RI Interview: Central bank governor Nor Shamsiah Mohd Yunus says Malaysia will keep dismantling ESG barriers

Climate disclosures, stress testing and prudential regulation top supervisor’s to-do list

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Over the past few years, Malaysia has moved at pace to position itself as a regional leader on sustainable finance. The country is among only a handful which are piloting a taxonomy for eligible ‘green’ investments akin to that pioneered under the EU’s Sustainable Finance Action Plan. Malaysia has also rolled out a series of incentives and resources aimed at encouraging both issuers and investors to integrate sustainability factors into their decision-making.

Other advancements have focused on leveraging Shariah-compliant finance – Malaysia is a key market for assets managed according to Islamic principles – and bringing it up to mark with ESG standards. In 2014, Malaysian regulators introduced the first global SRI standard for Shariah-compliant bonds, which was followed in 2019 by a Shariah-based ESG risk management framework for the banking sector.

Much of the country’s pivot toward ESG has taken place under the purview of current Malaysian central bank governor Nor Shamsiah Mohd Yunus. Other than a short stint at the IMF, Nor Shamsiah has led Bank Negara Malaysia (BNM) – Malaysia’s central bank – in a senior leadership role since 2010, first as Deputy Governor and, as of 2018, as Governor.

But according to Nor Shamsiah, there is still work to be done. One of the immediate priorities of BNM, she says, is improving the quality of forward-looking data on climate-related risks.

“Data is a critical challenge for three main reasons,” she explains. “Firstly, the available data from sustainability disclosures is incomplete and of poor quality; secondly, there are inconsistent metrics and limited transparency in ESG scores and ratings; and lastly, limitations of public datasets on environmental data such as environmental hazards, rainfall and emissions make managing climate risks more difficult.”

Physical risks are a clear and present danger for the country. Data from BNM shows that the Malaysian economy lost $2bn (RM8bn) between 1998 and 2018 as a result of climate-related events. A combined 11.7% of banking and insurance assets are estimated to be exposed to these risks.

“There will be clear immediate prospects for differentiating financial institutions based on their support of climate goals.”

To address data gaps, Nor Shamsiah is leveraging the green taxonomy – expected to be issued later this year – to improve the consistency of disclosures, as well as a financial sector initiative to implement the recommendations of the Task force for Climate Related Financial Disclosures (TCFD) and working with the government to overhaul public datasets.

The lion’s share of these initiatives are overseen by a joint steering committee – co-chaired by BNM and Malaysia’s Securities Commission – which is responsible for plotting the course of the financial sector’s climate change and broader sustainability strategy.

The future introduction of taxonomy-aligned disclosures also has the potential to expand BNM’s supervisory toolkit by providing a basis for “differentiated regulatory treatments,” says Nor Shamsiah.

Although the idea of using separate prudential treatments for assets based on climate-risk – for example, by reducing the capital requirements for green assets – has been around for some time, it is yet to be implemented by rulemakers anywhere in the world.

“We expect to monitor reporting by financial institutions based on the taxonomy over an observation period to address consistency issues and identify key data gaps before incentive designs can be introduced on a broader scale. However, there will be clear immediate prospects for differentiating financial institutions based on their support of climate goals,” promises Nor Shamsiah.

At the same time, BNM is undertaking efforts to understand how physical and transition climate risks can impact the health of the wider financial sector. According to Nor Shamsiah, the initial focus has been on mapping how risks are transmitted from climate events like floods, rising sea levels and monsoons to the financial sector.

“Greater understanding of the climate risk transmission channels would contribute towards the development of an analytical framework to conduct sensitivity analysis and to design an appropriate stress testing scenario for the financial system,” she explains.

Although there is no accepted single approach for supervisors to assess system-wide exposure to climate change risks, there have been recent technical advancements. Chief among this is last year’s release of a common analytical framework for supervisory assessments by green central banking group the Network for Greening the Financial System (NGFS), of which BNM is a member.

Currently, the NGFS framework is being updated for regional application but Nor Shamsiah indicates that BNM will use it to inform it sensitivity analysis and stress testing.

And BNM’s focus on climate change is not confined to its supervisory mandate: the Bank also advocates on the subject among central banks within ASEAN – the intergovernmental association of South East Asian countries.

Until recently, BNM led an ASEAN task force set up to examine the role of central banks in combating the effects of climate change, which produced a landmark report on the implications of climate and environment-related risks for financial and monetary stability. ASEAN members have since voted to adopt a number of its the report’s recommendations, such as developing a regional green taxonomy and sustainable finance roadmap, and establishing a joint climate data collection mechanism.

Nor Shamsiah believes that a collective approach by the supervisory community is key if there is to be “some level of global consistency” on matters such as integrating climate considerations into prudential regulation, risk assessment and assurance frameworks for green assets and the development of market mechanisms to intermediate green financial flows.

“These continue to be areas in which more coordinated efforts by central banks and financial regulators have the potential to spur the mainstreaming of green finance to address climate risks.”

The article has been updated to clarify that the Malaysian green taxonomy is due to be implemented later this year.