NGFT Classifier

Financial markets are how the world funds its response to climate change: capital has to move toward low-carbon, resource-efficient, resilient activities, and away from ones that make things worse. That redirection of money is what people mean by "sustainable finance." But redirecting capital only works if everyone agrees on what counts as sustainable in the first place. For years, they didn't. Different banks, funds and rating agencies each used their own definitions, methodologies and scores, and a well-known UBS survey found that roughly three-quarters of high-net-worth investors found the resulting maze of sustainability labels confusing.

That confusion has a name economists use: information asymmetry. The bank or company raising money knows exactly what the loan or bond is funding; the depositor, investor or regulator reading the annual report doesn't. Left unresolved, that gap opens the door to greenwashing: labelling an ordinary loan "green" because it sounds good, not because it earns it. A taxonomy is the tool built to close that gap. It's a classification system: a rulebook that sorts economic activities (a poultry farm, a cement plant, a hydropower project) against a shared, checkable definition of "sustainable," so the label means the same thing no matter who's using it.

Think of a sustainable finance taxonomy as an encyclopaedia of sustainable economic activities: a detailed list of sectors and activities, paired with the criteria an activity has to meet to be considered aligned. Once that exists, three things become possible that weren't possible before: investors can actually compare how sustainable different investments are, rather than taking a label on faith; greenwashing gets much harder, because there's now an objective standard to be checked against; and the market stops fragmenting into dozens of competing private definitions, because everyone converges on the same reference tool.

This is also where taxonomies earn their keep for a bank specifically, not just for the system in the abstract: they give you confidence that a loan you're tagging "green" will hold up to scrutiny, they help direct capital toward activities that lower your own portfolio's exposure to climate and environmental risk, and internationally, taxonomy alignment is increasingly the ticket needed to access green bonds, climate funds (like the GCF) and preferential green finance instruments. It's worth being equally clear on what a taxonomy is not: it says nothing about the financial return of an investment, and it doesn't ban unsustainable activities either, it simply doesn't label them sustainable.

Whatever country you look at, a taxonomy is assembled from the same three core elements, decided in roughly this order:

Once the scope is set, a taxonomy needs a method for actually deciding whether a given activity clears the bar. Around the world, three approaches show up, often blended together:

Most taxonomies pursue more than one objective at once (say, climate mitigation and biodiversity protection), and that raises an obvious question: what if an activity helps one objective while quietly damaging another? A large hydropower plant can genuinely cut emissions and still flood a habitat. The answer most taxonomies (the EU's included) build in is Do No Significant Harm (DNSH): an activity only counts as aligned if, in serving one objective, it doesn't meaningfully undermine any of the others. You'll meet NGFT's own version of this gate in Lesson 3.

Between 2000 and 2019, Nepal ranked as the tenth most-affected country in the world on the Global Climate Risk Index: counted by lives lost, economic damage and the sheer frequency of floods, storms and heatwaves. And here's the uncomfortable part: Nepal contributes a practically negligible share of global greenhouse gas emissions. We didn't cause much of this problem, but we're exposed to it more than almost anyone else.

Now bring this back to your desk as a loan officer. Nepal's financial system runs on banks, and those banks are heavily parked in agriculture, construction, real estate, manufacturing, wholesale and retail: sectors that sit directly in the path of climate and environmental risk. A flood that wipes out a client's poultry farm doesn't just hurt the client. It becomes a stressed asset on your bank's book. So "going green" here isn't a PR exercise, it's your bank quietly de-risking its own portfolio while it happens to help the country too.

This is exactly the gap Nepal Rastra Bank (NRB) tried to close when it published the Nepal Green Finance Taxonomy (NGFT) in its 2022/23 monetary policy. Think of it as a shared rulebook: a common language, so that when one banker says a loan is "green," it means the same thing as when a banker across town says it. It aligns with Nepal's NDC (2020), the Long-Term Strategy for Net Zero Emissions by 2045, the National Adaptation Plan (2021), and the Green, Resilient and Inclusive Development (GRID) approach, so you're not just following a bank circular, you're plugging into the country's actual climate commitments.

