Good morning and Salam Sejahtera.

It is my very great privilege to be given an opportunity to speak on this important occasion. I would like to thank Climate Governance Malaysia for inviting me, and for keeping attention at the highest levels of Government, corporations and authorities focused on the crucial subject of our response to climate change. We know that every little bit counts to ensure that we do not take our eye off the ball, and CGM has been a valuable partner in our efforts through the Joint Committee on Climate Change, or JC3, to mobilise collective climate actions.

Climate and environmental related risks have consistently dominated the top five global risk chart of the World Economic Forum since 2020. As we continue to experience the real world and often devastating effects of climate change on our communities and economies, their profound implications for countries both in the near- and long-term are no longer in question. The only question is how we are choosing to respond, recognising the responsibilities we bear for choices made today that will shape the future of our society and economies.

In the face of overwhelming evidence that we are far from solving the climate crisis, this is a question we all urgently need to come to terms with. In its most recent assessment of the state of climate action published in November last year^[1], the World Resources Institute found, and I quote, that “global efforts to limit warming to 1.5 degrees Celsius are failing across the board, with recent progress made on every indicator - except electric passenger car sales – lagging significantly behind the pace and scale necessary to address the climate crisis”. Progress for all but one of the 42 indicators assessed are not on track. Not only are most indicators well off track, several indicators tracked by the Institute are also moving entirely in the wrong direction. This is corroborated by the World Economic Forum report^[2] finding that global emissions must decrease around 7% annually just to retain any chance of limiting global warming below 1.5 degrees by the end of the century. Today they are still increasing by 1.5%.

Along with many other countries, Malaysia stands at a pivotal juncture, where the realities of the climate crisis are converging with global megatrends – including urbanisation and technological change - to propel us forward at a pace and scale that we have not experienced before. Doing nothing or too little will leave us highly vulnerable. At the same time, there are also real prospects to tap into enormous new opportunities that were not possible before, to achieve higher standards of inclusive and sustainable growth.

Against this backdrop, the climate policy landscape in Malaysia has evolved substantially in the last few years, with the Government and policymakers making important strides to provide greater clarity and certainty around the national climate agenda and priorities. Such progress has been critical to inform and align cross-cutting policies, business strategies and investment decisions. As we speak, the Government continues to advance several other major infrastructure and policy priorities, including the refreshed National Climate Change Policy, the Long-Term Low Emission Development Strategies (LT-LEDS) and Nationally Determined Contribution (NDC) roadmaps, the carbon market policy and the climate change legislation.

The realisation of a just and orderly transition hoped for under these policies will depend on at least three factors. First, the ability to meet the funding needs for transition. Second, the ability to capture climate risk interactions and synergies well in order to optimise climate actions and avoid unintended consequences. And third, the ability to strengthen our individual and collective capacity in terms of knowledge, skills and resources in order to deliver the kind of transformational change needed to alter the course the world is already on. These priorities continue to be the primary focus of the work of the Joint Committee on Climate Change, or JC3, which serves as a key platform in Malaysia for leading and supporting the financial sector’s climate response.

Today, over 60% of the Malaysian financial institutions have set, or are in the process of setting, climate targets. Climate considerations are also being mainstreamed in the Islamic financial sector through the implementation of the Value-based Impact Assessment Framework, or VBIAF. I am pleased to note that the Islamic banking industry will today be releasing the third tranche of the VBIAF sectoral guide which further expands the coverage of economic sectors to include agriculture, mining and quarrying, road transportation and waste management activities. This builds on the progress of two earlier tranches covering seven sectors and activities including palm oil, renewable energy and energy efficiency.

Along with higher reporting and disclosure standards following the implementation of the Climate Change and Principle-based Taxonomy by all financial institutions, these developments are expected to drive greater efforts by financial institutions to provide climate-aligned financing and protection solutions for households and businesses. This includes a wider range of product offerings such as sustainability-linked loans and bonds, blended finance solutions offered in collaboration with multilateral institutions and development financial institutions, and adaptive flood and business interruption protection coverage.

