TheJakartaPost
Please Update your browser
Your browser is out of date, and may not be compatible with our website. A list of the most popular web browsers can be found below.
Just click on the icons to get to the download page.
[ANALYSIS] Achieving a green economy through sustainable finance
Indonesia’s entry into the top 20 green bond issuing countries provides an opportunity for the country to continue to develop its green issuances in line with environmental, social and governance (ESG) trends.
Change Size
![[ANALYSIS] Achieving a green economy through sustainable finance](https://img.jakpost.net/c/2021/04/13/2021_04_13_112336_1618301498._large.jpg)
T
he pandemic is accelerating environmental, social and governance (ESG) trends and has revealed companies’ resilience or vulnerability in facing crises and their ability to be responsive and adaptable. This particularly shows how well prepared companies are against another systemic challenge. The pandemic has increased the need for effective crisis management and emphasizes the importance of stronger council involvement in overseeing ESG issues.
Global green issuances, which include green bonds, loans, sukuks and green asset-backed securities (ABS), continue to increase. The Climate Bonds Initiative (CBI) states that from 2015 to 2020, green issuances cumulatively reached a value of US$1,002 trillion. For 2015 to 2020, regionally and cumulatively, Europe was the highest green-issuing region, reaching $432.5 billion (43 percent), followed by North America at $237.6 billion (24 percent) and Asia Pacific at $219.3 billion (22 percent). Other notable green issuances include $20 billion (2 percent) by Latin America and the Caribbean (LAC) and $3.5 billion (less than 1 percent) by Africa. In 2020, global green bond issuances reached $269.5 billion, and Indonesia (19 percent) was among the top 20 countries for annual green bond issuances.
Investment in the energy sector was the largest component of the $354.7 billion issuance, followed by low carbon buildings at $263.5 billion and transportation at $190.7 billion. Water infrastructure was in the fourth position at $98.7 billion, and waste management at the fifth at $36.9 billion. Industry, information and communication technology and land use collectively amounted to $40.8 billion, while $17.6 billion was for unallocated proceeds.
Financial corporations were the largest issuance source at $205.6 billion, with non-financial corporations next at $205.0 billion, followed by development banks at $158.8 billion. Government-supported entities contributed $153.1 billion to the market size, and local governments contributed $63.9 billion. ABS comprised $116.2 billion, and green loans totaled $28.9 billion in markets with signs of growth, particularly in Asia.
The total sovereign issuance in 2020 reached $71.5 billion, with green sovereign memberships now counting 17 countries: Belgium, Chile, Egypt, Fiji, France, Germany, Hong Kong, Hungary, Ireland, Indonesia, Lithuania, the Netherlands, Nigeria, Poland, Seychelles, Sweden and Thailand. According to the CBI count, 14 other countries may enter the club next year.
Indonesia’s entry into the top 20 countries provides an opportunity for the country to continue to develop its green issuances (ESG). Increasing ESG is one of the focuses of Indonesia’s capital market. In 2017, the Indonesian Financial Services Authority (OJK) issued new regulations that gradually helped all financial institutions issue sustainability reports, starting in 2019 for large banks and beyond. The Indonesia Stock Exchange (IDX) joined the Sustainable Stock Exchange (SSE) initiative in 2019, in line with its commitment to ESG issues.
The CFA Institute, a global association of investment professionals, states that the Indonesian market is dominated by government bonds. The demand for corporate bond issuance continues to increase but is still far below government bond issuance. Most companies still approach banks for debt financing. Bonds are traded over the counter, with all traded bonds reported to regulators and published on the IDX website. The liquidity of the over-the-counter (OTC) market increases over time, especially for government bonds.
Increasing demand for bonds was due to the upgrade in Indonesia’s credit rating. Fitch Ratings (Fitch) gave an investment-grade rating in 2011, followed by Moody’s in 2012 and Standard & Poor’s (S&P) in 2017. At the end of August 2020, Indonesia’s state credit rating was Baa2/Stable by Moody’s, BBB/Negative by S&P, and BBB/Stable by Fitch.
There is much room for capital market growth from both investors and companies, given that Indonesia has the largest population and greatest GDP in ASEAN and considering that it is a country that consists of 17,000 islands. Furthermore, Indonesians, especially potential investors, have had a taste of what technology and infrastructure can bring. This will help generate demand and supply in Indonesia’s capital market, thus also improving ESG investment.
To meet the supply and demand in ESG investment, the government must make sustainability guidelines aligned with the Paris Agreement, namely decarbonization and restricting global temperature rise to within 2˚C by 2050. Following other countries, the government and the OJK must provide useful guidance. This guideline should be made by an independent agency and include the main green aspects in the company sample.
Additionally, independent external reviews will be required, and they should comply with the Green Loan Principles and the Climate Bonds Standard, as both have become common practices. These include guarantee reports, second-party opinions, green ratings and verification reports for certified climate loans. Therefore, they can ensure that the companies that make loans or are recommended for green bonds are indeed sustainable.
***
Analyst at Mandiri Institute
