KUALA LUMPUR (Nov 26): Bank Negara Malaysia (BNM) said the transition to a green economy, while critical for addressing climate change, is leading to increased costs, a phenomenon termed 'greenflation', which could significantly affect businesses and consumers alike.

The central bank highlighted that greenflation, driven by rising costs of adopting sustainable practices and technologies, is being closely monitored.

“As businesses transition and implement green initiatives, the associated costs are often passed on to consumers.

“However, globally, governments are providing incentives to reduce the cost burden on businesses, and we are exploring similar measures for small and medium enterprises (SMEs),” it said during the Malaysia Sustainability Media Workshop at Sasana Kijang here on Tuesday.

BNM also pointed out that the lack of comprehensive data remains a challenge in assessing the financial sector’s exposure to climate risks and is working to bridge the data gaps to provide clearer insights into the transmission of these risks.

“We are in the midst of collecting and analysing data to understand how climate risks impact financial institutions, which includes measuring the implications of events such as floods on gross development product (GDP) and financing,” it said.

Addressing concerns about the financial sector, BNM noted that while significant progress has been made in financing green initiatives, the uptake remains slow, particularly among small and medium enterprises (SMEs).

“Half of new financing by financial institutions is directed towards climate-supporting or greening activities, but the SME segment has been slower to respond due to recovery pressures post-Covid-19,” it said.

To encourage greater participation, BNM emphasised the importance of financial institutions working with clients to support their decarbonisation journeys.

“We urge financial institutions to engage with businesses to chart their transition pathways rather than withdrawing support, which could cause severe economic and social repercussions,” it added.

BNM further explained that flood risks remain a major concern, with studies showing that failure to adopt early adaptation measures could result in GDP losses of up to 4% during a major flood by 2030.

However, it said early intervention could halve the impact to 2%.

“There is also increased interest in flood insurance coverage among Malaysians, particularly following recent extreme weather events.

“While flood-related protection is still a niche product, awareness is growing as people realise the importance of these covers,” it said.

Despite the challenges posed by greenflation, BNM stressed that the green transition presents significant opportunities.

“Reducing carbon footprints opens up new trade opportunities and preserves existing partnerships, as international trade partners increasingly demand proof of sustainability efforts,” it said.

The central said the financial sector has allocated over RM240 billion for environment, social, and governance (ESG) activities up to 2027, underscoring its commitment to supporting sustainability initiatives.

“There is a cost to transitioning, but inaction is not an option. The green economy also offers opportunities for growth in new markets and technologies,” BNM added.

Uploaded by Lam Seng Fatt