Nor Shamsiah Mohd Yunus: Keynote address - Regional
Conference on Climate Change
Keynote address by Ms Nor Shamsiah Mohd Yunus, Governor of the Central Bank of Malaysia
(Bank Negara Malaysia), at the Regional Conference on Climate Change, Kuala Lumpur, 25
September 2019.
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It is my pleasure to welcome you to today's Regional Conference on Climate Change. The recent
shroud of haze in Malaysia and neighbouring countries is a timely reminder of the environmental
challenges confronting our generation and the generations to follow. With the passing of time,
these challenges have become more pressing, and their consequences more dire. Yet, our
response - at the industry, national and global level - is only just beginning to catch up to the
enormous task we face. As described by the former UN Secretary-General, "we are the last
generation that can take steps to avoid the worst impacts of climate change".
Climate change does not just threaten polar bears in the Arctic. It also threatens our
socioeconomic prosperity here in Southeast Asia. It poses risks to the fiscal position of governments,
the viability of businesses and the living standards of individuals. As such, the effects of climate
change are not merely an ecological problem for scientists and conservationists to worry about.
It presents a major economic issue with direct implications on financial stability. It is for this
reason that Bank Negara Malaysia, along with many other central banks around the globe, are
giving serious attention to climate risk. In my remarks today, I will outline:
Why climate change matters for the economy and for financial institutions, and;
How we can and must work towards building climate resilience.
Why climate change matters for the economy and financial institutions
The financial sector is an important enabler of economic growth. The ability of financial
institutions and authorities to identify and manage risks that can impair financial intermediation
has direct consequences on the performance of the financial sector and the economy. These
risks impact those we invest in, lend to, promise to cover and strive to create wealth with.
Climate change impacts all of them, in increasingly significant and lasting ways.
As we have seen in recent years, climate change is causing greater volatility in weather
patterns. Globally, overall economic losses arising from natural disasters have been on an
increasing trend for the past 40 years. In 2018, such losses amounted to USD160 billion - half
the size of Malaysia's economy, and among the costliest disaster year on record. Last year, Asia
was the continent most affected by geophysical events, where typhoons, earthquakes, landslides
and flash floods accounted for 43% of all events worldwide and for 74% of fatalities. While
storms and droughts have long been familiar to this region, they have become more intense,
more prolonged and more frequent. This translates into greater economic loss for governments,
businesses and households - which in turn, can make its way into the financial system.
Evidence of these effects can clearly be seen from recent events:
The Thai floods in 2011 cost USD45 billion in damages and affected 240,000 small
businesses. Carmakers in Malaysia, Japan and the US had to slow down production due to
the interrupted supply of parts from Thai factories. Prolonged supply chain disruptions,
which took months to recover, had direct financial and economic implications - Thai
exports fell, its budget deficit widened and the economy shrank by around 2%. The total cost
to the Thai economy was much higher if we account for the cost of repairs, rebuilding and
mitigation measures to prevent a repeat of the disaster.
Closer to home, the floods that hit Kelantan and Terengganu in 2014 were among Malaysia's
worst ever. More than 200,000 people were affected and displaced. Businesses and
financial institutions had to temporarily shut their operations. Economic activities and
financial intermediation were disrupted. The Government spent over RM2 billion to rebuild
basic infrastructure, such as roads and schools. The average cost to individual households
was estimated to be more than two years of income for their breadwinners. In 2017,
massive floods in Penang and Kedah saw similar effects. Banks also bore the costs of
moratoriums on loan repayments that were provided to those affected by such disasters. As
climate-related events intensify, these costs will escalate.
As a result of the severe and prolonged El Niño drought in 2016, the agriculture sector in
Malaysia shrank by 5.2%. Last year, adverse weather (and production constraints) dented
yields yet again, causing the sector to contract by up to 2.5% in the second quarter. This is
not an isolated problem for the agriculture industry. These shocks can also jeopardise
domestic food production and cause prices to inflate. For instance, the irregular weather and
prolonged haze conditions in 2015 caused the prices of fresh vegetables to rise by 7.7%.
Climate change can also affect the economy structurally and gradually. We know that the
earth is warming.
The global average temperature has been increasing by 0.1 degrees Celsius each year
since 1950. What we may not realise is that our cities are becoming hotter even more
quickly. Some cities, despite efforts to maintain green lungs, are heating up twice as fast -
as the relentless construction of high-rise steel, glass and concrete buildings work in
tandem with asphalt roads to trap heat in the city.
Global warming is not just a problem on dry land. Warmer oceans affect the food chain for
marine life and aggravate the already declining supply of fishery resources. This in turn
affects the fishing industry and the livelihood of fishermen.
Warming oceans also mean melting ice caps, raising sea levels. One in three people in
Southeast Asia live in low-elevation coastal zones. Alarmingly, since 1993, the Straits of
Malacca has risen by the width of an iPhone 5. If this rise doubles, we may see 15 metres of
shoreline erosion, which will displace many coastal populations and businesses.
