Contracts are not mere commercial transactions but are governance tools that safeguard environmental integrity and protect institutions from compliance risk, writes advocate & solicitor and ESG legal practitioner, Tan Poh Yee.
BANK LOAN decisions are not just financial transactions: they carry environmental consequences, influencing whether projects align with sustainability goals. Malaysia’s Paris Agreement 2015 pledge to cut greenhouse gas emissions is supported by domestic laws and regulations that ensure financing decisions contribute to those goals.
(Feature pic: CCPT principles and categories help banks ensure loans meet climate goals for projects across sectors from agriculture to steel. | Image by YH Law)
For financial institutions, compliance is not optional but a statutory and fiduciary responsibility. The Climate Change and Principle-based Taxonomy (CCPT) issued by Bank Negara Malaysia on April 2021 provides the lens through which lending activities must be assessed.
The CCPT is not merely a sustainability guideline but a compliance framework that requires banks to classify loans according to climate impact, embed environmental safeguards into loan terms, and demonstrate accountability to regulators and stakeholders.
Ensuring that every loan decision is credible under Malaysia’s CCPT framework, complies with Malaysian laws, and is aligned with international climate commitments, protects banks from environmental, reputational and compliance risks.
What is the CCPT framework?
The CCPT is a principle-based taxonomy developed by Bank Negara to guide financial institutions in classifying borrowers under five guiding principles (GP1–GP5). This framework assesses both the purpose of loan proceeds and the borrower’s overall operations.
The CCPT is part of the regulatory compliance regime. Institutions that fail to adhere to this, risk being queried by Bank Negara and are required to justify their decisions.
The CCPT framework uses 2 levels of taxonomy. The first comprises guiding principles based on the borrower’s nature of business and activity. The second comprises classifications based on how the project to be financed affects climate change.
The Five Guiding Principles
GP1 (Mitigation): Activities that reduce or prevent greenhouse gas emissions, such as renewable energy generation or using energy efficient technologies.
GP2 (Adaptation): Activities that increase resilience to climate impacts, such as growing drought resistant crops or installing flood resilient infrastructure.
GP3 (No Significant Harm): Activities that prevent pollution, protect ecosystems and use resources sustainably.
GP4 (Remedial Measures to Transition): Activities not yet aligned with climate objectives but are supported by credible remedial steps, such as efficiency upgrades or biodiversity safeguards.
GP5 (Prohibited Activities): Activities fundamentally harmful to the environment, such as coal-fired power generation or illegal deforestation, which banks must exclude entirely.
What the CCPT classifications mean
Once the guiding principle is identified, CCPT classification directly shapes credit risk management and regulatory credibility. Banks cannot rely solely on a borrower’s overall profile; they must evaluate the purpose of loan proceeds and whether the financed activity contributes to climate mitigation or adaptation.
Using the guiding principles, each loan would have been assessed at the transaction level (GP1/GP2) and the entity level (GP3—GP5). Based on this assessment, loans are then classified into categories C1—C5, from climate-supporting activities (C1), transitioning activities (C2-C3) and watchlist exposures (C4-C5). This classification ensures that financing decisions are consistent and aligned with Malaysia’s climate commitments.
For example, when a steel producer seeks financing to purchase an electric arc furnace, the loan purpose qualifies under GP1 because the furnace reduces emissions compared to blast furnaces. However, if the company’s overall operations reveal high emissions, classification depends on remedial measures.
If credible, time-bound measures are in place, the exposure will be classified as C2 (Transitioning). If no remedial measure exists, it shifts to C4 (Watchlist). If the company engages in prohibited activities such as coal expansion, the exposure is excluded under GP5.
This scenario illustrates that even climate supporting projects can be reclassified if the borrower’s overall operations fail to meet CCPT standards.
Role of JC3
In applying CCPT, financial institutions are supported by the Joint Committee on Climate Change (JC3). This is a regulatory-industry platform co-established by Bank Negara Malaysia and the Securities Commission Malaysia to pursue collaborative actions for building climate resilience within Malaysia’s financial sector.
