RFI Foundation estimates the financed greenhouse gas emissions in Malaysia’s financial system

Analysis provides a starting point for banks, investors and insurers/takaful operators to enhance their climate risk integration

The RFI Foundation released a report analyzing the greenhouse gas (GHG) emissions directly and indirectly financed by Malaysia’s financial sector.  The report, presented on Monday during a webinar organized with the World Bank’s Inclusive Growth and Sustainable Finance Hub in Malaysia, provides a quantitative, top-down estimate about how to estimate how much GHG emissions are financed by equity and debt capital markets and bank financing, respectively.

Four sectors represent over 80% of Malaysia’s GHG emissions and the potential risk they represent in unpriced costs will have a spillover effect across most of the financial assets in Malaysia. This risk is currently under-analyzed in relation to the aggregate impact when the related costs become internalized.  Several major sources of GHG emission risks have strong pass-through impacts onto other sectors in Malaysia’s economy include electricity generation, transportation and waste management. These risks will affect sectors including manufacturing, wholesale & retail and hospitality sectors.

By undercounting the costs related to financed GHG emissions, financial institutions understate the financial costs that companies will have to bear in coming years. From the perspective of a bank or investor, the prospect of these costs becoming a realized cost instead of an unpriced externality increases the risk that these companies’ earnings or creditworthiness will weaken over time.

To meaningfully address the unpriced GHG risks, financial institutions should establish a framework to understand how companies’ risk profile is affected by internalization of GHG emissions costs. For banks, what new opportunities for financing that offers such as investments in energy efficiency, choices relating to reducing high GHG emitting activities’ GHG footprint.

Investors are starting to factor these issues into their investment decisions already, even while GHG emissions are largely unpriced.  Larry Fink, CEO of BlackRock, which manages $7 trillion in assets emphasized in his letter to CEO’s earlier this year, climate change is “driving a profound reassessment of risk and asset values. And because capital markets pull future risk forward, we will see changes in capital allocation more quickly than we see changes to the climate itself”.

Commenting on the report, Blake Goud, CEO of the RFI Foundation said: “Many of the global investors who are signatories to UN-convened Net Zero Asset Owners Alliance and who collectively manage $5 trillion in assets, are among shareholders in Malaysian financial institutions and financial assets in Malaysia like bonds, sukuk and equities.  Financial institutions and investors should consider GHG emissions as a potential future cost when evaluating the future financial prospects of companies they finance. Their investors already are.”

This is the first of a series of reports analyzing the financed GHG emissions exposure of financial institutions across key Islamic finance markets. It can be downloaded from the RFI Foundation Research page