We are seeing evidence of this with more than 50% of new financing by banks this year reported to be channeled towards climate supporting and transition activities. That said, current public and financial sector commitments to ESG financing remain far below the RM1.3 trillion needed to support the economy’s energy transition alone.

To further encourage the development and expansion of innovative financial solutions, the Bank is currently looking to enhance the features of our low carbon transition and green technology funds for SMEs, with the view to further expand the industry’s capacity to finance transition activities and mobilise more diverse sources of funds for transition. This includes private sector investments in R&D to create or adapt innovative and implementable solutions to address Malaysia’s climate-related challenges. For example, as land resources grow scarce, the feasibility of vertical solar technologies need to be studied, particularly to harness renewable energy in our densely populated urban areas. With an important agriculture sector, Malaysia also needs to further develop regenerative farming practices focusing on conservation and rehabilitation techniques applied to food and farming systems that are cost effective and scalable. Other cutting-edge technologies include waste to wealth and green mobility solutions.

The Bank will leverage on our Regulatory Sandbox as well as the recent initiative to establish a Climate Finance Innovation Lab by Bank Pembangunan Malaysia to encourage the exploration of innovative financing models that support transition alongside appropriate regulatory and supervisory treatments.

While we expect financial institutions to make further progress towards meeting the funding gap, let me be very clear that we continue to expect banks, as well as insurers and takaful operators, to carefully manage exclusion risks. Our journey to strengthen climate resilience should not be at odds with preserving continued access to financing and protection for business growth and development. Consistent with this, we continue to evolve our regulatory and supervisory frameworks and tools to better capture risk interactions and synergies arising from mitigation and adaptation actions.

This has been crucially supported by JC3’s work to address challenges related to data availability, accessibility and reliability. To this end, JC3 has published the Climate Data Catalogue and continues to work closely with relevant parts of the government to improve access to critical data points, such as flood, and vehicle GHG emission data. The Bank’s review of financial institutions’ transition plans later this year as well as the first climate stress tests by financial institutions next year, will provide further valuable insights on how climate actions interact with other risks to affect different segments of the economy and society.

Indeed, the need for an inclusive approach to our nation’s low carbon transition cannot be over-stated. This goes beyond simply making transition finance available to SMEs. Financial institutions must invest in strengthening the advisory capacity of their client support teams in order to ensure that the current financing and protection needs of businesses can continue to be met in alignment with a climate resilient future. Large corporations must also do their part in supporting and accelerating the transition of small businesses within their supply chains towards sustainable practices. This can include providing SMEs with technologies or assistance in obtaining certification at an affordable cost.

The JC3 Greening Value Chain pilot project, or GVC, demonstrates the feasibility of such initiatives. So far, more than 400 SMEs have received technical training on GHG emissions measurement and management. Of those, more than half have begun to measure and report their carbon footprint. The operational modality of the GVC pilot can be easily replicated at scale with existing as well as new partners. I therefore urge corporates and financial institutions present here today to connect with JC3 and leverage on the GVC programme to accelerate the reduction of supply chain and financed emissions.

Ladies and gentlemen,
Finding common ground on the path to a more sustainable future can often be fraught with difficult conversations about competing priorities which can arise at the firm, sector or national levels. Perhaps the answer is not in thinking about these issues in terms of trade-offs. Rather, we need to apply an environmental lens through which we can bring things together into clearer and sharper focus so that we don’t miss (or lose) the forest for the trees – both figuratively and literally speaking.

On that note, thank you for your kind attention this morning, and I look forward to the sessions ahead.

Bank Negara Malaysia

10 September 2024

^[1] World Resources Institute (2023), “State of Climate Action 2023”, 14 November 2023

^[2] World Economic Forum (2023), “The State of Climate Action: Major Course Correction Needed from 1.5% to -7% Annual Emissions”, 8 November 2023