This is an important year for Malaysia with the continuing production of knowledge and research in various fields. The new beginning will bring to fruition the axis of work, including the country’s initiative to transition to a sustainable future—as it looks to eliminate the biggest hurdle to building up a green economy.
In 2004, when the country ranked third in the Southeast Asain region for carbon emissions of eight metric tonnes per capita, it shook the economy. The emissions were almost double the world average, and then it became a clear indication that the country’s commitment to a sustainable future needs to be solid.
Most major economies in the world have become proactive in climate action goals because they understand that by not doing so—it will also take a toll on their financial health. Last year, the central bank said that financial institutions will have to report their exposure to climate risks and the information gathered from those reports can be realised to set up regulatory standards. “It is for this reason that Bank Negara Malaysia (BNM), along with many other central banks around the globe, are giving serious attention to climate risk,” Bank governor Nor Shamsiah Mohamad Yunus said.
In line with the PH manifesto, Minister of Energy Yeo Bee Yin had announced three important climate-focused commitments: establishment of a climate change centre, national climate change adaptation and mitigation plan slated for completion by the end of 2019. The country has pledged to reduce the intensity of greenhouse gas emissions by 45 percent by 2030 as part of the famed Paris Agreement.
Bank Negara Malaysia proposes taxonomy to realise a green economy
As it prepares for its next phase of work on this front, a consultation paper was published by Bank Negara Malaysia to launch a principle-based taxonomy—following suit with the EU and Canada already developing their own taxonomy frameworks. The consultation paper stated that it will serve as a major guide to “facilitate financial institutions in identifying and classifying economic activities that could contribute to climate change objectives.”
The move emphasises on the central bank’s intensifying efforts to support climate change goals and achieve greater development progress over time. The exchange in knowledge and country-level dimensions of its work in the proposed framework will have a positive effect on its realisation of a green economy.
Malaysian banks buck the trend in energy fundings
Last year, a study showed that Maybank, CIMB and RHB Bank continue to finance new coal-powered projects in the region on a large scale. The banks have provided nearly $5 billion in loans and bonds for new coal projects in the country over the last decade, observed a report published by Market Forces.
First: CIMB is recognised to be the country’s biggest coal funder which has made advancements in fossil fuel on the back of $2.6 billion investments between 2010 and 2019. Second: Maybank followed suit by providing $1.8 billion in coal projects while RHB invested $435 million for the same purpose during that period.
The greater problem identified here is that as established global banks pull out from investing in coal projects, smaller banks step in to buck the trend in decarbonisation. According to Market Forces, if the trend continues then Malaysian banks will be at ‘risk of being left to prop up a dying industry’.
The transition is going to be more productive this time
Certainly, it is meant to be different this time for the Malaysian economy and the financial institutions because the proposed taxonomy targets institutions which the Bank Negara Malaysia superintends—pointing to a whole array of investment banks, licenced banks, Islamic banks and licenced insurers. The framework can in fact be adopted by other financial players like asset management companies, rating agencies and research institutions.
In this context, the consultation paper said “Bank Negara Malaysia takes the view that climate-related risk is a risk driver that has an impact on most of the commonly known risk types such as credit risk, market risk, liquidity risk, insurance risk, operational risk and strategic risk.”
What is interesting about the proposed taxonomy framework is that it will classify the economic activities of financial institutions into six categories—with highest performing levels on one end of the spectrum and prohibited activities on the other end of the spectrum. More specifically, it will be built on a set of thematic areas revolving around climate change mitigation, climate change adaptation, no significant harm to the environment, remedial efforts to promote transitions and prohibited activities.