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Unlocking green financing’s potential in Indonesia
Green financing in Indonesia refers to various types of financial products and services that support environmentally sustainable, socially responsible and government transparency initiatives.
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An illustration of green financing.
(Shutterstock/-)
G
reen financing in Indonesia is a growing sector, driven by the country's commitment to sustainable development and environmental conservation. The government pledged to reduce carbon emissions in accordance with the Paris Agreement by aiming for a nationally determined contribution (NDC) of reducing carbon emissions by 32 percent, or the equivalent of 912 million tonnes of CO2 by 2030. With such ambitious targets, both the government and private sector need to encourage green financing to support more environmentally friendly projects, create new job opportunities in the renewables sector and promote more sustainable economic growth.
Green financing in Indonesia refers to various types of financial products and services that support environmentally sustainable, socially responsible and government transparency initiatives. Based on the Financial Services Authority’s (OJK) Sustainable Finance Road Map II, such initiatives include renewable energy projects; energy efficiency programs; pollution prevention and control; sustainable natural resources and land use; terrestrial and aquatic biodiversity conservation; sustainable transportation; sustainable water and wastewater management; sustainable agriculture; climate change adaptation; eco-efficient products; green building; micro, small, and medium enterprises (MSMEs); and other environmentally friendly activities.
Green financing plays a crucial role in addressing climate change, promoting sustainable development and supporting Indonesia's transition mechanism to a low-carbon economy. Additionally, it will also contribute to lowering air pollution, enhancing public health and developing various opportunities in the green sector.
Based on government regulations, there is a strong push to unlock the potential of green financing in Indonesia. Green finance practices were established in Indonesia more than a decade ago through Bank Indonesia (BI) regulation No. 14/15/PBI/2012 on the implementation of business feasibility assessments on environmental management by borrowers in the business feasibility requirements in credit distribution. BI and the Environment and Forestry Ministry also issued several memorandums of understanding from 2011 to 2013 to assess the feasibility of distributing credit to borrowers based on Environmental Impact Analysis (AMDAL).
The OJK has also issued Sustainable Finance Road Map Phase II (2021-2025), following the first road map set in 2014. Previously, the OJK issued Financial Services Authority regulation (POJK) No. 51/POJK.03/2017 on sustainable finance targeting financial services institutions, issuers and public companies to prioritize funding for sustainable development and funding related to climate change in optimal quantities. There was also regulation POJK No. 60/POJK.04/2017 on the issuance and requirements for environmentally friendly debt securities and green bonds. The most recent regulation issued is POJK No. 14/2023 on carbon trading through carbon exchanges, which aims to boost support for green financing as it becomes more publicly accessible.
From the corporate side, the banking sector is expected to become a role model in carrying out environmentally sound practices related to its role as a financing provider. This issue cannot be separated from the response to regulatory demands and efforts to meet the expectations of stakeholders. Hence, it is important to build a sound green financing mechanism that is able to support and promote sustainable project financing, so as to encourage the transition to a low-carbon, sustainable economy. Common green financing mechanisms include green bonds, green loans, green funds, carbon markets, grants and subsidies, sustainability-linked loans, green venture capital, green mortgages and socially responsible investing (SRI).
Green bond issuance in Indonesia has started to gain traction, although the capitalization is not large yet. Based on the Indonesia Central Securities Depository (KSEI), currently, there are 17 listed green bonds with a total emission of Rp 21.1 trillion (US$1.34 billion), of which 82 percent are being issued by state-owned banks (Bank Mandiri, BNI and BRI). As for the credit side, an estimated Rp 1.6 quadrillion in green loans are being channeled by similar state-owned banks. Green bonds are debt securities issued to finance projects that have positive environmental or climate benefits. Similar to green bonds, green loans are loans specifically used to finance green projects, provided by banks or financial institutions and come with terms and conditions that promote environmental sustainability. Green loans can also be channeled through private placement to offset their carbon emissions.
