KUALA LUMPUR: Climate change is fast becoming a material source of structural change that has or may have a significant impact on the financial system and the wider economy.
Recognising its risks and impacts, Bank Negara Malaysia (BNM) has issued a discussion paper on Climate Change and Principal-based Taxonomy which aims to provide an overview of the matter.
The discussion paper would serve as guidance to facilitate financial institutions in identifying and classifying economic activities that could contribute to climate change.
The objectives of this document are for financial institutions to among others, increase awareness and actively respond to climate change and identify economic activities that contribute to climate change objectives.
“It also aims to prepare and build capabilities in managing the financial risks from climate change,” said BNM in the discussion paper released last week.
Climate change and its impacts according to the central bank can manifest in three dimensions of risk namely physical risk, transition risk and liability risk. Physical risk arises from climate-related events that damage property, reduce productivity and disrupt trade.
Transition risk, on the other hand, arises from transitioning to a lower-carbon economy which may entail extensive policy, legal, technology and market changes to address mitigation and adaptation requirements related to climate change.
Liability risk entails legal risks and claims on damages and losses incurred from the effects of physical and transition risks.
Hence, the BNM encourages financial institutions to take action to embed climate-related-risks considerations in their business operations and decision making. This also includes promoting financial flows to activities that will support the transition to low carbon and climate-resilient economy.
The document is developed in reference to international standards and guidelines as well as the Value-Based Intermediation Financing and Investment Impact Assessment Framework (VBIAF) Guidance Document.
The document will undergo a period of public consultation before it is finalised. The BNM invites written feedback on the discussion paper, including suggestions for particular areas to be clarified or elaborated further and any alternative proposals that the bank should consider.
To provide more comprehensive feedback to the document, investment banks are also included in the consultation process.
The Securities Commission Malaysia will also be seeking feedback from the Fund Management industry on the discussion paper and it will be provided to the central bank.
Feedback must be submitted to the BNM by March 31, 2020. — Bernama