News Regulations22 Sep 2022

Malaysia:Bank Negara expects insurers and other FIs to understand how climate change affects risk exposures

| 22 Sep 2022

Bank Negara Malaysia (BNM) expects financial institutions (FIs) to understand how climate-related risk drivers can impact their risk exposures - including credit, market and insurance risks from their lending, underwriting and investment activities, according to Ms Jessica Chew, deputy governor of Malaysia's central bank.

In a speech yesterday at a conference on green housing in Asia, Ms Chew said that BNM expects financial institutions to be able to identify, measure and manage the risks well.

At the same time, the financial sector can and should play a catalytic role in the transition towards a low-carbon economy through its control of resources that fuel the economy.

Ms Chew highlighted a few key developments that will shape the Malaysian financial sector’s climate response in the coming years. The response in turn will affect how financial institutions interact with businesses going forward.

Taxanomy

Beginning in July this year, financial institutions have started reporting their climate-related risk exposures based on the Climate Change and Principle-based Taxonomy developed for the financial sector to assess and classify economic activities within their portfolios. Aside from building a strong foundation for risk assessments and disclosures, the taxonomy is expected to encourage the flow of capital toward supporting transition activities.

BNM recognises the need to minimise macroeconomic and social dislocations in the short term in the transition to a low-carbon economy. The financial sector taxonomy, therefore, does not adopt a binary classification of green and brown activities, but also recognises credible efforts by businesses to actively reduce the harm that their operations might pose to the environment during the transition.

Based on an analysis of their material exposures to climate-related risks, financial institutions would be required to take actions to address high and unmitigated exposures.

Standards

BNM has also strengthened the standards that it expects financial institutions to meet in managing climate-related risks. These include an expectation that financial institutions would work with and support their customers in managing their transition. "More to the point, if businesses are committed and willing to undertake changes to reduce their GHG emissions and green their operations, the financial sector should help them make the transition. This may take the form of appropriate financing or protection solutions and advisory services," Ms Chew said.

On its part, the Bank will continue to support transition activities through the MYR1bn ($220m) Low Carbon Transition Facility and other funds for SMEs which will complement funds extended by financial institutions to help SMEs implement sustainable low carbon practices.

Disclosures

BNM also requires all FIs by 2024 to make disclosures in line with the recommendations of the Task Force on Climate-related Disclosures (TCFD). Given that such disclosures by FIs will ultimately depend on disclosures provided by their customers and counterparties, this will have implications on demands for climate-related information from businesses.

Transition

Significant efforts are also being pursued to support climate risk management and transition through the Joint Committee on Climate Change, or JC3, which is co-chaired by the Bank and the Securities Commission. The JC3 serves as an industry-regulator collaborative platform to drive and coordinate the financial sector’s response to climate change.

As part of efforts to scale up transition finance, JC3 is actively exploring pilot programmes to test new green solutions and instruments. In identifying suitable pilot projects, priority will be given to climate-friendly projects that can help develop the broader ecosystem for green finance, such as carbon accounting and measurement frameworks, climate data aggregators, or green credentialing standards.

Another key deliverable of JC3 this year is the upcoming publication of a data catalogue that will point users to credible sources of critical climate data needed to support identified use cases, Ms Chew said.

She said, "All of this is to say that climate strategies are set to be a key focal point of financial institutions’ business and risk decisions going forward."

Green housing insurance

She noted that while it was encouraging to see major banks in Malaysia already offering targeted financing solutions for green residential homes, much more could be done. For example, protection products, such as green housing insurance, remain an unexplored market in Malaysia despite the steadily increasing number of green buildings in the country. Within existing product offerings, novel features such as additional protection for non-certified green buildings to rebuild in green when damage occurs could also be explored.


 

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