BNM Climate Change and Principle-based Taxonomy - What this means for FIs Hong Chin Pheng
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BNM Climate Change and Principle-based Taxonomy What this means for FIs Hong Chin Pheng Deputy Director Financial Conglomorate Supervision Department Bank Negara Malaysia
CCPT as a Key Building Block in Supporting an Orderly Transition
Key Considerations
1 Provide a framework that facilitates robust and consistent assessments of economic activities and their associated impacts on climate and the
broader environment
2 Consider the state of economic development and different stages of transitioning across economic agents
3 Support transition of economic activities that currently do not contribute to climate change objectives
Progressive classification system to acknowledge concrete transition
5 Guiding Principles (GP)
efforts and commitments
1 Climate Change Economic Activity
Overall
Classification Business
4
Mitigation Remedial
(GP1) Measures to GP1 GP2 GP3 GP4
Transition Supporting
2 Climate Change (GP4) Activities with positive impacts on climate
C1 GP1 or GP2 or both ✓
Adaptation change, and causing no significant harm to
the environment
5
(GP2)
Prohibited Transitioning
Activities C2 GP1 or GP2 or both ✘ ✓
Activities causing significant harm to the
3 No Significant (GP5) environment but remedial measures C3 ✘ ✘ ✓
Harm to the
Environment
taken to reduce harm
(GP3) Watchlist C4 GP1 or GP2 or both ✘ ✘
Activities causing significant harm to the
environment and no remedial measures C5 ✘ ✘ ✘
taken to reduce harm
2Supervisory Expectations
FIs to play nurturing role
• Accelerate customers’ (including value chain) transitioning towards more sustainable practices
• Active channelling of resources towards low carbon and sustainable activities
Conduct further due diligence on customers’ business operations
• FIs to better understand how customers’ business model and operations contribute to climate risk mitigation/adaptation objectives
and impact on the broader environment
• Leverage on external sources to proxy customers’ GHG emission data, or external validation/certification, if necessary
Integration of climate considerations (whole-of-bank approach)
• Embed climate considerations in business strategy, operations and decision makings
• Incorporate climate-related risks in risk appetite, overall risk management framework and lending/investment policies
• Conduct stress testing/scenario analysis and incorporate results in internal capital target setting as part of ICAAP.
• Explore relevant metrics/ targets and develop new products that aid management of climate-related risks.
Continuous staff capacity building
• Strengthen technical and assessment capabilities in climate-related risks to undertake effective risk assessment and customer due
diligence
Increased commitment on climate-related disclosures
• Intensify readiness for greater climate-related risks disclosures, aligning with TCFD recommendations
• Advocate improved sustainability disclosures by customers’
3Action Plans to Ensure Effective Implementation of CCPT
Establishment of a
CCPT Implementation
Group
FIs to report on
Explore CCPT for
exposures based on
insurance/ takaful
CCPT classification
underwriting
Continued supervisory
engagements and
review/stocktake for
alignment of
Socialisation with FIs
supervisory
and other relevant
expectations and
stakeholders post-
progress of CCPT
issuance of CCPT
implementation
Key
Priorities
Participation in the Development of ASEAN Regional Taxonomy
4Illustration of CCPT classification process
Q1: Does the purpose of the facility/transaction/funding contribute to:
At the • Climate change mitigation (substantially avoid, reduce or enable), and/or [GP1]
transaction • Climate change adaptation (increase own resilience or enable others to adapt) [GP2]
level:
Yes No
At the Q2: Does the economic activity or the overall business Q2: Does the economic activity or the overall
transaction potentially cause significant harm to the broader business potentially cause significant harm to the
and issuer environment? [GP3] broader environment? [GP3]
levels: DNSH May cause significant harm May cause significant harm
At the Q3: Remedial measures taken to
Q3: Remedial measures taken to promote transition
transaction promote transition and reduce
and reduce harmful practices? [GP4]
and issuer harmful practices? [GP4]
levels: Yes No Yes No
C1 C2 C3 C4 C5
Supporting Transitioning Watchlist
Source: Adaptation from “Overview and Recommendations for Sustainable Finance Taxonomies” paper by ICMA Case 1: Green Building
(May 2021).
Case 2: Fossil Fuel
Case 3: Oil Palm
5Case 1 : Refinancing a Green Building
Background Transaction Level Overall Business Level
GP1 GP2 GP3 GP4* Scenario 1
• An SPV – Refinance existing
credit facility to part finance
• Borrower had assessed and improved the building’s design to
construction of a green • Purpose of
building for own use. reduce adverse impact on climate change
financing meets
• Sustainability due diligence was conducted as part of the FIs
• Issued a provisional Green climate change
Building Index (GBI) Design mitigation objective approval process
Assessment certification and (subject to a • Compliance with the FIs internal real estate and construction C1
applying for the final GBI minimum GBI silver sector guides’ requirements, sustainable financing policy and
award. rating, based on the controversy check
FI’s risk appetite).
