Nor Shamsiah Mohd Yunus: Launch of the World Bank Sustainable
and Inclusive Finance Forum
Keynote address by Ms Nor Shamsiah Mohd Yunus, Governor of the Central Bank of Malaysia
(Bank Negara Malaysia), at the (virtual) launch of the World Bank Sustainable and Inclusive
Finance Forum, 6 October 2020.
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The late Kofi Annan, Secretary-General of the United Nations, said in 2001 that the biggest
challenge in this century is "to take an idea that seems abstract - sustainable development - and
turn it into a reality for all the world's people". Despite the massive strides achieved to alleviate
poverty in pursuit of the Sustainable Development Goals, almost two decades later, the benefits
of sustainable development continue to elude the majority of the world's population.
Today, with the COVID-19 pandemic still raging, we see a potential reversal of decades' worth of
progress in poverty reduction, with an estimated 71 million people expected to be pushed back
into extreme poverty - the first rise in global poverty since 1998 . The pandemic has brought the
global economy to its knees and the lives we once knew as 'normal' have been turned on their
head. At the same time, displacement and disruptions due to climate-related events such as
storms, flooding and droughts have persisted and intensified.
The pandemic offers many valuable lessons which can help us think about how we can navigate
and move forward on the SDGs, and what finance specifically can do. While causing great
upheaval, the pandemic has provided an impetus for us to reset and reprioritise resources to
reconstruct our economies and financial systems to be more sustainable and inclusive. Most
importantly, the pandemic offers a once-in-a-generation opportunity to implement reforms in
areas that have been neglected for too long. Such an opportunity may not come again.
One such area is our response to climate risks. Few foresaw the pandemic coming, and even
fewer had imagined its massive impact and threat to both human lives and the global economy.
While there were warnings by some in the scientific and medical community, unfortunately these
hardly registered in the minds and imaginations of policymakers, businesses and others. Had the
world taken these warnings more seriously, perhaps things would have been different. The
magnitude and severity of the impact could have been less damaging.
When it comes to the climate, we are seeing similar signs of inaction. This is in spite of all the
compelling data surrounding global warming, and in spite of all the visible signs of worsening
natural disasters. With the resources of governments, businesses and individuals coming under
substantial stress in the fight against this unprecedented health crisis, the calls for a "green
recovery" have yet to be met with concrete and sustained actions on the scale needed to achieve
meaningful and lasting change. On the contrary, there are signs that initiatives to reduce carbon
emissions or cut pollution are being deprioritised. International climate change negotiations
scheduled for COP26 later this year are also being postponed due to the pandemic, delaying
further global progress on the climate front.
And yet, the reality is that climate change is an existential threat to humanity. It is also a threat
that humanity itself helped to create and must now, with the strongest vigour, mitigate. The
financial sector has a central role in this effort. Policymakers, supervisors and those responsible
for managing financial institutions must strategically consider how we respond to climate risks.
Financial institutions are exposed to liability risks, asset impairment, and rising claims arising
from climate-related risk. The materialisation of these risks can impact and disrupt financial
intermediation activities, in turn amplifying climate-related risks to the economy. Such risks are
already clear and present, and they will intensify if we do not take steps to alter course.
While policymakers and supervisors are taking steps to facilitate and catalyse progress in this
area, the challenge I believe for all of us is this - As we move forward, how do we sustain
meaningful change within the financial sector that is compatible with greener and more
sustainable financial services? I think it will require three things:
1. A new way of defining and thinking about sustainable finance;
2. A better way to hold financial institutions accountable for their role in promoting sustainability
outcomes; and
3. A collaborative way of working together to provide the enabling conditions for the demand
and supply of sustainable financing to thrive.
In responding to the pandemic, vast amounts of financial resources are being mobilised to bring
the pandemic under control. Billions of dollars are being spent to develop and procure potential
COVID-19 vaccines. More than a hundred candidates are in the race to develop an effective
vaccine, of which only a handful will, in all likelihood, be successful. Thereafter, there will be more
funding needed to produce, procure and distribute the vaccine.
In the case of the climate crisis, trillions are needed to help reach the goal of The Paris
Agreement. The role of green bonds will be key. Globally, transition bonds are making headlines
as a new funding instrument designed to help "brown" companies shift to greener business
activities. Malaysia continues to be the forefront of green sukuk, which caters to the needs of
investors that prefer investments with a positive environmental impact, particularly those which
go towards funding activities or technologies that support a low-carbon and climate resilient
society. In addition, social bonds and sukuk are gaining appeal as instruments which direct
funding towards projects that generate positive socio-economic outcomes. An example is the
Sukuk Prihatin which was recently launched by the Government of Malaysia to raise funds to
support Malaysia's efforts to combat COVID-19 and support an economic recovery. These
include financing micro SMEs especially female entrepreneurs, supporting grants for research
into infectious diseases, and improving connectivity for rural schools. Investors also have the
option of donating the principal amount upon maturity.
Institutionalised forms of social finance which blend "social dividends" with financial returns are
also being pursued to fill the gap in financing business and government initiatives. This is an area
where Islamic finance has made important headway given its emphasis on improving social
justice through wealth redistribution and fair financial dealings. In building social resilience and
sustainability for example, in Malaysia, a scheme called iTEKAD was launched in May to mobilise
social finance contributions such as zakat towards providing seed capital that is packaged with
microfinancing for eligible micro-entrepreneurs to start and grow their businesses to generate
sustainable incomes.
