FINANCIAL INSTITUTIONS PLAY SIGNIFICANT ROLE IN TRANSITION TOWARDS GREEN INVESTMENT -- ABDUL WAHID

By Sharifah Pirdaus Syed Ali

KUALA LUMPUR, July 25  – As the global movement towards sustainability or environmental, social and governance (ESG) is gaining momentum, the role of financial institutions (FIs) is significant in the transition towards green investments.

Bursa Malaysia chairman Tan Sri Abdul Wahid Omar said FIs are at the heart of sustainability, to a greater extent than carbon dependent industries because the financial system is seen as a catalyst for change across the whole economy.

“In view of providing financing solutions through their core expertise, from lending to catalysing capital markets, FIs can tap into an immense and increasingly critical opportunity to create a positive impact,” he said in an exclusive email interview with Bernama.

He said investors and FIs are now increasingly recognising the value proposition of incorporating ESG as considerations in asset allocation and financing.

“Some institutions are allocating capital and steering financial flows towards more low carbon, climate-resilient activities.

“While others are taking steps to change corporate behaviour, influence policy outcomes and build the data, tools and transparency required to embed climate change into how the market functions,” he added.

Abdul Wahid noted that there is also increasing commercial and competitive pressure on FIs to favour green and sustainable investment, and in doing so, adopt higher standards of transparency.

“What is notable is that many FIs were already moving down the path towards green financing before the COVID-19 pandemic.

“FIs such as HSBC Group and CIMB Group have committed to being net-zero by 2050, which includes a commitment not to fund coal projects by 2040,” he said.

Meanwhile, within the ASEAN region, Abdul Wahid highlighted that green financing opportunities were estimated at US$3 trillion between 2016 and 2030.

This opportunity represents a new ASEAN green investment market that is 37 times the size of the global 2016 green bond market, with investment spread across four sectors -- infrastructure, renewable energy, energy efficiency and food, agriculture and land use.

“Consequently, from a revenue or earnings perspective, the sustainable finance space offers very attractive and exciting growth opportunities for financial institutions.

“Not only are they poised to grow their revenue streams but, at the same time, contribute to the country’s transition towards a low carbon future,” he said.

While sustainable finance is still emerging in ASEAN capital markets, he noted that governments and regulators have made some meaningful efforts to promote and support this space, and it is without a doubt gaining some traction.

“With ASEAN economies still having issues accessing finance for green investments, the mobilisation of funds by the financial sector needs to be accelerated to bring about a paradigm shift towards the sustainable development of the region’s economy

“It is important to leverage the momentum and take the right actions on a regional basis to move this agenda forward,” he opined.

On another note he shared that some of the challenges currently faced by FIs when attempting to incorporate climate change considerations into their operations include challenges in incorporating climate risks into their risk management framework/processes.

“For example, the complexities surrounding incorporating climate-related scenarios into risk models, ways to ‘capture’ various aspects of climate change in quantitative/financial terms,” he said.

Furthermore the general lack of awareness and/or expertise/capability on impacts of climate change from board of directors, senior management down to practitioners as well as lack of relevant data from customers to determine overall exposure of the lending portfolio to climate change impacts also post challenges to FIs, he said.

On governmental initiatives, he said that in March this year, the finance ministers and central bank governors from ASEAN nations had announced their support for an ASEAN Taxonomy of Sustainable Finance with some preliminary work already commencing.

In general, a taxonomy typically provides a degree of clarity or transparency and consistency on the kinds of economic activities and initiatives that can be classified as being “green” or “sustainable”.

For Bank Negara Malaysia’s taxonomy, he said it facilitates assessment and categorisation of economic activities “according to the extent to which the activities meet climate objectives and promote the transition to a low-carbon economy”.

As for businesses, he said the taxonomy will enable them to better articulate the extent to which their initiatives and/or revenue streams contribute to meeting the country’s and stakeholders’ climate objectives and Malaysia’s transition to a low-carbon economy.

“In such a way, it serves to enhance investor or stakeholder confidence in the credibility of making such claims and allay any ‘greenwashing’ concerns.

“For businesses that aimed to attract investors with a green or sustainability mandate or orientation, the taxonomy helps by ensuring that the deployment of such funding or capital goes to activities that align with investors’ sustainability goals on climate change,” he said.

He added that a taxonomy is also helpful for businesses when it comes to evaluating the viability of taking on specific sustainable projects, especially when it comes to available financing options, financing costs as well as available government incentives.

“It is worth bearing in mind that the taxonomy is intended to be used by Malaysian FIs that is by  integrating climate change considerations into financing decision-making,” he concluded.

-- BERNAMA