Additionally, coastal erosion will directly impact tourism in places such as Kota Kinabalu and
manufacturing in industrial zones such as Kota Bharu, Kuala Terengganu and Mersing. If
this trend continues, our mangroves would completely sink by 2040 and industrial zones will
be affected by 2060. Our ports, the lifeblood of international trade linkages, will also struggle
to cope with rising sea levels. A recent study estimates that pre-emptively adapting Port
Klang and Tanjung Pelepas for climatic conditions expected in 2070 will cost nearly RM3
billion. Naturally, this cost would be far greater if not planned for in advance.
The effects of climate change are real. They are already upon us; and make no mistake, they will
intensify. For this reason, financial institutions can no longer be passive about climate change
and its effects. There is a clear economic case for building resilience to climate change: it
directly affects our balance sheets, and can pose a broader risk to financial stability from
significant and prolonged climate-related events.
So far, I have explained the direct, physical risk posed by climate change to the economy and
financial industry. However, it is not only the climate that is changing. The changing behaviours of
economic agents also give rise to significant transitioning risks. As the world becomes
increasingly concerned with reducing the global carbon footprint, governments, businesses and
consumers are pushing for a transition to a more sustainable, greener economy. As this
happens, some sectors of the economy may face declining demand, big shifts in asset values or
higher costs of doing business. For instance, governments' actions to enforce the Paris
Agreement could see the vast majority of the world's proven fossil fuel reserves left in the
ground. This has implications on the value of investments in energy companies, particularly
those dealing with oil, gas and coal.
For many emerging market economies, the transition towards sustainability also invites policy
conflicts. For example, national goals for reducing fossil fuel use may entail significant trade-offs
with growth and poverty reduction objectives, at least in the short- to medium-term. These
challenges are further intensified by broader environmental, social and governance (ESG)
considerations. Achieving sustainable growth and development amidst capacity and funding
constraints can present significant challenges for political leadership, economic priorities and
social outcomes. Under these circumstances, the higher cost of transition is likely to mean that a
longer time is needed for the transition towards more sustainable growth policies, while keeping
in mind that this may be at the expense of heightened physical risks as a result of delayed action.
This remains a difficult balance that requires careful and well-informed assessments, policy
coordination, planning and communication.
A very real example, close to home, is palm oil. As we all know, many in the global community
have expressed concerns about the environmental impact of the palm oil industry, which
accounts for 7% of Malaysia's gross exports. Regardless of whether these concerns are
justified, the fact remains that the industry is faced with significant transition risks. The
government and industry's response to these risks will ultimately determine the resulting
economic impact on firms in the industry, their counterparties and the economy more broadly.
Inevitably, some adjustments will need to be made. Already, the industry is working towards the
end-2019 deadline for certification of Malaysian Sustainable Palm Oil (MSPO) compliance. But
the stark reality is that these adjustments will not come easily, especially for smallholders. In this
regard, I would like to applaud the effort made by several banks to educate and assist borrowers
in the palm oil industry in their journey to obtain MSPO certification. Such efforts are crucial to
ensure that the transition is orderly and can be sustained.
How we can work towards building climate resilience
Having established - I hope - a clear case for action, let me now address how we can work
towards building climate resilience together. The Bank has identified several key priorities.
First, we have to develop the tools and capacity for identifying climate risks relevant to financial
business. Climate change science is complex and multivariate. Getting to grips with issues such
as weather patterns, groundwater management and sustainable palm oil go well beyond the
remit of traditional cash flow projections, credit loss modelling or interest rate yield curves. We
will need to know what issues to pay attention to, how those issues affect your business and find
a common language to discuss them in a meaningful way. To this end, the Bank and Securities
Commission Malaysia, are collaborating with the World Bank to develop a principles-based
taxonomy to enable financial institutions in Malaysia to classify green assets consistently. This
framework aims to support informed decisions and analysis of exposures to climate risk in fund
raising, lending and investment activities. The Bank expects to issue the first draft of the
taxonomy by the end of this year for industry feedback prior to its adoption.
Second, we need to develop a
more complete understanding of the impact of
climaterelated risks to the Malaysian financial system and economy. In this regard, the Bank is actively
involved in working together with the Central Banks and Supervisors Network of Greening the
Financial System (NGFS) to develop an analytical framework to assess such risks. This entails
sizing the impact of climate change on our financial system and economy, both in the central
case and tail-end scenarios. This exercise also aims to estimate the relevant time frames in
which these risks may materialise. To do so, we would need to better understand the
transmission channels of climate-related risks, taking into consideration potential second-round
effects and feedback loops. Ultimately, this exercise would provide valuable insights on how to
best integrate climate-related risks into the Bank's macroeconomic and financial surveillance
activities and feed into wider policy responses to climate change.
