KUALA LUMPUR: Bank Negara Malaysia's (BNM) principle-based climate change taxonomy will guide financial institutions in assessing and classifying economic activities based on the activities' impact on the climate and environment, according to Moody's Investors Service (Moody's).

It said the central bank's Change and Principle-based Taxonomy (CCPT) would also deepen the institutions' understanding of climate risks and therefore enhance their ability to reduce or mitigate such risks.

"Also, it will facilitate the development of portfolio management techniques that will help protect balance sheets against climate risks and contribute to the institutions' green objectives," it said in a statement.

On April 30, 2021, BNM published the CCPT following a three-month consultation that ended in March 2020.

"This is credit positive for financial institutions in the country because the taxonomy will enhance these institutions' risk management and support their green strategies," said Moody's.

Additionally, it said the taxonomy will pave the way for greater market transparency, which in turn will strengthen the financial institutions' discipline in managing climate risks and committing to climate goals, given the increasing attention of stakeholders - including customers and investors - to environmental, social and corporate governance (ESG) issues.

The taxonomy is principle-based rather than rule-based, which will ease its adoption, given the nascent stage of climate risk management and the ongoing updates to national climate goals in Malaysia.

Moody's noted that the principle-based approach will also support alignment with other jurisdictions, particularly for financial institutions that operate across geographies.

"An example is the recent announcement by members of the Association of Southeast Asian Nations (ASEAN) in March 2021 to develop a regional taxonomy.

"Under the taxonomy, financial institutions will assess economic activities based on the following guiding principles: climate change mitigation, climate change adaption, no significant harm to the environment, remedial efforts to promote transition, and prohibited activities," it added.

-- BERNAMA