Here's a question worth sitting with: before NGFT existed, what stopped a bank from just calling any loan "green" if it felt like it? Nothing, really. And that's the problem: without a shared definition, "green" becomes whatever a marketing team wants it to mean, and depositors, regulators and investors have no way to tell a genuine climate-smart loan from a relabeled ordinary one. Economists call this information asymmetry: the bank knows what the money is really funding, but everyone reading the annual report doesn't.

A taxonomy closes that gap. It gives every activity: a poultry farm, a hydropower plant, a cement factory, a consistent, checkable answer to "is this green?" That consistency is what lets green bonds get issued, climate funds get accessed and genuinely green businesses get preferential rates, because everyone downstream can trust the label. NGFT's primary users are BFIs, capital markets and insurance, but it's open to MSMEs, pension funds and trust funds too, the whole financial system is meant to speak this one language.

NGFT doesn't just hand you a single yes/no checkbox. It uses a dual approach: a principle-based method (four broad environmental objectives, which you'll meet in Lesson 2) layered with a whitelist: a pre-approved, sector-by-sector catalogue of specific activities that are already known to be Green, Amber or Red. In practice, you'll spend most of your time on the whitelist side: look up your borrower's sector and activity in the Navigator or Classifier tab of this tool, and the tag is already there.

Every loan you'll ever classify falls under one of these 17 buckets. You don't need to memorise them: just know they exist, because Step 1 of the Classifier always starts by asking "which sector?"

Say a customer walks in wanting a loan to install a solar-powered irrigation pump. Before you can call that loan green, NGFT wants you to ask: which of the four environmental objectives does this actually serve? Not all four: just at least one, credibly. Those four objectives are Climate Change Adaptation, Climate Change Mitigation, Natural Resource Conservation and Pollution Prevention and Control. They're drawn from Nepal's own policy commitments, the NDC, the National Adaptation Plan, the Long-Term Strategy to Net Zero by 2045, and the GRID approach, so they're not abstract global boilerplate, they're Nepal's own climate promises translated into bank-loan language.

These rules underpin all four principles and guide what makes an activity "green". Every Green or Amber activity traces back to at least one of these rules.

Every activity you classify lands on exactly one of three labels: Green, Amber or Red. Simple enough on the surface. But here's the part that trips people up: this label describes the specific activity the loan is financing, not the borrower as a person or the sector as a whole. A single borrower can hold one Green loan and one Red loan at the same bank, for two different activities. Classify the activity, not the client.

You've now met the four principles and the two safety gates: this lesson is just about the order you apply them in, taken straight from NGFT Figure 4 and compressed into five steps. One housekeeping note first: per NGFT Section 3.2.2, your bank's ESRM Steps 1 and 2 come before any of this, taxonomy classification sits on top of, not instead of, your normal environmental and social risk management screening.

Research into NGFT's rollout has flagged one obstacle above all others: the pervasive lack of awareness of climate risk and green-financing principles among BFI staff, borrowers and even regulators: not a shortage of good policy, a shortage of people who know how to apply it day to day. That's not a knock on anyone; it's just a new framework, and new frameworks take time to become second nature. But it does mean that finishing this lesson genuinely moves the needle, you're one banker who now knows the framework well enough to apply it correctly, which is precisely the gap the sector is short on.

NGFT Section 3.3 spells out what a BFI is expected to do. Stripped of the regulatory language, it comes down to three jobs: and you'll notice all three map directly onto tabs in this tool.

NGFT wasn't drafted behind closed doors at NRB alone. Five institutions sat on a joint Steering and Working Committee that governed the entire process: Nepal Rastra Bank (NRB), the Securities Board of Nepal (SEBON), the Nepal Insurance Authority (NIA), the Ministry of Finance (MoF) and the Ministry of Forests and Environment (MoFE). That's deliberate: a taxonomy that only NRB believed in would only bind banks, but this one is meant to speak for the whole financial system, so the capital market and insurance regulators had to be in the room from day one.

