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Malaysia’s Fight Against Climate Change: Perspectives from a Central Banker

by internationalbanker

By Nor Shamsiah, Governor, Bank Negara Malaysia (BNM)





Growing up, we were taught in school that Malaysia was a blessed country. Our geographical position, just north of the equator and away from the Ring of Fire guaranteed we would have not only an endless summer but also freedom from disasters such as earthquakes, cyclones, and volcanic eruptions. We rarely personally experience major natural disasters.

Climate change has challenged this narrative.

Between 1998 and 2021, Malaysia was awash in a total of 14 major floods.1 In December 2021, we watched on social media and news outlets as reports poured in about rapidly rising flood waters that submerged the ground floors of vulnerable homes; roads became impassable, and people were stranded; families were displaced, and the number of casualties began to add up. Due to a combination of heavy rainfall and high tides, Malaysia was subjected to flooding previously deemed a “once-in-a- century” disaster. The floods resulted in 55 fatalities2 and RM6.1 billion worth of damage to homes, vehicles, businesses and infrastructure, equivalent to 0.4 percent of nominal gross domestic product (GDP).3 Since then, we have continued to experience recurring episodes of floods with adverse social and economic impacts.

We now know that these “acts of God” have man’s fingerprints on them. Science shows that such unpredictable weather events are partly due to the high carbon emissions of human activity. The temperature rises from climate change increase both extreme rainfall events4 and intense dry spells.5 Such events have major implications for certain parts of Malaysia’s economy—for instance, the agriculture sector, which contracted by 5.7 percent in the fourth quarter of 2019 following a severe drought. 

A change is needed in how our economies are run. We must invest in adaptations to address our susceptibility to what was once considered tail events, recently demonstrated by the COVID-19 pandemic. Nature’s “externalities” must be reintegrated and appropriately accounted for in recognition of their indivisible relationships with the effective functioning of economies. Finance has the capacity to reorient our economies by channelling funds towards greener and more sustainable activities and by creating the right conditions for households and businesses to accelerate the transition and adaptation to a rapidly changing world. This will build not only the economy’s resilience but also the financial sector’s, in the face of shocks and periods of heightened uncertainty.

If financial systems are the drivers of the economy, central bankers are the cartographers—able to chart a path forward through our financial and monetary-stability management. While the seismic shifts needed to reorient our economies will not happen overnight, present decisions critically matter. At Bank Negara Malaysia (BNM), our response to climate change aligns with our financial and monetary-stability mandates and centres around three key strategies.

First, we are working to integrate climate and environmental risks into how we regulate and supervise financial institutions. Along with other global regulators, we are strengthening expectations for financial institutions on managing climate risks, including climate-related stress testing. We are also improving the reporting and disclosure of climate-related risks and opportunities. As a whole, these actions aim to integrate climate and sustainability considerations into financial institutions’ future business planning, risk management and operations, alongside the consideration of traditional credit, market and liquidity risks.

Second, we are setting up the building blocks for an enabling financial ecosystem to support a just and orderly transition. This means supporting the financial sector in effectively mitigating climate-related risks and capturing transition opportunities. Work is underway to improve the accessibility to and quality of climate-related data that is critical to accurately measure and understand climate-related risks and opportunities. Pilot solutions are being explored to encourage the innovation needed to scale up green- finance solutions, such as innovative protection products for floods and blended-finance options to explore risk-sharing arrangements, that can crowd in much-needed private funding for transition activities. BNM also actively coordinates with the government and relevant agencies to ensure that the financial sector’s response is aligned with national goals and strategies, consistent with a “whole-of- nation” approach. Concerted efforts at the national level continue to be critical to bridging the gaps for individuals and businesses to best manage impacts and capitalise on opportunities.

Finally, BNM aims to embed climate and environmental-related risks across all our functions. Not only is this important to our core mandates, but it is also necessary to manage our exposures to climate risks. This means enriching the scope of our macroeconomic and financial-stability assessments to include climate and sustainability effects; managing our financial and non-financial assets with greater consideration of climate and environmental risks; and running our physical operations more sustainably.

Green finance cannot be truly sustainable unless it is also inclusive. Therefore, as we pursue these urgent measures, the economy’s transition cannot come at the expense of those most vulnerable.

