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PODCAST: BNM focusing on pilot solutions to spur green finance innovations

Bank Negara Malaysia (BNM) is focusing on pilot solutions to support innovation in climate-friendly finance as it aims for larger financial flows toward climate-supporting and transitioning activities.

“We have actually set a target where at least 50% of new financing is channeled for climate supporting and transitioning activities by 2026,” Madelena Mohamed, the head of BNM’s sustainability unit, told IFN. “To achieve this, we are now focusing on what we call pilot solutions to encourage innovation in green finance. This would include innovative protection solutions for floods, [and] blended finance options to explore risk-sharing arrangements in the much-needed private sector funding for adaptation and transition activities.”

This comes as the regulator ramps up its sustainability drive to prepare the Malaysian financial industry, which boasts one of the most sophisticated Islamic finance sectors globally, to tackle escalating threats triggered by climate change.

BNM last December released its Climate Risk Management and Scenario Analysis policy document taking into consideration feedback from 99 respondents when the exposure draft was issued the year before.

“Based on the feedback that we received, the industry is broadly supportive of the principles and requirements that we have put forward,” Madelena said.

The policy outlines 14 principles as well as specific requirements and guidance on six components that lay out expectations on areas relating to governance strategy, risk appetite, risk management, scenario analysis and disclosures.

“We do note that our financial institutions are at varying stages of understanding and readiness — they are actually along the spectrum of almost ready and yet to be ready. A few have started to integrate climate-related risks in business solutions and also climate risk management practices but there are many others that are still in the early stages of doing so, especially the smaller ones,” Madelena explained. “So, giving sufficient time for the financial institutions to build the capacity and capability is absolutely key.”

Measures such as appointing a designated officer to oversee the effectiveness of management of climate-related risks and development of data capabilities, tools and methodologies are to be in place by the end of this year. On the other hand, initiatives such as the identification and monitoring of internal climate-related targets as well as the use of scenario analysis to assess the related impact on business strategies will only be effective at the end of 2024, similarly for the mandatory climate-related disclosures in line with the Task Force on Climate-Related Financial Disclosures.

Perhaps most urgently is that financial institutions are to perform a gap analysis on their existing practices and requirements in the policy document as well as develop an implementation plan to be submitted to BNM by June this year.

Next year, BNM will undertake an industry-wide stress testing.

“Leading up to the exercise, we will be working toward finalizing the frameworks, the approaches for stress testing, and we will continue with our engagements and conversations with financial institutions.”

This is an excerpt of an interview with Madelena Mohamed, the director of Bank Negara Malaysia’s sustainability unit. To listen to the full conversation, log on to IFN Podcast.

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