• Complies with applicable • Satisfactory report from Environmental Management Plan
requirements such as • GBI mainly focuses and Occupational Safety & Health Management Plan.
Environmental Management on evaluating the
Plan and Occupational environmental
GP4 Scenario 2
Safety & Health performance of GP2
Management Plan. buildings, not the
• Borrower facing allegations of improper waste management.
building’s adaptive
• Adopts strict policy to ensure • FI assessed that the customer has put in place remediation
capacity to climate-
compliance with ESG measures and demonstrated serious commitment to improve
related hazards.
standards which includes
its waste management practices with actionable, time-bound
ensuring no deforestation,
forced labour or and transparent remediation plans. C2
development-induced Legend : • This includes the development and implementation of a
displacement of local Meets GP company policy to require recycling and proper disposal of
communities. Does not meet GP construction waste.
Not Applicable
*
Back to Main Slide
6Case 2 : Financing in Fossil-Fuel Related Activities
Background Transaction Level Overall Business Level
Scenario 1 (Bond Issuance)
• Customer involved in both
upstream and downstream
GP1 GP2 GP3 GP4
• Good track record in terms of
demonstrating commitments in • Purpose – to facilitate
addressing climate change and diversification on • Customer engages in other upstream and downstream oil
the associated environmental renewal energy. and gas activities that do have potential negative effects on
impacts the environment.
• Meets GP1 as directly
• Demonstrated a clear supports climate • However, customer has clear plans and practices in place C2
sustainability strategy e.g. to change mitigation but to support transition efforts towards a low carbon and
achieve net zero carbon not adaptation. climate resilient economy.
emissions by 2050
• Commitment to reduce GHG
emissions, focusing on Scenario 2 (Revolving Credit)
liquefied natural gas while
transitioning towards renewable GP1 GP2 GP3 GP4
energy solutions.
• Purpose – facilitate • Customer’s activities do have potential negative effects on
• Complies to EQA 1974 and expansion of the environment.
ISO 14001:2003 Environmental upstream business
Management Systems • Nonetheless, customer has clear plans and is adopting
• Do not contribute to sustainable practices to support the transition efforts
certification for 80% of its
exploration with target to climate change towards a low carbon and climate resilient economy such C3
achieve 100% by a committed mitigation or as commitment to reduce GHG emissions and focus on
timeline adaptation objective supplying low carbon fuels.
Legend : Meets GP
Back to Main Slide
Does not meet GP 7Case 3 : Financing for Expansion of Oil Palm Plantation
Background Transaction level Overall Business Level
• Mid-sized customer requests GP4 Scenario 1
for project financing to fund
GP1 GP2 GP3
new cultivation on existing MSPO certified and has Taken actions on remedial actions to reduce harm to the environment
agriculture land and taken measures to reduce and subjected to periodic due diligence on progress of actions.
implement measures to GHG emissions:
support the adoption of i) No use of open burning for cultivation and waste disposal
sustainable practices. i) Systematically collect,
accumulate and transfer
ii) Management of water table in existing peat areas to reduce peat
subsidence rate i.e. release of GHG emission from peat soil
C2
• Has obtained MSPO oil palm biomass for
certification covering 7 MGP* iii) Use palm oil mill effluent as a substitute for inorganic fertiliser
for oil palm plantation and 6 processing by biofuel
producer
MGP for its oil palm mills as GP3 GP4 Scenario 2
follows: ii) Use of hybrid vehicles for
maintenance work and On top of the remedial actions above, customer is also implementing
✓ Management commitment international best practices to substantially limit harm to
& responsibility transportation of palm
fruits environment:
✓ Transparency i) No new deforestation and no new cultivation on peatland
✓ Comply with legal req. Has also taken measures to ii) Maintain a ground cover of natural vegetation in existing peatland
✓ Social responsibility, increase climate resilience: to keep surface moist, minimize irreversible drying and reduce
GHG emission
C1
health, safety and i) Install water harvesting
employment conditions system (e.g. redirecting iii) Construct water management and drainage systems to maintain
water from drainage and acceptable level of water table for existing peatland
✓ Environment, natural
storage of rainwater as iv) No new cultivation on steep terrains (slope of 25 degree or more)
resources, biodiversity and
ecosystem services contingency for dry spells v) Conduct periodic soil testing to determine its organic matter and
periods) pH structure, and maintain soil fertility
✓ Best practices
*MGP – Malaysian Sustainable Legend : Meets GP
✓ Development of new Palm Oil General Princtiple Back to Main Slide
8 Does not meet GP
plantingThank you !
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