Malaysian central bank calls for feedback on green taxonomy proposals

The taxonomy will be the first from an emerging market country

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Bank Negara Malaysia (BNM) is inviting feedback on its plans for a ‘principle-based’ green taxonomy, saying it will be meeting with banks and insurers to discuss how they will adopt the framework. 

The central bank, which supervises the country’s banks (including investment banks, Islamic banks and development banks) and insurers and reinsurers, is working with the World Bank on a taxonomy “to facilitate financial institutions in identifying and classifying economic activities that could contribute to climate change objectives”.

"Supervised institutions are expected to conduct holistic due diligence assessments and consider the impact their businesses have on the wider eco-system"

The taxonomy will be the third such categorisation system globally, following the high-profile EU taxonomy and one in development in Canada.

In a 28-page discussion paper kicking off the public consultation, BNM said it “considers climate change as a material source of risk that could pose threats to financial stability”. “Supervised institutions are therefore expected to integrate climate-related risks and considerations into their business strategies and risk management practices,” it warned, recommending stronger governance on climate change, greater knowledge and integration of climate risk into management, and disclosure of such risks via the Task Force on Climate-related Financial Disclosures (TCFD). It also called for more “financial flows to activities that will support transition to a low-carbon and climate-resilient economy”.

The taxonomy is aimed at banks and insurers but BNM said it could be used as a guide by asset managers, ratings agencies and research houses, too. 

The taxonomy has five principles: 

1.     Climate change mitigation

2.     Climate change adaptation

3.     No significant harm to the environment

4.     Remedial efforts to promote transition, and 

5.     Prohibited activities

The classification system itself is expected to be divided into six tiers. ‘Category 1’ – the highest performing – will be economic activities that support substantial climate mitigation or adaptation without causing harm to the broader environment; while ‘Category 6’ covers prohibited activities, which contravene environmental laws. The middle four categories deal with climate-aligned activities that harm the broader environment, and those that aren’t climate aligned but aren’t prohibited. Categories 2-4 are in place to “recognise the early stages of transition”. “Exclusion of these categories from access to financing may result in severe negative impact to the economy,” said the discussion paper. 

“An economic activity should not be considered environmentally sustainable independently from the overall business activities,” it continued. “Supervised institutions are expected to conduct holistic due diligence assessments and consider the impact their businesses have on the wider eco-system and ensure that their businesses do not have track records of environmentally damaging practices.”

BNM will be meeting with individual institutions to discuss their plans to implement the taxonomy, it said. 

The taxonomy is part of a wider push from Malaysian regulators to position the country as the leading emerging market on climate finance. For details of its other efforts, see RI’s country profile here.