The committee then ran a three-step process to get from a blank page to the document you're reading now:

NGFT's design didn't start from scratch either. It followed a conceptual framework from the World Bank's 2020 guide, Developing a National Green Taxonomy, which lays out six actions any country can follow:

Lesson 0 introduced the three global testing methods in the abstract. Here's who actually uses each one in practice:

Why hybrid, and not a full EU-style technical screening system? Technical criteria demand detailed emissions data, sector-specific baselines and verification capacity that Nepal's BFIs and regulators don't yet have at scale. A pure whitelist, on the other hand, is easy to apply but hard to defend if challenged, there's no underlying logic to point to. The hybrid gets you the day-to-day simplicity of "look it up" while keeping the four core principles as the reasoning that justifies every entry on the list.

You'll hear "green finance," "climate finance" and "sustainable finance" used as if they're synonyms. NGFT is precise about this, and it matters: knowing which term applies tells you what an activity is actually being checked against. Picture five concentric circles, each one wider than the last:

One more term worth knowing: Carbon Financing. This places a monetary value on carbon emissions and lets companies wishing to offset their own emissions buy carbon credits earned from sustainable projects. NGFT explicitly leaves the door open here: projects qualifying for the Verified Carbon Market (VCM) can be integrated into a bank's green financing options, identified as investment-worthy for BFIs and other market participants.

Lesson 2 mentioned Nepal needs roughly USD 77 billion to meet its adaptation, mitigation and sustainable development commitments by 2030. That figure isn't a single estimate, it's four separate national cost estimates added together:

Nepal's financial system is bank-dominated. Banking and Financial Institutions (BFIs) lending is tracked across 18 sectors in NRB's Supervisory Information System (SIS), slightly more granular than the 17 sectors NGFT itself uses for classification. NRB has further prioritised directed lending toward agriculture, energy, tourism, and small, micro, cottage and medium industries (MSMEs). The catch, as of NGFT's publication: there was no systematic breakdown of lending, investment tracking or monitoring specifically in "green" sectors, which is precisely the visibility gap the taxonomy was designed to close.

The 17 sectors you met in Lesson 2 aren't invented for NGFT alone, they're stitched together from five existing sources so that every regulator's own rulebook is respected:

Real loan files aren't always this tidy. Per NGFT Section 3.2.2, if an investment is relevant to multiple sectors or sub-sectors at once, you don't classify each component separately and average them, you evaluate it based on the aggregate performance of all its activities toward the green objectives. A mixed-use loan financing both organic tea cultivation and a small diesel-powered drying unit, for example, has to be assessed as a whole, not cherry-picked from its greenest line item.

Lesson 4 walked you through one worked example. Here's the underlying logic it was quietly running, written out as the actual branching questions NGFT Section 3.2.2 uses:

Before a loan file ever reaches you, the borrower already has three obligations under NGFT, even if they've never heard the word "taxonomy":

Lesson 5 compressed your job into three headlines for memorability. NGFT Section 3.4.2 actually spells out eight duties for BFIs, insurers and merchant banks. Here's the complete list, with the Lesson 5 headline each one feeds into:

Section 3.4.3 doesn't just impose obligations downward, it commits the regulators themselves to five duties:

Every individual classification you make eventually feeds a chain that runs: Clients → BFIs, Insurance & Merchant Banks → Regulators (NRB, SEBON, NIA) → Ministry of Finance & Ministry of Forests and Environment. BFIs monitor client adherence to taxonomy-aligned financing through regular follow-ups and site visits, guiding remedial measures where needed. Regulators then supervise the BFIs themselves, running annual checks on progress. NGFT is explicit about tone here: the first response to a problem is a list of improvements needed, not a penalty. Fines are reserved for the extreme case of improper conduct, precisely so the regulatory approach doesn't deter private initiative while the market is still learning the framework.

Disclosure requirements differ by sector, per NGFT Table 4:

Beyond the numbers, Annexes 4f and 4g require market participants to answer four questions, and NGFT also directs reporting to follow the International Capital Market Association's (ICMA) Green Bond Principles: