Climate concerns now an inevitable part of business
Companies must be responsible and accountable; allocators of capital need transparency as they are the ones who decide what goes where
PETALING JAYA: Addressing climate change is set to be part of doing business as concerns from investors, governments and regulators grow, according to Climate Governance Malaysia.
Its founding member Datin Seri Sunita Rajakumar stated that businesses need to be responsible and accountable because allocators of capital – bankers, investors and insurers – need this level of transparency as they are deciding where the capital is going. The first step for business to address is by establishing climate disclosure and reporting.
“If such information is not available in the annual report, they will take this as a proxy to the quality of management and board,” she said in her presentation “Auditors role in understanding climate change” during the Governance in Audit virtual forum organised by the Institute of Internal Auditors Malaysia yesterday.
Domestically, Sunita pointed out that Bank Negara Malaysia’s stance on the issue is clear as it outlined climate change is far reaching in breadth and magnitude – foreseeable and irreversible – there is a need to act now. In a taxonomy published on April 30, 2020, it stated that there is a clear link between physical risk drivers and systemic risk on the financial system, and the regulator can map out how exactly this is going to be affected.
“One of the things recognised is carbon pricing, a classic market failure in which the cost of pollution is borne by society at large globally but the profits accrue to the polluters. Pricing this pollutant is going to be important but the government needs to create an enabling environment,” she said.
In regard to carbon pricing, the European Union announced on Wednesday that it will introduce a border carbon tax to imports into the customs union as part of its ambitions to be carbon neutral by 2050. Sunita noted that the region does not want to be accused of outsourcing its climate ambitions to countries that have zero controls.
The carbon pricing approach is not limited to governments alone, as global reinsurer Swiss Re has introduced an internal carbon levy of US$100 per tonne in 2021 which will be increased to US$200 per tonne by 2030. The levy will fund compensation of residual operational emissions through high-quality carbon removal projects. Its group CEO Christian Mumenthaler was quoted as saying that the move is proof of its climate action component of the company’s sustainability strategy and underscores its belief that leading companies can and must propel climate protection beyond mere compliance with current regulations.
Sunita observed this move as an indicator to ascertain whether a business is still profitable with the changing climate.
“This is why shadow pricing is important, as it establishes how resilient you are to the inevitable price of carbon.”
In a report assessing climate change impact of 48 countries by Swiss Re, she
pointed out that Malaysia was second last in terms of climate resilience, as it is vulnerable to extreme weather events and has a low adaptive capacity.
On a baseline scenario of a 2–2.6°C temperature rise, the report found Malaysia, Thailand and the Philippines would lose 33– 36% of GDP by 2048, as a result from the growing adverse impacts such as reductions in labour and agricultural productivity.
“Another way of looking at this is our sovereign ratings is going to be affected, and the estimation is at least six notches of downgrade, which will affect our cost of funding and weaken the currency,” Sunita said.
She highlighted the importance for Malaysia to make headways into address climate change as it is a trading nation which exports close to 70% of its GDP to countries such as European Union, China, Japan and South Korea which have declared their ambitions to have net zero carbon emission by 2050 and 2060 in the case of China.
Given that these countries are trying to reduce their own carbon footprint, businesses and sectors that are trying to export need to manage their carbon footprint or might not be buyers for their goods.
“Meanwhile, being at the forefront in climate and sustainability will provide a competitive edge over those lagging behind in the climate issue,” Sunita explained.