This article first appeared in Forum, The Edge Malaysia Weekly on December 14, 2020 - December 20, 2020

The Paris Agreement was signed exactly five years ago on Dec 12, by 196 nations. It was a breakthrough in global climate governance and cooperation, with a target to limit global warming this century to 1.5°C, and at most, to 2°C. As part of this, each signatory country had committed to its own Nationally Determined Contributions (NDCs) to reduce carbon emissions.

However, many countries are not on track to meeting their Paris commitments, and five years on, with more advanced approaches to climate modelling, the data is telling us that global warming is on track to hit 2.8°C, far exceeding the Paris Agreement’s limit of 2°C.

This means that there is tremendous pressure from responsible countries, prudent regulators and allocators of capital to do more and accelerate efforts towards meeting the Paris Agreement’s ambitions, or even to do more.

To date, 33 nations and 1,800 local governments have declared climate emergencies. This has increased the momentum to push for more ambitious commitments and urgent climate action.

Some have gone on to set net-zero carbon targets, which means sequestering as much carbon as is emitted. So far, 126 governments have made net-zero commitments, including Asian giants Japan and South Korea by 2050 and China by 2060.

In addition, the Malaysian government has committed to the Sustainable Development Goals, along with every nation in the world, “on behalf of the peoples we serve” by “working tirelessly for the full implementation of this Agenda by 2030”, including Goal 13 on Climate Action.

Malaysia’s NDC is to achieve a 45% improvement in greenhouse gas emission intensity per unit GDP by 2030, compared with 2005 levels. As at 2014, Malaysia’s carbon intensity had improved by 33% compared with 2005 levels, although after netting off emissions from land use, land use change and forestry (LULUCF), the figure stood closer to 27%.

Of the total target of 45%, 10% is conditional on receiving financial, technological and capacity support from developed countries, and Malaysia is ramping up collaboration with our developed-country partners. However, more needs to be done. With only 10 years left to achieve our 2030 target, Malaysia must pick up speed and accelerate progress across all actors and stakeholders, if we hope to meet our NDC targets.

Malaysia contributes less than 0.7% of total global emissions but is a significant carbon sink and one of only 17 countries in the world with mega-biodiversity. Historically, we have experienced degradation of forested areas owing to industrialisation and expansion in agriculture.

On a positive note, major sustainable initiatives in forestry are being undertaken, including the Central Forest Spine (CFS) and Heart of Borneo (HOB), which are high conservation value forests. However, despite promising conservation and restoration efforts, forests are still being cleared for development. This leaves patches of fragmented forest habitats, disrupting ecosystems and hydrological cycles, and reducing our carbon sequestration potential.

In 2018, 93% of energy in Malaysia was generated from fossil fuels, with 22% from coal. Renewable energy generation (energy from renewable sources excluding large hydropower of >100mw) increased from 2% in 2008 to 7% in 2018, a third of our stated target of 20% renewable energy in the country’s generation mix by 2025.

Aside from our NDC, no declaration of climate ambition or official climate change act has been tabled in Malaysia, and although the imposition of a carbon tax is being considered by the Ministry of Environment and Water, no specific plans or timelines have been elaborated to date. Untaxed carbon emissions is a classic example of a market failure, where the “cost” of carbon is borne by society at large, often disproportionately impacting the poor, while profits accrue to those emitting it. Declaring a price on carbon would substantially advance efforts to smoothly transition to a low-carbon economy.

Positively, courts around the world are increasingly recognising the science and data behind climate change and its impacts. These courts have started allowing communities that can demonstrate how they have been adversely affected by climate change impacts caused by companies to seek compensation from said companies, even those on the other side of the planet.

The climate crisis is a top financial risk which needs to be addressed as part of the governance and stewardship duties of CEOs and boards of directors, in the same way as any other issues prioritised at the board level. The presumption of knowledge on the impacts of climate change has led lawyers to opine that if there is no disclosure on climate risk in companies’ financial statements, their boards, having considered all key risks, have concluded that climate change impact was not material and resolved not to disclose pertinent information.

