Key policies and governance approach

Otoritas Jasa Keuangan (OJK), the Indonesia Financial Services Authority, launched a Sustainable Finance Roadmap (2015-2019) in 2014 [3]. This Roadmap embodied Indonesia’s strong commitment to raising awareness and improving the private sector’s environmental and social performance. The Roadmap set forth a detailed work plan for the financial services industry under OJK’s authority (banking, capital market, and non-bank financial services) and laid out, among others, the timeline for the development of sustainable finance regulation, sustainable financial products, incentives for financial institutions, and coordination among government agencies [6]. 

Indonesia's Sustainable Finance Roadmap is now in its 2nd phase [7]. In January 2021, OJK issued the Sustainable Finance Roadmap Phase II (SFR II) which outlines how the financial sector will move towards a more sustainable trajectory over the next few years (2021-2025), with Indonesia’s Green Taxonomy as a priority. Launched in January 2022 [8], Indonesia’s Green Taxonomy 1.0 aims to be used as (1) the basis for the development of incentive and disincentive policy of various ministries and institutions, including OJK; and (2) guidelines for information openness, risk management, and development of innovative sustainable finance products and/or services for FSS and issuers. Furthermore, the development of the Green Taxonomy is expected to provide an overview on the classification of sectors/sub-sectors that have been scientifically categorized as green, to avoid greenwashing practices [1].

Additionally, the Sustainable Finance Roadmap is complemented by the Regulation on the Implementation of Sustainable Finance for Financial Services Institutions, Issuers, and Publicly Listed Companies. Issued by OJK in 2017, this was the first regulation on sustainable finance in Indonesia, which mandates all financial institutions to integrate sustainable principles in their business process. The regulation covers sustainable finance principles, the timeline for implementation by financial institutions, and the requirement to submit a Sustainable Finance Action Plan and Sustainability Report [6]. 

Successes and remaining challenges

The Sustainable Finance Roadmap Phase I (2015 - 2019) achieved several milestones including the introduction of sustainable finance principles, the identification of numerous sustainable business criteria, the development of an incentive scheme, and the implementation of a series of training programs for the financial industry. The financial industry has responded well to the rolling out of this Roadmap and the international community has applauded Indonesia. Nevertheless, some gaps remained to be filled, such as (i) the industry’s low awareness of sustainable finance, the financial industry is still of the view that implementing a sustainable business translates into additional costs and business actors are in general still oriented towards short-term profits; (ii) the absence of commonly agreed green standards at the national scale; and (iii) untapped business opportunities in the sustainable sector, which require adequate infrastructures, not only from regulators, but also from business actors and related ministries/institutions in forms of support and collaboration [9].

To address the absence of commonly agreed green standards at the national scale, OJK launched Indonesia’s Green Taxonomy 1.0 in 2022 to provide the Financial Services Sector with a better understanding on the classification of green activities. However, the Green Taxonomy acknowledges that there may be some challenges in its implementation in the future. One such challenge is related to a need for understanding and diverse approaches in determining the green criteria thresholds, which will require continuous coordination. In this regard, it is to be understood that the Indonesia Green Taxonomy Edition 1.0 document is a dynamic/ living document that will be revised should there be any addition or reduction of economic sectors that meet the green criteria due to, for instance, the addition of new business activities, changes in standards and policies, as well as scientific developments and technological advancements [1].

Further, moving forward, to prevent unwanted impacts on the financial sector, it is essential that climate-related risks are managed. Climate change risks include risk of climate change phenomena that cause property damage and directly affect business processes (physical risk), and risk arising from changes in policy and technology development while shifting towards a greener, carbon-neutral economy (transition risk) [5], [9]. The implementation of sustainable finance is a major program that requires well managed steps. Failure to undertake such responsible development will come at great costs. Research from the University of California, Berkeley shows that if climate change is not properly mitigated, it could lead to a 23% decline in GDP by 2100 [9]. So far, government spending on climate change has been recorded at IDR 373.5 trillion (or USD 26.68 billion) in the 2016-2019 period, which can meet only 34% of the total investment needed to achieve the country’s NDC target [10]. Therefore, Indonesia must urgently give greater attention towards improving the contribution of the private sector to fill this 66% funding gap [8]. With appropriate regulatory reforms, as well as de-risking measures such as guarantees, joint operations and public-private partnerships, Indonesia could unlock significant new private finance flows, especially in the late 2020s and early 2030s, when investment needs peak [11].

Initiatives and Development Plans

The Indonesia Sustainable Finance Initiative (ISFI) aims to promote and implement inclusive sustainable finance practices. This initiative serves as an open platform for the banking and non-banking financial industry, corporate issuers, and other relevant industry sectors [12]. 

Indonesia has launched its first blending finance platform, SDGs Indonesia One, which aims to optimise the financing of environmentally sound infrastructure projects in Indonesia. The platform has raised an impressive $3.22 billion in commitments and has a target of $4 billion. In 2021, most of the financial support from SGDs Indonesia One was focused on renewable energy [13].

PT Indonesia Infrastructure Finance (IIF), a private national company and non-bank financing institution, is playing a vital role by supporting the flow of private capital into infrastructure development and reallocating resources from carbon-intensive to low-carbon and climate-resilient infrastructure. Established in 2010 by the Government of Indonesia, the World Bank Group, Asian Development Bank (ADB) and other multilateral institutions, IIF’s core purpose is to accelerate and improve private sector participation in Indonesia’s infrastructure sector by providing financing and advisory services. The World Bank has provided USD 300 million of investment project financing to IIF, as of July 2022, to increase its capacity to finance infrastructure projects in Indonesia and manage social and environmental risks [14].

IIF has issued a Sustainability Bond to raise awareness of their commitment towards environmental and social sustainability. To issue the bond, IIF developed a Sustainable Financing Framework, defining 11 green and social categories of eligible projects and a transparent governance process compliant with the International Capital Markets Association standards. IIF listed the USD 150 million bond on the Singapore Stock Exchange on January 28, 2021, attracting international investors. It was the first Sustainability Bond issued by a non-banking financial institution in Indonesia. The transaction received the Sustainability Bond of the Year award for 2022 in the category of Financial Institution from the trade publication Environmental Finance. According to IIF, the proceeds of the bond were allocated towards drinking water supply infrastructure, renewable energy, healthcare, and telecommunication projects, including the 70 MW Wind Power Plant Project in South Sulawesi which contributed to Indonesia’s NDCs by reducing 190,724 tCO2eq greenhouse gas emissions in 2021 [14].