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.

Ultimately, this exercise would provide valuable insights on how to 3/5  BIS central bankers' speeches  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 strengthen the use of disclosures more broadly, to provide greater 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.