2024 Climate Risk Stress Testing Exercise

Key Takeaways from the Bank Negara Malaysia Methodology Paper

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 An Overview of BNM’s Climate Risk Stress Testing Exercise Methodology Paper and Timeline
Financial institutions are required to conduct climate risk stress testing to assess potential vulnerabilities to various
climate scenarios.
Applicability
Required Optional
Prescribed development Licensed digital banks
Licensed banks Licensed investment banks
financial institutions

Licensed Islamic banks Licensed insurers and

Licensed Islamic digital banks
takaful operators

Time Horizon
31st December 2024 1-Year Projections on the annual recurring 5-Year Projections to the subsequent
First Projection Reporting Point projection report at the end-of calendar years reporting at the end of calendar years

2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 2030 2035 2040 2045 2050

Long-term climate scenarios span over a 27-year period

Regulatory Climate-Related Assessment for Banks and Insurers and Takaful Operators
BNM CCPT BNM CRMSA Exposure Draft BNM CRST Discussion Paper BNM CRMSA Policy Document BNM CRST Methodology Paper
➢ Principle-based taxonomy to assess and ➢ Sets out the proposed ➢ Discussion paper published by ➢ Issuance of the BNM CRMSA ➢ The 2024 Climate Risk Stress Test
categorise economic activities based on requirements and guidance BNM which sets out Bank Negara Policy Document taking into (CRST) exercise is primarily
climate objectives and promote transition on climate risk management Malaysia’s (“the Bank”) proposed consideration feedback from intended to facilitate financial
to low carbon economy by facilitating and scenario analysis framework and elements for the industry players on the exposure institutions’ learning and capacity
standardized classification and reporting industry-wide climate risk stress draft building in addressing risks from
of climate-related exposures testing (CRST) exercise in 2024 climate change

30 April 2021 27 December 2021 30 June 2022 30 November 2022 29 February 2024
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 An Overview of NGFS Climate Scenario used for 2024 CRST Exercise
The three long-term climate scenarios reflecting diverse pathways for Malaysia's transition and physical risks up to 2050.
The three climate scenarios as
NGFS
described in the methodology paper
High • Orderly - Net Zero 2050 (“NZ2050”) : This climate scenario rests on strong climate policies and significant green
Disorderly Too Little, Too Late technology breakthroughs to rapidly reduce greenhouse gas (GHG) emissions, limiting global warming to 1.5°C. It
reflects key features of an early and orderly transition to a low carbon world.
Divergent
Net Zero
(1.5 °C) Delayed
• Disorderly - Divergent Net Zero 2050 (“DNZ2050”) : This scenario differs from the NZ 2050 scenario in several
Transition aspects. Here, global climate policies are much more stringent in selected economic sectors, reflecting a quicker
Transition Risks

phase-out of fossil fuels and the impact thereof. The distributional impacts from climate policies are uneven, with
some sectors being affected even more relative to the rest suggesting varied focus of climate policies being introduced
at different points in time.
Net Zero
Current
2050
Policies
• Hot House World - Nationally Determined Contributions (“NDCs”) : The NDCs scenario assumes both implemented
(1.5 °C) Below
2°C
NDCs and pledged policy measures are fully implemented but remains inadequate to facilitate an orderly transition. While
emissions decline, the limited policy actions taken are insufficient and will lead to an approximately 2.5°C increase in
Orderly Hot House World temperatures, and a materialisation of moderate to severe physical risks.
Low * The three climate scenarios were based on the NGFS Phase III integrated assessment model outputs.
Low Physical Risks High

