KUALA LUMPUR (Aug 4): Development Financial Institutions (DFIs) can help re-shape the economy towards prioritising the adoption of sustainable agenda as part of the post-pandemic rebuilding efforts.
Bank Negara Malaysia’s (BNM) assistant governor Adnan Zaylani Mohamad Zahid said this entails using financing to nudge businesses and consumers to adopt practices that promote resilience and good governance while growing sustainably and protecting the environment.
“The need for this is undeniable and inevitable. Increasingly, we see more of Malaysia’s industries and companies face scrutiny and challenges in their international business due to unsustainable and questionable practices,” he said in his opening address at the Association of Developmental Financial Institutions of Malaysia (ADFIM) Webinar on Sustainable Financing today.
Adnan said DFIs should be creative in designing innovative funding structures and solutions that leverage on the capacity of the private sector and knowledge from other partners, including peers and the government.
“DFIs are often constrained by the size of their balance sheet or capital and take on outsized risks in specific sectors in serving their mandates.
“On the other hand, the private sector may have larger financial capacity but is traditionally more inclined to support low-risk and well-served customers, while high-risk customers are either left out or are charged quite expensively to buffer for uncertainties,” he said.
In overcoming these challenges, Adnan said DFIs ought to collaborate with other entities in mobilising capital and diversifying risk across different institutions, thus providing an opportunity for the private sector to participate in these segments within the comfort of their risk tolerance.
In parallel, he said DFIs need to continuously build their internal expertise and deepen their understanding of the sectors or segments through regular engagement with the industry as well as enhance industry analysis, leveraging on access to data within the government.
“This would augment DFIs’ credibility to lead and crowd-in the private sector towards participating in innovative funding structures,” he said.
Adnan said that DFIs, as instruments of policy and agencies of government, have a critical role to play, in particular to deal with the economic and financial challenges faced by businesses in the economy.
“We are well familiar with the role of DFIs as complementing the market-based and commercially driven financial institutions. This already calls for DFIs to adopt a balanced approach to financing, promoting and supporting public interest or development initiatives.
“Some would involve higher risks in particular in new ventures or industries or financing those who, at the margins, are unable to obtain financing under normal commercial terms from financial institutions. All this while at the same time, managing risks and ensuring long term financial sustainability,” he said.
According to Adnan, various frameworks are now being put in place to empower DFIs in sustainable finance, and DFIs can already step up efforts in this space.
For example, he said BNM’s climate change and principle-based taxonomy facilitates all financial institutions to be part of the driving force that promotes orderly transition towards a low-carbon future.
“Other frameworks focus on creating incentives that would shape DFIs’ behaviour to be more in tune with their developmental roles. The adage “what gets measured gets managed” reflects the importance of building a structured and holistic measurement framework for DFIs.
“This will support DFIs to pursue national economic and social well-being while simultaneously support an orderly transition of the economy towards achieving sustainability goals. In this, it is particularly pertinent for DFIs to advocate accountability, transparency and efficiency since DFIs are also public institutions,” he said.
Towards this, Adnan said DFIs that are part of the Value Based Intermediation (VBI) community are encouraged to apply impact-based disclosure on value-based practices and financial solutions contributing to the triple bottom line, namely, people, planet and prosperity.
“Institutions are required to disclose an optimal set of information to stakeholders with an objective to generate intended market discipline and promote stakeholder activism. A paradigm shift that fosters collective action and cultural change is the impetus to a successful implementation of sustainable finance,” he said.
Adnan said DFIs should also look for like-minded partners across the public and private sector to collectively advance the national goals of achieving sustainable development.
“We see industry collaboration and collective action as a critical component of achieving higher, wider and more impactful societal and economic goals. This is evident through the work done under VBI where several DFIs are part of the community of practitioners (COP).
“The COP pools resources and expertise, enabling members to accelerate learning as well as drive several common initiatives together such as the issuance of VBI sectoral guidelines,” he said.
Meanwhile, he said another important driver for sustainable finance is the need for it to be institutionalised and embraced throughout the organisation, with clear leadership or a tone from the top.
This, he said, will ensure that a clear message resonates throughout the organisation of the commitment and intent that can then drive organisational initiatives, supported by the necessary infrastructure and systems to create change.
Source : The Edge Markets – 5 August 2021 (Thursday)