This article first appeared in The Edge Malaysia Weekly on December 26, 2022 - January 1, 2023

The link between the financial sector and the environment may have been difficult to understand in the past, but since sustainable finance took off, it has been increasingly on people’s minds.

Banks are under pressure to stop lending to companies that earn revenue from coal mining, for instance, while capital market tools like bonds are being issued to raise funds for green buildings.

Tatiana Didier, senior economist at the World Bank Group’s (WBG) Inclusive Growth and Sustainable Finance Hub in Malaysia, chose this career path to explore that dynamic. Born in Brazil, she was used to seeing the destruction of mega-biodiverse forests.

“It’s heartbreaking. I’m a financial sector economist, so I thought, what can we do? What is the role of the financial sector here? There has to be something,” says Didier.

She believes sustainable finance is important to address the risks that are bound to come with climate change.

“We are not only going to depend on public funding. We need private financing. And to mobilise that capital, [we need] banks. So, I think it’s important to get them to embark on this journey. Once they are there, it will trickle down [to smaller firms].”

Cecile Niang, practice manager for East Asia and Pacific at WBG, has a similar experience. Born in Senegal, she witnessed how desertification drove poverty and rural-urban migration.

“I witnessed in my own country how climate change can impact the livelihoods of populations,” says Niang, who is also an economist and has spent decades working for WBG in various regions.

“I [saw] glaciers melting in the Himalayas; floods and cyclones in Southeast Asia; and droughts in the Sahel [in North Africa]. I really got absorbed into sustainable finance when I joined [WBG] in the Caribbean region in 2014.”

A number of extreme storms ravaged the region and drastically impacted its economy. From then on, she began looking at disaster risk finance to see how fund flows could help countries rebuild or cushion shocks from natural disasters.

“For a long time, climate and finance were operating in parallel. I would say it’s really only in the past 10 years that we’ve started to see a conversion because governments will not be able to foot the bill [from climate disasters] and meet their national targets alone. We have been working with governments around the world to boost sustainable finance so it can bring about decarbonisation and greener livelihoods and manage climate risks,” says Niang.

WBG has played a crucial role in enabling the growth of sustainable finance globally by providing financing and knowledge support. Its office in Malaysia, called the Inclusive Growth and Sustainable Finance Hub, provides knowledge expertise to the government and other parties on topics such as equitable growth and sustainable finance.

In 2016, it joined a technical working group with Bank Negara Malaysia and the Securities Commission Malaysia to support the Malaysia Green Finance Programme and launched the world’s first green sukuk.

Most recently, in November, it launched a report titled “Unleashing sustainable finance in Southeast Asia”, with Didier as the lead author. Niang was in the country for the launch of the report as well as the Global Green Finance Leadership Programme 2022 conference.

Economists are sometimes criticised for being disconnected from reality as they devise policies that might not be well implemented on the ground. Additionally, working with governments means dealing with bureaucracy. Can these World Bank economists really make a difference in their roles?

Niang and Didier believe so. Institutions and high-level decisions matter, they say. Decarbonisation, for instance, requires a national strategy. Regulations are also crucial.

“Regulations matter when it comes to shifting the private and financial sectors towards industry climate standards. Some governments with whom we work have used other tools, such as risk sharing, with the financial sector,” Niang says.

The recently released report says countries with policies that enable sustainable finance tend to have more developed markets. Malaysia, in fact, was highlighted for having a more developed sustainable finance market than its peers.

A key highlight from the recent sustainable finance report is that the sustainable debt and equity markets have grown significantly in the Asean region in the last five years, going from US$250 million in 2016 to US$6.75 billion in 2021.

But the sustainable debt and equity market is still a fraction of conventional markets, and there is a sizeable gap in sustainable financing for small- and medium-sized enterprises (SMEs). Among the main challenges for adopting sustainable finance are the limited availability and complexity of climate-

related information. Adding to that, there is a shortage of expertise in the financial sector.

These challenges can be addressed by ensuring that timely and high-quality data are accessible, implementing taxonomies and disclosure standards, and crafting policies that can de-risk sustainable investments.

“What are sustainable activities? What is a green or transition project? [Having a common set of definitions] comes through taxonomies,” says Didier.

“Another thing is disclosure frameworks and reporting, which help with transparency and the flow of information for financial institutions. This is so they can measure their exposure to risks from the climate and environment.”

Malaysia has the foundations to make a mark in sustainable finance, given its strength in Islamic finance, according to the report.

The emphasis on transition finance, which aims to help companies in high-carbon-emitting industries to transform, is also an advantage.

“The European Union [EU] taxonomy focuses mostly on [whether an activity] is green or not green. But the Asean and Malaysian taxonomies have green, amber and red. This is part of the economic transformation of going from amber to green, and it’s what we call transition finance,” says Niang.

“If you look at the EU or China, they saw a huge boost in volumes going into sustainable finance the moment they issued their taxonomy. But they missed out on transition finance, which they now have to catch up with.”

What emerging economies like Malaysia lag behind in is the narrow scope of sustainable finance. Most of the sustainable financing in Southeast Asia goes towards renewable energy and energy efficiency. This is important, but much more needs to be done.

For instance, sustainable finance could support clean transport, protect biodiversity or transform the agriculture sector. “The next frontier for countries like Malaysia is to have a more diversified set of investments related to climate,” says Niang.

Her personal hope is to see sustainable finance address biodiversity risks. A report released by the hub and Bank Negara earlier this year highlighted that 87% of financial assets in Malaysia are exposed to nature-related risks, whether due to deforestation or flooding.

“The more I look at innovations in the world, the more I wish to increase my impact on biodiversity. I found it really powerful to learn about the rhino bond in South Africa, the mangrove bond in Australia and the tiger conservation bond that is being considered in Malaysia,” says Niang.

Didier, meanwhile, wants to see an emphasis on adaptation to climate change and a just transition, so that even the most vulnerable groups are protected.

“It’s not just about financing green projects but also about adaptation and making sure resilience is there and that the financial sector can support it,” says Didier.

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