generate positive environmental or social impact. It also includes mezzanine finance[1].

1. Debt Instruments:

Green Bonds: Bonds issued to raise capital for projects with clear environmental benefits, such as renewable energy, clean transport etc.

• Climate Bonds: Bonds linked to climate mitigation or adaptation projects.
• Sustainability Linked Bonds: Bonds where interest rates or financial terms are tied to the issuer achieving specific sustainability performance targets, providing incentives for ESG improvements
• Climate Loans / Green Loans: Bank loans or credit facilities earmarked for projects with positive environmental or climate impacts, sometimes offered at concessional rates.
•  
• b. Derisking Instruments: Guarantee, securitization, Grant, Hedging, Insurance and Risk Mitigation Instrument
• c. Climate /Green Funds: Funds established by governments, multilateral organizations, or private investors to finance climate mitigation or adaptation projects, e.g., the Green Climate Fund.
• d. Carbon Trading: Commodifying carbon that allows entities to buy and sell carbon credits, representing quantified reductions or removals of greenhouse gas emissions, to meet regulatory or voluntary emission reduction targets.
• e. Public-Private Partnerships (PPPs): It is a collaboration between public and private sector to finance and implement sustainable projects.
• f. Blended Finance: It combines concessional finance from public and philanthropic sources with commercial finance from private sector.  In blended finance, concessional finance acts as a catalytic capital aiding to de-risk investments that are perceived as carrying high risk and low returns. Blended finance makes large scale projects bankable by reducing the risk and assuring stability. Besides, it allows Government to access technical expertise of private sector. In the context of Nepal’s gradual transition from a Least Developed Country (LDC) to a developing country status in November 2026,  blended finance can play a major role in bridging the funding gap of Nepal Government in financing various priority and large-scale projects.
• g. Results-Based Financing (RBF): Financial payments linked to achieving pre-agreed environmental or social outcomes, such as emission reductions under REDD+ (Reducing Emissions from Deforestation and Forest Degradation)  programs[2].

International Framework and Alliance for Sustainable Finance

Some of the international frameworks for sustainable finance include:

1. Green Climate Fund (GCF)

GCF was established within the framework of UNFCCC. It is the world’s climate fund for developing countries that mobilize and deliver capital in large scale, strengthen institutions and support transformative changes and bring together partnership network to deliver impact.

b. The Principles for Responsible Investment (PRI)

It is an international network of 5000 plus signatories worldwide. It has 6 Principles for Responsible Investment that guide its member in incorporating environmental, social and governance factors into their investment and ownership decisions. The PRI provides a framework for incorporating sustainability issues into investment practice.

c. The Principles for Sustainable Insurance (PSI)

The PSI provides a holistic approach to managing a wide range of global and emerging risks in the insurance business, from climate change and natural disasters to water scarcity, food insecurity and pandemics. It has set of 4 Principles for sustainable insurance. There are 140 plus organizations affiliated to PSI representing more than 25% of World’s insurance premium.

d. The Principles for Responsible Banking (PRB)

The Principles for Responsible Banking is a global framework launched by the United Nations Environment Programme Finance Initiative (UNEP FI) in 2019 to guide banks in aligning their strategies, portfolios, and operations with sustainability and the Sustainable Development Goals (SDGs), particularly in addressing climate change. Over 350 banks – representing approximately 50% of global banking assets – are stepping up to implement the UN Principles for Responsible Banking (PRB). It sets out 6 Principles for responsible banking.

e. The Partnership for Carbon Accounting Financials (PCAF)

The Partnership for Carbon Accounting Financials (PCAF) is a global initiative where financial institutions collaboratively develop and use a standardized method to measure and disclose the greenhouse gas (GHG) emissions from their loans and investments (financed emissions). There are over 650 signatories in PCAF and 11 Commercials Banks of Nepal are the signatories in PCAF as at end of December 2025.

