Views on sustainable finance
How prepared are financial institutions in Malaysia and the broader Southeast Asia region to provide sustainable finance?
1. Should the financial sector embrace the concepts of sustainable finance wholeheartedly?
The global ambition of limiting the global average temperature increase to 1.5°C has become a core and crucial agenda for many, if not all nations. This call for action is now critical as discussed in the UN Climate Change Conference COP26 in 2021. The renewed goals and new goals established on the adaptation, climate finance goals, etc. provides an abundance of opportunities amidst the risks to undertake new strategies to transition businesses, build resiliency, and ride on the wave of technology moving towards a greener, low carbon economy.
For a successful and orderly transition, the financial sector plays an important role, as governments and businesses require funding for new initiatives, impactful research, and development – this is where sustainable finance comes into play.
Sustainable finance is an enabler that bridges the gap by providing financial flows to ensure economic activities come to fruition. It is thus imperative that the financial sector embraces sustainable finance wholeheartedly to grab the waves of opportunity, while contributing towards a sustainable future for our future generations.
2. How prepared are Malaysian and regional FI’s in doing so?
Banks within Malaysia and the region are ramping up their preparation and capacity towards providing sustainable finance as well as strengthening their climate risk management. Banks have begun allocating dedicated funding towards sustainable finance – e.g. In 2021, Maybank has committed RM50 billion for sustainable financing, which covers direct lending or investment, while CIMB also set a target of mobilising RM30 billion towards sustainable finance by 2024. Another example in 2019 was Hong Leong Bank’s RM500 million commitment for the financing of renewable energy over 4 years, to support the government’s goal in increasing the share of renewable energy for climate change mitigation.
With guidance from Bank Negara Malaysia’s publication on the Climate Change and Principle-based Taxonomy which introduces a principle-based taxonomy to categorise economic activities being funded, and the recent publication on Climate Risk Management and Scenario Analysis Exposure Draft, banks in Malaysia are well supported in their preparation to ramp up capabilities.
3. Central banks are in the process of setting up certain standards of green finance to follow. Is this correct?
We can see that central banks are in the process of setting up green finance guidance and/or standards. The recent publication ASEAN Taxonomy for Sustainable Finance, comprising membership of all ten ASEAN countries’ governments and/or central banks, serves as a reference point to guide capital and funding towards sustainable finance activities. Its activity classification system into green, amber, or red provides a common standard across the different jurisdictions in ASEAN. Further issuances of the taxonomy is expected moving forward.
4. What happens if these FI’s do not take the concepts of green finance seriously?
Financial institutions who do not take the concepts of green finance seriously face the risk of bearing the impacts of getting left behind through missed opportunities and the transition risk, which is the risk of economic dislocation associated with the process of adjusting towards a low carbon economy – for instance, governmental policy, market, and technological changes. Financial institutions who do not relook into their risk appetite of financing and potentially credit underwriting methodologies will risk continuous financing of high carbon intensive sectors, of which in the long run, will face potential obsolescence when economies transition and shift towards new carbon capture technologies. This will in turn pose credit risks for financial institutions, due to risk of lower asset valuation or higher risk of repayment capacity.
5. For those companies and projects that will be in need of funding, do they have to ensure their businesses and projects are ESG certified?
While it has not been stated in any requirements nor regulations that companies and projects must be ESG certified, there is an observable trend that is moving towards that direction in the long run. Bank Negara Malaysia is cognisant that an orderly transition towards a low carbon economy is essential. To minimise the risk of sudden economic dislocation, financial institutions are expected to take on a nurturing and educational approach towards their customers, considering the current state of economic development of the country and nascent stage of climate risk management businesses are in. To meet the growing expectations in the long run, businesses should thus take proactive steps to begin building ESG capacity and aim for a reputable and professionally recognised ESG certification in the medium to long term.
The views and opinions expressed in this article are those of Justin Ong, Deloitte Malaysia’s Risk Advisory Leader, and do not necessarily reflect Deloitte’s view.