Net Zero Readiness Index: Malaysia

“Malaysia’s challenge is to decarbonize its energy-centric economy in the face of population growth pressures and poverty outside of urban areas. The transition to net carbon zero will require not just political will but also significant structural and legislative reforms on a national scale,” says Phang Oy Cheng, Executive Director of Sustainability Advisory, KPMG in Malaysia.

One of the government’s strengths is introducing the Green Technology Financing Scheme (GTFS), which is to subsidize work in sectors including renewable energy, buildings, transport and manufacturing.³ Through this scheme, the government is able to facilitate more green projects and businesses.

There have been some progression towards its green agenda where TNB has stated that its Jimah East electricity generation facility, commissioned in 2019, will be its last new coal-fired power plant, as it has pledged not to invest anymore in greenfield coal-fired power plants. This is in line with the company’s transition to cleaner and more sustainable energy.⁷

Currently, it is observed that the main drivers of climate change action are largely by private initiatives from the business sector. In October 2020, PETRONAS, the Malaysian oil and gas group, set an aspiration to achieve Net Zero emissions by 2050, partly by making existing operations more efficient but also by developing low and zero carbon fuels and carbon capture technologies.⁸

Around three-quarters of Malaysia’s industrial output is from small and medium enterprises, which will typically need government guidance and regulation to decarbonize, but at present this is lacking although there is evidence of circular economy incentives. Similarly, a well-run carbon market and pricing would provide companies with a standard way to measure their progress and help them access green capital, underlining the need for these to be introduced.

From the investors’ perspective, sustainable investing is viewed as pivotal to climate change action. The country’s pension fund, the Employees Provident Fund, has announced its aim to having a fully ESG-compliant portfolio by 2030 through its sustainable investment policy and became the signatory of the UN Principles of Responsible Investment.⁹ With that, there is likely to be more inflow of funds towards the ESG agenda, including Net Zero.

As for the financial services sector, financial institutions are under increasing pressure by investors, regulators and other stakeholders to mitigate the possible risks arising from climate change. However, the challenge is in assessing, quantifying and managing those risks. Bank Negara Malaysia, Malaysia’s central bank, has implemented initiatives for the financial sector to address issues on climate change, which include the Climate Change and Principles-based Taxonomy (CCPT) and the Value-based Intermediation Guidelines (VBI). The CCPT aims to classify activities based on their impact on climate change and to steer financial flows towards activities that promote the transition to a lower carbon economy.¹⁰ The VBI is aimed to provide the outcomes of Islamic financing to generate positive and sustainable impact to the economy, community and environment.¹¹

On agriculture, some palm oil plantations have used waste biomass to provide electricity for several years, although mills tend to be relatively old and could be more efficient. Palm trees are not currently recognized as a way to lock up carbon, but Phang says this could be explored.

While Malaysia scores high on forestry as a proportion of total land area, more work could be done to certify and protect these forests. According to the Plantation Industries and Commodities Ministry, Malaysia, through the Malaysian Sustainable Palm Oil, is committed to limit the total oil palm cultivated areas at 6.5 million hectares, to halt deforestation and ensure its oil remains sustainable. This means that the industry must accelerate its productivity through technology.