Nepal Investment Summit 2024 Completely Overlooked the Importance of Environmental, Social, and Governance Factors 

The discouraging foreign investment statistics over the past decade can largely be attributed to the government's inadequate focus on implementing robust ESG frameworks. According to a PwC report from 2022, ESG investments in the Asia & Pacific region are expected to reach USD 3.3 trillion by 2026, representing 22% of assets under management. 

In 2012, as an 8-year-old, I often wondered how a least-developed country could transform into a stable, middle-income nation within a century, with foreign investments playing a key role despite limited resources. Now, at 20, I understand that economic transformation involves more than just foreign investments and Mergers & Acquisitions (M&A), but these remain crucial components. Nepal has always recognized the importance of foreign investments for growth, yet it is disheartening to see the government and private entities clinging to outdated investment practices.

A simple compliance statement is no longer acceptable. ESG (Environmental, Social, and Governance) factors have become guiding principles for bidders and are now a critical element in due diligence for both foreign direct investments and private equity. Despite Nepal's lag in adopting ESG diligence compared to other countries, it is high time to integrate ESG considerations into public and private M&A and FDI frameworks.

Nepal’s investment summit, held in late April 2024, completely overlooked the importance of ESG. While the adoption of ESG practices has been gradual, for a country actively seeking foreign investments and FDI more than ever, ESG considerations are increasingly vital across most sectors. Yet, ESG remains underutilized in both public and private M&A deals. Law firms listed in Legal 500 in Nepal have largely neglected ESG and responsible business practices, failing to align with key frameworks such as OECD guidelines, UNGPs, and other important standards in their corporate and dispute resolution work. However, some positives can be seen in venture capital and private equity startups, where the ‘Impact Approach to ESG’ is integrated into investment due diligence and highlighted in annual reports. Still, it’s too late for the lead actor—the government—to be playing catch-up.

The year 2024 has been internationally dubbed the year of the rise of climate litigation, with significant High Court cases in Australia, New Zealand, and the EU potentially driving a global paradigm shift in civil and common law jurisdictions. While Nepal has seen some rights-based strategic climate litigation, the regulatory and litigation risks associated with climate-related issues, greenwashing, bluewashing, human rights, and other claims remain significant for both public and private companies. These risks impact shareholder expectations, public image, and the ability to attract long-term funding and investments. It is surprising that market leaders are not yet prioritizing clean energy, responsible business practices, modern slavery, and ESG principles in their corporate M&A and advisory work. Time is running out to catch up on these issues. Major sectors of M&A activity in Nepal, including hydropower, manufacturing, and hospitality, must internalize the importance of ESG, responsible business practices, and energy transition as driving principles.

The discouraging foreign investment statistics over the past decade can largely be attributed to the government's inadequate focus on implementing robust ESG frameworks. According to a PwC report from 2022, ESG investments in the Asia & Pacific region are expected to reach USD 3.3 trillion by 2026, representing 22% of assets under management. For Nepal to stay competitive, it must adopt a robust ESG framework and establish independent regulatory bodies to tackle misrepresentation and greenwashing. A 2023 Forbes article supports this claim, noting that two-thirds of retail investors now consider sustainability, with asset managers increasingly using ESG filters. Nepal currently lacks a fixed ESG regulatory framework and independent bodies to address greenwashing and misrepresentation in complex M&A transactions.

Ways Forward

For the Government

Both the current Oli-led government and the previous Dahal administration prioritized Foreign Direct Investment (FDI) to achieve the goal of ‘Prosperous Nepal, Happy Nepali,’ but they have struggled to adapt to the evolving landscape of next-generation investments. One effective approach would be for the government to delegate operations to the Investment Board Nepal, establishing an advisory group comprising independent experts and thought leaders in Business & Human Rights, ESG, and Responsible Business Practices. This group could develop a comprehensive ESG framework tailored to Nepal’s needs and aligned with international standards. By implementing this framework, Nepal can enhance its investment climate, strengthen its global standing, and better fulfill its international commitments before COP29 in Baku.

Next, essential regulatory oversight could be managed by a dedicated department within the Ministry of Finance and the Ministry of Forests and Environment, jointly, with direct supervision and liaison from Dr. Yuba Raj Khatiwada, Economic Advisor to the Prime Minister. Given his extensive experience as Finance Minister, Central Bank Governor, and Senior Economist, he is well-positioned to advise on the government’s existing green climate finance initiatives and the development of new ESG practices. His role would include keeping the Prime Minister and his council of ministers informed about the progress of ESG in Nepal.  

This approach would also complement Prof. Dr. R.P. Bichha’s portfolio at the National Planning Commission (NPC), focusing on SDGs 3, 6, and 7, to provide joint advice to the Vice-Chair of NPC and the government. Empowering this regulatory framework to address greenwashing, bluewashing, and other misrepresentations in climate, energy, and ESG matters during M&A transactions will help establish effective regulatory practices.

For Private Companies

Five hundred listed law firms and reputed accounting firms with corporate advisory and M&A practice groups must integrate human rights, responsible business practices, and ESG as core drivers for their future strategies. Identifying modern slavery risks and other key issues within the ‘S’ of ESG is crucial. Additionally, the ‘G’ in ESG encompasses more than just transparency; it includes tax reporting, board diversity, and ethical compliance. General Counsels and in-house legal teams play a vital role in regulating these practices within their organizations.

Annual reports should include an ESG section with independent advice and oversight from lawyers or other specialists. To support this, companies should engage independent experts, host monthly events with students and professionals, and raise awareness. Law schools and journals should empower student-run projects and articles that focus on ESG and responsible business, fostering academic discussion at the intersection of M&A, corporate advisory, ESG, and business & human rights.

Why Invest in Nepal?

The answer to this should include a mandatory, robust ‘ESG & Responsible Business Framework’ to seize opportunities and attract investors, regardless of Nepal’s geographic position, as a core principle for appealing to shareholders.

 
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