The menacing effects of heat-trapping emissions and a huge shift in perceptions are building a case against financial lending in fossil fuel. The United Nations Secretary-General Antonio Guterres recently urged development banks to stop their financing activities in fossil fuel following a report which found that the World Bank had invested $12 billion since the Paris Agreement in 2015.
Sensing that things are changing, developed countries are becoming more proactive in dwarfing the parallel growth of the fossil fuel industry. Case in point: Bank Negara Malaysia published a discussion paper on Climate Change and Principle-based Taxonomy last year which provides an overview of the crisis and its subsequent impact on the financial industry—all for the development of a national taxonomy, which is already underway in the European Union and Canada. The discussion paper stated that it will act as a guideline to ensure financial institutions in the country are ‘identifying and classifying economic activities’ that could play an important role in contributing to climate change objectives.
Is Bank Negara Malaysia’s taxonomy inspired by other jurisdictions?
Malaysian financial regulators’ decision to develop a taxonomy stems from their observation in international markets coupled with national experiences. While developing the taxonomy, it is important for the regulators to ensure that it is fully in line with the international best practices and science-based definitions. This process is again crucial because those financial institutions and economies that do not abide by that will be left behind as the rest of the world finds a middle ground in global standards.
In March, the European Union (EU) Technical Expert Group on Sustainable Finance published a report which comprises recommendations related to the overarching assessment and design of the proposed EU taxonomy. It is reported that the World Bank is also launching a global guide to develop a national green taxonomy on the basis of previous engagements from a host of countries.
In Malaysia, the need for a taxonomy became more apparent during the development of Value-Based Intermediation guidelines which target sustainability financing of banks and other financial institutions while assessing transactions. In fact, local Islamic banks have observed the absence of a taxonomy in the country, which is causing a major obstacle in building up a sustainable financial system.
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.” In September, it was reported that 12 financial institutions will begin a pilot project to implement a taxonomy for classifying climate risks and firm up climate resilience in the country.
The proposed taxonomy receives tremendous attention
Governor Datuk Nor Shamsiah Mohd Yunus in her speech addressing the Sustainable and Inclusive Finance Forum, said “It is also intended to facilitate financial flows to activities that support the transition to a lower carbon economy We are working with financial institutions in Malaysia to improve transparency on how climate risk considerations are being integrated into business decisions. To this end, we are progressing plans to further encourage financial institutions to adopt the Task Force on Climate-related Financial Disclosures (TCFD) recommendations for climate-related disclosure.”
Developing a taxonomy is necessary for the country because of the value it can bring for external stakeholders to hold financial institutions accountable for their commitments toward climate risks. However, the project necessitate
s the involvement of various parties. For that reason, Bank Negara Malaysia is working closely with the Securities Commission Malaysia, the financial industry and other partners through the Joint Committee on Climate Change to develop a collective response to climate risk management.
The Asia Securities Industry & Financial Markets Association and its members are embracing the new opportunity to respond to the Bank Negara Malaysia and appreciate the efforts invested by the country to meet its Paris Agreement. The association in its report said “We thus urge Asia’s policymakers and regulators to work with and engage assertively in open dialogue with other jurisdictions in regional and international fora in efforts to develop a harmonised global taxonomy framework, whilst ensuring flexibility for regional specificities including the different needs of developed and emerging markets, as well as flexibility for different interpretations of sustainability provided there is sufficient transparency for informed comparisons by investors and market participants. We consider it inevitable that divergences in national taxonomies would lead to unintended consequences, in addition to creating further market fragmentation and hampering comparability of data and disclosure standards across jurisdictions.”
The central bank is inviting feedback on its proposed taxonomy. It plans to hold discussions with banks and insurers to understand how they will adopt the new framework. The proposed taxonomy is built on five principles: Climate change mitigation, climate change adaptation, no significant harm to the environment, remedial efforts to promote transition and prohibited activities. By practice, the classification system will be divided into six tiers in response to the severity of climate change. Overall, the central bank is improvising its experience in sustainable development which includes fixed income securities with triple-A risk adjustment returns, and it is the pioneer in issuance of green and blue bonds. More importantly, it is advising governments on the development of sustainable bond markets and acting as an intermediary in disaster risk transfer transactions for countries that are adapting climate change.
Malaysian banks buck the trend in decarbonisation
Despite the layered efforts, three significant Malaysian banks Maybank, CIMB and RHB Bank have provided $4.9 billion in loans and bonds for coal projects in the last ten years, according to Australia’s climate activist group Market Forces. This weighs on the country’s new vision to build sustainable financing, because 45 international banks have distanced themselves from fossil fuel financing, but domestic banks are plugging the gap. It is reported that fossil fuel and greenhouse emitters always stand a chance of being financed in Malaysia, which only makes it harder for the central bank to stop coal financing. Maybank, CIMB and RHB Bank are bucking the trend in decarbonisation as they continue to finance new coal projects in Southeast Asia in a big way. CIMB, in particular, has become the country’s biggest coal financier with more than $2.6 billion in coal projects between 2010 and 2019. During that period, Maybank provided $1.8 billion and RHB Bank $435 million for coal projects.
CIMB and Maybank have demonstrated significant interest in joining the funding collective for Jawa 9 and Jawa 10 projects in Indonesia. A report stated that the cost of developing the projects is $3.5 billion—and more importantly, the 2,000-megawatt facility has the capacity to prematurely kill 4,700 people from air pollution throughout its existence. It is worth noting that all of this comes from some of Southeast Asia’s largest banks. Market Forces in its report said “In continuing to invest in coal when other financial institutions are abandoning it, Malaysian banks are at risk of being left to prop up a dying industry.”
The group even said that coal financing in the country shows very little signs of abating because of CIMB and Maybank collective interest in financing the controversial Jawa 9 and Jawa 10 coal-fired power projects in the country. Other activities groups like Greenpeace and 350.org have urged CIMB not to support the project. Against this background, Bank Negara Malaysia has reminded the banks that they need to step up their game in climate change, and it might require all banks to report their exposures to climate risk.
Will big banks proactively support the taxonomy?
In response to the central bank’s challenge to combat climate change, Malaysia banks are taking up the challenge by adopting a responsible lending policy. In addition, they will be creating more awareness among retail and business banking customers on sustainability issues. Last October, CIMB rolled out a renewable energy financing package for smaller companies in Malaysia, and it has also allocated RM3 billion for loans in sustainability projects. Even RHB bank has institutionalised its approach toward sustainability and will develop a phased approach in integrating environmental, social and governance considerations into its decision-making practices.
CIMB has also joined a coalition of 130 international banks having a combined asset valuation of more than $47 trillion to realign their financing with sustainable development goals and the Paris Agreement on climate change. Currently, it has developed two group-wide policies, where one points to an overall sustainability while the other is focused on environmental and social risks in business lending. The bank has even reduced interest rates for clients who seek to purchase energy-efficient cars and houses, enabling them to make sustainable decisions. Even Maybank had developed a Responsible Lending Guideline to manage risks in for environmental, social and governance, which was further developed into a more comprehensive framework.