Summary of details on the NGFS Scenarios

NZ 2050 DNZ 2050 NDCs
Physical risk Limited Limited High
Mean global warming relative to pre-industrial average in 2050 1.4°C 1.4°C 2.6°C
Malaysia’s surface temperature based on IPCC’s AR6 95th Percentile (in 2050) 26.9°C 26.9°C 27.8°C
One-off 1-in-200 years flood event in Malaysia Lower severity Lower severity Greater severity
Transition risk High Moderate to higher Lower
Estimated average shadow carbon price in Malaysia (in 2050, USD per tCO2e based on 2010 prices, and USD 325.40 USD 698.90 USD 41.60
regional carbon prices)
Source: Intergovernmental Panel on Climate Change, NGFS and Bank Negara Malaysia
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 The Stress Test Parameters and Assumptions for Assessing Climate-related Risks
A comprehensive assessment of the impact of various climate scenarios on all financial risk exposures.
For Assessing the Impact of the Climate Scenarios on Significant Financial Risk Exposures Application of Static Balance Sheet Assumption
Types of Risks Banks Insurers and Takaful Operators Illustration of assumptions:
• A financial institution starts with an exposure of RM10,000 at the
Credit risk Quantitative Qualitative end of 2023, which could represent a loan exposure for banks or
an invested assets/liability exposure for ITOs.
Market risk Qualitative Quantitative
• Shock parameters for time +1, time +2, and time +3 are 10%, 15%,
Liquidity risk Qualitative Qualitative and 0%, respectively. These shocks encompass factors such as
increased probability of default, decline in equity market
Operational risk Qualitative Qualitative performance, or increased insurance claims (whichever is
Insurance and Takaful risk N/A Quantitative applicable to the financial institution).
• Estimated losses are calculated based on the exposure as of end-
Summary of Portfolio Coverage for Long-term Climate Scenarios 2023 for each reporting period (time +1, time +2, and time +3).
These estimated losses could represent ECL, mark-to-market
Portfolio Coverage Banks Insurers and Takaful Operators losses from invested assets, or insurance payouts for medical/fire
claims.
Residential and non-residential Required N/A Time +1: Time +2: Time +3:
property loans Take end-2023. Take end-2023. Take end-2023.
Apply 10% shock. Apply 15% shock. Apply 0% shock.
Construction and bridging loans Required N/A

Motor vehicle loans Optional N/A

Base Value: RM10,000

Other loans collateralized by Optional N/A
Estimated loss Estimated loss: Estimated loss:
properties (submit in reporting RM1,500 RM0
template): RM1,000
Life insurance funds N/A Required

Family takaful sub-funds N/A Required

General ITO’s lines of business N/A Required End-2023 End-2024 End-2025 End-2026
(time 0) (time +1) (time +2) (time +3)

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 The Stress Test Parameters and Assumptions for Assessing Climate-related Risks
A comprehensive assessment of the impact of various climate scenarios on all financial risk exposures.

Parameters Specific Considerations

Assessment for Top 10 Banks Insurers and Takaful Investment Banks

Location
Counterparties at Subsector Level Operators
Minimum Assessment Granularity :
Agriculture, Forestry and Fishing Portfolio Required: Required: To consider on the
Postcode-Level Subsectors: Oil palm coverage • Loans for the • Life insurance funds specificities of their
* Financial institutions must be able purchase of • Family takaful sub- business mix and their
to meaningfully differentiate the Mining and Quarrying residential and non- funds General ITOs’ vulnerability to physical
severity of estimated hazard impacts residential properties. lines of business and transition risks
by postcode. • Construction and arising from climate
Manufacturing
Subsectors: Food and beverages, Vehicles and
bridging loans. change but participation
Building materials, rubber and plastic products is optional.
Time Horizon Optional:
Electricity, Gas, Stream and Air • Loans for the
Conditioning Supply
purchase motor
For long-term climate scenarios:
Water Supply, Sewerage, Waste vehicles
• Span over a 27-year period from
Management and Remediation • Other types of loans
December 2023 (as the starting
Activities that are collateralised
position) until 2050.
by properties
Construction
For short-term acute physical risk
scenario: Types of • Credit risk • Credit risk • Credit risk
• Assume that the one-off flood Transportation and Storage financial risks • Market risk • Market risk • Market risk
Subsectors: Land transport and transport via
event occurs on 1 January 2024. pipelines, Water transport and Air transport to be • Liquidity risk • Liquidity risk • Liquidity risk
• Apply the shocks from the flood assessed • Operational risk • Operational risk • Operational risk
event to their balance sheet Real Estate • Insurance/Takaful risk
position as of 31 December 2023.

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Contact Information

Dr Justin Ong Kean Hu Dr Chee Wei Yen Lloydon Leong

Executive Director, Executive Director, Director

Malaysia Risk Advisory Leader Risk Advisory, Malaysia Risk Advisory, Malaysia

Email: keaong@deloitte.com Email: wechee@deloitte.com Email: llleong@deloitte.com

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