Islamic financial institutions in Malaysia are also committed to adopt what we call "Value-based
Intermediation" or "VBI" which advocates for positive and sustainable impact through the
practices, offerings and conduct of institutions. The triple bottom line considerations in VBI are
people, planet and prosperity. A number of VBI products offered include sustainability linked
financing for green and environmentally friendly projects, as well social impact financing to
support the SDGs, such as the financing of female entrepreneurs. Guidance is also provided for
Islamic financial institutions to incorporate ESG risk considerations in their financing and
investment decision making process for selected sectors, through the issuance of the
Valuebased Intermediation Financing and Investment Impact Assessment Framework (VBIAF)
Sectoral Guides on Palm Oil, Renewable Energy and Energy Efficiency, in August this year.
To help align understanding and assessments of risk, Bank Negara Malaysia will soon be
finalising a "Climate Change and Principles-based Taxonomy". The taxonomy provides a
common language to categorise economic activities based on their impact on climate change. It
is also intended to facilitate financial flows to activities that support the transition to a lower
carbon economy.
It will also be important for external stakeholders to hold financial institutions to account for their
climate risk commitments. We are working with financial institutions in Malaysia to improve
transparency on how climate risk considerations are being integrated into business decisions. To
this end, we are progressing plans to further encourage financial institutions to adopt the TCFD
recommendations for climate-related disclosure. Ensuring the integrity of disclosure is key, and
this needs to reflect an enterprise-wide commitment to climate risk mitigation and adaptation.
This not only improves credibility and trust on the part of stakeholders, but also helps to create
opportunities for growth and for achieving stronger business resilience.
This is a mission that involves many different parties. And so, we are working closely with the
Securities Commission Malaysia, the financial sector and other partners, through the Joint
Committee on Climate Change to drive and coordinate the financial sector's collective response
to climate risk. We also actively engage with the relevant government ministries and agencies to
align financial sector and national climate strategies, and address barriers to green financing and
investments.
I know many others are on a similar journey, with a shared aspiration to build more resilient
communities and countries. One might ask, what else can the financial sector do to accelerate
the mobilisation of financial resources for sustainable and inclusive purposes?
Here, let me turn to my final point on the need to embrace technology and digitalisation.
As countries went into lockdowns to contain the spread of the virus, day-to-day activities -
economic or social in nature - came to a halt. Faced with a disruption of an unprecedented
scale, it quickly became obvious that technology provided an important lifeline, or at least a way
to navigate the 'new normal'.
Indeed, the pandemic has accelerated the push towards greater digitalisation. As countries move
ahead in adopting more cutting-edge technologies, it will be critical to have in mind three key
imperatives.
One, the digitalisation agenda must be inclusive. We need to strengthen digital enablers,
particularly digital connectivity infrastructures and utilities to ensure the benefits of technology
can be more universally enjoyed, rather than by a select few that have access. Increasing digital
literacy is also crucial to ensure that no one is left behind, simply because they do not
understand the 'language' of the digital world.
Two, digitalisation efforts must combine both demand- and supply-side aspects. Creating
demand requires the right economic incentives for people and businesses to adopt digitalisation.
This includes promoting digital banking to meet the needs of the underserved segment.
Regulations need to be in place to protect against cyber threats and to increase user confidence.
Digital platforms also need to cater to consumer issues and interest, such as dispute resolution,
products returns and exchanges, and fraud cases. For the supply-side, a comprehensive talent
upskilling programme is needed to elevate the workforce's digital skillsets in order to effectively
support digital transformation. In Malaysia, a series of initiatives have been implemented to
accelerate digitisation among businesses, ranging from the provision of technical and advisory
support to funding assistance.
Three, digitalisation efforts must be complemented by an enabling policy environment. Digital
sandboxes are useful as test-beds and platforms to drive the commercialisation rate of
innovative technology solutions, which may include the diffusion of existing technologies.
Combined with regulatory facilitation, technical advisory and funding support, these sandboxes
provide a conducive environment to develop digital talent and knowledge to support scaling-up of
tech firms. At the national level, Malaysia has recently implemented a National Innovation and
Technology Sandbox to serve this purpose. The Bank's Financial Technology Regulatory
Sandbox, introduced in 2016, also serves as a platform to enable innovative solutions to be
deployed and tested in a live environment, within specified parameters and time frames. It has
benefitted participants through more affordable, accessible and efficient solutions, which have
encouraged wider adoption of digital financial services.
In advancing these imperatives, the financial sector can play an important role. Digital financial
services can become one of the key foundational infrastructure for more expansive digitalisation
efforts. For example, digital payments infrastructure is often seen as one of the key elements of
any digital economy. Such platforms not only bring efficiencies to retail customers and
smallscale transactions, but would provide a rich 'foundation' of data, upon which other innovations
and overlay services can be built.
While our immediate priority is to safeguard both lives and livelihoods in this pandemic, the world
must not lose sight of its goal to pursue a better and more sustainable future for all, such as that
set out by the SDGs. Clearly, the financial sector has a part to play in this mission.
Over the course of the next four days, this forum will further explore and discuss what some of
these questions and challenges mean for the financial sector, including Malaysia's experiences
in this area. I look forward to constructive and fruitful discussions during this forum.