Malaysia’s Green Finance Priorities Revealed by Economic Network Analysis

Malaysia’s path toward net-zero emissions may depend less on how much green finance the country mobilizes than on where that money goes. A study in the Journal of Industrial Ecology maps the economy’s exposure to carbon-transition risks and finds that financing needs are concentrated in a relatively small group of industries. The analysis combines two characteristics that are often examined separately: the carbon emitted by a sector and its importance within the web of domestic production. Electrical and optical equipment emerges as the economy’s most systemically important sector, while electricity, gas and water supply has by far the highest carbon intensity. Coke and refined petroleum, wholesale and retail trade, and basic and fabricated metals also rank among the sectors with substantial model-implied financing needs. The results suggest that climate finance designed around national averages or emissions alone could miss industries whose disruption would ripple through supply chains. Instead, the researchers propose sector-specific thresholds intended to help reduce emissions while limiting the economic damage associated with the transition.

Ali Faridzad and Nivakan Sritharan developed the framework for Malaysia, which has pledged to achieve net-zero greenhouse-gas emissions by 2050. The country has strengthened its climate policy through updated commitments under the Paris Agreement, the National Energy Transition Roadmap and other domestic initiatives. Existing programmes, including the Green Technology Financing Scheme, already direct support toward areas such as energy, manufacturing, transport, buildings, waste and water. Yet the researchers note that allocating capital efficiently is difficult because industries are connected through purchases, sales and intermediate inputs. A shock to one sector can therefore affect businesses that are not themselves major polluters. A factory may depend on electricity and refined fuels, while wholesalers, retailers, transport providers and equipment manufacturers may depend on the factory’s output. These relationships mean that a policy aimed at cutting emissions can produce indirect losses across the economy. The study addresses this problem by treating Malaysia’s production system as a network rather than a collection of independent sectors.

The researchers used input–output tables covering 34 Malaysian industries and data for 2020 through 2023 from the Asian Development Bank. The tables were expressed in constant 2010 prices, while sectoral carbon dioxide emissions came from the bank’s Environmentally Extended Multi-Regional Input–Output database. In an input–output model, a matrix of technical coefficients describes how much each industry requires from every other industry to produce its output. The Leontief inverse, calculated as the inverse of the identity matrix minus that coefficient matrix, estimates the direct and indirect production required to satisfy final demand. This allows a change in one industry to be traced through upstream suppliers and downstream users. The study also applied the standard Hypothetical Extraction Method. In that exercise, a sector is completely removed from the economic system by eliminating its row and column from the technical-coefficient matrix and setting its final demand to zero. The resulting loss in total output provides a measure of the sector’s propagated economic importance, called Hypothetical Extraction Centrality, or HEC.

Carbon intensity supplied the environmental side of the analysis. For each sector, it was calculated as carbon dioxide emissions per unit of output. The researchers normalized both carbon intensity and HEC on a scale from zero to one, then combined them into a sector-specific transition shock. A sector with high carbon intensity received a larger shock under an emissions-focused policy, while a highly central sector received more weight under a stability-focused policy. The model tested three alternatives: a baseline assigning equal weights to carbon intensity and HEC, a carbon-focused scenario assigning 70 percent weight to carbon intensity, and a stability-focused scenario assigning 70 percent weight to HEC. The maximum imposed shock was set at 30 percent. The framework then estimated how much each sector’s output could fall through the production network before exceeding an assumed tolerable loss of 10 percent of its initial output. The resulting green finance threshold represents the model-implied financial adjustment needed to close that gap in a single period, not the cumulative investment required for the country’s 2050 transition.

The sectoral indicators reveal why emissions and economic importance cannot be treated as interchangeable. Electricity, gas and water supply recorded the highest carbon intensity in the dataset, with a value of 7.0189 and a normalized score of 1. Its HEC, however, was moderate, at 11.2320, or 0.1822 after normalization. Electrical and optical equipment showed the opposite pattern. Its carbon intensity was relatively low, at 0.1273, with a normalized score of 0.0176, but its HEC reached 60.4837, the highest in the economy. That result places the sector at the center of extensive upstream and downstream connections. Wholesale trade, food, beverages and tobacco, and retail trade also displayed high centrality, demonstrating that distribution and demand-related activities can transmit shocks widely even when their direct emissions are limited. Other non-metallic minerals and chemicals were relatively carbon intensive but only moderately central. Air transport likewise had high carbon intensity, recorded at 4.3805, but a comparatively low HEC of 2.2156. The contrast identifies distinct policy problems: some sectors primarily require decarbonization, while others require resilience and technological support to prevent disruption.