D. Nepal’s Initiation and Sustainable Finance Practices

The issue of green financing has remained a priority of the Government of Nepal because Nepal is considered as a climate vulnerable country.Some of the initiatives of the government and institutions that are involved in promoting green financing are discussed below:

1. Nepal’s Climate Change Financing Framework

The Ministry of Finance has published Nepal’s first Climate Change Financing Framework in 2017. The framework is a roadmap to Systematically Strengthen Climate Change Mainstreaming into Planning and Budgeting. Nepal Government has majorly conducted the following climate change reforms and is currently in the process of considering the issuance of the 3^rd Nepal’s Climate Change Financing Framework:

• Climate Budget coding was introduced from FY 2013/14 to track allocations to climate change relevant programs and projects at national level.
• Line Ministry Budget Information System (LMBIS), Budget Management Information System (BMIS) and Financial Management Information System (FMIS) were updated to track Climate Change related Expenditure
• Expenditure and Climate Change Narrative Reports have been incorporated into the Consolidated Financial Statements.
• Budget Guidelines were improved in line with integrating climate finance into the budgeting process.

 

b. Nepal Climate Responsive Public Financial Management (CRPFM) Assessment and Nepal Gender Responsive Public Financial Management (GRPFM) Assessment

Nepal conducted its 1^st CRPFM and GRPFM Assessment as of 2022, and the report was published in April 2024. Out of the 9 indicators in GRPFM Assessment, only one was rated as B, two obtained a C score, and the rest were given a D score. The assessment provided a base for attracting climate finance in Nepal.

c. Carbon Trading Regulations, 2025 (2082B.S)

Recently, the Ministry of Forests and Environment (MoFE) has issued The Carbon Trading Regulations, 2082 which facilitated operationalizing Nepal’s carbon market framework and commodifying carbon in Nepal. The regulation is a significant step towards climate finance in Nepal and has prescribed institutional arrangements for facilitating carbon trading in Nepal.

d. Nepal’s National Carbon Registry

The Ministry of Forests and Environment has also developed and implemented Nepal’s National Carbon Registry in accordance with Article 6 of the Paris Agreement. Currently, through Reducing Emission from Deforestation and Forest Degradation (REDD+), Nepal has earned results-based payments by conserving forests, reducing emissions from deforestation and forest degradation, and enhancing carbon stocks.

e. Nepal Government’s International Commitments

• Nationally Determined Contribution (NDC) Implementation Plan and National Adaptation Plan (NAP)[3]

The Government published its second NDC for the years 2021-2030 in December 2020, setting a goal to achieve net-zero greenhouse gas emissions by 2050. In 2021, the Government published its National Adaptation Plan (NAP) to adapt to climate change effects over the short (until 2025), medium (until 2030), and long term (until 2050).

Moreover, the NDC Implementation Plan endorsed by the Government in August 2023 estimated the total cost of implementation until 2030  at US$ 35.95 billion which is planned to be drawn from National public financing sources, national and international private financing sources, and international climate change financing sources.

• Long-term Strategy (LTS) for Net-Zero Emissions

In October 2021, Nepal submitted its LTS for Net-zero Emissions to the UNFCCC. The LTS aims to achieve net-zero emissions by 2045 and is based on a long-term climate change strategy and action plan up to the year 2050.

• Nepal’s Commitment to SDGs

Nepal as a member state of the United Nations (UN) has committed to 2030 Agenda for Sustainable Development Goals (SDGs) early in 2015. Nepal’s commitment in SDGs has been reaffirmed in key policy documents including the 16^th Development Plan (2024/25-2028/29) and the 25 Year Long-Term Vision 2046 (2100 B.S.). These strategic documents have internalized and are fully aligned with the SDGs providing a clear roadmap towards prosperity over the next 25 years.

f. Nepal Green Finance Taxonomy, 2024

Nepal Rastra Bank has issued Nepal Green Finance Taxonomy, in October 2024 as a Guidelines for Financial Sector to identify and promote investments that meet environmental, social, and governance (ESG) requirements. The Taxonomy provides a standardized classification of green activities aiding the flow of domestic and international green finance to Nepal.

g. SEBON’s approval for Issuance of Green Bond

In May 2024, the Securities Board of Nepal has, for the first time, granted approval to a listed company for issuance of Green Bond. With this, The Nepal Infrastructure Bank Ltd. (NIFRA) Green Bond 6% amounting to Rs. 5 billion with 7 years maturity period marked Nepal’s first official foray into green finance through the capital market. This initiative of Nepal is in accordance with the Green Bond Principles (GBP) of the International Capital Market Association (ICMA).

h. Development of Nepal Sustainability Reporting Standards

The Accounting Standards Boards, Nepal has issued public consultation document on “Development of Nepal Sustainability Reporting Standards” on 16^th July 2025. The development and pronouncement of Sustainability Reporting Standards can be expected soon.

