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Banking industry's long and winding road to sustainable finance
Aligning sustainability standards for all stakeholders across all sectors, and not just finance, is necessary in order to avoid both internal and external climate risks while transitioning to a green economy.
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Indonesia has started tapping into the green bond market, both at home and overseas, to finance environmentally friendly projects, but sustainability standards remain an issue.
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ndonesia ratified the Paris Agreement through Law No. 16/2016 on the Ratification of the Paris Agreement to the United Nations Framework Convention on Climate Change. The agreement requires countries to contribute to keeping the rise in the global average temperature below 2 degrees Celsius and working to limit the temperature rise to 1.5 degrees from preindustrial levels.
Understandably, striving to achieve the nationally determined contribution (NDC) and adapting to the impacts of climate change is a daunting task. These efforts should concern not only the government but also all other stakeholders, because of the physical and transition risks that climate change poses.
Physical risks are caused by environmental damage, such as crop failure or destruction to productive assets due to flooding or rising sea levels. Transition risks arise when businesses are unable to adapt to changing values in society or to comply with new government policies toward a lower-carbon economy.
Businesses in the financial services sector will be exposed to transition risks if they fail to comply with Financial Services Authority (OJK) Regulation No. 51/2017 on the implementation of sustainable finance. This regulation mandates businesses to increase their financial and investment portfolios in sustainable finance instruments or projects, among other stipulations.
Transitioning from a conventional to a green economy will indeed require huge capital. Accordingly, new regulations have been introduced to attract investment to low-carbon initiatives and support the growth of Indonesia’s green economy.
One such regulation is the Tax Harmonization Law, which offers tax incentives for companies that participate in carbon trading and carbon balancing. Likewise, the presidential regulation on carbon economic value could encourage the establishment of a compliance carbon market.
The need for capital and the potentials of carbon markets and carbon trading offer opportunities to benefit the financial services sector, especially banks as regards their function as financial intermediaries. However, there are challenges for banks in embracing these opportunities while mitigating transition risks.
