Towards a Greener Financial System

Introduction

In 2025, global political shifts and renewed debates on climate commitments created uncertainty. At the same time, climate impacts became more visible domestically. Floods, heatwaves and other extreme events damaged homes and businesses, putting lives and livelihoods at risk. These events reminded us to stay focused on building a climate-resilient financial system.

Our approach in 2025 centred on driving innovation and collaboration (Diagram 1). We placed attention on transition and adaptation solutions. We continued to build climate resilience across the financial system. During Malaysia’s ASEAN Chairmanship, we also provided platforms to develop avenues that support funding of regional projects.

We also promoted financing models that can speed up transition, including for the ASEAN Power Grid (APG).^[1] These efforts reflect our commitment to shaping credible climate strategies for Malaysia and the region at large.

As an organisation, we also ramped up efforts to green our operations. This included improving how we measure our emissions and strengthening its disclosure. We are guided by the Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD)^[2] and the Guide on Climate-related Disclosure for Central Banks^[3] by the Network for Greening the Financial System (NGFS) to ensure credible and transparent disclosure.

Strengthening Our Climate Governance and Driving BNM’s Climate- and Environment-Related Strategies Forward

Climate considerations are well-integrated within BNM. Our governance structure ensures that we stay ahead of climate- and environment-related risks^[4] (Diagram 2).

In 2025, we made further progress on our climate- and environment-related initiatives across our core functions. Five strategic thrusts guided our work (Diagram 3). This is also aligned with BNM’s Business Plan and the Financial Sector Blueprint 2022–2026.

Our strategies cover macroeconomic policies, financial sector resilience, national transition, internal initiatives and thought leadership (Diagram 4). These align closely with BNM’s mandates and national climate and environmental plans. Internationally, BNM continued to advocate for global collective action through the NGFS and other global platforms (Diagram 5). Through these engagements, BNM consistently highlights the unique transition challenges faced by emerging economies. This ensures greater inclusivity when global commitments or best practices are discussed.

During Malaysia’s ASEAN Chairmanship, we supported the development of the ASEAN Taxonomy for Sustainable Finance Version 4. As in the past, we led the work on setting thresholds – this time for the manufacturing sector. The taxonomy remains a key framework that provides consistent definition and application of green and transition finance across the region. We also directed focus on improving access to finance to support a just and climate-resilient transition. We secured strong interest to fund the ASEAN Power Grid, including support from financial institutions, multilateral development banks, philanthropic capital providers and other partners. We also expanded the Greening Value Chain (GVC)^[5] programme to ASEAN member states to help SMEs in the region transition. Specifically, we partnered with the Asian Development Bank and United Nations Development Programme in developing the playbook for ASEAN GVC.^[6] The rollout of the GVC pilots in Cambodia and Indonesia indicates growing interest in facilitating SMEs in the region to stay competitive and build resilience within the global supply chain.

Enhancing our regulatory focus

A strong regulatory foundation is critical for managing climate‑related risks. In 2025, we enhanced supervisory expectations and guidelines to strengthen how financial institutions identify and manage climate risk. We continued to improve the credibility and consistency of financial institutions’ reporting under the Climate Change and Principle-based Taxonomy (CCPT). Supplementary documents for the CCPT issued through the Joint Committee on Climate Change (JC3) facilitated more effective assessments by financial institutions. We also simplified and harmonised information submission to financial institutions to ease the burden of customers. We ran the first industry-wide climate risk stress testing exercise in 2025. To support this exercise, we issued reporting templates to capture how financial institutions apply the Climate Risk Stress Testing (CRST) Methodology Paper released in 2024.

A credible plan is key to a smooth climate transition. We worked with financial institutions to better understand their challenges in developing credible transition strategies. We held technical clinics that zoom in on various aspects of the transition plan. These include implementation strategies, governance and engagement, and metrics and science-based targets. These clinics helped build the capacity of staff in financial institutions who are responsible for their institutions’ transition plans.

Enhancing awareness and understanding

Issues surrounding climate and sustainability continue to evolve rapidly. This requires us to engage widely to keep pace with what is happening on the global and domestic fronts. This included speaking to external experts who shared practical industry insights. Within BNM, to keep everyone abreast, we issued postings, conducted brown‑bag sessions and e-learning modules. These efforts helped deepen understanding of climate- and environment-related risks and BNM’s role in managing them.

Advancing Climate Action in the Financial Sector

The financial sector plays an important role in Malaysia’s shift towards a greener economy. Thus far, financial institutions have made inroads in embedding climate considerations in risk management, business strategies, operations and product development (Diagram 6). This shift has been supported by practical tools and frameworks that help financial institutions and their clients manage the transition with more confidence. These resources also catalysed change by supporting businesses as they adapt and tap into new opportunities for sustainable growth.

Greater consistency in reporting

Reporting standards under the Climate Change and Principle-based Taxonomy (CCPT) have strengthened across institutions. This improves how financial institutions engage with and advise their clients. The quality of assessment continues to improve. This is also supported by enhanced classifications introduced in 2024. The new C5b category allows financial institutions to better identify economic activities that are neither climate-positive nor pose significant harm to the environment.

In 2025, financial institutions also began to implement the National Sustainability Reporting Framework (NSRF). The NSRF builds on the TCFD disclosure recommendations and is aligned with the IFRS Sustainability Disclosure Standards issued by the International Sustainability Standards Board (ISSB). This strengthens climate-related disclosures across the financial sector. To further support implementation by financial institutions, a guidance document on NSRF is being developed alongside planned training sessions.

