Physical Climate Risks
Physical risks can be event-based (acute) or longer term climate pattern shifts (chronic). It can have direct financial implications for organizations such as direct damage to assets, or indirect impacts including supply chain disruption.
Where Are We Heading Towards?
For Malaysia, climate change poses an asymmetrical challenge. On one hand, our impact on global emissions is small, but on the other hand, the effect of climate change on us is disproportionately large and existential. So, where is Malaysia heading towards?
It is projected that the average annual air temperature for the country may increase by 0.5°C-1.0°C during the period of 2030, and the temperature is expected to rise toward the critical 1.5°C Celsius benchmark during the period of 2050.
Half a Degree and a World Apart
You may think that a difference of only 0.5°C would be insignificant - however, a couple degrees of warming can have enormous effects. Click on this Link to understand the half a degree of warming can make.
Projected Average Annual Temperature and Average Annual Rainfall for the Regions in Malaysia
What does this temperature rise projection mean for corporate Malaysia? Check out the interactive projections below of sea level rise & water stress scenarios between the period of 2030-2050 in Malaysia, and the potential sectors which are vulnerable to the impacts.
Sea Level Rise
Projections of sea level rise in Peninsular Malaysia (2030 & 2050)
Malaysia’s coastal zone shores are exposed to erosion due to coastal developments with unprotected shorelines and rising sea levels. Over 15% of Malaysia’s coastline is continuously being eroded. This trend is alarming, where around 70% of the population in Malaysia live and work in the coastal zone.
Furthermore, the coastal zone area is dominated by activities such as manufacturing industries, agriculture (rubber, coconut, paddy, oil palm plantation), fisheries, aquaculture, transportation, poultry rearing, urban development, residential, ports & jetties, tourism and mining. Businesses with activities/supply chain in the coastal area are thus exposed to the threats of rising sea levels.
Click on these interactive charts below to witness the projected sea level rise scenario of
the respective states.
Perak (Bagan Serai)
Perak (Teluk Intan)
Source:Climate Central Coastal Risk Screening Tool
Projection Information: The selected settings for this screening SLR projection data is based on SLR + Annual Flood projection type, unchecked pollution scenario, and mid luck levels. Areas that are shown as threatened exclude areas isolated by higher land. For the source of SLR projection, mid-range datasets are utilized (Kopp et al. 2014).
Projections of water stress in Peninsular Malaysia (2030 & 2040)
Occurrences of dry spells in Malaysia which can result in water storage levels of dams to fall below the 50% warning level consecutively for a few months are also expected to occur more frequently in the future.
Some sectors which are potentially impacted by water stress include sectors such as hydrological (e.g., rivers & dams), agriculture (e.g., paddy farming, rubber), construction, healthcare, energy (e.g., reduced hydropower supply), and the industrial sector.
Click on these interactive charts below to witness the projected water scenario of the respective states.
Source: WRI Aqueduct Water Risk Atlas
Scenario: "Business as usual" scenario (SSP2 RCP8.5) represents a world with stable economic development and steadily rising global carbon emissions, with CO2 concentrations reaching ~1370 ppm by 2100 and global mean temperatures increasing by 2.6–4.8°C relative to 1986–2005 levels.
Malaysia’s changing climate poses material risks to the country’s economy and returns of financial institutions. Swiss Re, one of the world’s largest providers of insurance to other insurance companies, estimates that the effects of climate change (if global temperatures rise to 2°C) is expected to cut Malaysia’s economic growth 20% below expectations by 2050.
Given the potential vulnerabilities faced by various businesses, it is essential for business leaders to continuously integrate climate related risks into the organization’s risk mapping, and to formulate adaptation & mitigation plans to enhance long term business resilience.
The road to a low-carbon economy will involve addressing the mitigation and adaptation requirements related to climate change. This is likely to materialize in the form of extensive policy, legal, technology, and market changes, also known as transition risks.
Transition Risks/Opportunities For Malaysian Businesses
Rising Net Zero Regulations Which Favour
"Green" Trading Partners
Supply Chain Pressures
Shifts In Global Market Needs & Increased
Demand For Greening Supply Chains
Shifts In Capital Allocation
Evolving Climate Policies
Opportunity To Access Green
Increasing Climate Demands From Gen Y & Z
Source: UN Global Compact Network Malaysia & Brunei
Rising Net Zero Regulations Which Favours “Green” Trading Partners
Most recently, some international governments have taken actions on a few major manufacturing and plantation players in relation to sustainability-linked violations. This resulted in severe reputational risks to those companies, and played to the advantage of their trade competitors. As a growing number of Malaysia’s significant trade partners (e.g., China, US, EU) formulate regulations & policies to align with their Net Zero climate ambitions, trade will inevitably pivot towards favoring partners who are taking positive climate actions and penalizing non-compliance. Thus, businesses with foresight should take this opportunity to go above and beyond their peers to prove their climate and other ESG credentials in order to continue enjoying market access in developed markets and be positioned as leading global industry players.