On climate-related disclosures, a member of the International Accounting Standards Board (IASB), the standard-setting body for the International Financial Reporting Standards (IFRS), has gone further to advise that even if a “company in an industry likely to be affected by climate-related risks determines that its impairment testing does not need to include a specific assumption regarding such risks, taking into account investor comments on the importance of climate-related risks to their investment decisions and reasonable expectations that the recoverable amount of the company’s assets could be affected by such risks, when applying the Practice Statement (that is, IFRS Practice Statement 2 Making Materiality Judgements), the company may conclude that it needs to disclose information that explains clearly why the carrying amounts of its assets are not exposed to climate-related risks”.

The World Economic Forum’s Climate Governance Initiative is a set of principles built on the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) intended to help boards of directors and management teams implement climate governance within their organisations. Climate Governance Malaysia is the local country chapter of this initiative, being the first in Asia and second in the world to be established.

Countries such as France, the UK and New Zealand have already legislated pathways to mandatory reporting on climate risks. However, in Malaysia, there are no formal requirements in place for businesses to monitor, report and verify their carbon footprints, or to disclose their climate risks.

Globally, almost half of companies with market capitalisation greater than US$10 billion (RM40.6 billion) are already making disclosures in line with most of the TCFD recommendations, and at a minimum, companies should disclose whether the assumptions in their accounts are aligned with Paris ambitions.

The governor of Bank Negara Malaysia has called the climate crisis “an existential threat” because it poses systemic risks to the financial system. This spurred the formation of the Joint Committee on Climate Change (JC3) in 2019 as a multi-regulator platform to pursue collaborative actions for building climate resilience within the financial sector.

The 12 financial institution members of the JC3 are now participating in the pilot implementation of a Climate Change and Principle-Based Taxonomy, prioritising efforts to strengthen climate risk management practices in the financial sector and building on the long-established shariah sector’s Value-Based Intermediation Financing and Investment Impact Assessment Framework (VBIAF).

The need to increase and encourage sustainable financing sources for climate mitigation and adaptation measures is critical in enhancing efforts towards achieving NDCs. There simply is not enough public funding to facilitate the pivot from brown to green, and this provides opportunities for financial institutions and allocators of capital. However, in order for financiers and investors to “finance green”, the companies and investees themselves must be able to measure, monitor and disclose their own carbon footprints and climate risks.

Petronas became the first oil company in Asia to commit to achieving net-zero carbon emissions by 2050, and this past week, CIMB announced its commitment to phase out coal from its portfolio by 2040. In October 2020, 43 business leaders came together to commit to sustainability efforts via the CEO Action Network (CAN). Originally mooted by CIMB (also a signatory of the Principles for Responsible Banking and the Collective Commitment to Climate Action), CAN is led by a steering committee chaired by the president of Petronas, with work streams for government advocacy and capacity building.

The momentum is also picking up with events such as CIMB’s The Cooler Earth Summit, Kuala Lumpur Eco Film Festival (KLEFF), Malaysia Local Conference of Youth (MLCOY), grassroots initiatives which work with vulnerable communities, and many other efforts to mobilise society.

But is this enough? We are entering into what is likely to be the most critical decade in the history of humanity. In order for there to be a viable future for this planet, we need to take meaningful steps in the multi-decade carbon transition, which will be both deeply complicated and uncomfortable for many.

The longer we take to start taking real action, the steeper and more drastic the transition will need to be. This is a transition which needs all of society, including all of the government’s attention and will to act.

We are now starting to see an acceleration of action, but this needs to grow exponentially in terms of action and the number of actors. We are just starting to dip our toes into this. However, time is running out, and we need to take the plunge.

Datin Seri Sunita Rajakumar is the chair and founder of Climate Governance Malaysia, the country chapter of the World Economic Forum’s initiative for the promotion of climate governance principles. Luanne Sieh is head of group sustainability and corporate responsibility, CIMB Group and chair of the CEO Action Network Working Group, which was formally established in 2020 as a closed-door peer-to-peer informal coalition of 40 Malaysian business leaders focused on sustainability advocacy, capacity building, action and performance.

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