JC3 as a platform for innovation and collaboration

The JC3 continued to play an important role in accelerating climate action within the financial sector (Diagram 7). The launch of the Climate Finance Innovation Lab (CFIL) marked a key milestone. CFIL connects project developers with potential funders to turn ideas into viable projects. It focuses on creating practical and innovative financing solutions. Qualifying projects gain access to funding, expert guidance, and a strong partner network to help them scale (Diagram 8).

Managing Climate- and Environment-Related Risk Across BNM’s Operations

While much of our work focuses on climate action across the financial sector, it is equally important that we manage the climate- and environment-related risks within our own operations.

Climate- and environment-related risks can disrupt operations, damage assets and affect employee safety. For a central bank, managing these risks is critical to maintain operational continuity and uphold public trust. Our aim is to safeguard critical functions while reducing our environmental footprint in a credible and transparent manner.

Enhancing internal risk management

The Board Risk Committee provides oversight on how we manage climate- and environment-related risks within our enterprise risk framework. This strengthens governance and accountability.

In 2025, we strengthened our internal approach to managing these risks. We updated the Enterprise Risk Appetite Statement to better reflect how we assess and respond to climate- and environment-related risks across our assets and premises. A clearer statement helps protect our buildings, reduce operational disruptions and keep our employees safe.

We also began reviewing our business continuity management (BCM) plans to prepare for disruptions, such as floods, water shortages and fires. These actions reduce operational vulnerabilities and protect critical financial infrastructure. They also allow us to set a strong example for the industry on good climate-related risk management.

Improving emissions monitoring and management

We are committed to strengthen how we manage emissions from our operations, address data gaps and enhance emissions reporting. With support from experts through technical engagement, we now have a method to measure, track and report emissions from our physical operations and currency-related activities. This has improved the accuracy of our emissions measurement and guided refinements to our internal sustainability dashboard. It is also aligned with global standards under the Greenhouse Gas (GHG) Protocol and considers various scenarios. Over time, we will expand these strategies to encapsulate other parts of our operations. These will inform the development of a credible transition plan for BNM.

The targeted carbon reduction initiatives and asset rationalisation across our operations have begun to yield outcomes (Chart 1). To manage Scope 2 emissions, we rolled out measures such as using electricity more efficiently, raising staff awareness on sustainability, optimising building systems, and investing in energy-saving technologies. We also continued our subscription to the Green Electricity Tariff for key premises, including Sasana Kijang, the Automated Cash Centre, and BNM Headquarters. This helped us avoid the generation of fossil fuel electricity by 21,848 tCO₂e (56% of total Scope 2 emissions) in 2025.

Addressing Nature-Related Financial Risks

Nature-related risks, like climate risks, can lead to financial and economic losses. They can also worsen the effects of climate change. Building on our 2022 study with the World Bank on An Exploration of Nature-related Financial Risks in Malaysia, we continued to deepen our understanding of nature-related risks and opportunities. In 2025, we advanced to practical action.

Working with the World Bank and UNDP BIOFIN, we piloted the use of Taskforce on Nature-related Financial Disclosures (TNFD) LEAP (Locate, Evaluate, Assess, Prepare) approach for assessing nature risk. Two economic sectors with strong value chains are used in this pilot.

Three financial institutions and two corporates participated in the pilot, generating practical insights and recommendations to improve nature-related risk and opportunity assessments in Malaysia. The full report will be published in 2026.

Going Forward

Malaysia is strengthening its pathway to net zero by 2050. Two key plans – the Long-Term Low Emissions Development Strategy and the NDC Roadmap – set the direction for emissions reductions and shifting to cleaner energy. New laws and policies, including the climate change legislation and the national carbon market policy, will create the frameworks needed for credible climate action and carbon trading systems.

For the financial sector, these developments signal new opportunities and responsibilities. BNM’s priorities for 2026 reflect this, with a focus on nature, climate and institutional readiness to support a smooth transition for the whole economy (Diagram 9).

Notes

^[1] The ASEAN Power Grid (APG) is the shared vision of ASEAN Member States (AMS) for fully integrated grid operations in Southeast Asia by 2045. The APG holds great promise for promoting regional economic integration and growth, enhancing energy security and accelerating clean energy transition.

^[2] A globally recognised framework to help public companies and other organisations more effectively disclose climate-related risks and opportunities through their existing reporting processes.

^[3] A guide that serves as a complement to the TCFD recommendations, providing additional guidance for central banks that are taking their first steps in climate-related disclosure.

^[4] More information on BNM’s climate governance structure and the role of the Board and senior management can be found in the ‘Strengthening Our Climate Governance’ section in chapter on ʽTowards a Greener Financial Systemʼ of Bank Negara Malaysia’s Annual Report 2024.

^[5] Supports SMEs in reducing their carbon footprint through technical training, emission reporting tools and financing.

^[6] Further details on Priority Economic Deliverables (PEDs) are in the chapter on ʽInternational Engagementsʼ and the feature article on ʽMalaysia’s 2025 ASEAN/ASEAN+3 Chairmanship: Advancing Inclusive and Sustainable Economic Growth for ASEAN and Malaysiaʼ of Bank Negara Malaysia’s Annual Report 2025.