JC3 places particular emphasis on GP3 (No Significant Harm) and GP4 (Remedial Measures to Transition) because these are the most complex categories in the CCPT and these two principles sit in the grey zone.
Unlike GP1 and GP2 which are quite straightforward because the projects to be financed directly reduce emissions or adapt lifestyle, GP3 and GP4 would need deliberation and a judgment call to be made. Banks need more guidance to decide whether a particular project seeking financing truly transitions to low GHG.
JC3 develops standardised questionnaires for banks to use when assessing borrowers under GP3 and GP4. These due diligence tools, which the bank applies during loan evaluation, helps the bank gather information on legal compliance, statutory licenses and environmental safeguards. Using the questionnaires at the loan application stage enables banks to demonstrate accountability in their CCPT classification.
Shared responsibility in CCPT classification
With statutory interpretation and enforceability checks embedded in the CCPT classification process, this safeguards credibility for both banks and borrowers.
For banks, it ensures reporting withstands regulatory scrutiny, lending decisions are justified, and liability risks are minimised. For borrowers, even where loan or security terms are largely fixed, these checks provide assurance that their sustainability commitments are legally recognised and transparent.
Consider a palm oil company applying for a loan to expand its plantation in Sabah. The company proposes installing a methane-capturing system to treat palm oil mill effluent (POME).
Under CCPT, this activity could qualify as climate-aligned (GP1-Mitigation), but enforceability depends on statutory compliance. The borrower must demonstrate that its mill is licensed and compliant under the Environmental Quality (Prescribed Premises) (Crude Palm Oil) Regulations 1977, which govern effluent treatment and discharge standards for palm oil mills.
Banks often rely on broad “catch-all” covenants requiring borrowers to comply with all laws. While technically sufficient, such clauses may not demonstrate CCPT credibility. To demonstrate credibility of CCPT classification and to strengthen enforceability, banks should tighten relevant clauses instead of relying solely on these broad catch-all provisions.
Embedding specific statutory references into loan documentation is one example of such tightening. This can be achieved either within the loan agreement itself or through the letter of offer annexed to the loan agreement and expressly incorporated by reference.
In Malaysian practice, this is a common way to preserve standard templates while still binding borrowers to sector-specific statutory requirements.
This enables banks to demonstrate to regulators that enforceability of environmental safeguards has been embedded into financing terms while borrowers gain legitimacy because their commitments are explicitly tied to enforceable statutory requirements.
Public Awareness and Malaysia Taxonomy
While CCPT is currently the main framework guiding sustainable finance in Malaysia, regulators are developing a more detailed Malaysia Taxonomy for Sustainable Finance. Unlike CCPT’s principle-based approach, the Malaysia Taxonomy will be science-based and introduce technical screening criteria to classify economic activities with greater precision.
However, public awareness of CCPT remains very low. Many companies do not even understand which guiding principle they fall under, let alone how to navigate a more complex scientific taxonomy.
Since the Malaysia Taxonomy will be science-based and introduce technical screening criteria, it is even more important that companies first grasp the fundamentals of CCPT. CCPT is the groundwork concept for sustainable finance in Malaysia and without a clear understanding of its principles, businesses will struggle to engage meaningfully with the scientific formulation of the new taxonomy once it is finalised.
Strengthening integrity
CCPT reporting is not just a compliance exercise for banks, nor simply a regulatory hurdle for borrowers. It is a shared framework that strengthens the integrity of financing relationships. Embedding statutory interpretation and enforceability checks enables banks to gain credibility against liability while borrowers gain confidence that their sustainability commitments are legally sound and transparent.
When both sides uphold credibility, CCPT reporting becomes more than regulatory compliance. It becomes a foundation for trust, resilience and sustainable growth across the financial ecosystem.
Tan Poh Yee advises boards and companies on legal, regulatory and compliance matters in ESG and sustainability. She believes that every decision, every occurrence, creates ripple effects across the environment, society or governance.
[Edited by SL Wong]
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