Marginalised groups suffer the most due to climate change, as they are least likely to be insured and often lack the resources to rebuild and adapt, particularly after repeated climate incidents. Yet, they are also likely to be most in need of support during the transition to lower-carbon activities. The transition pathways we envisage both at domestic and global levels must thus strive to deliver equitable outcomes in terms of both the benefits and burdens of mitigation to strengthen overall resilience to the impacts of climate change. We have endeavoured to embed these considerations of climate justice into our policies and measures. Our principles-based climate-change taxonomy classification recognises and supports transition efforts to encourage financial flows to businesses in transition. We have also launched dedicated funds to support small and medium-sized enterprises (SMEs), which account for a significant share of our economy but have the least resources to shift to low-carbon or high-tech green activities.

Economic systems cannot continue to operate as if they are entirely disconnected from nature. A recently published research piece by BNM in collaboration with the World Bank6 explores the risks and opportunities arising from the complex and intricate relationship between nature, the economy, and the financial system in Malaysia. It elaborates on the importance of the feedback loop that links nature- related risks to potential economic and financial losses. Based on the available data, Malaysian banks were preliminarily found to potentially have considerable exposure to various nature-related financial risks. Given our economy’s deep reliance on ecosystems, nature’s “externalities” must be reintegrated and appropriately accounted for in recognition of their indivisible relationship with the effective functioning of economies.

The message from the April 2022 Intergovernmental Panel on Climate Change (IPCC) report7 is clear: The window of opportunity to enable climate resilience is rapidly narrowing. As delays in action allow for rising temperatures, potential measures for adaptation diminish and become less and less effective. At the same time, this must be managed against a backdrop of challenging economic conditions, inflationary pressures and heightened global uncertainties. Therefore, keeping in perspective the real economic environment in which we operate is critical. The energy crisis in Europe and soaring oil prices are stark reminders of a climate transition that is still far from secure or straightforward. Climate change, as well as measures to manage the transition, have the potential to affect the dynamics of inflation, output, and productivity. While monetary policy is not a typical tool in the climate-policy toolkit, central banks will need to consider the impacts of transition on the conduct of economic assessments, the transmission of monetary policy and, ultimately, their ability to deliver on monetary-stability mandates. To this end, BNM is working to deepen our understanding of the transmission and impact of climate risk on the Malaysian economy as well as its interrelationship with the conduct of monetary policy.

Malaysia announced its commitment to achieving net-zero greenhouse gas (GHG) emissions as early as 2050. This needs to be supported by transition pathways at a sectoral level, along with clear governance and accountability frameworks for implementing climate policies. In Malaysia, efforts are also being intensified to leverage digital technology, particularly to develop relevant infrastructure to capture and analyse climate-related data and scale up public-private initiatives to support the transition. On a regional front, continued cooperation remains vital to advance aligned and interoperable taxonomies and quality standards that will instil investor confidence and encourage the much-needed flow of finance to the region. Globally, there is a need for better mechanisms to account for and counteract climate-policy spillovers that can lead to outsized and disorderly impacts, especially on emerging economies in transition. This will be crucial to sustaining the fight against climate change in economies that will bear a disproportionate impact from delayed transitions.



1 Malaysian Re: “Malaysian Insurance Highlights 2021,” May 17, 2022.

2 The Star: “Floods: 55 fatalities from December 2021 to January 2022,” Fatimah Zainal, March 8, 2022.

3 Department of Statistics Malaysia Official Portal: “Special Report on Impact of Floods in Malaysia 2021,” January 28, 2022.

4 World Bank Group and Asian Development Bank (ADB): “Climate Risk Country Profile: Malaysia,” 2021.

5 The World Bank: “Floods and Droughts: An EPIC Response to These Hazards in the Era of Climate Change,” June 17, 2021.

6 Bank Negara Malaysia: “Bank Negara Malaysia and World Bank assess nature-related financial risks for Malaysian banks,” March 15, 2022.

7 Intergovernmental Panel on Climate Change (IPCC): “Climate Change 2022: Mitigation of Climate Change,” IPCC Sixth Assessment Report: Mitigation of Climate Change, the Working Group III.



Nor Shamsiah is the 9th Governor of Bank Negara Malaysia (BNM), assuming office on July 1, 2018. She chairs BNM’s Monetary Policy Committee, the Financial Stability Committee and the Financial Stability Executive Committee. Prior to her current post, she served as the Assistant Director of the Monetary and Capital Markets Division of the International Monetary Fund.


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