KUALA LUMPUR: The majority of Malaysian banks have conducted a preliminary analysis to assess the impact of climate risk on their business models, according to PwC Malaysia.
In its 2021 survey on environmental, social and governance (ESG) readiness in the local banking sector, PwC Malaysia, however, said the analysis had yet to be translated into risk assessments.
"Eighty-six per cent of respondents expected the greatest impact of ESG risks will be on credit risk and lending processes," PwC Malaysia said in a survey involving 14 Malaysian banks.
The survey provided insights into the level of ESG adoption and challenges Malaysian banks face in navigating this disruptive environment.
The survey, conducted between July and August 2021, highlighted that Malaysian banks were in full steam in their ESG journey, but the level of ESG integration into the business varied across banks.
"Seventy-one per cent of respondents have considered climate change risks. In addition, 86 per cent of them have considered other environmental risks such as waste management and biodiversity protection, while 100 per cent have considered social and governance priorities."
PwC Malaysia said Malaysian banks should implement ESG strategy and align to their corporate strategy, manage ESG risks, incorporate credit assessment and build culture and capacity programmes while addressing data gaps.
PwC Malaysia said a number of ESG-related frameworks had been issued to guide banks on integrating sustainable practices into their businesses.
About 50 per cent of respondents have adopted climate change and principle-based taxonomy (CCPT), and the remaining 50 per cent of local banks plan to adopt in the next two years.
Fifty-seven per cent have adopted a value-based intermediation assessment framework (VBIAF), and 36 per cent have planned to adopt it in the next two years.
Additionally, 64 per cent of banks have planned to adopt a task force on climate-related financial disclosures (TCFD) in the next two years, said PwC Malaysia.
Meanwhile, 70 per cent of banks which have adopted CCPT revealed that the most challenging principles were GP3 (no significant harm to the environment) and GP4 (remedial measures to transition).
"This is due to the need for a holistic assessment of a customer's overall business model to comply with both principles."
PwC Malaysia said the common implementation challenges encountered by banks when adopting the guiding principles were the absence of client data/information (including poor data quality), challenges in translating principles-based guidelines into practice and difficulty in measuring indirect environmental impact.
Additionally, lack of ESG expertise and awareness among stakeholders as well as no standardised disclosure requirements were among the contributing factors.
"Banks are encouraged to apply the CCPT's guiding principles to categorise a customer's portfolio into one of three sustainability categories - climate supporting, transitioning, and watchlist.
On banks allocating responsibilities for ESG risks within their organisations, PwC Malaysia said over 90 per cent of respondents had assigned a department to operationalise ESG.
"Banks are making progress in establishing governance and oversight over ESG risks. Our survey results show that banks have allocated responsibilities for ESG risks to a specific department.
"Notably, several banks have established a dedicated department for sustainability."
The top three departments tasked to oversee ESG risks included corporate strategy (29 per cent), risk management (21 per cent) and sustainability (21 per cent).
It added that effective sustainability governance should cascade through all three lines of defence within banks.
"Roles and responsibilities for managing sustainability need to be clearly defined to demonstrate where accountability for risk management resides across each line.
"To enable greater effectiveness in sustainability governance, ESG skills need to be on par with industry developments."
PwC Malaysia survey showed that banks had demonstrated commitment to building capability and capacity within their organisations.
"Ninety-three per cent has its understanding and oversight of their organisation's approach to managing ESG risks are key to embedding effective governance.
"Eighty-six per cent (workforce) should invest in organisation-wide upskilling is crucial, be it through employee awareness workshops, training or lifelong learning courses in sustainability for employees in various roles/levels.
"Fifty per cent (specialists) - or specialised skills are not available in-house and there are efforts to hire ESG subject matter specialists to fill the gaps," said PwC Malaysia.