New principle-based guidance for financial institutions introduces progressive system of transition categories, incorporates broader environmental outcomes.
Bank Negara Malaysia (BNM) has issued a finalised guidance document for financial institutions to use to assess and classify economic activities that contribute to climate change mitigation and adaptation.
In December 2019, the central bank issued a discussion paper providing an overview of climate change and its impact to the financial system, including a draft principle-based taxonomy.
Having received written feedback on the discussion paper, BNM has been working with the JC3 (Joint Committee on Climate Change) Risk Management Sub-Committee to incorporate the feedback and enhance the discussion paper.
On Friday (30 April), BNM released the final issuance of the ‘Climate Change and Principle-based Taxonomy’ (CCPT) guidance document, which aims to:
- provide an overview of climate and its impact on businesses and households as well as the broader economy
- introduce a principle-based taxonomy for FIs to assess and categorise economic activities according to the extent to which the activities meet climate objectives and promote the transition to a low-carbon economy
- facilitate standardised classification and reporting of climate-related exposures to support risk assessments at the institution and systemic levels, strengthen accountability and market transparency, and encourage financial flows towards supporting climate objectives
The new guidance document introduces a progressive system of transition categories (Climate Supporting, Transitioning and Watchlist) to acknowledge and reflect the transition efforts and commitments by businesses to adopt sustainable practices.
It aims to provide greater clarity and guidance for the assessment of guiding principles (GP), which should be embedded in the due diligence assessment of existing and prospective customers.
- GP1: Climate change mitigation, activities to reduce or prevent emissions of GHG into the atmosphere
- GP2: Climate change adaptation, the process or actions taken to lower the negative effects and/or moderate harm caused by climate change
- GP3: No significant harm to the environment, activities which could adversely impact the surrounding community and precipitate disruptions to overall climate resilience
- GP4: Remedial measures to transition, measures to address significant harm identified at the economic activity level or the overall business level, or both
- GP5: Prohibited activities, economic activities that are illegal or contravene environmental laws
The updated guidance incorporates broader environmental outcomes through GP3, with specific focus on how business operations affect pollution, biodiversity and resource efficiency.
The document is applicable to licensed banks, investment banks, international Islamic banks, Islamic banks, insurers, reinsurers, takaful operators, retakaful operators, and prescribed development financial institutions.
It may also be used by other financial sector stakeholders such as capital market players and intermediaries and analysts to guide investment and asset selection decisions, as well as rating agencies in rating decisions.
BNM says financial institutions can also refer to the first cohort of the VBIAF (Value-based Intermediation Financing and Investment Impact Assessment Framework) sectoral guides on palm oil, renewable energy and energy efficiency for guidance on sectoral/ activity-based metrics, and climate-related and environmental risks mitigation measures.
The second cohort of guides on oil and gas, construction and infrastructure, and the manufacturing sector will be published by the end of 2021.