Third, we will need to address the appropriate treatment of climate risks within the prudential
and supervisory frameworks for financial institutions. As a start, the Bank will require financial
institutions to report their exposures to climate risks once work on the green taxonomy has been
finalised. Information gathered through this process will be used by the Bank to consider
changes to prudential standards to better reflect risks from climate-related exposures.
Concurrently, the Bank also intends to align, where relevant, the reporting requirements for
climate-related risks with the Value-Based Impact Assessment Framework (VBIAF), which will
be finalised by October this year, as well as its corresponding VBIAF Sectoral Guide, which is
currently being developed. In addition, the Bank will increase its engagements with individual
financial institutions to better understand how they consider climate risks in their risk
management approaches and practices.
Fourth, we need to more broadly, to provide greater
strengthen the use of disclosures
transparency on how climate risk considerations are integrated into business decisions. Such
disclosures, by both financial institutions and non-financial firms, will help drive action towards
more effective risk mitigation and better adaptation to climate change. To this end, the Bank will
work with the industry to implement the recommendations of the FSB Task Force on
Climaterelated Financial Disclosures (TCFD) in Malaysia.
Fifth, the financial industry will need to step forward and facilitate an orderly transition for
households, businesses and governments to adapt to the physical and transition risks of
climate change. This involves different players in the financial ecosystem - including banks,
insurers and takaful operators, venture capital and private equity firms - to ideate and innovate
solutions that would help the economy face the imminent climate-related risks. There is an
urgent and critical need to develop sustainable financial solutions, including funding and
investment structures with appropriate incentives and support mechanisms, to catalyse greater
climate resilience for firms and households.
Building climate resilience is no small feat. There is much work to be done with a window to
accomplish this work that is rapidly closing. Clear policy at the national level will be critical to
enable the financial industry to size up the physical and transition risks, and implement strategies
to manage these risks. Sector-specific approaches will also need to converge to limit risks of a
disorderly transition. This is a shared responsibility that requires us to come together to support
joint and coordinated responses to a clear and present threat to growth and financial stability. To
this end, I am pleased to announce that the Bank and the Securities Commission Malaysia are
establishing a Joint Committee on Climate Change with industry representation to pursue
collaborative actions for building climate resilience in the Malaysian financial sector. The key
mandates of the Joint Committee are to:
Build capacity through the sharing of knowledge, expertise and best practices in assessing
and managing climate-related risk;
Identify issues, challenges and priorities facing the financial sector in managing the transition
towards a low carbon economy; and
Facilitate collaboration between stakeholders in advancing coordinated solutions to address
arising challenges and issues.
Beyond resilience
As we intensify our efforts to increase climate resilience, let us not forget that climate action
begins with each of us. For the Bank, this has meant making changes to our own internal
operations to reduce our carbon footprint. For several years now, we have been watering our
grounds using rainwater harvested by our roofing systems. We have also actively reduced our
carbon footprint in our currency management operations. We print fewer brand new notes and
use durable polymer banknotes to prolong their lifespan in circulation. We also employ
coprocessing, where shredded old notes are converted into productive energy - this has saved 440
tons of CO2 emissions since 2016. The Bank has also embarked on a digitalisation strategy that
will significantly reduce internal usage of paper. We have also progressively moved to
incorporate wider sustainability considerations in our investment decisions.
Within the financial sector, the leadership shown by the Islamic finance industry in adopting
value-based intermediation is a positive step towards sharpening the focus of finance on creating
a positive impact to the economy, people and the environment. Several financial institutions are
also allocating more capital towards innovation that promotes sustainability - such as in
renewable energy sources, and sustainable agro-production and manufacturing. Others are
providing incentives to encourage "greener" consumption that is less damaging to the
environment. This includes preferential rates for hybrid vehicles and financing projects with a
Green Building Index certification which serve to encourage manufacturers and developers to
build more sustainable solutions.
Climate change will have irreversible consequences for us all. The effects to the planet, and
global efforts to transition towards greater sustainability, will certainly have implications for the
economy and for financial stability which cannot be ignored. Our window of opportunity to act is
narrowing very quickly. In the period ahead, it is crucial that the financial industry faces these
changes in a deliberate, informed manner. We must respond strategically, and pre-emptively;
and we must act now. We can no longer afford to just react once the worst has already
happened. The stakes are simply too high.
On our part, the Bank is committed to ensuring that the financial system remains resilient in the
face of these risks. To this end, I have set out a broad outline for achieving climate resilience.
The task ahead will call for strong leadership in working with authorities, businesses and
households to address what may be one of the greatest threats to our generation.
Discussions at this conference aim to help us meet this challenge with greater confidence and
conviction on what must be done - individually and collectively. On that note, I look forward to the
engaging sessions ahead. Thank you.