Malaysia | Guidance document on climate change and principle-based taxonomy

On 30 April 2021, Bank Negara Malaysia issued a finalised guidance document for financial institutions to assess and classify economic activities which contribute to climate change mitigation and adaption.

Bank Negara Malaysia worked with the JC3 (Joint Committee on Climate Change) Risk Management Sub-Committee to enhance the guidance document, when it was still a discussion paper, upon receiving written feedback from financial institutions, asset management companies, rating agencies and non-governmental organisations.

The finalised guidance document seeks to:

• provide an overview of climate and its impact on businesses and households as well as the broader economy;
• introduce a principle-based taxonomy for financial institutions to assess and categorise economic activities to the extent to which the activities meet climate objectives and promote the transition to a low-carbon economy;
• facilitate standardised classification and reporting of climate-related exposures to support risk assessments at the institution and systemic levels, strengthen accountability and market transparency and encourage financial flows towards supporting climate objectives.

The guidance document also introduces a progressive system of transition categories (Climate Supporting, Transitioning and Watchlist) to acknowledge concrete transition efforts and commitments by businesses to adopt sustainable practices.

The following entities are subject to the guidance document:

• banks, investment banks, insurers and reinsurers licensed under the Financial Services Act 2013;
• Islamic banks, international Islamic banks, takaful operators and retakaful operators under the Islamic Financial Services Act 2013; and
• development financial institutions which are prescribed under the Development Financial Institutions Act 2002.

It may also be used by other financial sector stakeholders such as capital market players and intermediaries and analysts to guide investment and asset selection decisions, as well as rating agencies in rating decisions.