When the two indicators were combined, only a few sectors consistently occupied the high-carbon, high-centrality quadrant. Coke, refined petroleum and nuclear fuel was the most persistent example. Electricity, gas and water supply, air transport and water transport generally fell into the high-carbon, low-centrality group, making them candidates for finance focused on emissions reduction with comparatively contained network effects. Electrical and optical equipment, wholesale trade, retail trade and several manufacturing-related activities tended to occupy the low-carbon, high-centrality group. For these industries, green finance could support cleaner technology, supply-chain resilience and adaptation rather than simply targeting direct emissions. Education, health and social work, financial intermediation and other services were usually low in both carbon intensity and centrality. The overall classifications remained broadly stable when the researchers used means, medians and the 40th and 60th percentiles as alternative boundaries. That stability suggests the broad pattern was not produced by one arbitrary threshold, although individual sectors near a boundary could shift categories.

The estimated financing thresholds put the contrast between policy priorities into monetary terms. In the 2023 baseline scenario, Electrical and optical equipment had the largest threshold, approximately USD 61.6 billion. Coke, refined petroleum and nuclear fuel followed at about USD 33.1 billion, with wholesale trade at USD 19.9 billion, retail trade at USD 17.8 billion and basic and fabricated metals at USD 14.9 billion. Electricity, gas and water supply remained near USD 13.5 billion despite its much higher carbon intensity, reflecting its lower network centrality. Under the stability-focused scenario, the threshold for Electrical and optical equipment rose to approximately USD 65.6 billion. Coke and refined petroleum reached USD 39.1 billion, wholesale trade USD 24.9 billion, retail trade USD 22.9 billion and basic and fabricated metals USD 17.0 billion. Under the carbon-focused scenario, Electrical and optical equipment still led at about USD 52.6 billion, while electricity, gas and water supply reached USD 13.6 billion. Coke and refined petroleum, basic metals and wholesale trade received estimated thresholds of USD 22.2 billion, USD 10.5 billion and USD 9.4 billion, respectively.

The researchers also examined whether the rankings changed between 2020 and 2023. The relative ordering remained broadly consistent, even as absolute thresholds varied with economic conditions and output levels. Electrical and optical equipment rose from approximately USD 35.5 billion in 2020 to more than USD 61.5 billion in 2023 under the baseline scenario, and exceeded USD 65 billion in the stability-focused scenario in 2023. Coke and refined petroleum generally increased from roughly USD 25–35 billion in 2020 to more than USD 30–40 billion by 2023, depending on the scenario. Wholesale and retail trade, basic metals and electricity, gas and water supply also remained persistent priorities. In contrast, textiles, leather products, education, health and other service-oriented activities showed low or negligible thresholds across the period. The authors interpret this temporal consistency as evidence that the results reflect underlying production structures rather than a single year’s disruption. However, the model is static and covers one period at a time, so it does not simulate how industries might innovate, substitute inputs or change their relationships during a long-term transition.

The study therefore presents its thresholds as analytical benchmarks rather than forecasts or funding prescriptions. They are conditional on the selected shock size, the 10 percent acceptable-loss assumption, the weights assigned to carbon intensity and centrality, and the fixed relationships in the input–output tables. The framework does not capture technological change, behavioral responses, substitution effects or dynamic investment pathways. Nor do the values represent the cumulative capital required to meet Malaysia’s 2050 net-zero goal. Even with those limitations, the approach offers policymakers and financial institutions a way to compare competing objectives transparently. A carbon-focused allocation may prioritize power, fuels and metals, while a stability-focused allocation gives greater emphasis to industries whose disruption could spread through production networks. The central message is that effective green finance must manage both environmental exposure and systemic importance. By identifying where those risks intersect—and where they diverge—the model offers a scalable method that could be adapted to other emerging economies balancing decarbonization with economic stability.

Subject of Research: Sector-specific green finance thresholds for managing Malaysia’s carbon-transition risks

Article Title: Sectoral green finance thresholds for managing carbon transition risks: an input–output network approach with evidence from Malaysia

Article References: Faridzad, A., & Sritharan, N. (2026). Sectoral green finance thresholds for managing carbon transition risks: an input–output network approach with evidence from Malaysia. Journal of Industrial Ecology. https://doi.org/10.1007/s44498-026-00160-7

Image Credits: AI Generated

DOI: 10.1007/s44498-026-00160-7

Keywords: green finance, carbon transition, input-output analysis, Malaysia, climate risk, economic networks, carbon intensity, supply chains, Sectoral, green, finance, thresholds