This article first appeared in The Edge Malaysia Weekly on November 18, 2024 - November 24, 2024

Energy transition is a conversation about the redirection of capital, with more funding being needed to finance global renewable energy requirements.

However, since the Paris Agreement, the world’s 60 largest banks have channelled US$4.6 trillion (RM19.95 trillion) into the fossil fuel industry, locking the world into decades of additional greenhouse gas emissions, according to the report “Banking on climate chaos: Fossil fuel finance report 2022”.

Fossil fuels are the leading driver of climate change today, and is therefore one of the greatest threats to humanity’s future. Over 2,000 companies worldwide have set decarbonisation targets.

However, concerns over greenwashing have led to the development of voluntary net-zero standards to provide clarity over what credible net-zero plans entail.

One such standard is the ISO Net Zero Guidelines, which requires corporations to establish “policies to phase out fossil fuels ... both by selling assets and responsibly retiring them”.

Such a commitment is recommended by a further nine additional net-zero standards, according to an Oxford Net Zero analysis, and the Science-Based Targets Initiative is expected to include a similar requirement in its upcoming Financial Institutions Net-Zero Standard.

To date, however, only one Malaysian bank has set a policy to phase out fossil fuel financing, revealing that the majority of Malaysia’s financial industry are vulnerable to transition risk.

Underscoring this risk is the emergence of climate litigation as an accountability tool. The Network for Greening the Financial System and the European Central Bank have warned that climate litigation against banks directly could pose risks to financial stability.

In 2023 alone, six climate litigation cases were filed, challenging financial flows to climate-risk projects. In one notable case, French non-governmental organisations (NGO) sued BNP Paribas for its role in financing TotalEnergies’ controversial East African Crude Oil Pipeline.

Another emerging trend in climate litigation is greenwashing cases, where corporations are being sued for having misleading environmental claims.

For example, a Dutch NGO is suing BNP Paribas for claiming to have a net-zero target, while excluding the majority of its financed emissions from its targets — a credibility gap that Malaysian banks are especially exposed to.

These forms of climate litigation are not only seen in the Global North. In 2022, a Thai court ruled in favour of a community that filed a suit against a coal mining project on the basis that it violated their right to a clean and healthy environment.

There is a scientific consensus that all fossil fuel expansion is inconsistent with a 1.5°C pathway, and that includes fossil fuel expansion in Malaysia.

Despite counter-narratives primarily from the fossil fuel lobby, as Asia’s largest liquefied natural gas (LNG) exporter, Malaysia continues to be a significant contributor to global emissions, with our state-owned Petroliam Nasional Bhd (Petronas) being the 25th highest-emitting company in the world since 1988, according to the CDP Carbon Majors Report 2017.

This underscores the significant impact a domestic exclusion of fossil fuel financing would have on mitigating global emissions. For example, the current development of a 1.2GW fossil-fuel power plant in Pulau Indah would not have been possible without RM2.7 billion in financing arrangements from three Malaysian banks.

Based on data from the RimbaWatch Future Emissions Database, these three banks have directly facilitated an estimated “carbon lock-in” of 114 million tonnes of carbon dioxide equivalent (tCO2e). Through this, these banks have added a burden equivalent to the annual emissions of entire countries such as Iceland and Mauritius to the world.

This example underscores the materiality of financed greenhouse gas emissions to Malaysian banks. Local banks have shown a clear appetite to finance fossil fuels both domestically and abroad.

If  Malaysian banks are truly serious about their climate change commitments, much more needs to be done to align their actions with their words.

Adam Farhan and Claudia Nyon are from RimbaWatch, a regional watch group conducting research and analysis on climate-related issues

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