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Jakarta Post

Sustainable finance and banks: Building momentum for change

  • Yosea Iskandar

    -

Jakarta   /   Thu, January 7, 2021   /   01:52 am
Sustainable finance and banks: Building momentum for change A team of Indonesian forest rangers make their way on May 9, 2017 through a forest in the Leuser Ecosystem, primarily located in Aceh province and among the most important natural forests left in Southeast Asia. (AFP/Chaideer Mahyuddin)

The enactment of the Job Creation Law has sparked a new debate on the environment. Some believe that the changes the law has made to the Environmental Protection and Management Law will cause more environmental damage.

Despite the pros and cons, the unprecedented challenges presented by the COVID-19 pandemic should be our final wake-up call. It has never been more urgent for us to realize what the future holds for us, should we – in both the public and private sectors – fail to stop the ongoing deterioration of the environment.

The year 2020 provided an opportunity for Indonesia’s banking industry to take a greater role in protecting the environment. This was the first year that banks were required to file a business sustainability report with the Financial Services Authority (OJK). The report covers a bank’s performance in economic, financial, social and environmental aspects toward developing a sustainable business. Considering their intermediary function, banks are strategically positioned to support environmental protection and the sustainable development goals. This is imperative for banks as business entities, for various reasons.

One of these reasons is compliance risk. The Banking Law mandates the following objectives for banks in Indonesia: supporting national development for the purpose of improving equitable distribution, economic growth, dynamic sustainable growth and dynamic sustainable national stability. All aim to improve the welfare of the general public.

The implementing regulations were issued in line with the banks’ obligations towards sustainable development as mandated by the law. These include OJK Regulation No. 51/2017 on Implementation of Sustainable Finance for Financial Service Institutions, Issuers and Public Companies. It requires banks to implement sustainable finance – comprehensive support that creates sustainable economic growth by aligning economic, social and environmental interests. Filing and publishing an annual sustainability report starting in 2020 is one of the obligations under this regulation.

Failure to comply with this regulation makes banks liable to administrative sanctions through written warnings. This will affect the bank's compliance risk, and if it is not mitigated properly, it will cost the bank’s reputation and financial health rating.

Credit risk is another major reason. This will overshadow lending practices that do not meet the principles of sustainable finance. Sanctions imposed on companies that violate environmental regulations, for example, could result in a halt to its operations. This will in turn diminish the company’s ability to pay off its debts to lenders.

In addition, credit risk will increase if a debtor's businesses or assets given as collateral to banks are destroyed in a natural disaster, such as forest fires, landslides or floods. These disasters can occur as a result of factors associated with environmental destruction if the debtor does not follow environmental protection and management principles.

Other reasons are investment risk and reputational risk, which are both equally important. BlackRock CEO Larry Fink acknowledges on the company’s website that climate risk is investment risk. The investment management company believes that sustainability- and climate-integrated portfolios can provide better risk-adjusted returns to investors. It also believes that sustainable investing offer the strongest foundation for the future of investors’ portfolios.

Growing awareness over environmental issues will prompt investors to avoid industries and companies that do not support sustainable development. This negative investor sentiment can ruin a company’s reputation and stock value. Banks should view sustainability in higher regard so as not to hinder their growth.

Considering all of the above, the question now is not why, but how banks should respond and apply sustainable finance principles to create impact; how to build momentum for change toward a better future. There are many proven ways that banks can explore, both internally and externally.

Neither the Paris Agreement nor the Race To Zero global campaign as the world’s response to climate change is a familiar topic of daily conversation. But small gestures in nurturing environmentally friendly habits will be effective in reminding employees and others in the business community.

Internally, fostering an environmentally conscious workplace is the least banks can do. Raising employee awareness can be done in simple ways.

Externally, OJK Regulation No. 40/2019 on asset quality assessments for commercial banks requires banks to assess their debtor's business prospects in determining credit quality, including the debtor's efforts to preserve the environment. This means that banks are expected to encourage its debtors to take up environmentally friendly policies in running their businesses.

In its implementation, banks can run due diligence on the debtors’ environmental documents before extending credit facilities. Banks can also provide requirements in the credit agreement that debtors comply with prevailing environmental laws and regulations. Furthermore, banks can monitor the debtor’s compliance by conducting periodic reviews.

In the community, banks can strengthen their corporate social responsibility efforts. A variety of activities can be fun and enjoyable, such as tree-planting programs for employees and their families. Banks can also work with nongovernmental organizations and universities to help raise public awareness of environmental issues.

Hundreds of commercial and rural banks currently operate in Indonesia. Imagine the impact if they were all aiming toward a common goal and inspiring millions of their customers to do the same.

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The writer is head of the Legal and Corporate Secretariat at Bank DBS Indonesia. These views are personal.

 

Disclaimer: The opinions expressed in this article are those of the author and do not reflect the official stance of The Jakarta Post.