E. Challenges in Effective Implementation of Sustainable Finance Practices

Nepal’s journey towards effective implementation of sustainable Finance practices is challenging due to the following reasons:

1. Lack of integrated policy framework to harmonize sustainable / climate finance framework across Government, Public and Private sector.
2. Lack of coordinated institutional arrangements.
3. Insufficient research and study at institutional resources to explore the opportunities for sustainable finance.
4. Limited access to international climate funds.
5. Lack of sustainability reporting and disclosure standards.
6. Limited knowledge, awareness and preparedness of market towards sustainable practices.
7. Limited number of professionals and experts in sustainability reporting and sustainable finance.

F. Role of Professional Accountants

The role of Professional accountants is crucial for effective sustainable finance system. The professional accountants can significantly contribute to the following areas:

1. Strategic Planning and Implementation

• Strategic Planning and Implementation of National Adoption Plan, Policies and Commitments.
• Research and Consultation of Policy level issues including impact reporting.

b. Carbon Trading

• Technical expertise for quantifying the commodification of carbon and facilitating trading of carbon.

c. Sustainable / Climate Finance Analyst

• Expertise in developing bankable projects for attracting sustainable / climate finance funds.
• Effective rolling out of various sustainability related financial instruments in Nepal

d. Reporting and Assurance

• Navigating the implementation of Sustainability Reporting and Disclosure in various Industries.
• Increasing stakeholders’ confidence in sustainability reporting through assurance reporting and high ethical standards.

e. Promoting Sustainability related Finance and Sustainable Practices

• Promoting and facilitating arrangements for institutions in Nepal for obtaining alliance of international agencies
• Awareness and Training on sustainability and sustainable Finance.

f. Strengthening PFM through Sustainability

• Strengthening PFM by incorporating sustainability in public sector.
• Expertise in revenue management at all levels of government through Natural Resource Accounting.

G. Conclusion

The global recognition of climate change and sustainability has transformed the way financial systems support economic development. Sustainable finance and climate finance are emerging as measures to address climate change and achieve sustainable development. The flow of funds in climate finance is increasing globally, and various alliances and networks have defined a framework for sustainable finance practices. Nepal has also made notable progress specially in policy level arrangements. Yet, funding gaps, lack of coordinated approaches amongst the three levels of government, private and public sectors; limited institutional arrangements, and  knowledge constraints pose major challenges for effective implementation of sustainable finance practices in Nepal. However, within this evolving landscape, professional accountants play a critical role by navigating  sustainable finance as a measure for sustainable development in Nepal.

Reference

EUR-Lex — Sustainable finance definition Overview of sustainable finance definition (European Commission / EUR‑Lex)

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United Nations Framework Convention on Climate Change. (2021). Climate finance. https://unfccc.int/topics/climate-finance/the-big-picture/climate-finance-in-the-negotiations

Ministry of Finance, Government of Nepal. (2017). Climate Change Financing Framework: A roadmap to systematically strengthen climate change mainstreaming into planning and budgeting. Government of Nepal. https://www.undp.org/sites/g/files/zskgke326/files/2024-06/climate_chnage_financing_framework-2017.pdf

Government of Nepal. (2023). Nationally Determined Contribution (NDC) Implementation Plan: August 2023. Ministry of Forests and Environment. https://www.climatenepal.org.np/resources/nationally-determined-contributions-ndc-implementation-plan-2023-nepa

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Government of Nepal, Department of Printing. (2082). Title of the Gazette notification (Rajpatra Ref. No. 26153). https://rajpatra.dop.gov.np/welcome/book/?ref=26153

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Oxfam in Nepal. (2025). Unpacking climate finance in Nepal: Gaps, challenges and opportunities. Kathmandu, Nepal. https://nepal.oxfam.org/latest/publications/unpacking-climate-finance-nepal