On April 30, 2021, Bank Negara Malaysia (BNM) published Malaysia’s national climate-focused sustainability taxonomy for the financial sector, the Climate Change and Principle-based Taxonomy (CCPT). The CCPT sets out five Guiding Principles (GPs) intended to help financial institutions (FIs) assess and categorize economic activities according to the extent to which they meet climate objectives and promote the transition to a low-carbon economy.

In this Blog Post, we discuss the scope and applicability of the CCPT, the five GPs and what this new national taxonomy could mean for Southeast Asia’s forthcoming regional sustainability taxonomy.

Scope and Applicability of the CCPT

The CCPT is intended to serve as a guide for BNM-supervised FIs including licensed banks, investment banks, Islamic banks, insurers and reinsurers, takaful and retakaful operators and prescribed development financial institutions. Other financial sector stakeholders, including intermediaries, can refer to the CCPT to guide their investment and asset selection decisions.

FIs are primarily encouraged to apply the GPs in transaction due diligence processes to assess whether an economic activity falls into one of three sustainability categories:

  1. Climate Supporting: Activities with a positive impact on climate change mitigation (GP1) and/or adaptation (GP2), and no significant harm to the environment (GP3);
  2. Transitioning: Activities with a potential harm to the environment but remedial measures taken to reduce harmful practices (GP4); or
  3. Watchlist: Activities with a potential harm to the environment and no remedial measures taken to reduce harmful practices.

The CCPT is also intended to facilitate standardized reporting of climate-related exposures, encourage financial flows toward supporting climate objectives, assist in ratings decisions and support the design and structuring of green finance solutions and services.

GP1: Climate Change Mitigation

An economic activity supports climate change mitigation if it makes a substantial contribution to the following objectives:

  • Avoiding greenhouse gas emissions;
  • Reducing greenhouse gas emissions; or
  • Enabling others to avoid or reduce greenhouse gas emissions.

Economic activities that generally meet GP1 include the production and operation of renewable power generation facilities, operation of electric vehicles and reforestation.

GP2: Climate Change Adaptation

An economic activity supports climate change adaptation if it:

  • Implements measures to increase one’s own resilience to climate change (e.g., resilience against the increased risk of extreme weather events); or
  • Enables others to increase their resilience to climate change.

Economic activities that generally meet GP2 include water conservation and rainwater harvesting, refitting buildings to cope with future climate conditions and building sea walls in coastal areas.

GP3: No Significant Harm to the Environment

In addition to climate impacts, FIs should take into account the impact of economic activity on the broader environment. An economy activity does no significant harm to the environment if it meets the following environmental objectives:

  • Preventing, reducing and controlling pollution;
  • Protecting healthy ecosystems and biodiversity; and
  • Using energy, water and other natural resources in a sustainable and efficient manner.

FIs should apply environmental assessments to understand whether an economic activity significantly harms the environment, and are encouraged to seek certifications and assurances for such assessments. Environmental assessment criteria may include proper waste management practices, avoiding land use in protected areas and managing risks to water quality.

GP4: Remedial Measures to Transition

Importantly, the CCPT “considers the state of economic development of [Malaysia] and the nascent stage of climate risk management at which businesses and other economic agents are currently in.” In this respect, the CCPT seeks to avoid the outright exclusion of economic activities that currently do not contribute to climate change objectives. This approach is intended to “avoid disruptive exclusions and dislocations” and ensure an “orderly transition of the economy.”

FIs are instead expected to assess economic activities holistically. Rather than strictly prohibiting certain activities as “unsustainable”, FIs should encourage, facilitate and account for remedial efforts and improvement programs undertaken by businesses to align less sustainable operations with a low-carbon and climate-resilient economy.

GP5: Prohibited Activities

At a minimum, FIs should verify and ensure that economic activities are not illegal and do not contravene Malaysian environmental law. Prohibited activities include:

  • Illegal deforestation;
  • Illegal waste management; and
  • Operations using fire for land clearance.

In addition to this minimum environmental safeguard, FIs are encouraged to assess whether economic activities comply with Malaysian human rights and labor laws, as well as the OECD Guidelines for Multinational Enterprise and UN Guiding Principles on Business and Human Rights.

The CCPT and the ASEAN Taxonomy

BNM has published the CCPT just one month after finance ministers and central bank governors from members of the Association of Southeast Asian Nations (ASEAN), including Malaysia, announced their support for a regional ASEAN Taxonomy of Sustainable Finance (ASEAN Taxonomy). The ASEAN Taxonomy is intended to serve as ASEAN’s common language for sustainable finance while complementing the national sustainability initiatives of its members, including the CCPT and the proposed green finance taxonomy in Singapore.

While it remains to be seen exactly how the ASEAN Taxonomy will relate to national taxonomies, BNM’s publication of a final, well-developed national taxonomy should influence the development of the higher-level ASEAN Taxonomy. ASEAN could look to the CCPT as an example of a uniquely Southeast Asian perspective on sustainability, alongside international examples from the European Union and others.

In particular, the CCPT’s efforts avoid the outright exclusion of “unsustainable” economic activities in light of Malaysia’s state of economic development could feature in an ASEAN Taxonomy that must contend with ten nations in varying stages of economic development. Indeed, GDP per capita among ASEAN members ranges from approximately US$1,400 to US$65,000, setting the stage for divergent opinions on an acceptable level of “sustainability”. Against this backdrop, the CCPT’s flexibility in highlighting the importance of remediation efforts over outright exclusions could inform an ASEAN Taxonomy that supports both sustainable finance and the economic development of all ASEAN members.