Bank Negara Malaysia (“BNM”), as the central bank and a statutory body, plays a pivotal role in promoting monetary and financial stability. In line with this mandate, BNM is actively working to strengthen the sustainability and climate resilience of Malaysia’s financial system. This effort aims to ensure that the country’s financial institutions can continue to provide effective financial intermediation services despite the growing challenges posed by climate change.
Before delving into this topic, it is crucial to address a fundamental question: What are the potential negative effects of climate change, commonly referred to as climate-related risks? Furthermore, how do these risks impact the financial system?
The climate-related risks include the following:-
(a) Physical risk – property damages, lower productivity and trade disruption due to extreme weather events & changes in climate. This will affect the asset value and creditworthiness.
(b) Transition risk – the pace, magnitude and method of adjustment towards low-carbon economy. This will result in stranded assets & reduced profitability.
(c) Liability risk – compensation costs for losses & legal cost related to climate change due to the failure to consider or respond to impact of climate change.
Based on BNM, the above climate-related risks would impact the financial system in the following ways:-
(a) Loss of Credit & Insurance/Protection – losses & impairment of retail, residential and corporate loans. Devaluation of residential & commercial properties.
(b) Financial Market Loss – lower corporate profitability & increased litigation leading to fair value loss due to devaluation of equities, bonds & commodities.
(c) Feedback Loop – financial contagion feeding back to the economic. Wider economic deterioration due to the lower demand, productivity and output impacting the financial system.
Therefore, it is essential for financial institutions, including Bank Negara Malaysia (BNM), to incorporate Environmental, Social, and Governance (ESG) factors into their decision-making processes to ensure long-term resilience and sustainability.
As a member of the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), Bank Negara Malaysia (BNM) supports the NGFS Glasgow Declaration and aligns with the recommendations outlined in the NGFS’ First Comprehensive Report, A Call for Action: Climate Change as a Source of Financial Risk. In this context, BNM is committed to the following key initiatives, inter alia:
(a) Integrating climate-related risks into financial stability monitoring and micro-supervision – This involves incorporating reviews of financial institutions’ efforts to strengthen climate risk management practices into formal supervisory assessments and taking appropriate supervisory action when these efforts are found to be inadequate.
(b) Integrating sustainability factors into own-portfolio management – This includes assessing how climate change may influence monetary policy as part of its periodic review of the monetary policy framework.
(c) Bridging data gaps — BNM leads and provides dedicated resources for the newly established Sub-Committee on Bridging Data Gaps, which was formed under the Joint Committee on Climate Change (JC3).
(d) Building awareness, intellectual capacity, and encouraging technical assistance and knowledge sharing — This is achieved through ongoing programmes of dialogues, conferences, and workshops on climate-related risks and opportunities. BNM also contributes to the formulation of national climate policies to ensure alignment with the financial sector’s response to climate risks.
(e) Achieving robust and internationally consistent climate and environmental disclosures — BNM aims to enhance transparency on the management of, and exposures to, climate-related risks in the financial sector.
(f) Reducing its own operational carbon footprint — BNM seeks to lower its environmental impact through energy-efficient operations, sustainable food management, the adoption of e-payments, and environmentally friendly production and management of banknotes. These efforts contribute to Malaysia’s broader goal of achieving net-zero greenhouse gas (GHG) emissions by 2050.
BNM is leading the charge in creating a resilient and sustainable financial system by embedding ESG principles and tackling climate-related risks. In doing so, BNM is shaping a future where finance drives environmental progress. The time for collective action is now — together, we can build a lasting, resilient future where finance empowers positive change for generations to come.
Disclaimer: This article is for informational purposes only and does not constitute any legal advice. If you have any questions or require further information on this matter, please do not hesitate to contact us directly.