1. Climate change is posing new challenges to central banks and regulators whose main mandate is to ensure systemic financial stability. In Malaysia, many financial institutions (FIs) and the businesses they back are beginning to realise the importance of proactively addressing a wide array of physical and transition risks that can arise as the drive to build a low-carbon and climate-friendly economy intensifies.
2. For example, the increase in the frequency and intensity of extreme weather events can trigger irreversible financial losses. In turn, a system-wide transition towards net-zero, if successful, could also have far-reaching effects on critical economic sectors. Technological innovations and low-carbon solutions seen as game-changers will require businesses to make structural shifts to adapt to different realities. A new awareness about “green swan” events, defined as rare, extreme and sudden paradigm shifts brought about by this new type of systemic risk represented by climate change, has now emerged, and the financial sector knows it needs to move quickly to navigate the landscape when they occur.
3. Often plagued by a confusing ‘alphabet soup’ of sustainability reporting frameworks, standards and practices with overlapping requirements, FIs and corporates increasingly look to central banking authorities for guidance and clearer signals on which framework they should integrate into current processes of risk management and planning. The newly-released Task Force on Climate-Related Financial Disclosures (TCFD) Application Guide, designed as a set of basic and stretch recommendations for banks, insurers and takaful operators in Malaysia to adopt, is expected to change the landscape.
4. Issued by Malaysia’s Joint Committee on Climate Change (JC3), which is co-chaired by representatives from Bank Negara Malaysia (BNM) and Securities Commission (SC) Malaysia and with participation from Bursa and supporting institutions, the guide aims to facilitate more informed financial and business decision-making in addressing climate-related risks, so that climate risk management can be done in a transparent and consistent manner
5. It also complements the Climate Change and Principle-based Taxonomy (CCPT) published by the central bank, as well as plans by BNM to conduct climate-related stress tests for the financial sector in 2024. The JC3 said that it supports that financial institutions regulated by BNM are expected to work towards adopting the stretch recommendations fully aligned with TCFD disclosures by end 2024. For FIs yet to address any of the recommendations made, they are recommended to adopt at least the basic recommendations within 24 months.
6. Professor Yeah Kim Leng, senior fellow and director of the Economic Studies Programme at the Jeffrey Cheah Institute on Southeast Asia said that FIs in Malaysia play a crucial and strategic role in directing financing and investments, such that the country stays on track for its net-zero carbon targets and other environment-related goals.
7. “The early onboarding of FIs onto the climate action bandwagon will have a significant influence on changing the behaviour of producers and consumers towards reducing their carbon footprint and in terms of adoption of sustainability practices,” said Yeah, who is also the deputy president of the Malaysian Economic Association, and a former member of BNM’s Monetary Policy Committee.
MORE THAN A NUDGE TO WEAN OFF FOSSIL FUELS
1. Sector players, including carbon-intensive ones, however, will be given some time to make the pivot gradually, by setting clear decarbonisation goals and implementing effective strategies and initiatives to embrace the new realities.
2. “Given the flexible and sufficiently long adjustment period, it is envisaged that FIs that implement the TCFD-aligned recommendations will be able to adapt to the desired shift in the business landscape from fossil-fuel dependent sectors to renewables and sectors that are anchored on sustainable production and consumption principles and practices,” said Yeah.
3. A joint report by BNM and the World Bank published in March 2022 shows that Malaysian banks have broad exposure to physical and transition risks, with 54 per cent of their commercial loans portfolio or RM398 billion going to sectors that depend to a high extent on ecosystem services, as of December 2020.
4. With FIs moving faster to reduce the risks of their loan assets being stranded by climate-related changes, businesses will be compelled to broaden their perspectives - taking a financially-focused view to identify climate change’s impact on their business models beyond their own carbon footprint, and creating a domino effect further down the value chain.
A BOOST TO TRANSITION FINANCE AND TAILORED GREEN PRODUCT
1. Besides strengthening the resilience of Malaysia’s financial sector to climate risks and events, the application of the TCFD-aligned recommendations can also help FIs acquire a competitive edge over their competitors. The market will likely see a surge in green products designed and tailored to help clients push through in their decarbonisation journey.
2. For instance, Malaysian bank CIMB now offers a preferential rate (i.e. a 0.5 per cent reduction from the conventional rate) on loans for hybrid or electric vehicles, on top of a 50 per cent reduction on road tax for green technology vehicles provided by the government.
3. Banks are also coming up with green technology financing schemes to accelerate the development of sustainability-related technologies by small and medium enterprises (SMEs). This includes BNM’s RM1 billion Low Carbon Transition Facility that matches funds provided by FIs and provides dedicated support to SMEs. It is available for SMEs of all economic sectors, up to a maximum of RM10 million, for financing working capital and capital expenditure.
4. Professor Yeah believes that there are investment and financing opportunities arising from the green transition that can be seized. “Individual FIs can use the guidelines to formulate strategic roadmaps to develop their competitive advantages that leverage on the opportunities presented by the transition to a low carbon and green economy,” he said.
CONTINUED ENGAGEMENT FOR GREATER CLIMATE RESILIENCE
1. Ultimately, as climate-related disclosures are moved into mainstream reporting, these disclosures will be subject to the same rigorous governance processes as financial reporting now is.
2. Over the past months, after the release of the TCFD Application Guide, the JC3 has also continued to engage with corporates to identify climate and sustainable financing needs that can be mobilised through the financial sectors.
3. Speaking to the media in September, BNM deputy governor and co-chair of JC3 Jessica Chew said that the committee is encouraged by the increasing focus and concrete actions being taken by FIs to manage climate-related risks. “Further progress will, however, critically depend on key enablers, including accessibility to data and putting better disclosures in place,” she said.
Source:
https://www.eco-business.com/news/what-does-the-new-tcfd-aligned-guidelines-for-climate-risk-disclosure-and-management-mean-for-malaysias-businesses/