Supply Chain Pressures
Shifts In Global Market Needs & Increased Demand For Greening Supply Chains
Apart from the push from international regulators, another major contributor to the climate agenda are global business customers. Malaysian companies will eventually be placed under pressure to adhere & act on stricter climate requirements of their international clients - which have already endorsed Net Zero emission targets while demanding compliance from their supply chain. This is evidenced in the latest SBTi Annual Progress Report showing that 94% companies with approved Science Based Targets (SBTs) have set Scope 3 targets, and close to 70 companies have required their suppliers to set their own SBTs. This is something for both large and small businesses to consider, if they wish to remain competitive in the market.
Shifts In Capital Allocation
To date, one of the primary challenges facing banks, issuers and investors is to have a complete & standardized dataset of the climate-related financial risks they face. This is changing with growing investor and regulatory pressure as well as with mandates for disclosure of climate-related financial risks in alignment with TCFD, both internationally (e.g., PRI) and within Malaysia (e.g., BNM, Bursa).
Requiring companies and financial institutions to disclose climate change risks will trigger huge shifts in capital investments or “differentiated regulatory treatments” of assets, whereby some companies could be left with stranded assets - holdings that turn out to be worthless because of changes associated with a transition to low-carbon energy sources. In addition, the shift in capital allocation could result in obsolete business models, and presents risks for management or talent to scale quickly to meet rapid shifts in climate-related demands.
Opportunities To Access Green Financing
Driven by both investor demand and regulatory push, the rise in innovative green financial products such as green sukuk/bonds and sustainability-linked loans presents opportunities for businesses to leverage on climate-related data points, and to engage in and communicate best practices to ready their organizations to tap into these green finances. Existing Malaysian corporate beneficiaries include Yinson, Axiata & Sarawak Energy Bhd.
In fact, some Malaysian companies are already experiencing the need to prove their ESG credentials when seeking international financing opportunities - although Southeast Asian banks have yet to set up very stringent requirements, financial professionals and boards foresee this to be a basic requirement for obtaining finance in the coming years.
Evolving Climate Policies
Overall, Malaysia’s regulatory policies & initiatives in relation to climate change have created an enabling environment for various sectors. Furthermore, initiatives such as the 12th Malaysian Plan, Bank Negara’s Climate Change Taxonomy, and the establishment of the Malaysian Climate Action Council complements the government’s aspiration to become a carbon-neutral nation. As local policies gradually evolve to match the initiatives of the international climate landscape, local companies may be more susceptible to the costs of GHG emissions in their businesses becoming internalized. Thus, there lies a strong case for businesses to future proof their organizations by starting to make investments today to reduce their direct & indirect GHG emissions.
Increasing Climate Demands From Gen Y & Z
The pandemic represents a landmark in the lives of the younger generations - this group which disproportionately works in service jobs and are in the lowest rungs of professional ranks faced challenges of layoffs and entering/returning to the job market in a severe recession. It is no surprise that climate change & sustainability tops most of their list as one of the key challenges to be addressed. Given that the next decade will be shaped by the maturation of Generation Z, in terms of workforce talent participation and consumer base, business leaders must be well-equipped to address the needs of this growing pool of climate-conscious generation.
Should SMEs Care About Climate Change?
As with Covid-19, climate change does not discriminate. Small and medium-sized enterprises (SMEs) in Malaysia constitute over 98% of business establishments and represent key drivers of economic growth for Malaysia.
With insufficient resources, SMEs will face far more negative impacts on the impending physical risks (e.g., floods, sea level rise, water stress), which is expected to increase in frequency and duration in the future. Furthermore, indirect impacts such as rising scarcity and increasing prices of resources (e.g., water & energy) as well as supply chain disruptions due to climate change may threaten its continuity and prosperity.
Although SMEs are not directly exposed to global markets, the increasing number of Net Zero pledges by international shareholders and regulators will eventually result in the rise in climate demands within supply chains, where small businesses will be “pressured” by larger companies to adhere to their respective climate targets. In fact, a recent study by Standard Chartered found a potential loss in export revenue of US$65.3 billion (RM268.8 bil) for Malaysian suppliers who fail to transition alongside their MNC partners.
Moving forward, the SME community must recognize that taking positive climate actions is the only financially sustainable way to operate.
Climate change is an existential threat facing humanity today. The science is clear, there is an unprecedented increase in ambition for Net Zero pledges, and Malaysian businesses need to raise their ambition to remain relevant in the future of sustainable trade. Download this guide to understand the business case for businesses to undertake climate actions.
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