Green Finance for Environmental Sustainability in Nepal

This study examines the relationship between green finance and environmental sustainability in Nepal from 1990 to 2023. Constructing the index for financial development by using Principal Component Analysis (PCA), the relationship is explored using Auto-Regressive Distributed Lag (ARDL) followed by Fully Modified Ordinary Least Square (FMOLS), Canonical Cointegration Regression (CCR) and machine learning Kernel-based Regularised Least Square (KRLS) approaches. The empirical results demonstrate that components of green finance, specifically promotion of renewable energy, significantly reduce greenhouse gas emissions, confirming its role in achieving environmental sustainability. In contrast, financial development and economic growth exhibit negative effects on environmental quality, while urbanisation shows detrimental impacts. These findings align with Nepal’s commitment to achieve net-zero emissions by 2045 and underscore the critical role of green finance in decoupling economic growth from environmental degradation. The study contributes to the literature by providing empirical evidence from a developing economy and proposing a policy framework integrating green finance mechanisms with sustainable development goals. Key policy recommendations include implementing fiscal incentives for renewable energy investments, and strengthening environmental, social, and governance (ESG) disclosure requirements. The findings offer valuable insights for policymakers seeking to balance economic development with environmental protection in emerging economies.