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Amid heightening physical risks from climate change events and transition risks from growing domestic and international expectations around decarbonisation, Bank Negara Malaysia has introduced various programmes to assist small and medium enterprises (SMEs) to build their technical capability and improve access to financing.
In May, for instance, under the leadership of the Joint Committee on Climate Change (JC3), an SME focus group was formed to tackle the challenges that SMEs face.
“As a start, the group will prioritise strategies and solutions to raise awareness and reduce the cost of transition as well as facilitate better disclosures. This will help meet [the] increasing demands of fund providers, customers and business partners of SMEs on how businesses are impacting the environment,” Jessica Chew, deputy governor of Bank Negara, tells ESG in an email interview.
Bank-based credit forms a large part of financing for the Malaysian economy, which is why financial institutions play an important role in driving the transition for companies and the country.
“In the Financial Sector Blueprint 2022-2026, the [central] bank set a target of at least 50% of new financing by banks to be aligned with climate supporting or transitioning activities by 2026. Identification of such green or transition activities is guided by the Climate Change and Principles-based Taxonomy (CCPT), which recognises concrete remedial actions towards low-carbon practices and building climate resilience,” says Chew.
A significant number of financial institutions have already developed dedicated strategies and frameworks for sustainability and incorporated climate-related risks in their relevant internal policies, she adds.
These efforts are key to financial institutions in effectively managing climate risk and providing meaningful support to their customers to transition, and are expected to be further strengthened with key requirements set by the Climate Risk Management and Scenario Analysis policy document, which will come into effect in stages from year’s end.
While the financial sector is on the right track to achieve the goals set by the blueprint, much still needs to be done.
“Although the focus on transition continues to be important, there is also a need to address financing needs for adaptation efforts, particularly in the light of increasing physical risks,” says Chew.
“For instance, an SME located in a flood-prone area could build flood barriers or install early fool-proofing systems to minimise damage from future flood events. To tackle the issue, new financial structures are needed to support nascent or greenfield technologies and adaptation efforts, by incorporating effective risk sharing or risk mitigation mechanisms.”
As such, Bank Negara and JC3 are exploring new financial structures, such as parametric protection products for floods and blended finance options that combine public and private funding sources.
Helping SMEs understand decarbonisation
Another initiative that Bank Negara is working on is its Greening Value Chain (GVC) pilot programme, which was launched late last year. It builds the capacity of SMEs to make credible reporting on their greenhouse gas emissions via access to technical training, measurement software and on-site diagnostic reviews.
Bank Negara’s Low Carbon Transition Facility (LCTF), which allocated RM2 billion on a matching basis with participating financial institutions for SMEs to adopt sustainable practices, has had high approval ratings of up to 90%. Yet, after a year, the total application amount received for the LCTF stands at only RM363 million, says Chew.
“Engagement with financial institutions and businesses revealed that, apart from access to affordable financing, a key barrier facing SMEs is a general lack of awareness and know-how around actions needed to decarbonise their businesses, including how transition activities should be managed to minimise business disruptions in the short term,” she says.
“This formed the basis for the introduction of the GVC programme. Bank Negara realised that SMEs needed support to understand their emissions profile and more guidance on how to reduce their emissions.”
The GVC will support SMEs on this journey and encourage large corporates to help SMEs within their supply chain to transition. It also provides affordable financing from the LCTF programme.
Bank Negara is also tackling frictions surrounding climate data reporting. One example is a pilot exercise on a regional sustainability data platform that facilitates SMEs and corporates to disclose and report information needed by stakeholders in a streamlined and efficient manner.
“The platform will be interoperable with other ESG data platforms. For Malaysian businesses with cross-border operations in Asean, or that are plugged into the global supply chain, the availability and accessibility of ESG disclosure across all their footprints in Asean will help preserve access to key markets and enhance their competitiveness,” says Chew.
Transitioning high-emission sectors will not get shut out
The CCPT serves as a guide for financial institutions to classify their exposure to economic activities based on the impact of such activities on climate change and the broader environment. This includes exposure to banks’ SME customers. All loans, financing and investments will be classified into three categories: watchlist, transitioning and climate supporting.
The focus on transition acknowledges efforts taken and commitments made by businesses to transition to low carbon and sustainable practices. This is consistent with the expectation for financial institutions to play a nurturing role and support their clients in transitioning, says Chew.
This does not mean that companies in high-emission sectors that are trying to transition will be shut out of financing opportunities.
A transition that does not include these sectors could result in significant economic losses and dislocation of workers.
“In applying the assessment criteria under the CCPT, we expect financial institutions to reflect on the commitments, efforts as well as specific transition needs of SMEs to adopt measures that will more closely align their business and operations to a low-carbon and climate-resilient future. This will drive the classification of exposures under the CCPT, thus preserving access to financing for SMEs in transition,” says Chew.
“Abruptly halting access to financing for businesses that have yet to transition or are in an early phase of the transition would only make it harder for them to do so and be counterproductive in achieving the country’s climate goals.”
The expectation is therefore for financial institutions to not only provide finance, Chew adds, but also technical advisory services to support their customers and nurture their transition efforts.
Source: https://theedgemalaysia.com/node/679194